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Posts Tagged ‘Corruption’

There are probably a million ways to game the Geithner bailout plan, just as the TARP has already led to various unintended consequences, such as the continued provision of generous bonuses by AIG and the Merrill Lynch purchase by BofA. James Galbraith has a good article on this today.

The whole premise of the bailout is that these “toxic” assets comprised of various tranches of bonds secured by mortgages are worth a lot more than the market will presently pay for them.  Is this true?  Yes, their cash flows are in order for now, but there are impending waves of foreclosures and defaults as these loans reset in the next few years. 

The Geithner plan amounts to a bribe to investors.  Invest 7.5 cents, TARP will invest 7.5 cents, and the remaining 85 cents will come from the FDIC. Yes, that FDIC, it being the most important component of stability in our banking system that is supposed to be rock solid in all circumstances. If things go wrong, the 15 cents from the private investors and the TARP are wiped out in the manner of equity, but the FDIC has no recourse other than managing, foreclosing, and then unloading these properties. The FDIC will be in the position of foreclosing upon hapless homeowners, but it will face obvious political pressures to play ball with doomed workouts to help the unlucky. We’ll get to see how good of a landlord Obama is when his role is not “community organizin'” but salvaging value from broke people for the FDIC. My guess: not a very good one.

Under the Geithner plan, banks will sell their “toxic” assets at whatever price they want. Under this scheme, the hope is that somewhere above today’s 30 cents or less in value. The idea is that they’re “really” worth somewhere closer to 60 or 70 cents on the dollar, and that having the banks now take 70 cent (as opposed to 30 cent) losses would be an unnecessary and short-sighted exercise with systemic consequences.

But banks and investors like to make money and avoid losses. That’s in their blood. Why wouldn’t a bank take 7.5 cents of its own deposits to buy certain assets from itself at the requisite 60 or 70 cents, in spite of the fact though the assets are in fact only worth 30 cents, when 85% of the bid price is nonrecouse pain absorbed by the FDIC?  I mean, why not bid 100% if it’s just a question of minimizing losses. That way they can still reduce their collective exposure to 10% or less of what it was, because they would take no losses now and push them off into the future. At most, the gap of 70 cents from actual (i.e., 30 cents) to the $1.00 par value would only cost 7.5 cents to wipe out, and the cost of 92.5% of that shift would be borne on a nonrecouse basis by the FDIC with the remainder by the TARP? Why wouldn’t bank A and bank B do this for one another on a handshake if the self-purchase was too unseemly or prohibited?  What rules would prevent that?

Tim Geithner’s and Obama’s bullishness in general and their talk about the real value of the assets ignores all the impending defaults on the underlying mortgages.  As I already stated, they are probably worth 30 cents at most, and that generous estimate too depends on the continued vitality of home buyers on the scene who will set the market price for the various overpriced and oversupplied 2004-2006 homes. This whole plan shifts the worst banks’ risks on to the most responsible banks and ultimately the taxpayers by giving the FDIC and the Treasury the bill: specifically, at least 92.5 cents of exposure on this plan for every dollar of losses avoided by the banks. Who knew Obama would become the worst banks’ best friend?

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Radley Balko evinces a typically obtuse libertarian reaction to a typically horrifying Mexico drug war murder:  in this case, a police chief and his family gunned down in Monterrey.  Of course, it’s always the drug war itself that has the chief responsibility with libertarians.  There is no condemnation of the murder or the murderers.  They are compelled, as it were, to murder.

I will grant arguendo that laws may make certain crimes more profitable and more likely and thus those laws may be on balance more costly than the benefits, but only a callous partisan would thereby absolve the killers of their moral responsibility for their acts.   These killers are bad people with the chief moral responsibility for their murder.  It’s a stretch to say the drug war “made” them do it.  You need food, clothing, and shelter.  You don’t need to get rich quick trafficking cocaine.  These people are callous, generally dull, and greedy people.  I also remain unconvinced that there penchant for violence would not find another outlet in the absence of drug prohibition.  Some people who are not that bright don’t want to work 9-5.  They like the money, bling, and power of their present criminal activities.  They will find something to do criminal, whether it’s theft, forced prostitutition, human trafficking, counterfeiting, dog-fighting, recreational rape, or generalized shakedowns of legitimate businesses.  It’s not like the real Mafia did not preexist prohibition or disappeared after the end of prohibition; instead, it began in the lawlessness that was 18th and 19th Century Italy, and, after the 1930s, the original Mafia changed its attention to skimming profits from otherwise lawful enterprises like the garment and sanitation trade in NYC.

So much of the empirical case for libertariansim consists of a pretty thin melange of fallacies, where all the costs of the current world we live in are attributed to those laws and institutions they do not like, and all the benefits projected into a yet-to-be-seen world without these laws.  They say this even though obvious complexities present themselves.  Countries with relatively strict drug laws are not unusually violent or lawless–Finland or Singapore come to mind–and Mexico in particular has had a 100 year bloody history rooted in age-old traditions of corruption, demagoguery, and various resentments among social classes.  These aspects of these societies exist in spite of and in parallel to the drug trade.

But hey, I’m sure Radley’s and his sycophantic followers’ priorities are straight:  we are all to blame at least equally with the drug dealers.  And the most important thing is that when the Mexican police do raid these drug gangs that they knock and announce first.  I would not want to see police be militarized against these well armed sociopaths.  It would be unseemly.

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It’s a sign of real degradation in our republic that two families, whose claim to authority chiefly consists of great skill in acquiring power and dispensing benefits to loyalists, are now alternating rule in our country. Where are we . . . Iraq? Since 1988, either a Bush or a Clinton has been President. If Hillary wins, one wonders if Jeb or George P. Bush (who has been grooming himself for a run since college) is next? Geoff Wheatcroft criticizes this trend in the Washington Post:

Among so much about American politics that can impress or depress a friendly transatlantic observer, there’s nothing more astonishing than this: Why on Earth should Sen. Hillary Rodham Clinton be the front-runner for the presidency?

She has now pulled well ahead of Sen. Barack Obama, both in polls and in fundraising. If the Democrats can’t win next year, they should give up for good, so she must be considered the clear favorite for the White House. But in all seriousness: What has she ever done to deserve this eminence? How could a country that prides itself on its spirit of equality and opportunity possibly be led by someone whose ascent owes more to her marriage than to her merits?

We all, nations as well as individuals, have difficulty seeing ourselves as others see us. In this case, I doubt that Americans realize how extraordinary their country appears from the outside. In Europe, the supposed home of class privilege and heritable status, we have abandoned the hereditary principle (apart from the rather useful institution of constitutional monarchy), and the days are gone when Pitt the Elder was prime minister and then Pitt the Younger. But Americans find nothing untoward in Bush the Elder being followed by Bush the Younger.

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