Tuesday, July 28, 2009

Money Money Money

Barney Frank has an excellent discussion on the nature of risk taking in the financial industry under the current "rules" in the Maddow piece below. To paraphrase: 'they give themselves incentive bonuses. They work under the general principle of heads I win tails I break even. ... You'd have to be pretty dumb not to take too much risk under that situation.'

Come On
It's almost as if Goldman is looking for reasons to make people hate them:

Goldman Sachs is using its new taxpayer-subsidized status to bring increased risk to the financial system, a group of House members charged Monday. They want to know why the Federal Reserve is allowing it.

The group on Monday sent a letter to the Fed asking for an explanation of why Goldman Sachs is being allowed to speculate wildly even while officially redesignating itself a bank holding company, which theoretically means stricter regulation. The bank designation gives Goldman access to dirt-cheap Federal Reserve loans.

Goldman initially applied for the new designation last fall, so that it could access bailout funds (since paid back). Because bank holding companies, unlike investment banks, have access to a host of valuable taxpayer subsidies, they are required to reduce the risk associated with their investment activity. But Goldman then applied to the Federal Reserve for an exemption to the rules, saying that it takes time to alter a business model. The exemption was granted in February -- and Goldman went on to take even greater risks. Its Value-at-Risk model, a widely used measure of the risk of loss, recently showed potential trading losses at $245 million a day; in May 2008, it was $184 million a day.

The bets paid off in the most recent quarter as the market rose and Goldman posted stellar earnings. Morgan Stanley, meanwhile, was similarly given an exemption by the Fed but did what it said it would do and reduced its risk. The company lost money, largely as a result of that decision.

The likely result: Other players on Wall Street will follow Goldman back toward the cliff they dangled over just months ago. In announcing its lousy earnings, Morgan Stanley assured that it will increase the risk it takes in the future. Citigroup is racing to increase its exposure, too, handing another billion dollars worth of chips to its riskiest traders, bringing its hedge fund operations to close to $2 billion. On the brink of collapse, it had scaled such investing down to around $800 million.

As Wall Street follows Goldman, overall systemic risk is ramped up. Meanwhile, Congress is debating whether to give the Fed authority to regulate systemic risk throughout the economy. The congressional letter puts the Fed on the spot, demanding that it explain why it's allowing Goldman to use taxpayer dollars to increase systemic risk.

"The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money. This is the very definition of 'heads we win, tails the taxpayers lose,'" reads the letter.

Nobody says that capitalism doesn't require some risk. But playing Russian Roulette is really unnecessary.

Again, I suspect that nobody wants to stop them because everyone's afraid that the American economy is a hollow shell without this activity. But that's just my own paranoid guess. Maybe it's really just a straight up scam designed to screw taxpayers and destroy the economy as some sort of master plan to take over the world, who knows?

But every day it becomes more and more clear that they are going to take every advantage no matter how blatant and outrageous. And except for a few lonely House members, Matt Taibbi and some bloggers, nobody seems to give a damn.
Can Congress protect consumers? July 27: Wall Street is trying to block the creation of an agency that would help protect consumers from making the same bad financial decisions that led to the sub-prime mortgage crisis. Rachel Maddow is joined by the Chair of the House Financial Services Committee, Congressman Barney Frank.

DougJ: Can’t do better than Ezra

I’ve never read much of Ezra Klein’s stuff in the past, even though it’s been highly praised elsewhere. But there’s no question that yesterday’s opinion piece and today’s online chat are by far the most knowledgeable discussions of health care I’ve ever read in an American newspaper. Read the whole thing, but here’s a sample:

Ezra Klein: No. We don’t have the best health care in the world. Not on any broad measure or metric. We don’t have the most cost effective health care in the world. We don’t have the best outcomes in the world. We can’t even manage to give everyone access to health care.

That said, there are certain diseases, like breast cancer, that we are uniquely good at treating. But then we lag on diseases like diabetes. It’s a mixed bag. And it’s a mixed bag that we are spending twice as much as most other countries on. So it’s important to say this clearly: We have a very, even uniquely, bad health-care system. Not for every individual. But in the aggregate. As a country, we spend far too much and get much too little.


Charlottesville, Va.: Peggy Noonan had a column over the weekend listing three points that damage support of health-care reform. The first one seemed a bit odd—that doctors sometimes undercharge patients who are strapped financially. Is there any evidence out there supporting or debunking this? Any comments on the article overall?

Common Sense May Sink ObamaCare (Wall Street Journal, July 25)

Ezra Klein: Didn’t see her article, but it’s actually the opposite: Doctors overcharge patients who are strapped financially.

This is actually sort of intuitive. A piece of fruit at a good grocery store is pretty cheap. A piece of fruit at a corner bodega is often not. That’s because Safeway negotiate large discounts on behalf of their customers while the bodega doesn’t. Similarly, people with insurance—be it Medicare or a large employer’s plan—have negotiated discounts. But people with bad insurance, or no insurance, don’t. And so they end up paying a lot more.

I’ve taken a lot of shit here for supposedly overestimating the effect the punditocracy has on our government. But I sincerely believe that if Klein had had an public opinion page gig for the past 17 years and David Broder hadn’t, this country would be in a different place. Even though that means Klein would have started when he was eight.

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