A Financial Choice, Act II

In early September 2008, I drove down to Charleston to visit a cousin who had recently suffered a terrible accident. Throughout the drive I listened to extended public radio reports on an evolving calamity: the collapse of Lehman Brothers financial services firm. The horror that the government was going to allow such a large firm to go under was decorated with the baroque gadgetry of terms that would become more familiar in the coming years: credit default swaps, subprime mortgage lending, tranches, CDOs. The gore and detail of the cover that had been constructed around scams and fraud at the broadest level was audible in the voices of interviewers and guests. There was a tinge of disbelief within their attempts to explain what these terms meant and how they had gotten us all (!) into so much peril. It was as close to 1929 as we had come and potentially far worse – so extensively had the giant vampire squid of financial engineering welded its tentacles to every sector. Housing, banking, investing, construction, debt, bonds… this is business America now, and every other activity is vulnerable to its caprice. It was the stretch run of a presidential election as well; one candidate tried to suspend the campaign, the other fortunately tried to hold things together.

And he did mange to hold things together, despite rather obvious at the time challenges he personally faced. But the Lehman moment got everyone’s attention, everyone who mattered. $700 billion for Troubled Asset Relief (TARP), $250 billion for Capital Purchase(CPP), in addition to billions more in government-backed guarantees to individual banks. And eventually, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. It seemed the public assistance required to save the vampire from itself had sealed the argument in favor of financial reform.

Yesterday, the Republican House of Representatives passed the Financial Choice Act and can you guess what it does? Right! Overturns Dodd-Frank. And not only is it a bad idea to weaken a law that requires stronger banks,

The bill also offers the wrong kind of relief. During the last crisis, all kinds of financial activity — including insurance, money-market funds and speculative trading at banks — depended on government support. That’s why Dodd-Frank placed limits on banks’ trading operations and provided added oversight for all systemically important institutions, and why regulators require them to have enough cash on hand to survive a panic.
Those provisions aren’t perfect — simpler and more effective options exist — but the Choice Act just scraps them. What’s more, it would eliminate the Office of Financial Research, created to give regulators the data they need to see what’s going on in markets and institutions. The law would leave regulators in the dark, and taxpayers implicitly or explicitly backing much of the financial sector.

If you didn’t click, that’s coming from fcking Bloomberg. The financial industry doesn’t even think it’s a good idea. In trying to undo more Obama-era legislation, the know-nothings in Congress are re-setting the table for our financial catastrophe guests. Sure, certain things could make Dodd-Frank unnecessary. But unfortunately, none of the thousands of people, firms, funds and frauds who populate this sector care about a stronger financial system or its being more competitive. It’s the logic of business – the democracy, whiskey, sexy of fools.
Image: Detail from The Garden of Earthly Delights, by Hieronymus Bosch, ca. 1500

Green Faith

This could go without saying, but I guess if I really believed that, I would let it. There is no good faith element – as in, “We’re operating in good faith” – in a capitalist system. Nor does there have to be. There is only green faith.

WASHINGTON — Reversing its oft-repeated position that it was acting only on behalf of its clients in its exotic dealings with the American International Group, Goldman Sachs now says that it also used its own money to make secret wagers against the U.S. housing market.

A senior Goldman executive disclosed the “bilateral” wagers on subprime mortgages in an interview with McClatchy, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an “intermediary” responding to its clients’ demands.

They could clearly see it was toppling and vulnerable sector; opportunities abounded. Of course they were playing both sides, they would be stupid derelict in their duties, i.e., not competitive, not to. Just as we would be derelict in our duties stupid not to know this is what they are doing, particularly because of the despite the altruistic tone of their t-shirts and coffee mugs. The very notion that something, anything, is done by a company that is in the best interest of anything other than making more money is… worse than naive, it’s a sentiment that is itself counted on and used, where possible, to make more money – a tool like any other. No flag, no empathy, no brotherhood, no fidelity except to profit, where the loyalty is ruthless and unwavering. It has to be.

See the circle? You’re soaking in it.

It’s Like Blue, Pink and Yellow, Only Different

Inside this Newsweek story about AIG, via Atrios, is a nugget that gets at our own larger house of cards, into which they are few ways in – but once you’re in, they are literally no ways out. To wit:

Most of this as-yet-undiscovered problem, Gober says, lies in the area of reinsurance, whereby one insurance company insures the liabilities of another so that the latter doesn’t have to carry all the risk on its books. Most major insurance companies use outside firms to reinsure, but the vast majority of AIG’s reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don’t add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. “The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire,” says Gober, who has a consulting business devoted to protecting policyholders. Gober says there are numerous other examples of “cooked books” between AIG subsidiaries. Based on the state insurance regulators’ own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging.

Think concentric economies of scale without the redundancies. When one ring goes beyond what it’s able to support on it’s own, it leverages an outer ring to “insure” itself against loses. I don’t know any other way but to use the scare quotes around insure, and neither do they.

This insurance examiner happened to be from Mississippi, so take that area as a case in point. When you hear about all the beach front property that gets threatened or actually destroyed from storms, huge dollar amounts invariably get tossed around. Small enclaves of precarious oceanfront property could theoretically be insured against loss, say by a local firm or even Lloyds of London (if they still exist), if the property owners had sufficient capital to pay incredibly hefty premiums to insure property that is, for all intents and purposes but especially in plain old chances-of-anything-happening kinds of risk, built in the wrong place. Lovely perhaps, but fleeting. (For more on this, see love, definition of)

Now, for one thing, this would likely limit the number of houses and towns built in precarious geographical areas, and we wouldn’t want to do that –  celui sera UnAmurican. But anyway… stop anywhere here along the way, economically speaking, and the vista is much the same. Once you go beyond those who can afford to build, live and rebuild in danger-prone areas and extend the opportunity to the rest of anyone who wants the lovely, the insurance companies can’t guarantee these investments, even though they will write policies saying that someone* will. We send the risk spiraling outward, trying to leverage the power of the outer rings. But even there, the big firms can’t even write down their actual liabilities – because they wouldn’t be able to cover them in the eventuality of anything catastrophic across scales happening, otherwise known as the events they’re writing insurance to cover.

*Now, what if we stipulated from the outset that this someone was the government, aka the taxpayers? And what if as a part of such ventures other responsibilities were attached the ‘parties of the first part’ that raised the bar for how we go about insuring things? What if, in other words, everyone had to be honest about all of this, what would be different? Less beachfront property? Would the U.S. be a third-world backwater without the necessity to Pyramid-scheme at every opportunity? This is what we would have ourselves believe, that without such security and assurances, such as it is, we would wouldn’t be so prosperous.

I’ll leave it to you to re-assess the shifting definitions of those last few words in light of recent events.