Tuesday, June 16, 2009

Its been a long time

Its been a long time since I wrote in this blog. To be honest I was a little burned out after the election. Now however I am feeling the need to write again. I am glad that the Obama administration won, but man can they be disappointing.

President Obama has completely dropped the ball when it comes to Gay rights.
His selection of his economic team has been pretty poor.
His handling of Executive Power has left many with a sour taste in their mouth.

Thursday, March 26, 2009

Have A Question For the President

President Obama and the White House have created a space for the average citizen to ask a question of the President. They have created a place on WhiteHouse.gov called Open For Questions.
From the website, we're told Obama will be answering some of the questions himself:
We invite you to participate in our community-moderated online town hall. Submit your own question about the economy and vote on submissions from others. We also
encourage you to include a link to a video of yourself asking your question (ideally 30 seconds or less), but text submissions are all you need. Come back on Thursday to watch the President answer some of the most popular submissions live at WhiteHouse.gov.Submit your question or video -- or vote for the ones you want answered. You know these questions will be better and more pertinent than what the talking heads come up with. The past couple times I've gone to the White House press conferences, we got some great suggestions for questions. Send them directly to Obama.

Check the video at YouTube: http://www.youtube.com/watch?v=hjJm_Hzc6Yg&eurl=http%3A%2F%2Fmoderator%2Ewhitehouse%2Egov%2Fask%2F%3Fembed%2316%2Fe%3D55f8&feature=player_embedded


Obama's Online Townhall has begun

The White House is live streaming Obama's townhall from the East Room here. He'll be taking the questions, relating to the economy, that received the most votes in each category. According to the website, "92,920 people have submitted 104,116 questions and cast 3,606,819 votes." The President will also take questions from the audience.Jared Bernstein, V.P. Biden's chief economic adviser (and a blogger) did the intro, he just said, "The goal is to open up the White House to the American people."

Hoovervilles Return as Bushvilles

Today in the New York Times there is a report on the growth of tent cities across the country. Atrios at the blog Eschaton has dubbed them "Bushvilles." I think the title fits.

From the New York Times:
Like a dozen or so other cities across the nation, Fresno is dealing with an unhappy déjà vu: the arrival of modern-day Hoovervilles, illegal encampments of homeless people that are reminiscent, on a far smaller scale, of Depression-era shanty towns. At his news conference on Tuesday night, President Obama was asked directly about the tent cities and responded by saying that it was “not acceptable for children and families to be without a roof over their heads in a country as wealthy as ours.”While encampments and street living have always been a part of the landscape in big cities like Los Angeles and New York, these new tent cities have taken root — or grown from smaller enclaves of the homeless as more people lose jobs and housing — in such disparate places as Nashville, Olympia, Wash., and St. Petersburg, Fla.

The Economy Shrank Faster Than Thought

The U.S. economy contracted at pace of 6.3% at end of 2008, slightly worse than had been
previously reported. This was the worst showing in a quarter-century, and probably isn't doing much better this quarter.

Other news about the economy was not much better. New claims for unemployment benefits last week rose to a seasonally adjusted 652,000 from the previous week's revised figure of 644,000, the Labor Department said Thursday. The total number of people claiming benefits jumped to 5.56 million, higher than economists' projections of 5.48 million, and a ninth straight record-high. More job losses were announced this week. Shaw Industries Group Inc., the world's largest carpet maker and a subsidiary of Warren Buffett's holding company Berkshire Hathaway Inc., said it would close two plants in Georgia and lay off about 600 workers. Pharmaceutical company Hospira Inc. said it would cut 1,450 jobs, or about 10 percent of its work force, while beleaguered automaker General Motors Corp. said it laid off 160 engineers, the beginning of 3,400 planned cuts among its salaried employees.

The figures indicate the labor market remains weak even as some other economic indicators have come in better than expected. All the negative forces that are occurring in the economy are now feeding each other in a vicious cycle that has only deepened the recession, now in its second year, and really made this a Great Recession.

Making Sense of Geithner's Plan

Man there are a lot of people lining up against Tim Geithner's plan for ridding the financial system of 'toxic assets'. Of course people have lampooned that Geithner has changed the name to 'legacy assets', though I thought this was smart public relations. It might sound silly but rebranding works.

I don't like Geithner as the head of the Treasurery Department, he is not up too the job, which requires more than an understanding of the financial system. And I do think that Obama should have other voices on his economic team.

However I think that some critics of the new plan are confusing their dislike of Geithner with his plan. Not all, I think Professor Krugman brings up some relavent areas of concern, but on the whole, I am more optimistic of this plan than many.

One question I have heard is why is the Obama administration going with this plan, my uninformed opinion is the Obam administration is trying to avoid anything that requires legislative action. Lets face it, nothing coming out of Congress has any real chance of fixing this mess.

The main components of Treasury Secretary Geithner’s new PPIP to price and remove toxic assets from banks’ balance sheets are as follows:

Here are the Basic Principles of the Plan: Treasury will use $75bn - $100bn in TARP money to co-invest alongside private sector participants and the FDIC as well as the Federal Reserve, to buy $500bn to $1 trillion of toxic mortgage assets (both residential and commercial) off banks’ books ('toxic assets' I mean ‘legacy assets’)

There are two separate approaches that Geithner has for legacy loans and for legacy securities. At first, Treasury will share its $75-100bn equity stake equally between the two programs with the option to shift the bulk of financing towards the option with the greater promise of success with market participants.

1) Public-Private Program for Legacy Loans: The FDIC is going to establish several public-private investment funds whose sole purpose will be to purchase and hold specific loan pools put up for sale by banks (large and small). The transaction price will be established by the highest bid at an auction run by the FDIC, in which a wide array of institutional investors and even individuals with a long-term orientation are encouraged to participate. The liabilities of the investment fund consist of an equity stake (50% of which provided by auction winner, 50% from Treasury TARP), and collateralized debt issued by the investment fund and guaranteed by the FDIC to finance the remainder of the purchase price (FDIC gets guarantee fee). Before the auction, the FDIC specifies the pool-specific debt-to-equity ratio it is willing to guarantee subject to a maximum 6-to-1 leverage ratio. The private investor would then manage the servicing of the asset pool - using asset managers approved and supervised by the FDIC - until disposal or maturity.

Example: Assuming a 6-to-1 debt-to-equity ratio, the highest bid for a loan pool with $100 face value might turn out to be $84. Of this amount, the FDIC would provide $72 in debt guarantees whereas the equity stake of $12 would be shared equally between the auction winner ($6) and the Treasury ($6).

2) Legacy Securities Program: The legacy securities program is to be incorporated into the Term Asset-Backed Securities Facility (TALF) whose original goal was to provide collateralized financing (non-recourse loans) to buyers of newly created consumer loan/small business loan ABS. Under the Legacy Securities Program, the eligible collateral for TALF is extended to include non-agency RMBS that were originally rated AAA and outstanding CMBS and ABS that are rated AAA.

Example: Under the Legacy Securities Program, up to five Treasury-approved fund managers will have a period of time to raise private capital to target the purchase of designated securities. Assuming the fund manager is able to raise $100 of private capital for the fund, Treasury will provide $100 equity co-investment alongside private investors. Treasury will then provide a $100 loan to the public-private investment fund. Moreover, Treasury may also choose to provide an additional loan of up to $100 to the fund. The investment fund then has $300-$400 at its disposal to buy legacy securities at its discretion. As a purchaser of TALF-eligible securities, the PPIF would also have access to the expanded TALF program of collateralized Fed loans when it is launched.


The main sticking points in previous market-based approaches to clear toxic assets from banks’ books were threefold:

a) How to value illiquid assets?

b) Once a transaction price is established, will banks be willing to sell and take a hair cut?

c) How to induce private investors to purchase legacy assets without unduly wasting taxpayer money?

a) Valuation of Illiquid Assets

The theoretical foundations of Geithner’s plan are provided by Lucian Bebchuk from Harvard University among others. He explains that “if the underlying market failure is at least partly one of liquidity, an effective plan for a public-private partnership in buying troubled assets can be designed. The key is to have competition at two levels.First, at the level of buying troubled assets, the government’s program should focus on establishing many competing funds that are privately managed and partly funded with private capital-- and not creating one, large "aggregator bank"-- funded with public and private capital and engaging in purchasing troubled assets. Second, several potential fund managers should compete for government capital under a market mechanism resulting in maximum participation of private capital and minimum costs to taxpayers.”
Geithner’s plan seems to follow these guidelines to a large degree. In particular, on the one hand the government subsidy allows private investors to bid a higher price than otherwise warranted (i.e. the government gives investors the equivalent of a call option.) On the other hand, the fact that the private investor is bound to lose its entire equity stake if the asset value deteriorates from artificially high valuations provides an incentive to bid conservatively. Both effects together may contribute to a reasonable level of price discovery. In case of the securities program, the prospect of refinancing purchased legacy securities with TALF via a non-recourse loan (which is the equivalent of a put option) should incentivize private investors to bid higher than otherwise warranted.

b) Will banks participate?

A similar purely private solution to get toxic assets off banks’ balance sheets was tried with Paulson’s aborted Super-SIV when legacy assets were still marked substantially higher than at present. It became clear then that the private sector will require a possibly substantial taxpayer subsidy in order to overcome the collective action paralysis. Indeed, in the case of the legacy loan example outlined in the Geithner plan with a 6/1 leverage, private investors that invest 7.1% (=1/7 * 0.5) of the equity will get 50% of any upside in return. While Treasury will also share in any upside by half, any downside beyond the private investors’ equity stake is clearly borne by the taxpayers.

While this subsidy to investors provides a powerful incentive to bid prices up in a competitive auction, banks stuck with particularly toxic assets or thin capital buffers may still find a potential writedown at market-clearing prices prohibitive and some might need to be recapitalized after taking the hair cut. FDIC Chairman Sheila Bair has already warned that while this plan will help many solvent banks get rid of their toxic assets thus clearing the way for new loans and fresh capital some banks are beyond the stage of rescue. Those borderline insolvent banks will likely require an additional incentive to sell or mandatory participation otherwise they will prefer to hold on to their assets, especially in view of the FASB’s prospective easing of mark-to-market accounting rules.

For the sake completeness, some commentators would also like to see better safeguards established in order to prevent banks and asset managers from potentially colluding in their common interest to the detriment of the taxpayer.

c) And taxpayers?

At the end of the day the performance of the toxic legacy assets is driven by the cash flow performance of the underlying loans. Keep in mind that among subprime borrowers, serious delinquencies and foreclosures have affected about 20% of outstanding loans as of December 2008 thus impairing the cash flow directed to junior RMBS investors and/or ABS CDOs consisting of these junior tranches. While ABX prices responded positively to the prospect of increased buyer interest, the ultimate loan value will depend on whether households and commercial real estate borrowers will continue making payments in the future. More on that below.

As a practical example of the performance of a toxic portfolio, take the Fed’s Maiden Lane portfolio with Bear Stearns assets. Cumberland Advisors reported that so far the results aren’t promising, and they see no prospect for a profit on the assets. In fact, the portfolio has lost over 10% of its value, and losses are mounting. At present, losses on that portfolio exceed $4.5 billion and the taxpayers’ share is now $3.5 billion. Others point to the low recovery value of IndyMac’s mortgage portfolio as a benchmark.

Bottom line: Will it get credit flowing again?

The immediate market reaction (equities and investment grade CDS staged a substantial rally, less so high yield CDS) was clearly one of relief that nationalization seems to be off the table for now and that the administration is committed to market-based solutions. While the extent of the guarantees almost makes one wonder why the involvement of the private sector is needed in the first place, it is the involvement of the private sector that creates a context in which price setting and discovery happen based on a market mechanism.

An important question at this point is: What should we look at while assessing the plan in the months ahead?

Clearly the unfreeze of credit markets would be the first sign of success but we might not see this happening before some time. Some of the banks that choose to sell assets and take a writedown might be in need of additional capital before they can resume lending. Also, for those institutions that are beyond the stage of rescue and effectively insolvent, the plan will likely not be as effective in stimulating lending or participation in the first place.

The increase in the supply of credit that will come from institutions that are solvent will be important, but will demand be there to do its part? If the real side of the economy continues to deteriorate, it is likely that credit demand might be subdued. Moreover, a further continued deterioration on the real side of the economy would imply new defaults on credit cards, consumer loans, auto loans and mortgages that would result in new toxic assets on the balance sheets of financial institutions recreating an environment where banks would maintain stringent lending standards. Therefore, the success of the plan is a necessary but not sufficient condition to get the economy back on a recovery path. The success of the fiscal stimulus package in sustaining aggregate demand and minimizing job losses and the success in restarting demand in the housing sector will be instrumental to put a stop to the negative feedback loop between the real and the financial side of the economy.

Moreover, if the negative feedback loop persists, need for further funding will arise. While it will be very challenging to obtain Congress approval for additional TARP money, we should point out that the government has set aside an additional $750bn in the FY2010 budget in aid for the financial sector.

Hence, taking care of legacy loans and securities is a welcome step forward, especially for solvent institutions whose asset values are subject to a substantial liquidity discount. However, insolvent institutions might not find as much relief from this plan, and the impact of the plan on the real economy might not be enough to pull the economy out of a contraction for good part of this year and sluggish growth thereafter. But by conducting auctions and determining the market value of the toxic assets, the Treasury will be implicitly using the private sector to ‘stress test’ the financial system to determine which banks are insolvent and therefore will need further government intervention.

Thursday, March 19, 2009

Today is the Iraq war’s sixth anniversary.

Today marks the sixth Aniversary of the Iraq war. Whahoo! It's hard to believe that it's been 6 years since Bush lied to this nation and took us to war with Iraq.

This was a preventive war of choice, which is something this nation has rarely done, and it was based on “intelligence fixed around the policy.”

Since the invasion, hundreds of billions of dollars have been spent, over 4,000 U.S. servicemen and women and hundreds more from coalition countries have died (tens of thousands more physically and mentally wounded), over a 100,000 (or more) Iraqi civilians have parished and nearly 5 million have been displaced.

Yet the New York Times, Washington Post, LA Times, Wall Street Journal, and many other major American newspapers are ignoring the anniversary today. Only USA Today printed a story noting the anniversary of the invasion.

The Center for America's Progress blog Progress Report has more on the good, the bad, and the ugly of developments surrounding the Iraq war over the last year.

UpdateCheck out ThinkProgress's updated timeline of the Iraq war.

Jon Stewart on Dick Cheney

The Daily Show's Jon Stewart marvels at former vice president Dick Cheney's recent interview on CNN, and his "willful obliviousness to the impact of his policies, both economically and in the realm of foreign policy."

He offers some possible titles for Cheney's upcoming book. Among them: "The Bush Administration: If We Did It, Here's How It Happened," "A Heartclogging Work of Staggering Evil," and "I Know How to Make the Caged Bird Sing."

The Daily Show With Jon StewartM - Th 11p / 10c
Interview With a Vampire
Daily Show Full EpisodesImportant Things w/ Demetri MartinPolitical Humor

LibertyAir Blog

Wednesday, March 18, 2009

President Obama Getting Tough With Congress

For the first two months of his administration President Obama tried to show due deference to Congress, but now President Obama is thankfully starting to play hardball with the Republicans and right-leaning Democrats who are threatening to sink his ambitious proposals for this country. He's both calling out his critics and raising the option of using a legislative shortcut that would eliminate the threat of a Senate filibuster. Here are what a few new's sources are saying.

According to the New York Times:

"During an appearance on Tuesday at the Eisenhower Executive Office Building, Mr. Obama took a swipe at Republican critics of his $3.6 trillion budget and its agenda for health care, energy, taxes and economic recovery.

"'If there are members of Congress who object to specific policies and proposals in this budget, then I ask them to be ready and willing to propose constructive, alternative solutions,' Mr. Obama said. '"Just say no" is the right advice to give your teenagers about drugs. It is not an acceptable response to whatever economic policy is proposed by the other party.'

"The strong words were the latest in a push that has come to resemble elements of the two-year-long presidential campaign. Mr. Obama may hold his second prime-time news conference as president, perhaps as early as next week, to talk up the budget."

In addition Walter Alarkon writes in The Hill that Obama's change in rhetorical strategy is his response to "substantial pushback from lawmakers in both parties who sharply attacked key elements in his $3.55 trillion proposal."

And the Associated Press writes:

"In a new Web video, President Barack Obama is asking Americans to help him pass his $3.6 trillion budget."
But Obama's big shot across Congress's bow is this from McClatchy Newspapers:

"A top White House official threatened Tuesday to use a congressional rule to force some controversial proposals through the Senate by eliminating the Republicans' power to block legislation.

"Peter Orszag, the director of the White House Office of Management and Budget, said the Obama administration would prefer not to use the budget 'reconciliation' process that allows measures to pass the Senate on simple majority votes.

"Orszag said he wouldn't rule it out, however. The legislative tactic is being considered to push through Obama's global warming and health care programs, and perhaps his proposals to raise taxes on the wealthy....

"Under normal Senate rules, it requires 60 votes in the 100-member Senate to shut off debate and force a final vote. Democrats currently have 58 Senate votes. Under reconciliation, 51 votes can force anything through.

"There is plenty of historical precedent of using it by both parties, including Republican Presidents Ronald Reagan and George W. Bush, who used it force through big tax cuts.

"'Pretty much every major piece of budget legislation going back to April 1981, April '82, April 1990, April 1993, the 1990 act, the 2001 tax legislation, they were all done through reconciliation. Yet somehow this is being presented as an unusual thing,' Orszag said.

"'The historical norm as opposed to the exception is for a major piece of budget legislation to move through reconciliation.'"

The Washington Post reports the predictable Republican response:

"Republicans are howling about the proposal to expand health coverage and tax greenhouse gas emissions without their input, warning that it could irrevocably damage relations with the new president....

"Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, has argued against reconciliation as well....

"'There are many more problems with using reconciliation than is commonly appreciated,' Conrad said yesterday, after he and House Budget Committee Chairman Rep. John M. Spratt Jr. (D-S.C.) met with Obama at the White House. The topic of reconciliation came up 'in passing,' Conrad said, but no decisions were made.

"One big problem, Conrad said, is that reconciliation was conceived as a way to force hard budget choices, such as tax increases or spending cuts, not as a means to advance substantive legislation."

Roll Call reports on the opposition from some within Obama's own party:

"A bloc of Senate Democratic moderates is quietly maneuvering to keep open the
option of vetoing two of President Barack Obama's most ambitious agenda items
this year — climate change and health care reform.

"Eight Democrats who want to water down new climate change legislation have already joined with Republicans and signed a letter opposing any attempt to use fast-track budget rules to prevent filibusters. Many of the same Democrats also oppose using those budget rules to prevent filibusters of health care legislation...

"Democratic moderates have been couching their opposition to reconciliation with terms like 'bipartisanship' and 'regular order,' but when pressed, some Senators acknowledged they want to ensure their voices are heard during upcoming debates on global warming and health care.

"Senators from energy-producing states like West Virginia and Louisiana are worried new carbon taxes could be slammed down their throats. And fiscal conservatives are concerned they could be left out of the room while liberal Democrats push for a series of tax hikes proposed by Obama....

"But other Democrats said they were concerned that Republicans will filibuster anything Obama pushes on energy and climate change, and the recent run of near-total Republican opposition to Democratic priorities doesn't give them cause for hope. They argue that reconciliation — and the simple majority it requires — would ensure Democrats can forward their top agenda items.

Despite the tougher tack with Congress and Republican's in particular, it's worth nothing that President Obama is still not taking anything like Bush's "imperial presidency" approach to dealing with the legislative branch. For instance, he's actually asking Congress to write major legislation itself.

Robert Pear reports in the New York Times on how's that going:

"Three powerful House committee chairmen have agreed to work together on legislation to overhaul the health care system, starting with the view that most
employers should help finance coverage and that the government should offer a public health insurance plan as an alternative to private insurance.

"The unified approach contrasts with the competition and rivalry among committee
chairmen that helped sink President Bill Clinton's plan for universal health insurance 15 years ago....

"In a letter to President Obama, the chairmen said, 'Our intention is to bring similar
legislation before our committees.'"

Friday, March 13, 2009

Three Consecutive Good Days on Wall Street

We have not seen this in a while, three consecutive good days on Wall Street. This occurred because there were some small glimmers of hope. The were some indications that the economy’s downward spiral might be slowing. On Monday the markets fell to their lowest point in 12 years, but since then the indexes have bounced back roughly 10%.

Now we are not out of the woods yet, but a few days of light was welcome relief.

South Carolina's Republican Governor Turns Down $700m in Stimulus Money

South Carolina has the second highest unemployment rate in the country, so of course their Repuglican governor is going to turn down $700 million in stimulus money for unemployment insurance. What a moron. The people of South Carolina should really think about the votes they have made. They voted for McCain 54% to 45% for Obama. They voted for this Republican governor who will screw his state for an ideology. Now their state is entering into a massive depression, and I have to wonder will they wake up? I sure hope so, because we need the whole country to succeed. We are in the midst of a great recession, we don't have time for Repuglicans.

Update: Obama says NO to South Carolina Governor's stimulus scam

The Governor of South Carolina, Mark Sanford, trying to curry favor with the far right wing of the Republican Party (the ones who vote in presidential primaries and attend presidential caucuses, btw), wants to use federal stimulus dollars to pay his state's debt instead of rebuilding schools, for example.

Today, Obama, via OMB Director Peter Orszag, said NO to Sanford's scheme:

The Obama administration has rejected South Carolina Gov. Mark Sanford's request to use $700 million in federal stimulus cash to pay down state debt.White House Budget Director Peter Orszag (OHR'-zag) said in a letter to the Republican on Monday that the federal stimulus law doesn't allow President Barack Obama to make an exception for that cash. Sanford sought a waiver last week, asking to pay off debt rather than use the money to create jobs and avoid deep program cuts.Don't mess with Orszag. Now, keep in mind, Sanford pulled this stimulus stunt to garner attention. He got some of that attention in the form of an ad from the Democratic National Committee: