Tuesday Reads

Good Morning!

By now, you probably have heard that diplomat Richard Holbrooke has died at the age of 69 from an aorta tear.  His obits are chock-full of some amazing accomplishments.  Here’s one example from CNN.

Holbrooke was best known for being “the chief architect of the 1995 Dayton Peace Agreement” that ended the Bosnian war — the deadly ethnic conflict in the 1990s that erupted during the breakup of Yugoslavia.

Serving President Bill Clinton as assistant secretary of state for Europe from 1994 to 1996, Americans got a taste of Holbrooke’s drive and intellect, as typified in this remark from “To End a War” — his memoir of the Dayton negotiations.

“The negotiations were simultaneously cerebral and physical, abstract and personal, something like a combination of chess and mountain climbing,” he wrote.

After President Obama took office in 2008, Holbrooke took one of the toughest diplomatic assignments — U.S. special representative for Afghanistan and Pakistan, the region Obama regards as center of the war on terrorism.

He rated a great one at the Grey Lady.

More recently, Mr. Holbrooke wrestled with the stunning complexity of Afghanistan and Pakistan: how to bring stability to the region while fighting a resurgent Taliban and coping with corrupt governments, rigged elections, fragile economies, a rampant narcotics trade, nuclear weapons in Pakistan and the presence of Al Qaeda, and presumably Osama bin Laden, in the wild tribal borderlands.

One of his main tasks was to press President Hamid Karzai of Afghanistan to take responsibility for security in his country and to confront the corruption that imperils the American mission there. At times, Mr. Karzai refused to see him, but Mr. Holbrooke was undeterred.

“He’s an enormously tough customer,” Mr. Holbrooke said during one of the periodic breakfasts he had with reporters who covered his diplomatic exploits. “As you’ve heard,” he added with a smile, “so am I.”

He helped his boss, Mrs. Clinton, whom he had supported in her presidential bid, to persuade Mr. Obama to send more troops to Afghanistan, while pressing for more aid and development projects to improve the United States’ image there. But he died before anyone knew if the experiment would succeed.

A brilliant, sometimes abrasive infighter, he used a formidable arsenal of facts, bluffs, whispers, implied threats and, when necessary, pyrotechnic fits of anger to press his positions. President Obama, who praised Mr. Holbrooke on Monday afternoon at the State Department as “simply one of the giants of American foreign policy,” was sometimes driven to distraction by his lectures.

As we posted yesterday, a huge Senate Majority voted to advance the Obama-McConnell Tax deal.  Only 15 senators voted to stop Cloture. The up or down vote will be scheduled for either today or tomorrow. Stay tuned. We’ll follow the details here.

Fifteen lawmakers voted against it, including five Republicans: Sens. Tom Coburn (Okla.), Jim DeMint (S.C.), Jeff Sessions (Ala.), John Ensign (Nev.) and George Voinovich (Ohio).

Nine Democrats and one independent voted against the bill: Sens. Jeff Bingaman (N.M.), Sherrod Brown (Ohio), Russ Feingold (Wis.), Kirsten Gillibrand (N.Y.), Kay Hagan (N.C.), Frank Lautenberg (N.J.), Pat Leahy (Vt.), Carl Levin (Mich.), Mark Udall (Colo.) and Sanders.

“It makes no sense to me to provide huge tax breaks for millionaires and billionaires while we drive up the national debt that our children and grandchildren will have to pay,” Sanders said in a statement after the vote.

Obama applauded the Senate’s action to move his tax cut compromise with Republicans and urged the House to do the same quickly.

In a statement in the White House briefing room, Obama hailed the Senate’s “strong bipartisan support” for the package and declared “this proves that both parties can in fact work together.”

BostonBoomer brought this my attention so I thought I’d post it.  Is there a Real-Life Da Vinci code in the Mona Lisa?  Cue the Twilight Zone Music.

Intrigue is usually focused on her enigmatic smile.

But the Mona Lisa was at the centre of a new mystery yesterday after art detectives took a fresh look at the masterpiece – and noticed something in her eyes.

Hidden in the dark paint of her pupils are tiny letters and numbers, placed there by the artist Leonardo da Vinci and revealed only now thanks to high-­magnification techniques.

Speaking of secrets, I’ve been looking into the status of Credit Derivatives since Frank-Dodd passed and the NY Times had an article up on Sunday on secret meetings of  a secret Derivatives Dealers Club of 9 on Sunday.  FiscalLiberal and I have been trying to figure out if all the news actually actually reveals anything.    The Financial Times did an update on the area that is an interesting read but doesn’t really say anything’s been solved or changed.

Yet like one of those teenaged vampires on television, the CDS market keeps coming back to life. For example, activity in sovereign CDS is up by a third this year, as speculators and hedgers bet they know more than their counterparties about the probability or timing of Greek or Irish defaults. And no, the sovereign CDS tail is not wagging the sovereign bond dog. For example, there are about $25bn of outstanding CDS on Italy, compared with some $2,000bn of actual Italian bonds.The essential point to remember is that credit derivatives don’t matter very much in determining the state of the real world. The industry, worldwide, almost certainly doesn’t employ more than 10,000 people. It is intended to be a zero-sum business.

The original, modest, purpose of CDS was to provide a low-transaction-cost means of distributing illiquid credit risks around European banks, so as to reduce their risk concentration. Then, the justification became the ease and low cost of hedging credit by buying protection through CDS, rather than going through the expense and uncertainty of maintaining short positions in bonds.

We would all be better off if there were laws to make the majority of these things exchange-traded but  it won’t happen unless governments write the laws.  BostonBoomer knew I’ve been trying to write about this and pointed me to the KO show last night and an interview with Matt Taibbi.  You may want to watch the video at the link.  They talk about the nine dealers from the NY Times link above.  These guys have been blocking the formation of exchanges and lobby hard to keep these things opaque.  You may have read me talk about how information asymmetry relieve messes up a market.  This is a prime example. This KO-Taibbi conversation is easily understood.  I was pretty impressed by what it covered.   KO also throws a gratuitous slam at Obama and Orzag so you might want to watch that just to see how the worm has turned.  Hopefully, I’ll figure out a way to explain this thing simply and have the complete post later.  I’m still trying to get more details.  In my doctoral program, every one saves their one C for the Derivatives Theory course.  Pricing is based on a really complex mathematical model and the language of the deal is written by lawyers. It’s the stuff nightmares are made of!  The math proofs even makes the guys with masters in physics quake. It’s not an easy thing to explain, teach, study or figure out.  I think they like it that way. Like I said, information asymmetry.  Also, KO brings up some nasty stuff about Senator Scott Brown and donations too. Go check it out.

Speaking of nasty stuff, here’s a blast from the past from Slate and Christopher Hitchens. The title alone titillates: ‘How Can Anyone Defend Kissinger Now?  The Nixon tapes remind us what a vile creature Henry Kissinger is’.

Chatting eagerly with his famously racist and foul-mouthed boss in March 1973, following an appeal from Golda Meir to press Moscow to allow the emigration of Soviet Jewry, Kissinger is heard on the tapes to say:

The emigration of Jews from the Soviet Union is not an objective of American foreign policy. And if they put Jews into gas chambers in the Soviet Union, it is not an American concern. Maybe a humanitarian concern.

(One has to love that uneasy afterthought …)

In the past, Kissinger has defended his role as enabler to Nixon’s psychopathic bigotry, saying that he acted as a restraining influence on his boss by playing along and making soothing remarks. This can now go straight into the lavatory pan, along with his other hysterical lies. Obsessed as he was with the Jews, Nixon never came close to saying that he’d be indifferent to a replay of Auschwitz. For this, Kissinger deserves sole recognition.

It’s hard to know how to classify this observation in the taxonomy of obscenity. Should it be counted as tactical Holocaust pre-denial? That would be too mild. It’s actually a bit more like advance permission for another Holocaust. Which is why I wonder how long the official spokesmen of American Jewry are going to keep so quiet. Nothing remotely as revolting as this was ever uttered by Jesse Jackson or even Mel Gibson, to name only two famous targets of the wrath of the Anti-Defamation League. Where is the outrage? Is Kissinger—normally beseeched for comments on subjects about which he knows little or nothing—going to be able to sit out requests from the media that he clarify this statement? Does he get to keep his op-ed perch in reputable newspapers with nothing said? Will the publishers of his mendacious and purloined memoirs continue to give him expensive lunches as if nothing has happened?

Just a suggestion from me.  Drink your coffee before you go read that one. You may feel the need to spit at the screen.

One last depressing thing from the Wonk Room for advocates of GLBT rights.

This afternoon, White House Press Secretary Robert Gibbs refused to say that President Obama would call on the Senate to stay in session until it brought up the stand-alone measure to repeal Don’t Ask, Don’t Tell. In a series of passive replies to the Washington Blade’s Chris Johnson and the Advocate’s Kerry Eleveld, Gibbs didn’t directly urge the Senate to consider the measure, but said, “our hope is that the Senate will take this up again and we’ll see this done by the time the year ends.” “Don’t Ask, Don’t Tell and DREAM, along with government funding, are all in a basket of issues that are likely to come after” START, he argued earlier in the press briefing.

Asked by Eleveld why Obama has pledged to stay in DC until the Senate passed START but not DADT, Gibbs replied that the President would wait for the Senate to adjourn before leaving. Gibbs also refused to say if the administration was considering alternatives to legislative repeal …

Guess there’s more important things to do, like say, pass the Paris Hilton Inheritance Windfall Tax Breaks.

So, what’s on your reading and blogging list today?

Bernanke Rules

atlant-fed-eagleIs The Fed under Chairman Ben Bernanke  finally beginning to adopt the tougher lending regulations and rules that would’ve prevented much of the havoc of the last two years?  In a speech on April 17, Bernanke stated that damage done to the economy was not likely to be undone any time soon.  This gives more credence to the idea that we may see an L-shaped recovery.  In other words, be prepared to scuttle across the bottom for a very long time. But did the speech deliver the assurances we need that necessary steps and regulations w lending practices and financial innovations are in the works?  I don’t think so.

Here’s some interesting analysis by Craig Torres at Bloomberg.com.

Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause “long-lasting” damage to home prices, household wealth and borrowers’ good credit score.

“One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be,” the Fed chairman said today in a speech at the central bank’s community affairs conference in Washington. “The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting.”

The U.S. central bank has cut the benchmark lending rate to as low as zero and taken unprecedented steps to stem the credit crisis through direct support of consumer finance and mortgage lending. The Fed plans to purchase as much as $1.25 trillion in agency mortgage-backed securities this year to support the housing market and is providing financing for securities backed by loans to consumers and small businesses.

Bernanke and the Federal Reserve Board approved rules last July to toughen restrictions on mortgages, banning high-cost loans to borrowers with no verified income or assets and curbing penalties for repaying a loan early. The action came after members of Congress and other regulators urged the Fed to use its authority to prevent abusive lending.

This suggests Bernanke does not see home values going back up any time soon.  It also suggests that the lending markets are not likely to return to their heyday.  Does this mean, however, that we’re finally going to see the regulation and enforcement of prudent underwriting standards and no more hide the trash in a bundle and pass it to the next sucker?

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Where’s the Reform?

crash-headlineWe keep hearing about the global financial collapse and how several things played into its creation. Since the credit markets are mostly dried up, loose credit to purchase overpriced assets is no longer an issue. Still hanging out there with no real substantive policy discussion is Financial Reform. Has the current administration forgotten the complete lack of oversight by the SEC in the areas of derivatives, credit default swaps, and all those fancy little arrangements that allowed imprudent lenders to pass the trash? Where also is a hard look at Moody’s and other raters that actually applied a triple A label to stuff that is still unraveled?  Why aren’t we fixing what is obviously broken?

Dizard at Financial Times asks the question. What is the status of the structural reforms and laws required to fix the broken securities markets? It’s a very good question because both the SEC and the FED failed in their oversight duties of several markets. They’ve both asserted they didn’t have the legal standing to act or to provide that oversight. In that case, we have another example of oversight malpractice by the congressional committees designed to keep the financial and banking systems strong. They need to sort out responsibilities and enact laws to ensure oversight exists.

Here is one of the articles major points which is reform of rating agencies. He sees no progress on that front and believes we’re seeing some major maneuvering that ensures job security and protects fragile egos.

The financial system has a peacetime officer corps in a wartime situation. The people in positions of responsibility are principally interested in preserving their careers and avoiding public embarrassment. There are rare and important exceptions, such as Paul Volcker, who has nothing to prove about his integrity, and who is past any need to advance his career.

To identify what has to be done to put securities markets, banking and regulation on a sound basis for the future, the people at the top might have to admit to the specifics of their own past mistakes. They would also need a command of detail of the workings of the financial system that they have avoided acquiring over the years, since it was much more advantageous to spend one’s time scheming and toadying.

This is a naturally occurring aspect of human nature, but it is usually kept in check by periodic crises, which thin the herd and force the survivors to adapt. The “great moderation”, also known as periodic monetary bail-outs, in developed countries for the past couple of decades has prevented that process.

Let’s consider a specific issue, the reform of the leading US ratings agencies…So what are the federal regulators, and Congress, actually doing about ratings agency reform?

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