Political Economy category archive

A clear explanation of “toxic assets”: what they are, how they work, and how they came to be (hint: illegal drugs are not the only things measured in Gramms; so to are shady deals).

From the website:

Years before the current economic crisis, law professor and former Wall Street trader Frank Partnoy was warning about the dangers of risky financial practices.

In his 1997 book FIASCO: Blood in the Water on Wall Street, Partnoy detailed how derivatives — financial instruments whose value is determined by another security — were being used and abused by big financial firms. Partnoy used his experiences as a derivatives trader at Morgan Stanley to give the book an insider’s perspective. In the preface to FIASCO, Partnoy wrote about the growing influence of derivatives:

“Derivatives have become the largest market in the world. The size of the derivatives market, estimated at $55 trillion in 1996, is double the value of all U.S. stocks and more than 10 times the entire U.S. national debt. Meanwhile, derivatives losses continue to multiply.”

Partnoy is a professor at the University of San Diego law school. In addition to FIASCO, he’s the author of Infectious Greed: How Deceit and Risk Corrupted the Financial Markets.

Partnoy joins Fresh Air to explain derivatives, credit default swaps and how they led to the current financial crisis.

I listened to the podcast on my way back from Virginia Beach yesterday; it is fascinating.

Follow the link to the website to listen to the interview.

The Republicanist hangover worsens:

While other reports showed the contraction in U.S. factory activity slowed in March, and U.S. construction spending fell at a slower-than-expected rate in February, they were not enough to take focus away from what to many is the main data point of the week, U.S. non-farm payrolls for March on Friday.

U.S. private sector job losses accelerated in March to 742,000, more than economists’ expectations, according to a report by ADP Employer Services on Wednesday. February’s number was revised up to 706,000 job losses from a previously reported 697,000.

Omni National Bank, Atlanta, Ga.

You can bank on it.

No ideas, no solutions, not even dead air.

Just charades and good haircuts.

CC comments.

Via D-Day.

More Bushboroughs:

Showing the labor market’s considerable strain, the number of people collecting state unemployment benefits reached yet another new record, jumping 122,000 to a seasonally adjusted 5.56 million, the Labor Department reported Thursday.

The four-week average of these claims rose 123,750 to stand at 5.33 million — in itself a record high since the U.S. began compiling these statistics — also as of the week ended March 14.

In other news.

I don’t care who it is, no one provides $1,000,000,000 worth of performance in a year.

Espcially not for playing monopoly with other people’s money.

Top hedge fund managers earned 48% less on average last year, but industry chiefs James Simons, John Paulson, John Arnold and George Soros still took home more than $1 billion each, Alpha Magazine said Tuesday.

(snip)

Top 25 top-performing managers made $464 million each on average last year. That’s down from a record $892 million apiece in 2007, before the credit crisis triggered big losses and redemptions across the $1.5 trillion industry. Alpha Magazine cut its list of top earners to 25 from 50 last year.

In the Guardian, Devendra Kodwan explores the failure of the bankrupt busines bonus culture. The article sort of sputters to an unsatisfactory end, but it is still worth the two minutes it takes to read, for there is no question that bonus “pay for performance” schemes produce pay, but not performance.

Just look around.

A nugget:

First, the idea of using performance-based incentives that included bonuses, in particular share options, has clearly backfired. Recent research from US academics suggests that the link between executive incentives and firm performance is tenuous in a best-case scenario, and indeed negative in some cases. There is also disturbing evidence that when firms pay a very high level (90%) of CEO compensation in stock options, it increases the chances of questionable financial reporting in the following years.

Via Delaware Liberal.

A TPM reader wonders

who represents the taxpayers in the compensation decisions at government-controlled firms?

Terry Gross: “How did they (AIG–ed.) calculate risk when they were putting these complex instruments together?”

Guest Gretchen Morgenson: “. . . they certainly didn’t . . . .”

Listen to the interview here.

Duncan:

This story about “risk” is a pleasing one for people who imagine that the masters of the universe, or their managers, actually worry about such things. I don’t know if Timmeh does or doesn’t believe this, but it’s absurd. The current financial crisis has nothing to do with how much risk the banksters were willing to take on. They didn’t say: oh, well, I think we should tolerate a bit more risk now. They said: CA CHING CA CHING CA CHING CHING!

Bill points out in the comments to this post that corporate credit unions are going under.

Bloomberg has more. These are the first “corporate credit unions” to fail since 1995, according to the story.

I’m having difficulty finding a clear definition (that means that I’ve googled for more than 10 seconds) of a “corporate credit union” as opposed to a run-of-the-mill credit union, but Bloomberg says that corporate credit unions “make loans and provide other services for the retail credit unions that cater to the public.” It could be that

credit union:corporate credit union::insurer:reinsurer

Anyway, here’s the citation from Bloomberg.

Two corporate credit unions, with combined assets of $57 billion, were seized by the National Credit Union Administration yesterday to stabilize a system used by 90 million customers amid a worldwide financial crisis. Three U.S. banks failed, bringing this year’s total to 20.

U.S. Central Corporate Federal Credit Union, in Lenexa, Kansas, and Western Corporate Federal Credit Union in San Dimas, California, were put into conservatorship, the regulator said in a statement. The credit unions failed so-called stress tests that found an “unacceptably high concentration of risk” from mortgage-backed securities, the agency said.

I find the sentence that the “credit unions failed so-called stress tests” interesting.

Does it imply that these seizures were preemptive, or, at least, more preemptive than most seizures?

The MarketWatch story is here.

Bill Shein turns serious to consider possible outcome of the current panic. A nugget:

Most importantly, we must develop an economic model that doesn’t rely for its success on a fire hose of advertising that tells us we’re too fat, too poorly dressed, too ordinary, not having enough sex, not living glamorous-enough lives, not rich enough, not young enough, not driving the right car or using the right cell phone or living in a big house filled to capacity with gadgets and toys and fancy things.

Because if we are honest, we’ll see that modern consumer capitalism has become a cruel, manipulative, soul-destroying system that commits psychic violence on each of us – most notably our children – by nurturing self-doubt and mental confusion and unnecessary anxiety and regret. All in the name of “moving product.”

Bloomberg (emphasis added):

A credit freeze at the center of the worst financial crisis in seven decades, the highest unemployment rate since 1983, and slumps in manufacturing and housing are forcing policy makers to accelerate efforts to stabilize the economy. The Fed yesterday left its main interest rate within a record-low range and said it will buy $300 billion in Treasuries, plus more mortgage and agency debt, in a bid to end the recession.

(snip)

Initial claims for jobless benefits surged last month and through the week ended March 7, topping 600,000 each week. Today the Labor Department said the number of Americans collecting jobless benefits swelled to a record 5.47 million in the first week of March, indicating that former employees are unable to find new work as companies continue to cut costs.

The ultimate foreclosure:

When people can’t pay their mortgages and lose their homes, or are forced to downsize, they entrust their extra belongings to one of the 52,000 cinder-block-and-prefabricated-metal self-storage emporiums that dot the landscape. When they can’t afford to pay for the storage, their belongings get sold to the highest bidder, often at a pittance.

It’s impossible to get a precise statistical grip on the extent of these sales because the industry is fragmented, and the local owners are loath to discuss it, but anecdotal data confirm it is a surging phenomenon. “Every auctioneer I talk to says storage-unit sales are up considerably over just last year,” says Chris Longly, a spokesman for the National Auction Association. “It’s a sign of the times. A Denver auctioneer told me he had 900 in 2007, 1,200 in 2008, and in January 2009 alone, he had 200.”

Remember, these are the same people who have been flooding my mailbox (yes, flooding, still) with offers to issue me business credit cards because I am legally a business and pay a little business tax.

Almost three-quarters of U.S. companies with fewer than 500 employees are experiencing a deterioration in credit or credit- card terms at a time when half of them depend on credit cards as a primary source of financing, according to a December survey by the National Small Business Association, a trade group with more than 150,000 members.

The increase in credit-card costs has forced some business owners to stop using their cards, and at the same time declining credit limits are cutting their access to cash, said Todd McCracken, president of the Washington-based NSBA. Twenty-eight percent of small businesses surveyed by the NSBA said they had their card limits or lines of credit lowered in the second half of 2008.

Bank loans are drying up as an estimated 70 percent of U.S. banks have tightened standards for small-business loans, based on a Federal Reserve January survey of senior loan officers.

Susie has more (her intro to the post is worth clicking on the link).

nagflation: The incessant gloom-and-doom predictions from economic analysts who feel compelled to issue updates even if nothing has changed.

Courtesy BuzzWhack (http://www.buzzwhack.com).

Republican Economic Theory at work:

The WSJ reports that Americans have seen 18% of their wealth vanish in 2008. That’s a rather conservative estimate because they go on in the piece to note some folks have lost upwards of 35% of their wealth. I’ve talked to friends who have lost 40% or more in the past few months.

. . . except for those who did.