Supreme Court Agrees With Thoughtbasket

Posted on June 9, 2009 | 2 comments

OK, the justices didn’t exactly mention me in their decision, but they did unanimously (according to Scotusblog) rule against the Indiana pension funds who were whining that they hadn’t gotten enough money for their secured debt. The highest court in the country has thus decided that the Obama administration did not violate the rule of law in pushing through the Chrysler bankruptcy. Read here my post saying just that. Of course, some argue that this issue is too political for the Court to be focused just on the law, but if that were the driving issue here, wouldn’t this conservative court be likely to rule against Obama, not for him?

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Please Focus on Policy, Not on Fear

Posted on June 9, 2009 | Leave a comment

Opponents of President Obama’s plan to close the prison at Guantanamo Bay have recently seized on the tactic of asking “do you want these terrorists in your neighborhood?” and thus playing on people’s fears. This is purely a rhetorical feint, and it’s offensive. The president isn’t planning on installing the Gitmo inmates in your local condo complex, and his opponents know that. The inmates will go into military brigs or maximum security prisons: the same places that currently house murderers, rapists and drug dealers. Are Obama’s opponents saying that these prisons aren’t secure? If so, shouldn’t they focus on fixing the prisons, so that rapists aren’t wandering your neighborhoods?

The fact is that the opponents of closing Gitmo know perfectly well that moving the inmates to a US supermax facility is perfectly safe. They just disagree with closing the island prison on policy grounds. And that’s fine. There are reasons – cost, isolation from US courts, desire to maintain military control – for wanting to keep Gitmo open. But let’s discuss those actual reasons, instead of using fear mongering and mistruths to get people scared and worked up.

Speaking of mistruths, on the same day that Admiral Mike Mullen, the chairman of the Joint Chiefs, said that he has long wanted to close Gitmo because it “has been a recruiting symbol for those extremists and jihadists who would fight us,” Republican Senator John Kyl, who is a major league douchebag, claimed that “it’s palpably false to suggest that the existence of Gitmo created terrorists.” Who is a more reputable source – the career soldier or the sleazy politician?

Glenn Greenwald has an excellent piece in Salon describing how this is an ongoing pattern: Republicans use specious arguments to make voters afraid, and Democrats feel a need to act tough instead of pointing out the ridiculousness of the Republican arguments. The NY Times recently ran a piece showing how the Republicans were planning even before Obama’s inauguration to use this strategy. To me, this demonstrates that the strategy is purely political, with no basis in fact or policy.

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Wall Street Has Gone Too Far

Posted on June 1, 2009 | 1 comment

In the wake of the financial meltdown there has been continued tension between Main Street and Wall Street; between the working class (and the politicians who represent them) and the financiers (and the lobbyists who represent them). Despite the commentary from populists such as me who have been railing against Wall Streeters continuing to pay themselves huge bonuses, some of this tension has been between legitimate positions of free markets versus genuine concern about greed and income inequality.

But now the financiers have gone too far. First was an article last week saying that some big banks are looking at participating in the government’s PPIP (Public Private Investment Program) in order to buy their own toxic assets. Wait…so they are going to borrow cheap money from US taxpayers, and then use it to buy their own assets, with US Treasury backstopping on their losses? That is appalling without even considering the obvious conflict of interest regarding what price the assets are sold for. You have got to be kidding me.

Then today’s NY Times reports about the extensive lobbying effort that the big NY banks have launched to limit regulation of derivatives. You remember derivatives – the financial “weapons of mass destruction” that were a huge cause of the meltdown? The big banks make a ton of money on derivatives, and they don’t want that gravy train derailed. And since when they lose money, the taxpayers bail them out, they are clearly in support of the status quo. So they formed a lobbying organization and hired a big-name lawyer to lead the charge, paying him over $400,000 for four months of work. Now they are lobbying Congress to water down any sort of regulation of derivatives.

For banks that received taxpayer bailouts to now be spending money lobbying to avoid regulation on the very products that caused them to require bailouts? No way. It is time for Congress, and for the Obama administration to say “Fuck you, Wall Street.” The big banks make billions in profit on unregulated derivatives? Too damn bad. So maybe some traders will only make $2 million per year instead of $10 million. Tough shit. The Treasury Department-Wall Street axis of greed has to stop, and it has to stop now. President Obama, it’s time you step up to the plate on this.

Added bonus links: 1) Paul Krugman on how Reagan-era decisions on deregulation set the stage for financial catastrophe; and 2) a hilarious piece on Harvard Business School students taking a pledge to serve “the greater good” instead of their “narrow ambitions.” The money paragraph is the last one, with a quote about principles from a woman who is taking a job at Goldman Sachs, one of the leaders of the lobbying effort excoriated above. Oh, HBSers, it’s such a shame that you don’t understand irony.

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Chrysler Bailout and Contract Law

Posted on May 22, 2009 | 6 comments

Conservative commentators have been criticizing how President Obama handled the Chrysler bankruptcy, saying that because the Administration pushed the secured creditors to take less than the UAW, which was unsecured, the basic tenets of contract law were violated. If the Administration had actually forced the secured creditors into this position, by passing some new law or threatening to arrest them, I would completely agree with these commentators. Rule of law is an essential underpinning of the American system.

But Obama did not “force” the creditors to do anything; he simply applied leverage. This is what parties do in contentious business negotiations. Whether it’s a bankruptcy or unwinding a marketing partnership, when it gets ugly the businesspeople start deploying whatever leverage they have. In Obama’s case, he had two levers: 1) the bully pulpit of the presidency; and 2) the fact that without the UAW on board, Chrysler was worthless and the creditors would get nothing.

With his bully pulpit lever, Obama did indeed “browbeat” the creditors. But hey, this is hardball here, and there were billions of dollars at stake. Plus these are vulture funds…they are used to being insulted. With his second lever, Obama simply was playing the game of chicken that is usually played in a bankruptcy, and he won. The creditors were saying “give us what we want or we’ll take over the company” and Obama replied “take what we’re offering or we’ll give you the company.” The creditors blinked first; they knew that if they took over the company it would essentially disintegrate overnight, and they would be left with a bunch of factories nobody would buy.

I’m as big a supporter of the rule of law as anyone – I have long said that exporting law is more important than exporting democracy – but this is not a case of the government ignoring the law. Instead it’s a case of government playing by the same rules as business, but playing better, which is something the right wing ideologues just can’t handle. And lest you think I’m alone in this, here are a law professor and a private equity professional saying similar things.

Which isn’t to say that I am a blanket supporter of the auto bailouts, because I’m not. I would have been perfectly happy to see Chrysler shut down. But any criticism should be on the merits, not based on a spurious claim being advanced for political reasons.

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Is Sub-prime the New Dot-com?

Posted on May 20, 2009 | 1 comment

I recently came across an article that I wrote in 2001, right after the dot-com bubble had burst in the San Francisco area, and I was struck by how similar the themes were to articles that are being written now in the wake of the mortgage meltdown. In fact, replace “dot-com” with “sub-prime” and I could nearly publish the article as is. But I would never be so lazy with Thoughtbasket, so instead I’m going to point out some parallels between then and now. I would like to do this in table format, but my friends at WordPress haven’t added that technology yet, so I’m going to use paragraphs (very Gutenberg, I know (no, not Guttenberg)) instead.

The first, and most obvious, parallel is that of income and spending. During the dot-com boom folks in the Bay Area were making tons of money, and spending it freely. Salaries were high, and nobody bothered saving because their options were all going to be worth zillions. Every fancy restaurant in SF was packed, and there were waiting lists at the BMW and Mercedes dealerships. Audi too, but that’s an SF thing. This is remarkably similar to the mortgage and hedge fund frenzy of the past few years, including my paradigmatic example of the Cristal-swilling mortgage-writing meathead.

A second, and much less obvious, parallel is that both bubbles had specious intellectual theories trying to justify what were obviously market failures. The dot-com’s sham theory was the “new economy,” in which economic cycles were banished, cast into the dustbin of history by the ever-increasing productivity that computer technology would drive forevermore. As the recession of 2002 clearly demonstrated, the new economy was a fairy tale. The mortgage meltdown was fueled by the theory that financial firms could, using mathematical models, split up and quantify the risks in a basket of securities and then sell off the pieces to parties who had corresponding risk appetites, as calculated by their own mathematical models. As the recession of now is clearly demonstrating, the efficient market for risk is a fairy tale. Sound familiar?

The last parallel is the aftermath of the bubbles, the hangovers resulting from what were really drunken bacchanalia of faux-mastery of the universe, with the lucky few guzzling goblets of their own press and in their dizzy haze thinking themselves geniuses. Ex post partyo, of course, there is a period of regret and soul-searching (“I’m never going to drink again”), as people are humbled and their bank accounts flushed, and they try to make sense of their sudden fall from grace. In the case of the dot-com, this period lasted a few years. For a while, VCs lived by their stumbling home mantra (“I’ll never again invest in a company without a business model”), until they saw Twitter. Wall Street remains chastened, still debating whether it should stay in bed or go out for a greasy breakfast, but how long will that last? Wall Street spinmeisters are already pumping out stories about how they have to pay fat bonuses to retain good people. My prediction: by the fall of this year, we’ll see Wall Street reaching again for their beloved goblet.

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The Internet and Democracy

Posted on April 24, 2009 | 3 comments

I have always been something of an internet contrarian, claiming since 1996 – despite having worked in the internet industry the entire time – that the whole thing is overrated. And now, finally, I have someone on my side. Harvard law professor Cass Sunstein, who President Obama named head of the White House Office of Information and Regulatory Affairs, recently published a critique of the internet.

Specifically, Sunstein claims that the Internet creates self- reinforcing communication systems, in which internet users choose to associate solely with like-minded individuals, thereby reducing the diversity of opinion to which they are exposed, and so become more and more fixed in their viewpoints. Sunstein is not the first to discuss this, and it seems fairly common sense that single-viewpoint exposure will narrow one’s range of beliefs.

But Sunstein adds empirical data from several studies he has worked on. He had groups of Democrats and Republicans fill out surveys and then enter discussion groups with like-minded citizens. After the discussion groups, they again filled out surveys. The post-discussion surveys showed significant decrease in diversity of opinion relative to the pre-discussion surveys. Again, this shouldn’t surprise anyone, but it’s good to have the data to back it up.

Taking this concept a step further, Sunstein comments on the negative impact these self-reinforcing systems have on democracy. For him, the free flow of ideas is the essence of the democratic process. He quotes Alexander Hamilton, who believed “the jarring of opinions” would help promote thoughtful deliberation and curb excesses.

But in a world of Fox News and the blogosphere, is Sunstein simply tilting at windmills? Have Hamilton’s jarring opinions been swept away by the internet, much like travel agents and your daily paper? To some extent, and I say this with a heavy heart, I think the answer to both those questions is yes. It’s hard to see a Fox Newser switching to CNN, just as I don’t visualize a lot of Daily Kosers heading over to Ann Coulter’s pleasant little blog.

Of course, the editors of various online publications could address this by adding opposing viewpoints to their mix. Perhaps Daily Kos could add a couple of conservative columnists, or even have a “Conservative’s Corner” on the home page. But would that even help? According to Sunstein, only 2% of Daily Kos readers are Republicans so it might be too late. And it might drive away Daily Kos readers, who could leave to visit a site that caters more purely to their liberal views.

If editors of politically tilted websites and publications can’t, for business reasons, add diverse opinions, then maybe we all need to do it ourselves. Perhaps each liberal should read one conservative article a day, and vice versa. Of course this will take discipline, and sometimes even holding our noses, but if it helps promote a Hamiltonian jarring of opinions, isn’t it worth it?

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Spirituality and Evolution

Posted on March 20, 2009 | Leave a comment

A good friend recently steered me to a radio interview with Dr. Sherwin Nuland, author of the best-selling book How We Die. I am far too impatient to listen to the online stream of the interview, but fortunately a transcript was made available, so I could read it quickly. The title of the interview was The Biology of the Spirit, and it was based on Dr. Nuland’s theory that human consciousness and spirituality are based in evolutionary biology.

Nuland believes that humans have evolved to have a sense of spirituality. Although he comes from a Jewish background, Nuland’s theory is not based in religion, but rather in his understanding of human biology and how evolution works. In his view, spirituality tends to make people happy or relaxed or content – a position that is hard to argue with. And whichever one of those words you use, it implies being well suited to survival, and thus should be selected by evolution. Or, as Nuland puts it:

“When a stimulus comes in and the brain has 50,000 different ways of responding to it, some of those are useful for survival and some of those will either prevent survival or mar survival, and the human brain, in classical evolutionary pattern, will pick the one that is healthiest, that gives greatest pleasure. What gives greater pleasure than a spiritual sense?”

What struck me about Nuland’s theory is not just how common sense it is – assuming you believe in evolution – but how it resonates with the work of theologian Gordon Kaufman. Although I was unable to get into Professor Kaufman’s class while in graduate school (a fact which still mildly annoys me), I did study his great book In Face of Mystery, in which he discusses evolution. Kaufman’s view is that when you look at the history of evolution on earth, the general trajectory is up, toward what he calls the “human and humane.” This trajectory, this evolutionary path away from animals and toward all that is human, is, for Kaufman, God.

Kaufman comes at this as a professional theologian, an ordained minister in the Mennonite Church, but his position is not far from that of Nuland, the surgeon, who says “…for the past 40,000 years since modern Homo sapiens appeared on Earth, the way we have adapted to stimuli from the outside, we have relentlessly pursued this upward course, I believe, toward creating the richness of the human spirit.”

The fact that the minister and the surgeon have come to the same conclusion, from opposite directions, doesn’t mean that the conclusion is true, of course. But for me, it gives that conclusion some intellectual valences, a certain righteousness, that it might not otherwise have. Maybe that is because I agree with the conclusion; I have long argued that being human has a spiritual quality. But I think that even if I wasn’t on board with the results, I would pay closer attention to a conclusion that was reached by two such intelligent, yet opposite, thinkers.

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Less Greed, More Patience: The Wisdom of Roald Dahl

Posted on February 19, 2009 | Leave a comment

This is the last post in my series inspired by President Obama’s inaugural call to “set aside childish things” and start pulling together for the good of the nation. And in this post, I hope to speak less of specific acts of greed and more of a general attitude that has pervaded our society over the past couple of decades. This attitude – one of “I want it all, NOW” – was perhaps not among the childish things of which the president was thinking, but its consumptive nature and its impatience certainly strikes me as childish. In fact, it reminds me of nothing so much as Veruca Salt from Willie Wonka and the Chocolate Factory (the first movie, of course, not the remake), whose constant claim of “Daddy, I want it now!” led to her falling down the garbage chute after being judged a “bad egg.”

I wrote last week about how this attitude played out in spending, with people buying houses and cars and TVs that they couldn’t afford. But it also had a dramatic impact on economic and policy decisions, or often decisions put off. Examples include:

  • Asking for lower taxes while demanding more government services
  • Expecting cutting edge medical treatments while complaining about ever-higher health care costs
  • Unwillingness to invest in infrastructure
  • Refusal to address the impending catastrophes of Social Security and Medicare
  • Managing companies for quarterly earnings instead of for the long term

I could go on and on. But don’t listen to me; the NY Times magazine put it much better a few weeks ago:

“The norms of the last two decades or so – consume before invest; worry about the short term, not the long term – have been more than just a reflection of the economy. They have also affected the economy. Chief executives have fought for paychecks that their predecessors would have considered obscenely large. Technocrats inside Washington’s regulatory agencies, after listening to their bosses talk endlessly about the dangers of overregulation, made quite sure that they weren’t regulating too much. Financial engineering became a more appealing career track than actual engineering or science.”

Frank Rich added his own take, typically overwrought, but still relevant, here. But whether the phenomenon is described by the Times or by me, the process is still the same. When we, the public, all think like Veruca Salt, then our business leaders will think the same way, and we will elect politicians who will implement Veruca Salt policies. So unless we want the whole country to go down the garbage chute, let’s be less Veruca Salt and more Charlie. Instead of wanting it all now, we can aim for getting most of it soon. Remember, Veruca was sent down to the furnace, but Charlie ended up owning the whole factory.

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Greed: It’s Not Just For Wall Street

Posted on February 12, 2009 | Leave a comment

After my last post, full of invective against greed by Wall Street bankers and corporate chiefs, it’s only fair that I mention that we are all guilty of some greed. When President Obama said in his inaugural address that the current financial crisis is a result of “our collective failure to make hard choices and prepare the nation for a new age,” he wasn’t just talking about Wall Street. “Collective” means all of us, and we all share some blame. Or if not actually “all,” at least most of us.

Most of us were on a consumption binge of one sort or another. Some were buying things they didn’t need, others were buying things they couldn’t afford. The most obvious, and painful, example, is in the housing market. Folks bought more house than they could afford, and often more than they needed, seduced by low teaser rates, or by the chance to get a big win by selling it later. Others bought houses purely as investments, planning to flip them, only to be squeezed by rising mortgage payments and falling housing prices. Some refinanced with foolish mortgages, so they could “take money out of the house” and use the tax-subsidized proceeds to buy consumer products.

But it wasn’t just houses. We bought giant flat screen TVs, charging them to our credit cards. We drove around in monstrous Ford Excursions (financed by the geniuses on Wall Street), burning a gallon of gas every 15 miles. We drank bottled water instead of tap, we carried Coach purses, we stayed at 4 Seasons hotels when our income was purely Hamptons Inn.

While the Wall Street big shots may have taken huge bonuses with our tax dollars, they weren’t the only ones looking for the big score. We all wanted some goodies, whatever our income level. Those days are over. The goodies are nice, if they haven’t been repossessed, but we can’t afford them anymore. We couldn’t afford them then, which is the whole point. The days of living beyond our means are over. That doesn’t mean we’re going to be in yurts, heated only by burning cow manure. It just means that maybe we don’t need to have the biggest and newest, all the time.

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Obama: Greed is “Shameful”

Posted on February 5, 2009 | 3 comments

This is the second in a series of posts about the need for Americans to step up and be more responsible. We all knew this need was coming – it has been a theme running through many of my posts – but when President Obama called it out during his inaugural address, I decided to address it more directly. My first entry in this series was about NIMBY attitudes preventing environmental projects from moving forward. Today’s entry is about greed, particularly among corporate executives and Wall Street bankers.

When Obama said during his inauguration that “what is required of us now is a new era of responsibility — a recognition on the part of every American that we have duties to ourselves, our nation and the world,” my guess is that he meant businesspeople too. And yet just three days after the inauguration, the Wall Street Journal ran an article about companies using dicey calculations to boost the value of pension payments they are making to senior executives. I won’t get into the mathematical details, but the basic story is that instead of using IRS rates to discount the value of future pension payments, companies are using their own rates, to generate a higher payment.

For example, one of the executives profiled, John Hammergren of McKesson, is due to receive $84.6 million, rather than the $66.4 million he would be paid using the IRS rate. This man made $38 million in 2008, $25 million in 2007 and over $10 million per year for the last several years. And on top of all this money he gets paid, he is due a pension payment of $66 million. But that isn’t enough…he seems to need even more money, so he monkeys with the numbers to boost that pension by another $20 million.

Merrill Lynch is a steady source of greed. First you have John Thain (am I the only one who thinks he’s a dead ringer for Mitt Romney?)

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spending $1 million to redecorate his office. His excuse: the redecoration was done during better times. Dude, if you’re spending $1 million of shareholder money on office decorations, you are being greedy, no matter how well your company is doing. Then there is Thomas Montag, who Thain recruited to Merrill from Goldman Sachs with a guaranteed pay package of $39 million for 2008. Mr. Montag’s debt unit lost $16 billion in Q4 of 2008. Because of those losses, taxpayers have had to invest over $20 billion in Bank of America to support its acquisition of Merrill, and agree to share losses on $118 billion in assets. But has Montag (who, let’s not forget, after 20 years at Goldman is already rich) offered to take less of his bonus? No way. Why? Because he is greedy.

Of course, the ultimate symbol of greed was the recent news that Wall Street bankers paid themselves $18 billion in bonuses while taxpayers bailed out all their companies. It was this act of greed that President Obama called “shameful.” And he was right. For bankers to insist on getting their multi-million dollar performance bonuses, when their companies clearly had not performed, and were taking taxpayer money to survive, is the apex of greed. Companies claimed that they had to pay bonuses to retain employees. Where were those employees going to go? Bear Stearns? Lehman? I don’t think so.

Look, I understand people wanting to make money. I understand the desire to be rich. But rich people grubbing for the last dollar…I have to ask: have you no sense of decency? Responsibility and duty – to the nation, to our neighbors – means sometimes leaving a little money on the table. If we are to “begin again the work of remaking America,” as President Obama encourages us to do, reducing greed is a good place to start. How can we expect to solve problems like Social Security, health care, or global warming if everyone is grabbing as much money as they can? Whether the sacrifice is flying commercial instead of private, or buying a 30″ flat screen instead of 50″, if we are going to build America back up we must all change our attitude from “I want it all now” to “I’d like most of it, but I’m willing to share.” Let’s show a little restraint and try to come together to solve some really difficult challenges.

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