Bits & Pieces (The Wednesday Evening Matrix)

Why I like Matrix: Reloaded as much as The Matrix, even though many people do not:
The same scene, only different, somehow. Perhaps it’s Will Ferrel. 

Now, thanks to a student project on YouTube, we bring it full circle. The Muppet Matrix:

That’s it for now. – KW

A Few Billion Here, A Half A Billion There. . .

I can’t remember if I’ve ever mentioned on this blog how much I like Matt Taibbi’s work. He’s an excellent investigator and even better writer–it would almost be worth getting a subscription to Rolling Stone just to read his column. Today’s is about the Attorneys General settlement with the big banks and how it’s falling apart. . . which is a good thing (full disclosure: I shamelessly stole the idea for this post from jnc4p, who posted the link over on The Plum Line).

If it does get done, expect a great deal of public debate over whether or not the size of the settlement was sufficient. Did the banks pay enough? Should they have paid ten billion more? Twenty? Even I engaged in a little bit of that some weeks ago.

But if and when that debate takes place, it will actually obscure the real issue, because this settlement is not about getting money from the banks. The deal being contemplated is actually the opposite: a giant bailout.

In fact, any federal foreclosure settlement along the lines of what’s been proposed will amount to a last round of post-2008-crisis bailouts. I talked to one foreclosure activist over the weekend who put it this way: “[The AG settlement] will be a bigger bailout than TARP.”

How? The math actually makes a hell of a lot of sense, when you look at it closely.

I know that Mark and quarterback have both written about their experiences with settlements like these, and how you often are recovering mere pennies on the dollar, but I hadn’t thought about the implications of that until I read this:

[A] private analyst this summer was estimating that just one bank, Bank of America, could face more in damages than the Obama administration and the AGs are now trying to “wrest” from all the major banks, combined, for all their liabilities.

Just a few days ago, news of more such suits came in. An Irish company called Sealink Funding is suing Chase and Bank of America, seeking $4.5 billion combined in connection to losses in mortgage-backed securities sold to them by those banks. Meanwhile, a German bank, Landesbank Baden-Wurttemberg, is suing Chase for an additional $500 million in losses.

These huge amounts – a few billion here, a half a billion there – are coming from single companies, directed at single banks. And think about the Bank of America settlement for $8.5 billion: what’s the usual payoff in a lawsuit settlement? Ten cents on the dollar? Five?

In fact, the settlement amount in that case was just 2% of the face value of the loans when they were securitized ($424 billion), and represented just 4% of the principal still outstanding ($221 billion).

Why do those figures matter? Because the way these securitizations were structured, legally, Bank of America is obligated to buy back any loans that were sold fraudulently at face value – that is part of the legal language in the “pooling and servicing agreements” under which all of these mortgages were pooled.

So minus a settlement, Bank of America – one bank — had a potential liability of $424 billion just from its Countrywide holdings! And it got off for $8.5 billion, a major victory.

All of which puts in perspective the preposterously small size of the proposed AG settlement. $20 billion would be a lousy number if we were just talking about Bank of America. But all the big banks combined?

And an aspect of the whole Wall Street fiasco that hadn’t even occurred to me was who bought some of those derivatives (is that the right term, Scott?) CDOs (Michi):

To recap the crime: the banks lent money to firms like Countrywide, who in turn created billions in dicey loans, who then sold them back to the banks, who chopped them up and sold them to, among other things, your state’s worker retirement funds.

So this is bankers from Deutsche and Goldman and Bank of America essentially stealing the retirement nest eggs of firemen, teachers, cops, and other actors, as well as the investment monies of foreigners and hedge fund managers. To repeat: this was Wall Street hotshots stealing money from old ladies.

So now that California’s Attorney General has joined New York’s in deciding to not participate in this settlement, we may see some of these big banks, well, fail. Matt’s conclusion is that if they truly had to come to an equitable settlement it would cost them (in aggregate) a trillion dollars or more. That’s mindboggling!

Common Sense

After wading through the 14th A discussion between Scott, QB, and Mark, lms’ comment about common sense coincidentally reflected one of Prof. Volokh’s posts on VC. So, I thought I’d quote it here, not in response to lms, but just because of my own frustrations with the idea of “common sense.”

I’ve often seen people — usually on my side of the political aisle — praise “common sense,” and condemn those who make fancy arguments that defy common sense. Here’s an example, from a Reason column: 

So why do intelligent people consistently make such a hash of things? Because they are smart enough to talk themselves into anything. Ordinary mortals don’t engage in fancy mental gymnastics to reach conclusions that defy common sense. But intellectuals are particularly prone to this. 

I’ve always been skeptical of such praise of common sense, for two related reasons.
First, common sense often leads us to the wrong results. That’s especially evident in places where the rightness of the right result can be proven, such as mathematics, physics, astronomy, and so on. It often takes some pretty “fancy mental gymnastics” rather than “common sense” to solve problems in those fields. 

And it’s also true in more practical fields, such as economics. I suspect that to many people it’s common sense that if you want the store shelves to always be filled, you need to have someone centrally planning production or distribution; the “invisible hand” can easily be dismissed as “fancy mental gymnastics” by those whose common sense inclines them against that explanation. Likewise, it was probably common sense to many that alcohol kills lots of people, directly and indirectly, and therefore banning it might be good — and it’s still common sense to many that guns kill lots of people, directly and indirectly, and therefore banning them might be good. 

Second, even if your reaction to these matters is, “no, my common sense tells me that the free market is great, and this common sense is correct,” perhaps your common sense is in large measure molded by the “fancy mental gymnastics” of others — Adam Smith, Milton Friedman, and the like. And while your and my common sense may be well-tutored on these particular points, it’s likely that there are many other points, in the policy world and out of it, on which our common sense misleads us. 

Of course, this isn’t to say that common sense always leads us astray even in the policy world. 

Moreover, common sense may often be more helpful in day-to-day personal and business decisions — where we have been tutored by repeated exposure, and by having a strong personal incentive to get those decisions right — than it is with policy or scientific judgments in which we have little experience. And I’ll be the first to admit that intellectuals often get things wrong. But I’m not sure that extolling common sense, and condemning conclusions that defy common sense, is a good rule of thumb for dealing with complicated questions of science, economics, social policy, or foreign policy.-

The comments are somewhat entertaining: Comments

It’s Demand & Income Inequality (Wed. Open Thread)

One of my favorite conservatives, Bruce Bartlett, confirms what I’ve been saying for the last year. We’ve seen the economy worsen, from the small business perspective, and slow to a crawl. We talk to between 30 and 40 business owners a day, and don’t forget 78% of small businesses have less than 20 employees, and they all tell us they don’t really give a diddly squat about regulations or taxes right now. They care about the lack of customers. I understand my evidence is anecdotal, and there’s not necessarily a reason to believe me, but now the Bureau of Labor Statistics has verification. I also get it that Republicans and some large businesses care about regulations, especially the energy and health care industries, but could we stop pretending it’s true for small businesses or all large businesses?

On Aug. 29, the House majority leader, Eric Cantor of Virginia, sent a memorandum to members of the House Republican Conference, telling them to make the repeal of job-destroying regulations the key point in the Republican jobs agenda.
“By pursuing a steady repeal of job-destroying regulations, we can help lift the cloud of uncertainty hanging over small and large employers alike, empowering them to hire more workers,” Mr. Cantor said.
Evidence supporting Mr. Cantor’s contention that deregulation would increase unemployment is very weak. For some years, the Bureau of Labor Statistics has had a program that tracks mass layoffs. In 2007, the program was expanded, and businesses were asked their reasons for laying off workers. Among the reasons offered was “government regulations/intervention.” There is only partial data for 2007, but we have data since then through the second quarter of this year.
The table below presents the bureau’s data. As one can see, the number of layoffs nationwide caused by government regulation is minuscule and shows no evidence of getting worse during the Obama administration. Lack of demand for business products and services is vastly more important.


I also came across this interesting study yesterday. We’ve looked at so many statistics on income inequality, but I’m not sure anyone really understands why it’s important. I think this study gets to part of it at least. I also believe the “Occupy Wall Street” protests reflect the helplessness people, especially young people, feel in being able to combat it. Oh I know, they’re just a bunch of kids and unemployed people who don’t understand the global economy, but they know what’s happened to them over the last three years and it feels wrong. They’re calling themselves the 99% and that’s for both being unemployed and without benefits and also in the bottom 99%.

For example, the bailouts and stimulus pulled the US economy out of recession but haven’t been enough to fuel a steady recovery. Berg’s research suggests that sky-high income inequality in the United States could be partly to blame. So how important is equality? According to the study, making an economy’s income distribution 10 percent more equitable prolongs its typical growth spell by 50 percent.

Berg and Ostry aren’t the first economists to suggest that income inequality can torpedo the economy. Marriner Eccles, the Depression-era chairman of the Federal Reserve (and an architect of the New Deal), blamed the Great Crash on the nation’s wealth gap. “A giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth,” Eccles recalled in his memoirs. “In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped.”

Many economists believe a similar process has unfolded over the past decade. Median wages grew too little over the past 30 years to drive the kind of spending necessary to sustain the consumer economy. Instead, increasingly exotic forms of credit filled the gap, as the wealthy offered the middle class alluring credit card deals and variable-interest subprime loans. This allowed rich investors to keep making money and everyone else to feel like they were keeping up—until the whole system imploded.
There is a link to the study here which is in the current issue of Finance & Development, the quarterly magazine of the International Monetary Fund.


And last, but not least, it’s the trade deficit stupid. This piece in The Nation is an important one I think. Essentially, we need to get the wealthy investors to quit investing in financial instruments and steer them into long term “making stuff for export and consumption” stuff. There are ways to do that but they probably won’t like it too much because it’s much easier to do what they’re doing now.

But what’s behind it all is the fact that the United States cannot pay its way in the world. And while a smaller country would have expired long ago, we keep stumbling along, getting sicker, losing industrial weight, because the rest of the world has an interest in continuing to hold us upright. 

For Keynes that would be the challenge—not just to bring down but to eliminate it: the whole thing. The failure to do so has real implications for other parts of Keynes’s theory. The answer to our crisis is not to “hire and rewire,” or to have a lot of public works. Let me add, by the way: I’m a labor lawyer; I want the government to spend. I love public works. I’d love a new O’Hare Airport. I’d love a repaving of Lake Shore Drive. And certainly Keynes loved public works. He saw people starving; he had a heart. We have to do something. We can’t wait for the trade deficit to come down. But that’s not the answer—it’s urgent, to be sure, but it’s just a first step. The answer is to get rich people to put their money into real “investments” and not “loans.” It’s to induce the rich in this country to invest “by employing labor on the construction of durable assets.” Call them widgets; call them iPads. Call them anything we can wrap, ship and sell to somebody abroad.“Oh, but he wouldn’t put that ahead of the stimulus.” 

No—but he’d put them together.


Jon Stewart interviews author Michael Lewis.

Part One:
Part Two:
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