Friday, March 27, 2009

Populist outrage and oligarchs

One reason populist outrage over the excessive bonuses at AIG and elsewhere in the financial industry doesn't miss the point is discussed in an excellent Atlantic article by Simon Johnson and James Kwak. Johnson was the chief economist at the International Monetary Fund in 2007 and 2008. He's currently a professor at the Sloan School of Management at MIT. His experience with IMF bailouts of faltering economies gives him a perspective on the crisis in the US economy which is not shared by many of the people working to solve our problems in Washington and on Wall Street.

He sees what's happening here to have much in common with the collapse of the Malaysian economy in 1998 and other emerging market economic crises: It's a case of oligarchs manipulating the government to maintain wealth and power. However, unlike the methods of corrupt crony capitalism in emerging economies (bribery, political graft, extortion, etc.), what the US has is an ideological predisposition to follow the big players' lead in matters financial, even when they are precisely the ones who have conjured the current fubar situation.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

The argument continues by looking at who the big players in government are (and were) -- Geithner, Rubin, Snow, Paulson, Greenspan, et al. -- and how they are and were intimately connected with major financial institutions, particularly Goldman Sachs. The political/governmental decision makers are one and the same as the financial guys. Furthermore, their worldview has become just plain common sense among so many politicians and policy wonks. Thinking like a megacapitalist is just the way you think in the halls of power.

I'm reminded of Louis Althusser and his ideological state apparatus.

Meanwhile the money keeps piling up around the financial services people and their companies as more and fancier financial products are developed, making more and fancier ways to make more and (presumably) fancier dollars. (image from the Atlantic)
From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.
Keep in mind the capitalist rationale for having a financial sector in the first place: The bankers and brokers provide an essential service to the economy by aggregating savings and lending to business both so that goods and services can flow efficiently through the market and so that innovations and start ups can find necessary funding. For this the banks and brokerages deserve a profit (it is argued), and for this their employees and executives deserve a good wage. In recent years, however, wealth has been concentrated in the financial sector itself where it has flowed and eddied and swirled in a gyre of more wealth and (I'd argue) where it has created nothing but wealthy people. Well, according to Simon Johnson, it also created a worldview in which financiers could do no wrong and the rest of us were just too ignorant and innocent of economic realities to have anything worthwhile to say in economic policy discussions.

While it is true that the ginormous bonuses assorted AIG players received are only a tiny fraction of the many billions we taxpayers have so far poured into the company's ravenous maw, our outrage -- our populism in the face of a huge payday for the people who blew our economy to bits -- is exactly the right response. A populist pushback against the evident groupthink in Washington and on wall Street would be a healthy thing, indeed.

Wednesday, March 25, 2009

Elrod review

My review of Jeff Elrod is online at Glasstire. His small show of post-digital abstractions is at the Modern Art Museum of Fort Worth. Image above is Portrait (2003) from the Texas Gallery Web site.

Tuesday, March 24, 2009

Treading financial water

As a former college teacher, I have a retirement account with TIAA-CREF. One of the funds I hold in that account is CREF Stock, a broad portfolio of US and foreign stocks in a wide array of industries -- materials, manufacturing, consumer staples, financials, etc. Their 2008 financial report arrived the other day, and here's a fun fact from what they have to say about my investment:
An investment of $10,000 in this account on December 31, 1998 would be worth $9,296 at the end of the period [i.e., 12-31-08], including reinvestment of dividends and distributions.
The screen grab above is from today. It shows a 10-year decline of 2.56%.

Now that's capitalism.

One pissed dude

Matt Taibbi is mad as hell. From his Rolling Stone article:
The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).
But the major story for him is the transfer of power to the moneyed class. The transfer of cash is only a symptom of a political system purchased wholesale by oligarchs on Wall Street. The whole article is a wonderful, infuriating rant against a regulation-free financial system set up to make money and only money and nothing else but money.

Tuesday, March 17, 2009

AIG has pig lips

A big batch of lips goes to our national insurance company for their bonus policy. We give them money, they give it to foreign banks and to each other. They handed out bonuses to selected employees totaling $165 million AFTER getting bailed out with taxpayer money. From the New York Times:

[NY Attorney General, Andrew] Cuomo did not name the bonus recipients, but the numbers are eye-popping, given A.I.G.’s fragile state. The highest bonus was $6.4 million, and six other employees received more than $4 million, according to Mr. Cuomo. Fifteen other people received bonuses of more than $2 million, and 51 people received bonuses of $1 million to $2 million, Mr. Cuomo said. Eleven of those who received “retention” bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said.

A.I.G., which is now 80 percent owned by the government, paid out the so-called retention payments, saying the bonuses were needed to persuade workers to remain at its financial products unit. But the payouts have caused a public furor, and the White House said on Monday that the Treasury would write new requirements about the bonus money in the next $30 billion that it provides to the insurance giant. Already, the government has given A.I.G. $170 billion.
An amazing 73 bonuses of $1 million or more went to people in the financial products unit, the outfit that ruined the company with its penchant for selling those nifty credit default swaps. And Bloomberg reports even stranger news: AIG "budgeted $57 million in “retention” pay for employees who will be dismissed."

Pig Lips!

Or maybe they'd prefer pitchforks?

Sunday, March 15, 2009

I should be writing a review,

But I got distracted by this. AIG spilled some of the beans. Here's where our money went when we funneled it through the faltering insurance giant:

A.I.G.'s Biggest Counterparties
So we gave money to AIG because evil antimatter zombie demons were going to eat our wallets otherwise. And then -- because they'd insured a lot of shit they couldn't afford to cover when the market for the shit turned to more shit -- AIG gave money to...

Banks in France, Germany, Denmark, Scotland, Canada, and possibly Pluto, which is beyond Uranus.

Isn't it swell that the Fed and AIG formed a company to deal with the tanking securities behind a buncha rotting credit default swaps? I especially like what they named it: Maiden Lane III.

Maiden! Get it?

Not yet fucked!

Friday, March 13, 2009

What are we paying for?

I've made a few investments over the years. I bought a few shares in Target, for example. On the whole it's done well; though during the last few quarters, it could have been better.

Over the past year, the value of a share of Target has declined considerably, but on the whole I've realized a gain on my investment. This is not because I'm a brilliant investor. My wife told me to buy Target, and I did as I was told. Also I looked into it a little before I bought. That's called due diligence.

Now as an American taxpayer, I am an investor in a number of other companies with wildly divergent business models. One of them is AIG. Now I didn't want to buy shares in AIG. I didn't research their business plan, their cash flow, or their prospects and decide to pick up a part of their business for my portfolio. All that was done on my behalf by the gubment last fall when Hank Paulson bailed the bastards out because not doing so would have been unthinkable in the face of the systemic risk posed by AIG's failure.

You do what is needed. You do what you must do. Because you're a mensch. Because you are an American.

But what did we buy when we bought into AIG's business? Well we bought a lot of things, naturally, and one of the things we bought was a shitload of credit default swaps -- obligations to make whole people who had taken on risks in other financial market instruments that had the possibility of turning sour. Things like collateralized debt obligations, mortgage backed securities, and plain old corporate bonds.

So far, I and all of my fellow taxpayers are into AIG to the tune of of $165 BILLION. We, the people, OWN its puckered ass. At close today, it was valued as a whole at $1.35 billion. This is not a winning investment by any standard. We spent $165 billion to get a portion of $1.35 billion in equity? This is how the system works?

And so as investment folks we should by rights get a glimpse at what is being done with our bucks. We're the capitalists now, right?

Not so fast, children. We bailed out an insurance company! That means they have obligations to others. The money we "invested" in AIG went elsewhere! From the NY Times:

Nevertheless, Edward M. Liddy, the chief executive of A.I.G., explained to investors last week that “the vast majority” of taxpayer funds “have passed through A.I.G. to other financial institutions” as the company unwound deals with its customers.

On Wall Street, those customers are known as “counterparties,” and Mr. Liddy wouldn’t provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.’s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon.
We spent many billions to do what? We spent billions to make whole the likes of Société Générale, and make sure they not suffer the pain of investing in mortgage securities based on non performing buyers.

Is this a great country or what?

And we don't get to know where the money goes.

Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined.

Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.

SO, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify.
We are not allowed to know who is benefiting from our (it is OUR money!) rescue effort.

We bought an outfit that had enormous obligations to other outfits. AND nobody's saying just what and how much those obligations entail. So we can't do the due diligence an investor ordinarily should do on his risks.

Basically we're being asked to pick up the tab for a pig in a poke.

Cool, eh?

Tuesday, March 10, 2009

Picture of decline

Seen in a supermarket parking lot: a painting in the bed of a pickup truck. Other items include a folding chair, a bag of trash, a music stand, and a wheel barrow.

Sunday, March 8, 2009

Nationalized Citibank video

I gotta get around to saying something about the money we're pouring into AIG and where is appears to be going. An I gotta get to Fort Worth to see the Jeff Elrod show at the Modern.

But in the mean time check this NSFW video.

Thursday, March 5, 2009

Fees and stock valuations

Huffington Post today published a snarky little piece listing a few things that cost more than a share of Citigroup, Inc. One of them is a transaction at a Citi ATM. Under certain circumstances customers are charged a $1.50 fee to use their debit cards at Citi ATMs. At market close today, a share in the bank would set you back a dollar and two cents.

In December 2006, Citi traded as high as $57 a share, which puts its current value at about 1.8% of what it was valued at nine quarters ago. Hell, Marketwatch says Citi has lost 85% this year alone.

So what did the smart guys at Treasury and the Fed do back in February? They bought more equity in Citi, that's what. Ritholtz published a fine rant about it when it happened. His case boils down to this: the Fed and Treasury have 1. spent $25 billion for a 7.8% stake in Citi; 2. guarenteed 90% of the value of $300 billion in Citi's assets; 3. lent Citi another $20 billion; 4. converted taxpayer-purchased preferred shares to common stock -- that is, turned what was pretty much a pile of IOU's into a pile of shares in the bank.

Americans now own about 40% of Citi. And we only spent $45 billion for it.

Too bad the market capitalization for the whole company stood at $5.56 billion at today's close.

Let's see.... 40% 0f 5.56 = 2.224 and that's ... ummm ... almost 5% of 45. So far, we Americans have lost 95% of the money spent bailing out Citi.

Now you might (or might not) recall that Citigroup came into being in 1998 with the merger of Citibank and Travelers Insurance, which owned Salomon Smith Barney, in a deal that skirted the edges of the Depression-era banking law commonly called Glass-Steagall and probably actually violated it. Commercial banks like Citi weren't allowed to run investment services like Salomon under the existing banking laws. PBS's Frontline series has a nifty time line on the transaction here. (It's notable the program that link refers to was aired in 2003.) The following year (1999) saw the passage and signing into law of the Gramm-Leach-Bliley Financial Services Modernization Act which effectively erased any problems the merger of a bank with an insurance conglomerate which owned a major investment house might have had with laws intended to prohibit any such financial cross breeding.

Ten years on, one has to ask how's that working for us?

Jon Stewart on the topic of CNBC

Wednesday, March 4, 2009

Obama paintings

During the presidential campaign last fall, sponsored an online art exhibit featuring works that somehow embodied or (more likely) illustrated the themes of the Obama campaign. Competition winners can be seen here. Although some of the selected images are not as lame as I'd predicted, overall there isn't any need for most of them. American art and politics can get by just fine without things like that.

Another site offers a collection of Obama art of another sort. contains an assortment of portraits, caricatures, and other images executed by mostly anonymous artists that fit the name of the site just fine.

On the other hand, I found a number of them delightful. Above, for example is our president festooned with a taco hat in the company of polychrome men and women in their underwear. The Mexican flag over the White House might give some people pause, but nobody can doubt the value of all those tighty-whity men's briefs.

Also who doesn't love tacos?

(image from via Andrew Sullivan)

Sunday, March 1, 2009

Judge and jury

I spent today jurying a high school art competition at UT-Dallas. Sponsored by the Texas Visual Art Association, it's an annual event in the UT-D gallery. I've done it before, but this year the competition had grown quite a lot over past years' numbers. Over 1400 pieces were submitted. We jurors (Brian Gibb, director of Public Trust Gallery and publisher of Art Prostitute; Liliana Bloch, director of the McKinney Ave. Contemporary; and Margaret Meehan, an active artist currently living in Dallas; and me) whittled the show down to a manageable 170 or so works after hours of viewing and muttering amongst ourselves.

Coincidentally, yesterday I had lunch with a group of artists including Robyn O'Neil who was in my tiny town to jury the student show at her alma mater. I had the pleasure of being her teacher some years back, though I really can't claim to have taught her anything. Robyn is an amazing artist. Here's a picture of one of her drawings:

(click on it to see the full image)

Lunch was wonderful -- great companionship and good conversation that ranged from schemes for financing a trip to Berlin to a YouTube video of Paula Deen losing her pants during a cooking demonstration.