Senate Republicans forced a delay last night in passage of the omnibus spending bill. That and the day’s other political news in the TPMDC Morning Roundup.
It is a small subset of the larger problems we are facing. But when historians look back to write the history of this crisis, it will be difficult to explain why everyone conspired together to face the crisis with an unstaffed Treasury Department. It’s truly astounding. There were hints of this back in January. But it’s really only bleeding into the press now. Just yesterday, likely nominees for two critical positions pulled their names out of consideration.
The reasons for the delays seem clear at least in broad outlines. The Obama administration has set pretty stringent ethics requirements, relating to lobbying and conflicts of interests. That’s taken lots of people out of contention. And that’s been aggravated by the vetting snafus on Geithner and Daschle, which have probably made them still more gun-shy.
Then there’s a whole separate obstacle. Lots of the people who would staff a Treasury at the moment are compromised by their own roles in the debacle we’re facing. Whether that’s because so many of the people with the requisite experience are tainted or whether it’s just that so many of the people the principals — Geithner, Summers, et al. — know and trust are compromised is unclear to me.
Nor is it only people who caused the mess in the private sector but people in the regulatory agencies who enabled it or failed to prevent it.
To some degree, you can knock the Republicans for not helping to fast-track the confirmations of anyone who is immediately needed at Treasury. As I mentioned last night, Republicans are holding up two critical appointments on the National Economic Council for what they readily admit is payback. But fundamentally it’s a Democratic administration and a Democratic Congress. We’re in the midst of the worst economic crisis in almost anyone’s living memory. And we have a Treasury Department where a lot of the key offices are empty.
Looking over the consolidation of the financial services industry you see a distressing pattern. Find one company that brings together a lot of decently run and profitable companies under one roof. Then set up one subsidiary which sells a long run of risky and substantially fraudulent ‘financial products’ which sucks the entire conglomerated company to the brink of bankruptcy … or rather into bankruptcy, but is held just on the brink by permanent infusions of taxpayer funds, much of which is siphoned off into bonuses to keep the prized talent at the bankrupt company from leaving and going to other de facto bankrupt companies.
Another point. The more I learn what got a lot of these companies into trouble, foolish bets or excessive risk taking don’t really capture what we’re talking about. A lot of this stuff just amounts to fraud. So where are the criminal investigations. Not just hassling CEOs up on Capitol Hill, which is fine. But accountability before the law for the people who ruined the economy? There may be some short term prudential argument for not getting distracted while we’re in crisis mode. But I’m not sure I buy that. I lot of this was simply criminal.
The new crew at DOJ pulls the plug on one of Bradley Schlozman’s lawsuits to force Missouri to suppress voter participation.
Over at Cafe, Greg Mitchell and others have been discussing Mitchell’s latest book– “Why Obama Won.” Want a distraction from an 8.1% unemployment rate? Join us as we pick apart the ways the new media shaped the epic ’08 campaign.
I’m sure the knowledgeable people already know this. But it turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don’t just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, “the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors.” As the article notes, ironically, this provision which Wall Street pushed for and got to protect investment banks actually ended up hastening the collapse of Lehman and Bear Stearns last year.
Down in the article there are also the mentions of the entertainingly named “International Swaps and Derivatives Association“, one of the lobbies that helped get the change in place.
Along these lines, TPM Reader GG sent in this last night …
Respectfully, you guys are totally misunderstanding something crucial in the AIG bailout: Derivatives claims are not stayed in bankruptcy. (Yet another brilliant innovation from the 2005 bankruptcy reform legislation.)
If AIG were to go down, derivatives counterparties would be able to seize cash/collateral while other creditors and claimants would have to stand by and wait. Depending on how aggressive the insurance regulators in the hundreds of jurisdictions AIG operates have been, the subsidiaries might or might not have enough cash to stay afloat. If policyholders at AIG and other insurance companies started to cancel/cash in policies, there would definitely not be enough cash to pay them. Insurers would be forced to liquidate portfolios of equities and bonds into a collapsing market.
In other words, I don’t think the fear was so much about the counterparties as about the smoking heap of rubble they would leave in their wake.
Additionally, naming AIG’s counterparties without knowing/naming those counterparties’ counterparties and clients would be at best useless, and very likely dangerous. Let’s say Geithner acknowledges that Big French Bank is a significant AIG counterparty. (Likely, but I have no direct knowledge.) BFB then issues a statement confirming this, but stating it was structuring deals for its clients, who bear all the risk on the deals, and who it can’t name due to confidentiality clauses. Since everyone knows BFB specialized in setting up derivatives transactions for state-affiliated banks in Central and Eastern Europe, these already wobbly institutions start to face runs. In some cases this leads to actual riots in the streets, especially since the governments there don’t have the reserves to help out. If you’re Tim Geithner, do you risk it? Or do you grit your teeth and let a bunch of senators call you a scumbag for a few more hours?
I’d be curious to hear what other knowledgeable readers think about this. But separate from the immediate financial implications related to AIG, it does point us toward the larger political economy point: the self-reinforcing cycle in which financialization leads to vast sums of money concentrated in the hands of paper-jobbers, who then mobilize that money in Washington to rewrite the laws to privilege them for even greater profits.
A final question, I’d be curious to hear from people who work in this space what even the notional rationale would be for having derivative counter parties able to skip the line in a bankruptcy proceeding.
It occurred to me reading this morning’s new unemployment figures that we have to be getting within range of the raw number of unemployed we had during the Great Depression. Comparing the rate of unemployment to historical norms is fine, but in terms of sheer suffering, the actual number is still useful.
Now there are all kinds of obstacles to comparing unemployment numbers from 1933, which was the high water mark for depression-era unemployment, to those today. The methodologies are very different. Even the rise of two-income families changes the calculus a bit.
What I really want is a graph that reconciles and correlates those differences to give an apples to apples comparison of the latest numbers to those from the 1930s. In looking around, I see some of the work on this has been done, though not with the latest numbers. But I want a graph, so I can see it. If you find one that meets these criteria, please send it my way.
The 11th Circuit has just handed down its ruling on former Alabama Gov. Don Siegelman’s appeal of his conviction on public corruption charges. The court reversed his conviction on two counts, but affirmed the convictions on the other counts, which from my quick read of the opinion, amounts to affirming the heart of the case against Siegelman.
The case has been remanded to the district court for re-sentencing. I’m not enough of an expert on sentencing guidelines to predict how much this will change his sentence, but as I say, the heart of the case against him seems to have emerged intact from the appeal.
Late Update: Here’s the interview I did with Siegelman last summer:
Now that we get so much of our news from CNBC can they book some non-right-wing freaks for commentary?