January 20, 2011

The Left Has a Lot to Answer For

Crossposted at Underbelly.

Seems like everybody who counts wants to weigh in on Freddie deBoer (who?) 's piece decrying the marginalization of the left in the blogosphere.  See link, link, link, link, and perhaps especially link and many more.  I won't pretend to have read all of them, and I certainly can't top the best of them but I do want to add a thought that I haven't seen well enough developed elsewhere.

For starters,  I think deBoer is right; the blogosphere does need a more engaged left.  We all need a better left: market liberalism has turned into a kind of groupthink which is bound to become (if has not already become) a blind alley.  Sooner or later somebody or something is bound to upset this conceptual applecart and the sooner it happens the better for everybody.   If you doubt it, recall how the right horned itself into the dialogue 30 years ago and how, for all the howling (and, okay, for all the mandacity, the irresponsibility and the outright cruelty) the enquiry has been enriched by its  presence.  The dialogue needs the left.

The obvious corollary is that if the left isn't part of the dialogue, it's its own fault: the left isn't in the dialogue because nobody is listening and nobody is listening because the left doesn't have much to say.  this is a harsh, smug, self-satisfied and dismissive response.  Yet I will embrace it, because I think it is true.  The fact is, the left hasn't had anything interesting to say in years.  And this is a pity, because there are so many things on which things to be said.

Start with free trade.  It's one issue on which neoliberals and (many) conservatives agree.   Trade barriers bad, free trade good.  The left doesn't like free trade; they say it robs us of good jobs at the expense of low-paid labor overseas.    The mainstream response is that it really doesn't work that way--but the left isn't persuaded and in truth, they have a lot of evidence on their side.  Yet where is it written that American (steelworkers, auto workers, textile workers, whatever) should live well while a Bagladeshi starves?  Is this really what the left wants?  I doubt it, but isn't it s legitimate concern, and as such, doesn't it deserve  a response?

Or take the closely related issue of (private sector) trade unions (remember them?).   The left pines for a day when a man (sic) with a good union job could expect to support his wife and a couple of kids with a home in the suburbs, like Homer Simpson?  Well, you know what?  We all pine for those days.  Or, everyone except Scrooge McDuck.  We doubt they are on offer again; we suspect they depend on grotesquely unbalanced world economy, supported by trade barriers (see previous paragraph) that allowed Charlie Wilson and Walter Reuther to set an above-market price and divvy up the proceeds while we all drove crap cars.  Or worse: they loaded us up with railway featherbedding, with printers' bogus, with an illimitable array of makework charades that loaded us all up with extra costs while doing exactly nothing--or, nothing positive--for the worker's sense of self-worth.

We don't want to go back there, do we?  Once again, the question is not rhetorical.  Maybe the answer is "sure."  But it is a question, and deserves a candid and reasoned response--the kind of response that can only come from those who appear most committed to the old and (seemingly?) discredited scheme.

Or take public employee unions.  This is a somewhat different issue because they didn't even exist in the old days.  I speak out of special interest here because I enjoy a public pension and I'm just delighted to have it, thank you.  And in general, I think it is a fine idea to have a public service that is well paid.  But "well paid" has to mean "well paid for services rendered."  Thus I'm not at all disturbed when we pay our public school teachers decent salaries, but don't we have the right to expect something in return?  Can we really justify having teachers so (comparatively) well paid when the results they turn in are so consistently awful?

Or take the calamity of the underclass.  The right made some of its greatest inroads a generation ago when they cast a cold eye on Great Society spending programs and ventured you can't solve problems by throwing money at them.  And remember what happened?  Okay, I'll remind you: what happened was that they were proved largely right: all kinds of noble aspirations withered into private honeypots for the well-connected; jobs for the boys (and later, girls).  In a way it is a cheat: a lot of the voices insisting most loudly that you couldn't solve problems by throwing money at them--a lot of those voices really didn't give a rat's hind end whether the problems got solved or not (and they certainly weren't interested in giving their advice to the military).  But at the core, they were right.  The "liberals" pretty well lost that round, and it may be what cut them off from their leftist roots.  But the "left" for the most part, seems not to have learned the lesson.  And once again, we need to frame it as questions: can we really, despite all the evidence, really solve problems by throwing money at them? Can you put our mind at rest on that issue?  If not, what do you have to offer that will trump our concerns.

I could on here but I suspect you get the drift.  To restate the general point: I think there's a large chunk of the citizenry--I'd count myself among it--who have a serious interest in the health of the body politic, and a genuine eagerness to help produce a just society in which everyone can live with decency and self-respect (and good luck with that, eh?).   We certainly aren't eager to sign on to what we regard as the mainstream conservative agenda.  We are, for example, deeply apprehensive about the rising power of "movement Christianity"--we tend to be pro-choice; we believe in human-made climate change; we're revolted  by vulgar creationism.  But we aren't at all persuaded that "the left" has answers that are distinctive or interesting or, most of all plausible.

There is another, even more, contentious, way of stating the point: the left is still stuck pre-1989.  I don't suppose there are any communists left anywhere any more except on the North Korean politburo.  But a whole world of traditional leftism crumbled along with the Berlin wall.  It would take a hero to rebuild, or rather "reconstruct" it all.  I suppose it seems unfair to impose the responsibility on the advocates--a dialogic form of "blaming the victim."  Yet if anybody has done--or even begun--the job in any remotely plausible way, then I have missed it.  Any takers?

January 12, 2011

Justice Kagan's Torture Memo:" It Can't Possibly Mean That"

Folks in the commentariat seems to believe the planets are in alignment as they read (or hear about) new-Justice Elena Kagan's first Supreme Court opinion. The topic is "bankruptcy," and the general sentiment seems to be that it is only fitting for the newbie to be handed an assignment so "unimportant."

In a narrow sense, they are right: the issue is a precise point of statutory interpretation (so precise you could be excused for wondering why the Court messes with it at all). That is: does the debtor get to deduct expenses for a car payment when he owns no car? On a hasty reading, the uninitiated reader might conclude that "yes, he does get the deduction." He might also conclude that the result is a bit silly but clarity and coherence have apparently never been part of Congress' brief.

Justice Kagan was not so easily fooled. She reads the statute a second time and finds that "the key word...is 'applicable'," and that the deduction just wasn't applicable in this case. Seven of her brethren (sic?) signed on. The opinion is a perfectly creditable piece of handiwork; you would expect no less from a first-tier Harvard law grad. From a more spacious vantage, however, the case really needs to be filed not under "bankruptcy" per se but under "statutory interpretation." And here, you might be tempted to wonder whether what they learn at the Harvard Law School is the art of torturing the statute until you extract a confession.

There's a back-story here that you'd never suss out of the opinion itself. Specifically, the language in question comes from the famous-all-over-town bankruptcy amendments of 2005, which made it much tougher for ordinary folks to get bankruptcy relief. Whether that's A Good Thing or not is the kind of issue on which, inevitably, tastes differ. But another issue, apart from substance, is quality of the statute as a piece of draftsmanship. Here there is much wider agreement: it's a mare's nest, a dog's breakfast, a can of worms, just about anything but the cat's meow. Cudgeling my brain, I can think of only one person who has ever gone on record as believing that the statute is carefully written.

No surprise, then, that an kind of cottage industry has developed in the lower courts since 2005 which you might call Saving Congress from Itself--more precisely, trying to read some sense into a statute which often doesn't make any sense. But this endeavor has not been purely technical. Rather, there seems to have developed a sense among the lower courts that what Congress intended to do was jam it to the debtor good and hard, and that if Congress didn't get it right the first time, then we must help them. Bankruptcy lawyers have fashioned a new canon of statutory interpretation: if the statute seems to favor the creditor, apply the statute; if it seems to favor the debtor, assume it's a mistake and favor the creditor anyway.

I wouldn't put Kagan in quite that camp. Her reading seems more rooted in the "Congress couldn't have said anything that stupid" school. And she obviously has a lot of company: the whole crew is on board. The whole crew, that is, with one exception: Antonin Scalia who ways in with a typical blunt assertion of a kind of plain-meaning rule (whatever Scalia may be willing to torture, you'd have to say that statutes are not on the list). As to bankruptcy issues, it's a fight he's had  before: famously with Justice Harry Blackmun and as recently as last spring, with Justice Samuel Alito.  From early in his career Scalia has made it clear that (at least on non-political, technical, issues) if Congress is determined to muck things up, he will let them muck away.

So we are left with the ironical conclusion that Justice Kagan, late darling of the left, begins her Supreme Court career by putting money in the pocket of the credit card companies. while the last man standing at the pass in defense of the beleagured debtor is Antonin Scalia.

Coda: I really don't mind the Chief Justice giving the newbie a fairly technical case on which she can win broad assent. I just hope it isn't a reflection on his view of Justice Kagan. Back in an earlier time, I remember that Chief Justice Warren Burger harbored contempt for at least two things: Justice Thurgood Marshall, and bankruptcy. So Marshall got to write bankruptcy opinions. They weren't bad opinions (Marshall had, after all, plenty of good clerks). But if that is going to be the Chief's attitude to bankruptcy cases, I suspect the Court is better off just not taking them at all.  

Second Coda:  My friend Bob thinks I am being unkind to Justice Marshall.   Maybe; I know that I take second place to  no one in my admiration of the old guy.  But I doubt that he really cared all that much about the priority of tax claims in Chapter X, or the fate of crooked securities entrepreneurs in Chicago.

[Coss-posted with some variations at Underbelly.]

October 26, 2010

Two Thoughts on the Mortgage Meltdown:A Plague o' Both Your Houses

I won't for a moment pretend to have read everything written on the topic but here are a couple of thoughts on mortgage meltdown that i haven't seen elsewhere.

One: the banks are going ballistic hanging tough over the question whether they should rewrite some of these deals so that buyers can stay in their homes. They've pretty well sandbagged HAMP and they talk about a possible Chapter 13 writedown amendment as if it were the End of Western Civilization as we Know it.

What this loses sight of is the question of what will happen if the banks don't get writedowns. For borrowers, this is a huge issue, of course. Either they get to stay in their homes or they do not. For banks, I suspect it is not a big deal. The point is: they are never going to see this money anyway.

Consider the debtor with a $400,000 loan on property worth $280,000. He's out of work and can't pay. He walks away, leaving a deficiency claim of $120,000. What then? In a nonrecourse state, the bank eats it as a matter of law: the bank is debarred from pursuing the debtor for the shortfall.

In a recourse state, the bank can sue the debtor for the shortfall, but I suspect in most cases it won't be worth the bother. The debtor either (a) goes bankrupt and discharges the shortfall claim; or (b) does not go bankrupt and just limps along judgdment-proof, i.e., with no assets to play the game.

The point is that in all three cases, the bank is no worse off than if it took a modification. Indeed I can think of only one way that modification changes things and that is it may allow the bank to get more. How can this be? The answer is that if it plays its cards right, the bank may be able to position the debtor where he is obliged (and willing) to pay a bit more than the bare minimum--in our case, say $290,000. If these are the right numbers, than the bank is better off taking a carefully-done rewrite than otherwise.

That's point one. Now onto point two. We hear a steady drumbeat of argument that the debtors ought to get relief because the subprime fandango was full of "massive fraud." Correct, the subprime fandango was full of massive fraud, but look as little closer. From what I hear, the main fraud claim is that the banks (or brokers for banks) structured deals based on grotesquely inflated estimates of the borrowers' ability to pay--faked data about income and employment,l for example. Sounds like fraud to me, but who is defrauded here? Maybe the buyers of this caca, who took it on the bank's recommendations. Maybe the shareholders, entering into the delusion that their agents the managers were spinning straw into gold and thus deserved massive bonuses.

But the borrower? Maybe he was lied to--e.g., when he was told that it was perfectly all right to declare his income at eight times its actual number. Yet for the life of me I can't understand why a grownup loose on the streets could be misled into believing that he could pay, say, a $3,600 monthly mortgage payment from his takehome down at the car wash. 

Sure, there are cases and cases. That's why we have courts and lawyers (and that is why, inter alia, it is so bogus for the banks to say that they ought to be able to foreclose without paperwork). I might add that I'd feel differently if we were dealing with people 26 years into a 30-year mortgage who got whipsawed by some unseen society-wide calamity. But people take chances; it is okay with me that they take chances, but if you take chances, there is a chance that you will loses.

So, a plague o' both your houses.   I don't think the banks are ever going to get their money back on this one and I don't think they deserve to.  On the other hand, I'm not losing much sleep over debtors who so eagerly bought into such a lunatic fandango.

Cross-posted at Underbelly.

October 2, 2010

The Bankruptcy Squeegee Guys

Kudos to Katy Porter for dropping a dime on the Justice Department for its indefensible decision to chime in on the side of the creditors before the Supreme Court in the MBNA case. Katy's post offers a crisp summary of the issue—it's a dispute over a fine point of interpretation in a bankruptcy statute. But the real point is the meta-issue, on which let me cut to the chase: the government has no dog in his fight, and so no good motivation spending its limited resources trying to to work the ref.

Except one—speculative, but I'm sure she's right: the US Trustee (an arm of Justice) wants it. For the past five years, the US Trustee has taken as its mission the task of policing debtors (and their attorneys) in bankruptcy cases. Making a Supreme Court argument that creditors could perfectly well make themselves—and at their expense—is fully in consistent with the role the US Trustee has assigned to itself.

A bit of background. For a long time, the US Trustee was an agency in search of a mission. Congress created the US Trustee in 1978 as a compromise on the issue of how to supervise bankruptcy cases. The deal was to leave case management in the hands of private parties with the US Trustee as a kind of supervisor.

Except from day one, it was clear that nobody knew quite what the US Trustee was supposed to supervise, and how. For years, they satisfied themselves with a lot of glorified paper-shuffling, helping to weed the dormant cases out of sclerotic dockets, for example. They did play a small role in policing attorney's fees and blowing the whistle on some of the more egregious instances of attorney misbehavior. They'd weigh in on the bigger, more visible, public company cases—but these were typically the cases where their participation was least needed, the relevant interests being so well protected

Along came the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Urk!). For those who haven't been keeping score—BAPCPA was a miscellaneous grab-bag of amendments to the Bankruptcy Code mostly designed to make life more difficult or expensive for individual debtors trying to get the protection of bankruptcy. It was shambolically drafted and only semi-coherent but just in passing I'd have to note that a lot of the substance made good sense: for a generation, bankruptcy had indeed functioned as kind of a debtor's playground and a bit more balance in the system was not the End of Western Civilization as we Knew It.

But some time during this process, behind some Steelcase desk on Mass. Avenue, the light dawned: beat up on debtors and you will not offend the powerful in Congress. Nor, of course, the creditors who might have supposed they would have to do their own work, and on their own dime. Anyway, coming out of the box, the newly transmogrified US Trustee presented itself—more or less unasked—not in a striped shirt with a whistle, but as the boy in blue with the badge. In some respects they make me think of the squeegee men who used to pop up unasked in Manhattan to clean your car windows. Okay, the comparison is not exact: in this case the customer is perfectly happy to have his window cleaned, especially since it is not he who will have to pay for it.

Again, before I get carried away—there is nothing intrinsically wrong with the goal of policing debtor misbehavior. Laws are laws and deals are deals. And as I've already said, I'm somewhat more tolerant than many of my bomb-throwing pals of some of the substantive innovations of the 2005 Act. But I'm remembering what Woodrow Wilson once said about Congress: Congress may do the right thing but never because it is the right thing. Something similar may be said of the bureaucracy. The US Trustee's campaign against debtors has far less to do with any question of substantive right than it does with institutional survival. The Justice Department should stop being the enabler here. It should abandon its position in the MBNA case and devote its resources to a more worthwhile or product—like, perhaps, the abolition or at least the severe scaling-back of the US Trustee.

Cross-posted at Underbelly.

July 22, 2010

Bullet Points on the Late Uproar, Plus a Footnote on Macro

Herewith I reprint the substance of a couple of posts from my own blog (link, link); in one, I try to pull together some thoughts on the late (uproar, meltdown,economic event, clustermuck, whatever we call it); in the other I add a footnote about my own frustration with the economic debate over macro policy.

First--always willing to punch above my weight, I unburdened myself before a bunch of bankruptcy lawyers the other day on the issue of how we got into this economic mess, with a few tentative jabs at the issue of how we might get out.  Always happy to oversimplify, I offered these bullet points:

  • Housing Bubble or--? I think this one almost answers itself. Housing peaked in 2006; banks didn't melt down until 2008. So, a housing bubble that put a spear into a fragile and vulnerable banking system. Note that this is the first financial crisis top metastasize since 1931.
  • Liquidity or balance-sheet? Bankruptcy lawyers grasp this one: "bankruptcy insolvency" v. "equity insolvency." As phrased, the question again probably tips the hand of the answerer. We had the mother of all liquidity crises in 2008, but we've got a balance-sheet problem that looks like it will stick around for years.
  • How did we get where? "Bleeding Gums" Murphy or Banana Republic? The "Bleeding Gums" school holds that it was all the fault of the undeserving poor who wanted to become the undeserving rich and took on loans they could not possibly repay, thereby destroying the world financial infrastructure (they had help from Jimmy Carter, Chris Dodd and Barney Frank). The Banana Republic school holds that we've become a nation where a small and entrenched elite has come to regard the government as its dedicated honey pot. I suspect there is at least enough truth in either of these views to offend those who embrace the opposite.
  • What do we do next? As in: do we slash the budget or turn on the printing press? This is the pairing that I find hardest to reduce to a soundbyte. But it is the utter discontinuity on this issue--the array of respectable professorships on each side of the case--that does most to enhance the suspicion (a suspicion that I do not embrace)--the suspicion that economics has not yet advanced beyond the realm of campfire fairy tale.

I shared the platform with a working bankruptcy judge who described to us in edifying detail how much his life is dominated by the busted-up mortgage and how he doesn't see any end of it in sight. We passed on discussing the Financial Reform Act; I can't speak for my colleague but I figure it will be another year before we know how completely the lobbyists defang it in rule-making. I did hear somewhere, however, that Mary Schapiro has already said she'll need another 500 employees at the SEC. Insert your own stimulus joke here.

--

The next day I added:

I'm still puzzling over the scandal of economic theory that I was mulling over yesterday--the other discontinuity of view between competing schools of macro policy. That would be: the view(s) that (a) we've got to juice more into the system; or (b) we've got to cut, cut, cut. I tend to ally myself with those of my betters who propound the juice theory. And I'd certainly agree that the cut school is heavily populated with the terminally ignorant: people who don't seem to have the most primitive notion of how an economy works, and who are disposed to use government policy of any sort as a focus for their resentment (particularly when propounded by a suspected Kenyan).

But even a blind hog finds a few acorns and an idea has a truth value independent of the person who embraces it. Even if it is not the right remedy for the moment, still the cutter school has defenses or justifications far more sophisticated and plausible than what you are likely to hear on talk radio.

What is lacking, so far as I can tell, is anywhere near enough candid and responsible dialog between grownups who ought to know better. I'm willing to give the yahoos a bye; I'm happy to excuse politicians (at least provisionally) from the class of those who know better. That leaves a tranche--maybe two tranches--of impressively trained professionals who can fashion analytic advocacy of great sophistication, and marshal formidable batteries of data in their support. But they gaze across the void with an attitude of suppressed indignation (the cutters) or ironic indifference (the juicers). On both sides, it is unworthy of them. We the wide-eyed and gap-jawed outsiders deserve better.

July 11, 2010

Yep, That's What We Strive For

Overheard in a coffee shop near a law school:

...post-Socratic stress disorder.


Could be right.

 

Crossposted at Underbelly.

April 27, 2010

Reading Notes on the Meltdown

One of the melancholy consolations of the late economic meltdown is that it has produced some pretty good second-draft journalism: here in a moment, gone in a moment, but helpful and instructive while they last. Over the past year or so I’ve found myself obscurely compelled to try to keep up on this stuff. Of course I can’t really; there aren’t enough hours in the day. But I may have done some successful cherry-picking. Here are some offerings:

If I had to recommend just one book on how we got into this mess, I suppose it would be Barry Ritholz’ Bailout Nation with the saucy subtitle of “How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.” Given the snarky packaging (an enrgaged bull on the cover), you’d think it was a lightweight but Ritholtz is an extraordinarly shrewd student of the market, and he’s not overawed by power and wealth. As the title implies, Ritholtz assigns a lot of blame to the role of the government as guarantor against loss—he goes all back to the first Chrysler bailout a generation ago. He also develops an important structural point I hadn’t thought about until I read him—the shift in the great investment banks from”partnership” to “corporate” form, setting the stage for a heads-I-win, tails-you-lose investment strategy, where it may make sense for the trader to make absolutely bad deals if he gets to keep the gains while someone else suffer the losses.

A variant on the theme is Yves Smith’s ECONned, another book better than its title. Yves saw some of the madness from the inside so she can get gritty and granular than an outsider. She also has a distinctive advantage: she’s a woman, so she can see how much of the mess finds its roots in macho bravado.

Thirteen Bankers by Simon Johnson and James Kwak has received and deserves respectful attention, not least for the insights that Simon can bring from his past experience with the International Monetary Fund. Johnson fears we are beginning to look like a banana republic (“without the bananas,” someone has grumped), and he knows what they look like because he has seen them. It does have the drawback of coming a little late in the game, so it can seem repetitive.

A recent arrival that does not seem repetitive is Gary Gorton’s Slapped by the Invisible Hand. (can’t anybody write good titles any more?). Gorton comes to the table with long experience in the study of financial bubbles: he offers a challenging analysis of the late meltdown as a classic bank panic in modern dress, with the Wall Street repo market playing the role once inhabited by Jimmie Stewart in the Greek Revival edifice down in the center of Bedford Falls.

Remember the housing bust? It almost gets lost in the underbrush of Wall Street, but it was, after all, the triggering event—the shock that sent the larger system into a tailspin. For background on housing, I doubt that there is anything better than Alyssa Katz, Our Lot. She makes a persuasive case that the housing problem was not just one problem but half a dozen. She pulls some of her most interesting examples out of California.

A superb little book with a shelf-life perhaps even shorter than the others is Robert Pozen’s Too Big to Save? which I elsewhere described as CliffNotes for Finance Professors. It’s a marvel of exposition, a point-by-point account of the various (economic) problems that afflict us, with specific action plans for reform. Might be the best economics book I’ve read all year; unhappily, events are already overtaking it.

There’s a lot more. I’ve more or less deliberately sidestepped the memoirs (necessarily self-serving) of the Alan Greenspan, Hank Paulson, and their ilk: I figure they would only send my blood pressure up. I’ve mostly sidestepped the journalism of people such as Andrew Sorkin, figuring the chances are they’ve already said what they know in the papers. I’ve read only a few of the ticktocks of day-to-day life in the midst of calamity (though I did enjoy Willliam D. Cohan’s House of Cards about the fall of Bear Stearns).

Oh, I could go on and on. But let me end with one item, not strictly on point but related, and likely to outlive the current uproar. That would be Liaquat Ahmed’s Lords of Finance, subtitled “The Bankers who Broke the World,” about the calamities of misjudgment that went so far to aggravate the Stock Market Crash of 1929 into the Great Depression of the 1930s. Ahmed just won a Pulitzer Prize and no wonder: this is a book that will stand solidly on the shelf. It’s perhaps a consolation to know that our betters have not led us quite so deep into the swamps this time. Or at least, not yet.

April 2, 2010

Death Ships

In B. Traven's novel The Death Ship, a misbegotton sailor finds himself cast out to sea on an old scow whose purpose, as he learns, is not to reach port, but to sink--the owners having decided that it is worth more at the bottom of the ocean while they disport themselves with the insurance money. So, a death ship born to die.


I've been reflecting on death ships lately as it dawns on me that they may be more common than we think. Specifically I've read two accounts of the late financial uproar, in which the authors identify transactions which, as they argue were designed to fail. I choose my words advisedly--designed not just with reckless disregard of their prospects, but with failure as the end in view, and design feature and not a bug.

One is Yves Smith's account of Magnestar which (per Yves) designed investment vehicles with such a high probability of failure that the promoter could make money by shorting its own creation. That is, designed to fail.

The other is Gary P. Gorton in Slapped by the Original Hand, where he makes a comparable argument about the adjustable. Recall (forget so soon?): in the ARM, I take a 30-year mortgage at a two-year teaser rate. At the end of the two years, the rate adjusts up--but not adjust "up;" rather, up so far that I can't come close to servicing the old debt. So I have two remaining choices. One, default. Two, cut a new deal, perhaps with the same bank--which the bank, perhaps surprisingly, is happy to do because the property has gone in value and under the new deal, the bank effectively captures the new equity.

Per Gorton, this "new deal" scenario is not just a happy accident. Rather, he argues, the deal was structured that way from the start--the bank foresaw default and wanted default, because that was the bank's route to the ballooning equity stake.

So now I'm up to two now in my count of financial death ships--devices designed to screw up the economy not just by accident but on purpose and as a matter of policy.

Are there more death ships on Wall Street? I wouldn't be surprised; once you start looking for death ships, you see them everywhere. Consider Mel Brooks' The Producers, where the naughty boys undertake to get rich by producing a show that will fail: the comedy is that they fail to fail, and wind up in jail. Hell, consider the chicken: the fastidious among us may cringe at the thought that we get our dinner by breaking the neck of an innocent creature. The Marengo-and-Tetrazzini crowd will say: hey, the chicken wouldn't have been born to begin with if we hadn't intended to kill him. So, we did him a break. Or, a death ship.

I would want to distinguish those activities that harm others by fatal indifference as distinct from general plan, though the distinction may be hard to isolate. For example, I assume the tobacco companies know that they are in the business of killing people, but I assume this counts more as an unfortunate side effect than a settled business purpose--if they could make all that money through a non-lethal form of addiction, they'd be perfectly happy to do so. I would also distinguish those who make money off the misfortune of others. As a bankruptcy lawyer, I hear a lot about that, but I don't know of any bankruptcy lawyer who structures deals so he can profit from the debtor's bankruptcy.

I hesitate to include the Republican Party, because its nihilistic behavior has become something close to a meme. But I think you'd have to concede that the Republican campaign against Obamacare was more about destroying Obama than it was about his plan--and that, indeed, there must have been Republicans thanking their lucky stars that they President wanted something so bad that they would have the opportunity to try and destroy it. Query, was there ever a case where an entire economy, an entire polity, counted as a death ship?

It is dangerously tempting to raise this whole analysis to a higher plane--to consider whether we are all characters in somebody else's drama where we have no idea of the plot, nor least of all the denouement. Or as I say on my Facebook page (though the line is not original with me)--perhaps the rapture has already happened and we are the ones left behind. Or perhaps it is all just a giant rust-eaten garbage scow, on which somebody else hopes to collect the the insurance.

[Cross-posted at Underbelly.]

February 27, 2010

Why Is This Man Frowning? (Recourse Finance)

 

Per Mark J. Perry, here's reason #1 why the Canadians avoided a bank meltdown: recourse lending:

Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.


This is weird in so many ways that it is hard to know where to begin, but grant him his general proposition: There is indeed something problematic about the asymmetric heads-I-win, tails-you-lose structure of non-recourse finance.


The trouble is, once you start looking for it, you find "non-recourse" under almost every rock in the capitalist garden. I'm sure Perry would be happy to show you how the same problem underlies the bankruptcy discharge, where the debtor gets to walk away from his just debts. I'll bet (although I do not know) that he feels the same way about bank insurance, like the free-handed taxpayer guarantees that allowed the mischief-makers to bring down the Savings & Loan industry in the 80s/90s.

But it doesn't stop there. When I buy a call option on LittleCo stock, I acquire the right to take the stock or throw it away--analytically no different from my right when I buy my home on a nonrecourse mortgage. I have not heard Perry howling for the abolition of the conditional claims market, and I am not holding my breath.

Or consider the corporate limited liability form itself, the greatest social invention, so Bertrand Russell is supposed to have said, of the 19th Century. Restated: the equity stake in a leveraged company is a call option on the assets--you can take or walk away, just as with stock options, just as with the nonrecourse mortgage.

Probably nobody ever understood this better than the bankers. Look at that picture above of Mr. Banker Himself, J.P. Morgan Jr. Why does he look like he is ready to explode? Because it's his own skin in the game. He was a general partner. If the deals went sour, he stood to lose every penny. No wonder he was a prudent lender. No lwonder he staked so much on personal character.

Sadly, his successors appear at last to have grasped the full implications of his insight. What caused the late meltdown? Of course you can't bring it down to one cause, but if you had to name just one, I'd say--incorporation of investment banks, the great tectonic shift from unlimited to limited liability.* That's when the bankers stopped having skin in the game: when they shifted to heads-I-win, tails-you-lose. They bankers didn't worry about taking lunatic risks because they knew the downside was yours, or rather ours (indeed, any first semester MBA student can show you, the greater your capacity to shift he losses, the greater the inducement to take a risk and the more lunatic the risks you take).

I grant, there is a great puzzle here: why do shareholders get bankers get away with it--or more generally, why does anybody ever buy stock in a bank? But the same specter haunts Perry's argument: if banks operate in a regime of nonrecourse finance, you'd think it would make them more cautious in their lending, more prudent in protecting against risks that they couldn't offload. I don't know the answer to that, but Perry doesn't even seem to notice that it is a problem.

Final Jibe: I think it's pretty rich to see an endorsement of Canadian banking from a crowd who have spent the last dozen years or more telling us about the evils of Canadian health care.

Afterthought: and how could I have forgotten the biggest nonrecourse of them all?

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*I first grasped this point in reading Barry Ritholtz' Bailout Nation, though I am not sure he would press it quite as far as I do.

[Cross-posted (with minor tweaking) here.   The piece was also picked up at  Brad DeLong's blog, where it has generated an interesting comment thread.]

Update:  Returning visitors will note the vastly improved glower on the face of JPM, but what is it with the knife?
February 3, 2010

Obama In Context: Some Data on LBJ

Here's a bit I posted this morning at my own blog, followed by a few second thoughts.  To begin, here's the cross-post:

Is Obama blowing his big lead? My friend Ivan passes on some contextual data from the Lyndon Johnson years.

First: Johnson came out of the 1964 election with far bigger Congressional majorities than Obama brought home in 2008--a full two thirds in the Senate (the last time that happened)--also two thirds of the seats in the House, achieved via a stupendous pickup of 36 seats. Ivan reports:

In 1965 the first session of the Eighty-ninth Congress created the core of the Great Society. The Johnson Administration submitted eighty-seven bills to Congress, and Johnson signed eighty-four, or 96%, arguably the most successful legislative agenda in U.S. Congressional history.

But it didn't last. In 1966, the Dems followed up on their 36-seat gain with a 48-seat loss. They retained a majority in the House, but greatly depleted. Remarkably, they lost only three seats in the Senate and retained a 64-36 seat edge. And for what it is worth: the three Republican newcomers were Mark Hatfield of Oregon, Charles Percy of Illinois and Howard Baker of Tennessee--any one of who would probably qualify as a bomb-throwing lefty revolutionary by the standards of today's GOP.

Ivan adds: "if you are going to lose big anyway, isn't it better to have given America the Voting Rights Act, Medicare, Head Start, food stamps, NEA, PBS, the Wilderness Act?"

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Followup: I suspect that you can ascribe the 1966 collapse to two factors: one that the 1964 victory was just abberationally large, and 1966 was a kind of reversion to mean.  And two, the great gorilla in the room was the Viet Nam war. Johnson had rolled to reelection in large part by exciting fears that his adverary, Barry Goldwater, would be a war president.  And then Johnson became, in the eyes of many, as much as or more of a war president  than anything Goldwater might have exemplified.

I suspect that Johnson's great success can also be attributed in large part to one salient vector: fear.  Johnson is a fascinating guy in so many ways, but one was that he hadn't the least hesitancy  about scaring the living daylights out of his adversaries and making them foresee that if they stood in his way they'f find themselves trussed up and cuffed to the doorknob.  Others have tried, but I'm not sure any politician since Johnson has used stark terror quite so effectively as he who said "come, let us reason together."