Tuesday, March 31, 2009


Imagine that your teenager wrecks the family car. Then imagine saying to your teenager, "That's alright ... if you pay the first month I'll pay the rest of the new car & insurance costs because ... well, because you need to be out on the street impressing your friends." This, in essence, is how our bailout of Wall Street works.

This NY Times article by economist Joseph Stiglitz helps explain it, and is probably the best review of Treasury Secretary Tim Geithner's bail out plan that I have seen. Stiglitz offers a very accessible explanation of a complex program that tells us something that most of us already suspect: the American taxpayers foots the bill for Wall Street's stupidity, and their future profits.
The mechanics are rather simple.
1. Market players put up only what they can afford, or a fraction of the total cost of a (toxic) market instrument.

2. The government provides taxpayer money to help pay for this same instrument.

3. The government ALSO provides insurance in the form of loans that don't have to be paid back by the private sector.

So, if a market instrument costs $150.00 and the market player pitches in $12.00, the government matches it with $12.00 (our "equity" stake). But the government then has to provide a taxpayer guaranteed loan of $126.00!

And the market trash that's out there? It stays out there (albeit at a new price) and - unless we have some new and stiff regulations - the game begins anew.

- Mark


Anyone who has been listening to my radio program, or following this blog knows why I like this.

MADRID (AP) ― A Spanish court has agreed to consider opening a criminal case against six former Bush administration officials, including former Attorney General Alberto Gonzales, over allegations they gave legal cover for torture at Guantanamo Bay, a lawyer in the case said Saturday.
A little over 10 years ago I wrote an article for the Bakersfield Californian discussing why the U.S. should support Spain's detention of former Chilean dictator Augusto Pinochet. If I can find it I'll post it.

With their actions the Spaniards are telling the world that if the U.S. won't pursue those who violated international law they will do what they can to stain the Bush administration officials who did.

It should be noted, however, that the Bush administration officials who might be prosecuted in a Spanish court (in absentia) would, in all likelihood, never be extradited if convicted. They would have to travel to a country that would be amenable to arresting and extraditing those listed in the case.

- Mark

Monday, March 30, 2009


More on the Republican non-budget response to President Obama's "put-up-or-shut-up" challenge ...

- Mark


President Obama's firing of GM CEO Rick Wagoner has raised many eyebrows, and has the crazies from the Right in a tizzy over the increasing role of the state in the market. They could care less that Mr. Wagoner had 8 years to turn General Motors around but, instead, he presided over collapsed market share, tumbling stock prices, and, ultimately, the deterioration of a 100-year old organization. Still, the crazies - who ignore that Wagoner probably should have been fired four years ago - are asking "What's Next"?

If you ask me, what should come next are more firings and even criminal prosecutions. Here's why ...

WASHINGTON - Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.
In a few words, you had a few decision-makers making bigger and bigger bets with other people's (retirement) money because they could. Jon Stewart got it right when he told CNBC's Jim Cramer that it looks like "we're capitalizing your bets." If the bets pay off the institutional players win big and get bigger bonuses. If they don't, we suffer the losses. Head you win, tails we lose.

Incredibly, the former agency director who implemented the strategy until the Bush administration left, Charles E.F. Millard, is not concerned over the losses. A former managing director of Lehman Brothers, Millard said flatly that "the new investment policy is not riskier than the old one." There was no word on whether Millard shoveled the money into Lehman Brothers or toward other "friendly" institutions.

Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said,

Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it.
I don't know which is worse. Millard's arrogance or his ignorance. Either way I smell a rat.

- Mark

Friday, March 27, 2009


I just took a look at Paul Krugman's latest op-ed piece in the NY Times. It's one of his usual masterpieces - chock full of information, with powerful insights that others miss.

In a few words Krugman is pointing out that what President Obama is doing for the banking and financial sector is rebuilding the system that got us into this mess. Rather than get into the details of securities and banking the best way to think about what Paul Krugman is saying is to think about ABC's hit program Extreme Makeover.

In Extreme Makeover, ABC's design team arrives to bailout a struggling family who do the right thing through their lives, but find themselves overwhelmed by development, most of which they had no control over. Rather than take the family's old frame ABC's design team demolishes everything and rebuilds an entirely new home, with beautiful landscapes and, at times, they even throw in a car and tuition for college.

Krugman correctly points out that rather than demolish the commercial banking and investment infrastructure that got us into this mess - and then rebuilding everything with strong firewalls - the Obama administration has signed off on the old framework. The idea is to leave the framework (that encourages security markets) and strengthen the foundation with lots of taxpayer money and new regulations (which Geithner asked for this week). Krugman thinks this is a bad idea.

So do I.

This post is already long enough, but you can read Krugman's article to understand why he doesn't like what's happening. I also discuss the dangers of keeping the old framework in chapters 11 & 12 of my book. In a few words, we're setting ourselves up for an extreme do over.

- Mark


Here's a comparison of federal spending under Reagan, Clinton, and "W" ...

The record is pretty clear. We have spent more than we take in under republicans by a wide margin. Why republicans would propose more tax cuts in their most recent budget proposal is a mystery.

- Mark


Recently President Obama challenged congressional republicans to quit their bellyaching and come up with their own budget proposal if they weren't happy with what the White House was offering. The republicans responded by coming up with their own budget, sort of.

When House Republican leaders called a press conference Thursday to show their "alternative budget" it was woefully thin on specifics. But, as if they've been in some time capsule of ignorance for the past 8 years, it included one major policy proposal: a huge tax cut for the wealthy.

Unfortunately for the republicans, reporters greeted the Republican document with what can only be called a collective chuckle. From Ryan Grim, we get this scintillating exchange between a reporter and Minority Leader John Boehner:

"Are you going to have any further details on this today?" the first asked.

"On what?" asked Boehner.

"There's no detail in here," replied the reporter.
If you're wondering why Boehner is so clueless, perhaps it has something to do with the basic outlines of their plan, which I post here for your viewing (humor):

Seriously, republicans need to pick it up. No democracy is credible for long if the competition is incompetent, tone deaf, and clueless.

- Mark

Thursday, March 26, 2009


In 1899 the Commissioner of the U.S. Patent and Trademark Office, Charles H. Duell, is reported to have claimed that “Everything that can be invented has been” and said that he would retire because the U.S. Patent Office would no longer be needed (Duell resigned, but for other reasons). If true, apart from demonstrating a less than creative sense of imagination, it appears that Duell had bought into the notion that society – and creativity – tended to drift toward a sort of equilibrium, where inventiveness, curiosity, and other human developments stabilized.

In this case, Duell may have been so impressed with trains and other inventions of his day that he led himself to believe society had reached the limits of its creativity. This line of thinking - whether Duell fell into it or not - is real and reflects something else about human nature: a tendency to embrace ideas that reinforce what we want to believe.

This explains, in part, why we create pleasing and wishful theories that help us make sense of our world. In relationships we create theories about love and marriage. In markets we create blissful scenarios about market players doing the right thing in the pursuit of profits and wealth. The problem with this practice is that people who search for certainty in impractical or outdated theories about the world have trouble understanding how the world really works, or seeing the possibilities of human creativity.

Take, for example, what we knew before 1492. We didn’t know what lay beyond the horizons of the oceans so we created a theory that said “the world is flat.” It provided many in society with certainty – you will fall off the earth if you sail too far. While most accepted this world view, others were not satisfied. The adventurers - who were warned and criticized for their recklessness - would cut a path to the New World and change world history.

So it is in our political world today. Led by GOP Senator Mitch McConnell, republicans are now saying that President Obama is spreading himself too thin because he's trying to do too much. They are flat earthers. If they lived 500 years ago they would be burning witches because the offending "witch" said or did something they did not understand. Around the fire they would no doubt be muttering something about the witch not "being with us, so she must be against us."

While we can't say all republicans are medieval in their thinking, I don't think it's a stretch to suggest that they are the new Charles Duell's of our time.

Wedded to failed theories about tax giveaways to the rich (supply-side economics) and impractical notions about the virtues of market players in deregulated markets (laissez-faire), republicans are criticizing President Obama for, essentially, thinking big. This is what's happening.

As I've noted before, republicans are deathly afraid that President Obama's ambitious program might be successful. Obama's success would relegate their outdated ideas to the fringe of our political world ... they are afraid that President Obama will make them politically obsolete for the next generation. It's that simple.

So when republicans in Congress say they see "socialism" on the horizon what they really see are witches. This is why they search for truth in pithy but empty maxims, which embrace a status quo that Charles Duell might find comfort in. It also explains why they want President Obama to fail. They're afraid for themselves, and what they see in a future if President Obama is successful.

- Mark


I've been meaning to post on this for a while now ...

Media Matters points us to one of the many lies that FOX tries to plant into the minds of their viewers on a regular basis. On The Live Desk, Trace Gallagher cherry-picked numbers from the Dow Jones industrial average and tried to use them in a way that would suggest that President Obama's address to the National Conference of State Legislatures had caused the Dow Jones average to drop. The problem is Trace can't add and subtract. Check it out. According to information posted on-screen on Fox News, the Dow actually went up slightly during Obama's speech.

Political scientists and psychologists have a simple term for this. It's called propaganda. It works especially well when you have a committed (i.e. "gullible") audience willing to dance to a Waltz of Lies, which FOX spews out on a regular basis.

Here are the facts. When President Obama began to speak the Dow stood at a little above 7,367. When he finished speaking the Dow stood at 7,370, plus change. Since most of you who follow this site aren't FOX News followers I don't have to do the math for you.

I wonder what Trace does when he gets into negative numbers. His head probably explodes.

- Mark


My book, The Myth of the Free Market: The Role of the State in a Capitalist Economy, is now available at Bakersfield's Russo's Books. Most of you who have been following this blog, or listening to the radio program, already have an idea about what I say in the book (with the exception of the middle five chapters, which are historical).

Still, the last four chapters, which explain the roots of the market meltdown, will prove enlightening. Specifically, the story behind what you see in Table 9.1 and Figure 12.2 will force you to rethink what you know about the bailouts.

Go to Russo's Books, at Ming in the Marketplace, and pick up a copy.

- Mark

Wednesday, March 25, 2009


We've all heard about flying on a wing and a prayer. This case, and the subsequent conviction of a pilot who prayed before a crash landing, raises some interesting issues ...

- Mark

Tuesday, March 24, 2009


From the NY Times we get news of this AIG letter of resignation from Jake De Santis, an executive vice president at AIG ...

The letter of resignation is well written, but Jake's primary point is that he stayed AIG with the promise that he would be compensated for helping to clean up a mess that he claims he had no hand in making. Jake believes he should be compensated, as promised. He's also donating his bonus (after taxes) to charitable organizations that deal with those most affected by the financial fiasco. Good for him.

Two points here.

1. THE "I'VE HAD ENOUGH" CLAIM: Jake's mad because he was trying to do the "right thing" and now feels stigmitized by the political firestorm over the AIG bonuses paid out. While he may think his resignation tells us "I've had enough" it really tells me "I have enough, and can afford to walk away in feigned indignation over not making more."

Look, at the end of the day, most of us try and do the right thing but don't have millions of dollars stashed away after working 10-12 years. Jake can ask the UAW members who did the right thing and hope to have a job next year. He can also ask those now filing for bankruptcy, or who are losing their homes, about contracts and their life expectations. Jake needs to get over himself.

2. THE "I WORK HARD" CLAIM: Jake's rationale for leaving is all mixed up. Jake feels that he should get what he was promised because he's put in 10-14 hours a day over the past year. And just as a plumber who is "cheated after he has fixed the pipes" only to watch as "a careless electrician causes a fire that burns down the house" Jake believes he deserves his promised bonus for his hard work. I've said it before and I'll say it again: In the real world Bambi's mother dies. Love stinks, and doesn't really conquer much. Good and innocent people get trampled on.

Welcome to the real world Jake. Some times you get screwed.

The really interesting point here is that Jake, like my Wall Street friend from a few weeks ago, lives in an entitlement world that's been propped up by a bubble. They think whatever they do deserves a fabulous reward or special status. The last time I looked, Jake still received a nice salary for doing his job. I'm glad Jake's bubble has been popped.

I don't feel bad for Jake. He needs help. Good thing he can afford it.

- Mark


We all know that CNN's Lou Dobbs has made a name for himself rallying conservatives, the Minutemen, and other extremists over Mexico. Well, now it looks like Pat Buchanan wants to become his side-kick ...

That Buchanan replaces Sunnis and Shiias with Mexicans in his fear-mongering says much about the direction he wants to take the issue.

Look, I just finished grading papers and exams for my Politics of Mexico class and can say that my students (even the "C" students) understand the issues confronting the U.S. and Mexico over the next 20-30 years better than Buchanan. Very quickly, let me state that illegal immigration is a problem. So is the drug issue.

But we need to remember who does the hiring, and who creates demand for illicit narcotics here in the U.S. Simply put, in any market economy there is no supply without demand. Period.

The problems Buchanan sees are not going to go away any time soon as long as we have people like Pat Buchanan, Dobbs, and their Medieval-like approachs poisoning the airwaves. The challenges we face when it comes to Mexico require Marshall Plan-like vision and patience. Whether we want to believe it or not, we are in this together. I know that this is disappointing to many, but there is no other way to put it.

Moreover, as I pointed out more than 15 years ago when NAFTA came into force (see also Chapter 3 of Robert Pastor's book), simply signing empty and misguided "free trade agreements" with Mexico and Canada will not do the trick. You might find this hard to believe, but George W. Bush seemed to understand all of this, which was made clear when he hosted Mexico's President Vicente Fox days before 9/11. I'll have more to say about this at a later date, or whenever Buchanan and Dobbs start ramping up their ignorance.

For now, count me as someone who doesn't like the scapegoating and ill-will that Buchanan and Dobbs will create as long as they are allowed to become the face of the debate.

- Mark

Monday, March 23, 2009


If it seems like all we're doing is just getting ourselves into a bigger mess every time we hand Wall Street money, check this out this TARP inspired photo sequence. Some might even see Geithner's Plan ...

- Mark


Tim Geithner's new plan for bringing private market players back into the financial mess they created is getting hammered already. Robert Kuttner's most recent article helps explain why.

In a few words, the Treasury Secretary's plan is to get the Federal Reserve and the FDIC to put up new money to purchase (or subsidize the purchases of) the toxic debt on the books of our nation's financial institutions, and then to insure those newly purchased debt products. Geithner believes that by doing so we can entice the private equity players back into the game. In a few words (and to grossly oversimplify the process), we are pretty much bribing private players with guaranteed money and a guaranteed payoff ... and with public funds, no less.

Interestingly, according the the Wall Street Journal, many private market players are going into "wait and see" mode because they don't like how they are being villified in Washington. To be sure, they like the ideas and guarantees in Geithner's plan, but they don't like the oversight and tone they see coming from Washington.


- Mark

UPDATE: Count Paul Krugman as uninspired by Geither's Plan. Here are the money quotes,

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.
But I especially like this one,

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.
You can read Krugman's article here.


From Media Matters ...

On Fox & Friends Saturday, Karl Rove understated the debt run up by George W. Bush, asserting that there were only "$2.9 trillion in deficits under eight years of Bush."

Here's the problem with Karl Rove's math. The national debt really increased by at least $4.9 trillion during the eight years Bush was in office. But Rove doesn't see this figure because he ignores the costs of Bush's Blundering Wars Project. Rove also ignores the hundreds of billions in Clinton surpluses that the Bush administration burned through, and the trillion-plus dollar mess he handed President Obama. If we add this in we're now talking about at least $6 trillion in debt that the Bush administration buried us with over 8 years. And we haven't even begun to calculate the VA bills coming down the pike. Incredible.

Here's how Rove gets his $2.9 trillion figure.

Every year the Bush administration sent a budget to Congress after 9/11 they ignored the costs of war, preferring to put this in as "emergency" or "supplemental" expenses. They did this every year even though they knew we had to pay for the war every year. They did the same with Katrina funds. If you want to do this at home, add up your yearly normal expenses and forget to add in vacations, birthdays, special events, emergency expenditures, etc. Then think about how your budget would look like if you had vacations, birthdays, special events, and emergency expenditures every month. Your anticipated deficits (called "on-budget" deficits in DC) will not come anywhere near to what your real budget (padded by "off-budget" deficits) amounts to.

But we shouldn't be surprised. The Bush administration dedicated itself to creating a smoke & mirrors environment about what it did in Washington. Karl Rove and FOX News are dedicated to perpetuating the same smoke & mirrors today.

- Mark

Sunday, March 22, 2009


This op-ed piece from the NY Times' Frank Rich captures the turmoil and challenges that President Obama faces. In a few words, Rich makes it clear that the performances of Secretary Treasurer, Tim Geithner and his economic mentor, Larry Summers, aren't helping President Obama.

More specifically, Rich paints the two as a couple of blowhards who are tone-deaf to larger political realities that are slowly engulfing the White House.

- Mark

Saturday, March 21, 2009


UPDATE: Professor Fagan got caught up in some personal developments yesterday. He's sent apologies and wants to appear at a later date. I want him on too. Once we get it figured out I'll announce it.

- Mark

Professor Emeritus Brian Fagan will be with us on my radio program this after at 3:08 pm. We'll be discussing his NY Times bestselling book, The Great Warming: Climate Change and the Rise and Fall of Civilizations (Bloomsbury, 2008). Here's his clip from The Daily Show with Jon Stewart.

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

- Mark

Friday, March 20, 2009


With the U.S. economy in shambles, record budget deficits, and the wholesale looting of taxpayer money by the financial sector it dawned on me that what's happening here would not be tolerated by the U.S. in other parts of the world.

Anyone familiar with the history of economic development knows that when countries start running large budget and balance of trade deficits, and then experience the type of meltdown we are experiencing, that the U.S. and its Western allies have arrived to impose "structural adjustment reforms" on the country that has lost its way economically. This usually means draconian budget cuts, imposed policies, and forced financial terms.

In the past - using the U.S. Embassy as its base to direct events - the U.S. has even forced unwanted leaders from power. With this in mind, after being asked about developments in the U.S., Chile's President Michelle Bachelet joked:

The reason why in the United States there has never been a coup d'etat is because in the United States there is no United States embassy.
Keep in mind that this is from the president of Chile, one of two nations in Latin America that tries to do what we ask of them (Colombia is the other, but doesn't really count because we stuff them with arms and money for their war on drugs). President Obama has a lot of work in front of him.

- Mark

BOEHNER'S BONER (on deregulation)

Minority leader Rep. John Boehner seems to think that Americans are blindly stupid. While on CNN with Wolf Blitzer he claimed that there was no deregulation in the financial industry. Here, check it out.

Not only was there deregulation, but it occurred over the better part of 25 years, and is what helped cause our current economic meltdown (a culture of debt and market stupidity also played a role). While there are many cases of deregulation I could cite, here's my top 4 (which I explore in detail in my book).

1. SALOMON'S THREE WISHES, 1980-81: In the early 1980s Salomon Bros. sent their lobbyists to Washington and, along with other lobbyists, were able to get Congress to deregulate the banking and S&L industry so that they could sell mortgages at a loss, which meant that the American taxpayer picked up the tab. This facilitated the growth of mortgage securities, and the rise of collateralized debt obligations (CDOs), which AIG decided they would insure in the late 1990s. The S&Ls also got to use the proceeds to invest in things like ostrich farms and yachts, instead of using their money to fund home purchases.

2. THE FED'S 3-2 DECISION, 1987: With one single 3-2 vote the Federal Reserve said commercial banks could start acting like investment banks. The FED said they could handle municipal bonds and mortgage securities, which they began to compete for vigorously. The two people who voted against this provision included then FED Chair, Paul Volcker, who was concerned that commercial banks would become consumed with securities and lower lending standards in order to gain lucrative underwriting fees. Because commercial banks are FDIC insured Volcker believed banks would eventually get reckless in the securities market. Ooops.

3. THE FINANCIAL SERVICES MODERNIZATION ACT, 1999: With a vibrant market for CDOs and commercial banks already competing for investment bank business, Bill Clinton signed into law the bill that effectively eliminated the Depression Era Glass-Steagall Act. Glass-Steagall for years had kept the American economy from allowing insurance, bond, and commercial banks from mixing together under one roof. Why? Check out 1929. The Financial Services Modernization Act (A.K.A. Gramm-Leach Act) in effect said, "Go ahead, create, buy, and insure what you want".

4. PAULSON & THE SEC, 2004: In 2004, before he became Treasury Secretary, Hank Paulson was CEO of Goldman Sachs. He went in front of the Securities & Exchange Commission (SEC) to ask that the "net capital rule" be suspended. In plain English he argued that the financial industry should be able to borrow at a 30-1 ratio. Not surprisingly, the industry went from leverage ratios of 7-1 to 35-1 almost over night. How big was this? Imagine making $10,000 per year and finding a bank willing to lend you $350,000. Not surprisingly, the financial institutions went nuts borrowing and buying the complex instruments (which AIG insured) that helped sink our economy.

These deregulatory developments reached critical mass under George W. Bush, but were put on steroids with Alan Greenspan's easy money policies. Because borrowing was made easy, it gave the impression that money and wealth were free. In reality, deregulation over a 25 year period helped create a casino mentality, which emphasized wealth extraction rather than wealth creation.

How John Boehner can think otherwise is beyond me. What an idiot.

- Mark

Thursday, March 19, 2009


This article by economist James K. Galbraith in the Atlantic Monthly is one of the best that I've read on what's happening in the economy. It's long, but worth the read. First, why the current plan won't work:

Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital ... The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work.
This is not encouraging. But wait, it gets better:

In short, if we are in a true collapse of finance, our models will not serve. It is then appropriate to reach back, past the postwar years, to the experience of the Great Depression. And this can only be done by qualitative and historical analysis. Our modern numerical models just don’t capture the key feature of that crisis—which is, precisely, the collapse of the financial system.
Here's what Galbraith sees as the ultimate sign that we are on the road to recovery:

... the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.
I agree with this assessment. This will require that we do something about household debt loads across the country (at record highs), and work on putting more money in the hands of labor (increase wage levels).

There's more, but this is a good start. Read the article.

- Mark

Wednesday, March 18, 2009


One of the proposals for clawing back the bonuses paid out to the morons who ran our economy into the ground (by insuring products they didn't have the money to back up) is Rep. Carolyn Maloney's proposal. Maloney (D-NY) suggests that we tax AIG bonuses at 100%. I support this initiative.

Still, there are those who counter that this can't be done because the Constitution says we can't attach a "Bill of Attainder" (Art. I, Sec. 9 and Art. I, Sec. 10).

In simple terms a Bill of Attainder says we can't single out individuals or small groups of people for punishment after the fact. The goal of the Framers was to prevent "trial by legislature" or, put more simply, to prevent our country from being taken over by a legislative lynch mob or a Kangaroo Court mentality. Fair enough.

What these people fail to mention, however, is that there's nothing in the Constitution that says naked greed and stupidity that undermines our nation's economic health are protected.

Think about. What AIG and their financial partners have done undermines the "general Welfare of the United States" which means that Congress has "the Power to lay and collect Taxes, Duties, Imposts and Excises" provided that they are "uniform throughout the United States" (Art. I, Sec. 8). What this means is that if Congress does not single out AIG and, instead, makes clawback provisions uniform for all financial institutions who were saved by the taxpayer bailout we can get our money back. The legislation could say something like this:

"Given the current financial situation that our nation confronts, and how it undermines the economic stability and general welfare of the United States, any financial institution that received, or receives, TARP, TALF, Government, or any Federal Reserve funds from ________ through _________ will have their wages, retention salaries, or bonuses exceeding ______________ taxed at ________%."
The language could be more specific, but you get the point.

And the best part? We can get back a good chunk of the more than $4 billion in bonuses paid out to the Merrill Lynch incompetents, and can start pursuing other excessive bonuses and wages paid out to the other financial incompetents who helped run our economy into the ground. At the end of the day Congress just needs to get creative, and grow a pair.

I'll have more to say on this, and other options, later.

- Mark

Tuesday, March 17, 2009


Barron's did a review of 14 of the biggest and most prestigious brokerage (trading) firms. Their review covered 6 months, 1 year, 3 years, and 5 years. What did they find? Every one of the firms lost their clients money by failing to see the market meltdown coming. Click for larger image.

Keep in mind, these guys are supposed to be the experts. Yet they didn't generate net positive returns for their clients during any of the time periods tracked. Even a broken clock gets it right two times a day.

Why do I bring this up? Am I just pointing out the obvious? No, I'm pointing this out because we now have market experts telling us that we need to allow AIG's executives to keep their bonuses. As Devilstower tells us, the same people who didn't see the meltdown coming now believe that handing out million dollar bonuses for failure is a good idea.

Take Columbia University Professor of Financial Institutions, Charles Calomiris, for example. He believes we should just let AIG figure it out because, you know, they did such a standout job the last time. After telling us that we don't know what's going on in the financial trenches, he writes:

This illustrates the importance of avoiding government micromanagement of these institutions, since it is very hard for taxpayers, politicians, or bureaucrats to make such judgments ... Nevertheless, as a country we need to find the courage and strength of character to put the national interest above our own desires to punish financial institutions. Withholding effective support [for things like bonuses] will delay our recovery.
Calomiris offers the following advice: "What we need is, we need to compensate them so they stop losing money for us."

So if I got this right, we need to pay people not to lose money ... after they paid themselves a ton of cash (with bonuses) to lose money and wreck our economy. This is like saying we need to pay bonuses to the crew "Heckuva a job Brownie" left behind after Katrina laid waste to Louisiana because without the bonuses they might do a worse job then they did during Katrina. Huh? Does this make sense to anyone? Not to me it doesn't.

Let's make this simple: What Calomiris is advocating represents the logic that drives failure.

But what else would you expect from someone who moonlights as an analyst for the right wing, and uncritically "free market" oriented, American Enterprise Institute.

- Mark


In my book I outline how we can not speak of a free market when the government and the American taxpayer support market players with write-offs, bailouts, protective tariffs, tort reform protections, pet infrastructure projects, favorable legislation, fiscal policy, and a host of other subsidies that protect market players. Well check out what Bernie Madoff's bilked "investors" just fell into:

The Internal Revenue Service will allow victims of Ponzi schemes to deduct theft losses in the 2008 tax year and recoup taxes paid on phony income, Sen. Charles Schumer, D-NY, said Tuesday ... Under the IRS guidelines, victims will be able to take a deduction equal to 95% of the amount they invested, plus any investment income they believed they were earning ...
With financial institutions being saved by the American taxpayer, and AIG employees receiving millions in bonuses for simply making a deal (and a bad one at that), the decision to allow Bernie Madoff's "investors" to deduct 95% of the amount they put into his Ponzi scheme on their taxes proves the point I make throughout my book: THERE IS NO FREE MARKET.

Telling market players that they don't have to keep an eye on the people who make investments on their behalf because the American taxpayer will pick up 95% of the tab is simply wrong. Seriously, at what point do market players have to learn their lesson? As well, telling market players that they can put all their eggs in one basket, and that they don't have to worry about it because the American taxpayer will pick up the tab if things go south is not capitalism. It's market socialism.

Once we realize this we can get down to the business of understanding what needs to be done to fix this mess - nationalize the failing banks, claw back bonuses with the tax code, and impose "snap-back" provisions in our regulatory system so that we return to a system that kept an eye on the market stupidity that got us into this mess.

- Mark

Monday, March 16, 2009


These guys still don't get it ...

With millions of Americans unemployed or fighting to keep their homes, this weekends revelation that AIG spent over $150 million on bonuses is (yet another) another slap in the face to the American taxpayer. So is this comment by AIG's CEO that they needed to give out bonuses because,

"we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses ... if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
I don't know about anyone else but AIG's CEO, Edward M. Liddy, just demonstrated how clueless he and his Wall Street brethren are. Real talent does not run a company into the ground. Nor should they be compensated for doing so.

Look, we're all going along with these bailouts because we've been told that we need to keep the banking system solvent. We are not, however, going along with these bailouts to maintain a self-indulgent out of touch lifestyle. Paying bonuses for AIG's incompetence contributes to keeping out of touch lifestyles (like this one) afloat.

Here it's necessary to keep in mind that AIG was brought down mostly by its "Financial Products" group, the division that insured the toxic investment products. The people in the Financial Products division are also the guys who received the vast majority of the bonus money. Why? Because AIG's Financial Product division had incentive contracts that said, in effect, "We'll pay you $________ if you insure these bad bets."

Put even more simply, these guys are supposed get bonuses simply because they made a deal. It didn't matter how the deal actually worked out for the firm, as long as the deal was made. Even Monty Hall's "Let's Make a Deal" prize give away show didn't do business like this.

Here's a chart illustrating AIG's "Structure of Investment Stupidity" (click on the chart to expand it).

I don't know of anyone who believes we need to honor bonus contracts for market players who underwrote bad bets. If the auto workers can have their union contracts renegotiated, and my credit card company can unilaterally change the terms of my credit and interest payments, AIG's bonus contracts can be changed as well.

- Mark

Saturday, March 14, 2009


With more than 11 percent of mortgages in this country deliquent or in foreclosure (with Bakersfield among the worst hit), many people are either walking away from their homes, or thinking of doing so. This article from the NY Times discusses what to consider if you're thinking about walking away. It's also a good primer for some of the issues we'll be discussing with our guest today, acclaimed bankruptcy attorney Leonard Welsh.

I had lunch with Leonard on Thursday and can say the following: this promises to be perhaps the best show of the year. And, yes, I'm thinking all the way into Christmas.

- Mark

Friday, March 13, 2009


Jon Stewart's interview last night with CNBC's Jim Cramer was a masterpiece. I especially liked how Stewart was able to get Cramer to rebuke CNBC's Rick Santelli for yelling at "loser mortgage holders" while on the floor of the Chicago Mercantile Exchange (forward to 2:00 in the interview). This is PART I ...

For my money, the best segment was the second part of the interview, where Jon Stewart shows some clips where Cramer admits to gaming the system. He follows this up by telling Cramer "it feels like we are capitalizing your adventure" with our pensions and 401k plans. This is PART II ...

In the last part of the interview Cramer takes a pretty good jab at former Treasury Secretary Hank Paulson (who should be bloodied up because of his yet unpublicized role in this mess) and even calls for indictments. Stewart uses a few colorful words in this segment, but they're hearfelt and, in my view, justified. This is PART III ...

At the end of the day I give kudos to Cramer for going on Stewart's show. It was a great interview. If the interviews don't appear on this site you can go here to watch the show.

- Mark

Thursday, March 12, 2009


Last week I received a copy of what I'll describe as a “Market Outlook” review, produced by what was once one of the biggest financial institutions on Wall Street. In a few words the piece complained that things would go from bad to worse under President Obama because his programs were bringing “Big Government” back. It got me going because it came from one of the firms that had been saved by tens of billions in taxpayer dollars.

I looked up the e-mail addresses of the Wall Street economists and – more to blow off some steam than to initiate a dialogue – I sent the following message to the authors. The title of the post was “You Need Help” (I've corrected typos and changed names):

Dr. Wall Street Economist:

I just received your "The Return of Mr. Big Government" analysis.

It pretty much sums up why Wall Street still doesn't get it. No where do you try to explain that "Big Government is Back" because "Big Business" fell flat on it's face and decided to take the country's economy with them. At the end of the day everyone at your firm should be unemployed or looking for work. You don't seem to understand that many in your industry owe your current employment to Big Government and the American taxpayer.

That you try to frame current events in the same manner as a FOX News team says much.

And your prognosis on what happens when you "raise taxes on those earning over $250,000" lacks depth, or any reference to what happened in the 1990s.

Get help (and not from the American taxpayer), please.
Not expecting a response, I logged off. I was surprised to see this in my in box when I came back to my computer (I’ve cleaned up the typos).


Thank you for taking the time to send this email, even if you disagree with the message. These indeed are very troubling times and the government is doing all it can to underpin domestic demand and ensure social stability. My own belief is that Washington should be focused on assisting the state and local government sector, which is the second largest part of the economy and cutting back on services and much needed capital spending ...

I couldn’t believe it. These are the same guys who collapsed the economy by borrowing money they didn’t have, to bet on products they didn’t understand. And they think sending money to the states so they can cut services and invest in infrastructure (the logic here is rough) is the first step toward fixing the economy?

But wait, it gets better …
… I think given the size of the borrowing requirement from the government, we could very well run into a wall very soon. Even FDR kept the deficit contained at 6 pct of GDP......spending money wisely is essential and we have too much of a fiscal boondoggle at the federal level.
Nice. State the obvious ... and leave out the role of the previous administration in running up record deficits every year. Hey, I have an idea: How about NOT collapsing the economy by betting on financial gimmicks and then having them insured with market players who don’t have the money to pay off on claims?

In the next section Mr. Economist falls back on economic theories that have little to do with the issues at hand, and then sprinkles his point with a little false bravado. Check this out ...

And I agree with you about financial bailouts, and I feel the same about auto bailouts, and this country was built on creative destruction. Most of the people that lost jobs at RCA, Pan Am and Penn Square got jobs elsewhere or retooled and I'm frankly quite willing to do likewise . . .
Look, “creative destruction” refers to outdated industries being replaced by new technologies, or a workforce being forced into new lines of work because of competition. The horse & buggy industry was greatly diminished by the arrival of the train and the automobile industries, for example. Those who worked in the 8-Track tape industry lost out to those working with cassettes, which lost out to CDs, and so on …

The problem here is that, as much as they want to believe otherwise, the new kings of Wall Street aren’t like the Robber Barons of the past. Nor are they replacing old technologies and habits with new more efficient industries. Put simply, they built financial sand castles and sold them like snake oil. At least the Robber Barons who contributed to “creative destruction” in the past left a trail of brick & mortar and some pretty solid blue collar industries in their wake. Today's market fools simply collapsed the economy by making stupid bets.

Interestingly, the stupidity continues . . .

Bailing out banks was not something Mr. Abbot or Mr. Costello requested [he was speaking in the third person here] ... It is being mandated by Obama, Geithner and Bernanke. Yes, yes, the Wild West was created in the financial sector, and yet the regulators (Greenspan) were asleep at the witch.
Incredible. Mr. Abbot is simultaneously saying his company had nothing to do with their collapse while claiming they were forced into being saved with billions of taxpayer dollars by President Obama. There were no other options (like, say, a government takeover). Mr. Abbot wants us to believe that his company was simply caught up in some Big Government conspiracy that was concocted after Big Government fell “asleep at the switch” – irresponsibly leaving the banks to regulate themselves - only to wake up in time to impose uninvited order. Huh? (if you're having trouble following Mr. Abbot's line of thinking, you're not alone).

It’s this kind of pretzel logic that tells me we need to nationalize the failing institutions and force a little creative destruction (i.e. "You're fired.") on Wall Street’s economists - especially the ones who think like this.

Seriously, these people don’t need jobs. They need help.

- Mark


EARMARK: Portions of a piece of legislation (usually an appropriations bill) that benefit a specific state, region, project, or individual.

After passing a $410 billion spending bill, republicans in Congress are still up in arms about earmarks. What they're especially mad about is that President Obama isn't putting a stop to a problem that they turned into an art form after they came to power in Congress in 1994.

Worse, their complaints are really misdirected because - apart from doing nothing to stem spending when they were in power - at the end of the day earmarks amount to little more than 2% of the total federal budget.

Finally, of the 8,500 + earmarks in the spending bill, at least 40% of them belong to republicans. Put another way, republicans have a heavy hand in the cookie jar.

- Mark

Wednesday, March 11, 2009

FDIC . . . Forget Da' Insurance Co-pay

On the eve of the 2008 market collapse, September 14th, I wrote more posts that Sunday than on any other day. Specifically, I was looking at the elections and the financial institutions that were primed to collapse on Monday. I also wrote about something that was perplexing me. The Federal Deposit Insurance Corporation, which insures our bank deposits, was going broke.

I really wasn't surprised about the financial institutions going under. I had been talking about their problems on my radio program for a year, and was writing about it in real time for my book. But I hadn't been following the FDIC, so if it needed funds I was caught off guard ... Well, I am no longer perplexed by the FDIC's lack of funds.

Via the Boston Globe we're learning that, thanks to Congress, many banks have not been paying their FDIC dues for the past 10 years (which, no doubt, helped their bottom line). Here's the Boston Globe:

The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

How nice. You know, I think I'll just stop paying my insurance premiums, and ask my insurance company to pick up my tab when I get sick ...

You can read all the sordid details here.

- Mark

Tuesday, March 10, 2009


The NY Times has an excellent article on finance in today's paper located, curiously, under it's "science" section. Why science? Because the article discusses how physicists and their hard sciences brethren flocked to Wall Street in the 1980s and 1990s and became the analysts who created the novel financial instruments that helped get us into our current economic mess.

In a few words these "quant geeks" used novel financial instruments to create elegant models that made sense on their computers but, as we know now, had little to do with reality. There's a reason these guys ended up getting it wrong. Like Rumplestiltskin they were, in effect, trying to turn straw into gold.

Rumplestiltskin, as we know, is a child's fairy tale. What many of us don't know is that Rumplestiltskin is an exaggerated caricature of the ancient alchemists, who searched centuries for the Philosopher's Stone, a mysterious substance which the ancients believed had the power to turn base metals, or other materials, into gold. Even Sir Isaac Newton is said to have dabbled (secretly) in alchemy in search of the Philosopher’s Stone.

Sovereigns and alchemists alike believed that if the Philosophers’ Stone could be found, or if the right chemical reactions could be produced, their worries about money and finances would be solved. So it was with Wall Street and their new alchemists from the disciplines of physics and mathematics.

Unfortunately for us, our modern day Rumplestiltskins - the quant geeks and their Wall Street patrons - are now just starting to realize what the ancients learned long ago. Products that are unstable and/or worthless are just that, unstable or worthless.

The article is somewhat long, but worth the read.

- Mark

Monday, March 9, 2009


This week Congress will take up discussion of legislation that will make it easier for workers to unionize. In a few words, the legislation would allow workers to simply sign a card demanding a union. Employers don't like it.

Employers would prefer to have mandated elections because they give employers time to bring in anti-union teams, fire organizers, and generally intimidate the workforce. Passing this legislation would be a first step in helping to address the imablances that have grown between management and labor over the past 29 years; imbalances which have produced stagnant wages for America's middle class, bloated CEO wages, and now - with the economy collapsing - growing tent cities that resemble the Hoovervilles that dotted the American landscape almost 80 years ago.

How badly needed is this legislation? Pay gaps between labor and management have grown so out of hand that wage gaps are as bad as they were when Herbert Hoover left office. Today, as more and more observers are pointing out, labor is now confronting the worst economic situation since the Great Depression.

What follows below is an edited excerpt from Chapter 10 of my forthcoming book, The Myth of the Free Market: The Role of the State in a Capitalist Economy. It explains, in part, how labor has seen its economic position deteriorate over the past 29 years to the point that more and more families are now 1 or 2 paychecks away from being out on the street. FYI, I have 5 charts and graphs in my book - scheduled for release this week - that provide figures for what's presented in this section. If I can get them on a pdf file I will post them later ...

Among the forces that fed the market exuberance of the late 1990s and the early 2000s were cheap credit and debt. By feeding consumption, credit and debt fit the goals of both major political parties in America, but for different reasons. Democrats saw the democratization of credit; Republicans saw increased profits. Few thought it was necessary to take a look at collapsed savings rates and soaring debt levels in America . . . rarely was this question asked: What are the factors that cause many ordinary Americans to borrow beyond their means and that lead many into bankruptcy?

We know from Chapter 2 that divorce, job loss, and catastrophic illness cause 90 percent of all bankruptcy filings in America. But we need to shift the issue from uninvited life events to specific, policy-driven areas if we want to understand why Americans have been nudged to take on more and more debt over time. This means looking at wages in America.

In a 2007 speech, Federal Reserve Chairman Ben Bernanke considered incomes and focused on the growing gap between America’s middle class and the financial elite. Bernanke reported that, in spite of rising labor productivity and technological advances—which usually find their way into growing wages—income gaps had increased significantly in America since 1979 . . . perhaps his most significant observation was what he had to say about the impact that organized labor has on wages. According to Bernanke, unions not only reduce wage inequality, but at least 10 to 20 percent of wage inequality in America can be attributed to the decline of unions.

This is important, because organized labor was put on the defensive after Ronald Reagan entered the White House by an alliance of convenience between corporate America and political conservatives. According to Businessweek, things worked out so well for industry that as “[c]orporate America has perfected its ability to fend off labor groups” labor union membership dropped from 20.1 percent of the labor force in 1983 to 12 percent by 2006 . . . Economist, and Nobel laureate, Paul Krugman explains what happened:

It’s often assumed that the U.S. labor movement died a natural death, that it was made obsolete by globalization and technological change. But what really happened is that beginning in the 1970s, corporate America, which had previously had a largely cooperative relationship with unions, in effect declared war on organized labor . . . hardball tactics have been enabled by a political environment that has been deeply hostile to organized labor, both because politicians favored employers’ interests and because conservatives sought to weaken the Democratic Party. “We’re going to crush labor as a political entity,” Grover Norquist, the anti-tax activist, once declared.
The relationship between corporate America and the Republican Party has reaped financial benefits for America’s business elites and political payoffs for Republican political candidates. But it has been financially devastating for America’s working class.

Since the late 1970s, inflation, declining or stagnant wages, weakened unions, lax immigration policies, deregulation, and the challenges of having jobs shipped overseas have left ordinary Americans with an increasingly tough financial line to hoe. The arrangement, however, seems to have worked out well for America’s CEOs, who have seen their salaries rise in relation to the average worker: from a ratio of about 40:1 in 1980 to 262:1 in 2005 (other reports put the figure around 431:1).

Given that the federal government has been increasingly reluctant to intervene on behalf of labor over the past thirty-five years, ordinary working Americans have had to cope with rising costs and stagnating wages in a number of ways.

* Two-Income Households, 1970s: With the women’s movement came the rise of two-income households. Two working parents increased household income significantly.

* Credit and Charge It, 1980s: Americans began racking up serious personal debt in the 1980s when, as former Federal Reserve Chairman Alan Greenspan put it, “innovation and deregulation” worked to “expand credit availability to virtually all income classes.” At the end of 2008 total credit card debt stood at $969.9 billion (Graph 10.1).

* Decline of Leisure, 1990s: Although divorce and personal debt put a dent in disposable income, Americans began working more hours to make ends meet, even surpassing the Japanese in 1995.

* Household ATMS, 2000: To keep the American Dream alive, many Americans went on a borrowing binge, this time using their homes as ATMs.
With more and more households using their homes as ATMs, we can understand why home-owner equity in America was less in 2007 (at the height of the housing boom) than it had been seven years earlier. At the end of 2008 it was poised to drop below 50 percent for the first time since the government had started keeping track of this data.

The end result of stagnant wages, an increasingly hostile environment for labor, and easy credit was a savings rate that effectively stood at zero at the end of 2008. Not surprisingly, when the refinancing boom stalled because of plummeting housing prices and dried up credit markets, more and more Americans found other ways to cope with life’s expenditures—they began using “hardship withdrawals” to tap into retirement funds . . .

- Mark

Friday, March 6, 2009


It's bad enough that Treasury Secretary Tim Geithner's performances in front of the media and Congress have been reviewed like a Sylvester Stallone movie without Rocky or Rambo in the title. Now Geithner's got the former Prime Minister of Australia, Paul Keating, ripping into his performance during Asia's economic meltdown in the 1990s - the performance that was presented to all of us as Geithner's "Rocky" moment.

How big are these developments? Think about it. Would you have gone to a Sylvester Stallone movie if Rocky and Rambo were somehow erased from your memory (yeah, I didn't go either, even with Rocky, but play along here).

The American Prospect's Robert Kuttner is even suggesting that we may have been sold a bill of goods. Helping to erase Geithner's "Rocky moment" is the fact that people like Kuttner are starting to look at Geithner's mentors, who (with the exception of Paul Volcker) are now in the financial dog house, and the fact that Geithner was head of the Federal Reserve's New York district office when the market meltdown began. In a few words, Geithner is slowly projecting like a bad Sylvester Stallone movie.

This is important because President Obama came into office with a distinct mission: calm the markets and set the stage for stability and growth down the road. Geithner's performances and his mentors are not helping him now. And it's getting worse.

Nakedcapitalism.com is pointing out that the bailout of AIG may simply be a way of funneling money into other market players, here and abroad. If we want to put this in a negative light, AIG is simply a front company - used as a clearing house for shoveling money into financial institutions who bought the toxic garbage (subprimes, ARMs, etc.) produced by Wall Street. Here's a list of companies, compiled by the Wall Street Journal, who have been paid off through AIG:

Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Bank of America
Lloyds Banking Group

The fact that this is a "Who's Who" list of global financial players is not as important as this: the bailout of America's financial institutions is slowly being exposed for being little more than a transfer of taxpayer money to the "Big and the Stupid" (sounds like a Stallone movie already) who made bad bets on bad products with money they didn't have. And Geithner was there, watching it happen.

It now appears that we're shoveling money into these global financial firms because, if we don't, the world will blame us for the financial disaster we're confronting because of how we exposed them to our toxic garbage. This is important because it suggests that the world is telling us that if we don't help rectify the situation with their banks they just might quit playing ball with us financially. This, in turn, would force some real ugliness on the American dollar, and cause political panic as the dollar collapses around the world.

In a few words, we're doing this both to save our own skin, and because we want to maintain global political stability (trade partners that become trade competitors is usually a prelude to economic nationalism).

During the Cold War we paid for the defense of the West, and were able to convince the rest of the world to hold dollars. So from a political perspective what we're doing makes sense - even if we don't like bailing out stupidity and greed on Wall Street. There's only one problem here: We're no longer helping the world stave off the Soviet Union and communism (and, No, al Qaeda is not the greatest threat we have ever faced). The cooperation of our allies is now purely commercial and selfish. They want to keep our markets stable. If we blow it there's no telling what could follow.

So, where does this leave us? Here's what I see. President Obama is going to have to make a decision on Secretary Geithner within the next 3 months. If Geithner continues to come across as Sylvester Stallone Obama's going to have to reach for a political Robert De Niro for Treasury (is Paul Volcker open to stepping in?). Here's why. We're eventually going to have to nationalize the failing banks.

A Treasury Department that does little more than prop up the banks with trillions of dollars (there's at least $45 trillion in CDS counter party contracts) that doesn't reach U.S. consumers is simply not sustainable. Few will have much confidence in a partial nationalization game plan (or any Obama plan) if Geithner continues to falter.

What we're facing is too important to continue messing around with weak personalities and a steady drip of shell game AIG bailout stories. We need a Shakespearean performance from the Treasury Department on this one. At this point I'd even settle for the smoke & mirrors of a Rocky movie if it meant buying time for Geithner to grow into his position.

We simply need a better performance from Geithner.

- Mark

Thursday, March 5, 2009


Now this is just wrong. From the NY Times:

Dead people are the newest frontier in debt collecting, and one of the healthiest parts of the industry . . . Improved database technology is making it easier to discover when estates are opened in the country’s 3,000 probate courts, giving collectors an opportunity to file timely claims. But if there is no formal estate and thus nothing to file against, the human touch comes into play . . .
Specifically, new hires at the company at the forefront of this growing debt collecting approach, DCM Services, are trained for three weeks in what the company calls “empathic active listening.” Their tactics are clear. “You get to be the person who cares,” according to training manager, Autumn Boomgaarden.

But caring is not the only tactic employed by DCM Services. They also prey on the next of kin's sense of spiritual responsibility for their dearly departed. As Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry put it:

"... we want the dead to rest easy, knowing their obligations are taken care of ..."
Where do I begin ...

You know, there was a time when the Catholic Church preyed on the emotional and spiritual weaknesses of the poor to induce payments to save the souls of the dearly departed. The payments were called indulgences. But they were also considered so vile and ghoulish that they helped create the conditions for the Protestant Reformation that brought brutal wars, and changed Europe forever.

- Mark

P.S. In the FYI category: In most states the next of kin are not legally responsible for any of the bills of the deceased.


I think this is Jon Stewarts best piece ever (yes, even better than his smackdown of Tucker Carlson).

Stewart deserves a medal for this STFU to market "analysts" Rick Santelli, Jim Cramer, and everyone else tied to Wall Street who missed the meltdown, and STILL act like they know what they're talking about.

If Comedy Central unembeds this clip click here.

- Mark

Wednesday, March 4, 2009


For those of you close to someone whose home is under water (or is that upside down?) here’s an excellent Q & A article from the San Jose Mercury (thanks Mike). It answers some basic questions about the new federal legislation designed to stem the tide of looming home foreclosures. For some real life examples of how the program works out here’s a good NY Times article.

In a few words, any chance of getting a home loan renegotiated begins with the stipulation that you must be living in the home that's tied to the mortgage you're renegotiating. There are two type of programs, the Home Affordable Refinance (HAR) program and the Home Affordable Modification (HAM) program. Both involve either reducing interest rates and, in some cases, the principal.

Your chances of getting your home loan refinanced under the HAR are GOOD/EXCELLENT if:
• Fannie Mae or Freddie Mac hold your loan.
• You have no equity and/or owe up to 105% of your home's value.
• You are considered a “strong borrower” or a good risk (you have a good job).
If the above doesn’t work, you MIGHT be able to negotiate a refinance under HAM if:

• You are a “strong borrower” who owes less than $729,750.
• You’re payments (taxes, insurance, etc.) currently eats up more than 31% of your income.
• You've had, or anticipate, a change in your financial situation (divorce, job change, etc.) .
• You have a lender that’s willing to renegotiate, which may mean credit counseling. This will be a hard sell if you are seriously under water (or are working with Countrywide).
You WON’T be able to get your home refinanced if:

• Your current home loan is for more than $729,750.
• You’ve had a significant jolt to your income and/or finances.
While this post is designed to provide information, I feel obligated to say the following (it is my blog) . . .

The crime in all of this is that Countrywide – which was one of the earliest chump companies to stick out its hand for a bailout, after dumping their toxic debt products on the U.S. taxpayer – is increasingly saying “No” to homeowners in trouble. They’re doing this at the same time that it’s former president,Stanford Kurland, is making a killing purchasing delinquent home mortgages for his new company (as I noted here almost a year ago), some times for pennies on the dollar.

Kurland was forced out of Countrywide for helping run the company into the ground, but not before he cashed out hundreds of millions in stock right before Countrywide took a hit in the stock market. Now he’s going to get rich(er) picking up the pieces. I don’t know if Kurland has a conscience, but I have to think there’s a special place in Hell for him (if you believe in that kind of thing).

On the (potentially) bright side for those left out of HAR and HAM, the House is going to discuss a bill that could give bankruptcy judges the power to change mortgage terms on primary residences, while protecting loan-servicing companies from lawsuits by investors ... many of whom recklessly “invested” anticipating big and forced payouts on adjustable rate mortgages, CDO buyouts, and CDS guarantees.

Stay tuned.

- Mark

P.S. Here's an excellent interactive from the NY Times which also explains the mortgage programs (click on the piece to expand).

Tuesday, March 3, 2009


Our Black Swan Economy …

In The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb tells the story of how we once understood the swan world. There was a time when we believed that it was made up of nothing but white swans, because that’s all we saw. Then came the discovery of the first black swan in Australia in 1697, and all we knew about the swan world changed. Taleb then tells us that this is how we look at and understand markets today. In a few words, what we see is a function of what we know about markets which – as we’re seeing today – is not much.

Part of the reason for this is that we are obsessively focused on efficient and smoothly functioning markets. We don’t make much room for human frailties, like greed and stupidity because we like to assume market players operate rationally. Today, like the discovery of the black swan, we are finding that we don’t know as much as we thought we did about markets. What we thought we knew has been collapsed by reality. Why? Because market players find it’s easier to place short-term gains ahead of long-term considerations, which leads them to do stupid things that affect us all. This helps explain why the ideas we have about free markets are, quite frankly, a myth (which I discuss in my book).

The cumulative effects of seeking favorable legislation, exploiting gaps in the regulatory system, or simply acting irresponsibly is neither pretty, nor predictable – as the collapse of AIG illustrates. The activities pursued by AIG not only undermined market expectations but make a mockery of capitalist markets and our free market beliefs.

This is important to understand because if we don’t know as much about capitalist markets as we thought we did, you can be assured that the people talking about creeping socialism have no clue what they’re talking about. How can they? In order to understand socialism you have to understand capitalism (ask me later about private ownership, the existence of free labor, and the allocation of resources via the price mechanism).

For the record, here’s a socialist primer: The state ...
(1) seeks to own the means of production while controlling the price mechanism,
(2) promotes guaranteed (and egalitarian) forms of compensation, and
(3) curtails individual rights by cracking down on unwelcome dissent, stifles the press, and punishes political enemies.
What we are currently living through is a Black Swan moment, made worse by inarticulate observations of impending doom. In order to fix what ails us we need to embrace the Black Swan and ditch the doomsayers.

- Mark

For those of you who want to read more, see NPR's interview with Taleb and his intellectual mentor, mathematician Benoit Mendlbrot here. They think what we're facing could be bigger than the Great Depression.