The Lessons Of Chrysler

The bankruptcy judge in the Chrysler case basically told the hedge fund babies to quit their bitchin'.

The judge overseeing the bankruptcy of Chrysler on Tuesday took a significant step toward allowing the sale of most of the automaker to Fiat, approving the bidding procedures advocated by the company and backed by the Obama administration.

The decision by the federal bankruptcy judge, Arthur J. Gonzalez, is a setback for a group of Chrysler creditors who have argued that liquidation of the company or some other transaction could yield greater value. These lenders, primarily investment firms, have said that the plan for the Fiat transaction ran afoul of bankruptcy law and would chill efforts by others to produce competing, potentially higher bids.

But Judge Gonzalez disagreed, saying, “The court concludes that the bidding procedures are appropriate and necessary.” [...]

Judge Gonzalez earlier ordered the disclosure of identities of the Chrysler creditors, who had said making them public could lead to retaliation. A lawyer representing them claimed that the creditors had been harassed, and some had even received death threats.

Judge Gonzalez, said that their lawyers had not presented enough evidence of risk and gave the creditors until Wednesday morning to reveal their identities. The primary evidence cited by their lawyers was a set of anonymous comments on The Washington Post Web site.

These "death threats" that keep popping up every time a big-time financial company gets challenged never made sense to me. Now that I see they come from random Internet commenters named "jerkhoff" and it all becomes clear - they use whatever they can find to gather sympathy and chill dissent.

Meanwhile, as the deal moves forward, a couple lessons from how Chrysler dealt with its insolvency can be gleaned. First of all, Chrysler's road to profitability comes from importing the technology and management, not outsourcing the labor.

This big story was so easily missed because it runs against one of the main myths that our elites have cultivated about the US economy: that the country has a "comparative advantage" in highly skilled labor. In this story, the United States will continue to lose manufacturing and other "less-skilled" jobs as its economy becomes more concentrated in highly skilled sectors.

While this story of the US becoming a high skills center in the world economy may have been comforting to the elites, and was widely promoted by economists and the news media, there was never much truth to it. Highly skilled professionals did well in recent decades not because they succeeded in international competition, but rather because they were largely sheltered from it [...]

The end result of this protectionism for those at the top is a bloated overpaid sector of top managers, which is what we saw at Chrysler. If we compare wages for assembly-line workers in Europe and the United States, there would not be much difference between the pay of UAW members and their counterparts in Europe. However, there would be a very large difference between the multi-million dollar pay packages of the top executives at the US companies and their European counterparts. The pay gaps persist among the more highly paid engineers and management personnel.

Therefore, it was only logical that a bailout of Chrysler would seek to take advantage of the lower cost management and design skills available at a European car company like Fiat. In Chrysler, as in other companies, the high pay packages for these people are like an anchor dragging them down in international competition. If the US is to be competitive in the 21st century, we must either bring the pay of those at the top back down to earth or we should look to follow the lead of Chrysler and contract out for these services.

If only the bank executives competed on a level playing field with top talent abroad, most of whom get less in compensation and bonuses. And if only this perspective on restructuring and reducing in size were applied to the banks as well.

In return for its major loans to floundering auto companies too big and strategic to be allowed to go under, the Treasury opted for a structured bankruptcy, converting its loans to shares, ousting top executives, shrinking the companies. In return for its mega-loans to floundering banks that were also too big and strategic to fail, the Treasury has not opted for structured bankruptcy, has not converted its loans into shares, has not forced out top executives, has not moved to make banks smaller (save in its proposal to limit leverage). Indeed, its bailout of AIG rewarded bondholders such as Goldman Sachs to the detriment of everyone else.

Why the difference? Why compel the restructuring of one crucial industry and leave another, whose mismanagement all but brought down the world economy, basically untouched? Could it be that the leaders and folkways of American banking are familiar to the men who run the Treasury, while the leaders and folkways of the American auto industry are not -- meaning that they can assess Detroit more dispassionately than they can Wall Street? In short, where is the Treasury's Ron Bloom for banking?

If the Chrysler bailout turns out properly, maybe the Administration could take the hint.

Best Democracy Money Can Buy

For your reading pleasure, some snapshots of the banks and financial interests controlling our economy and eating up hundreds of billions in public money:

Their lobbyists:

A review of lobbying reports filed indicates that finance, insurance and real estate (FIRE) interests paid over $42 million to lobbyists who worked to defeat mortgage write-down in bankruptcy (cramdown) in the first quarter of 2009, as well as other anti-consumer legislation such as capping credit card interest rates.

$13 million of that comes from TARP recipients.

Then we have the bonus babies:

The 2008 AIG bonus pool just keeps getting larger and larger.

In a response to detailed questions from Rep. Elijah Cummings (D-Md.), the company has offered a third assessment of exactly how much it paid out in bonuses last year.

AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008.

That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees.

And there are the fraudsters:

New York AG Andrew Cuomo just issued 100 subpoenas to investment firms in his expanding investigation of pay-to-play schemes that defraud public employee retirement funds, and announced the participation of 100 officials in 36 states' attorney general offices in the probe.

(This pension fund placement agent scandal looks like a doozy.)

And finally, you have the good old American greedheads:

The White House, auto executives and union representatives were all able to come to an agreement last week to keep Chrysler out of bankruptcy. But the car company's creditors -- Wall Street banks and hedge funds -- refused repeated compromises and drove the company under.

The refusal doomed a major American auto company to bankruptcy, but it may have been a smart business move for the lenders.

Many of the Wall Street firms holding Chrysler bonds may also own credit default swaps that they bought to hedge their bets. These swaps, which are essentially like an insurance policy on the bonds should Chrysler default, were likely mostly issued by AIG.

AIG, thanks to the government bailout, has paid off swaps in the past at 100 cents on the dollar. Under the deal they would have had to accept with Chrysler, the bondholders would have received as little as 30 cents on the dollar, for example.

Why take 30 or 35 cents on the dollar from Chrysler when you can get the whole buck from the American taxpayer?

Like one of these hedge fund managers recently said, "This is America!" It sure is. The land of the "we're going to bring down your car company so taxpayers can indirectly bail us out with our credit default swaps from the company paying out millions in bonuses, freeing us up with more money to put into defrauding public pension funds, and our lobbyists will ensure it."

The Whine Of The Brooks Brothers Suits

Hedge fund managers are awfully steamed about the Snidely Whiplash mustache that Obama hung on them yesterday:

President Obama's harsh attack on hedge funds he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker's debt.

Hedge funds and investment managers were irate at Obama's description of them as "speculators" who were "refusing to sacrifice like everyone else" and who wanted "to hold out for the prospect of an unjustified taxpayer-funded bailout."

"Some of the characterizations that were used today to refer to us as speculators or to say we're looking for a bailout is really unfair," said one executive who spoke on condition of anonymity because of the sensitivity of the matter. "What we're looking for is a reasonable payout on the value of the debt . . . more in line with what unions and Fiat were getting." [...]

"It sounds like people are being bullied right now," said Ron Geffner, a partner at the law firm Sadis and Goldberg, which represents hedge funds. "To play the 'I stand with Chrysler, I stand with families, I stand with the dealers, I stand with the consumers' -- that's great conceptually, but . . . I stand with the fact that we live in a capitalist society where companies who don't modify their business plans and stay current die and go by the wayside."

It's simply a lie to say they wanted a payout in line with the unions and Fiat. They wanted a bankruptcy so they could cash in on credit default swaps that pay out in the event of a bankruptcy, and make a killing at the expense of Chrysler.

Also, if we indeed do live in a capitalist society, where everyone is treated equally and companies must act within the boundaries of the regulatory landscape, then I expect these hedge fund managers to march en masse to Capitol Hill and demand they be charged the regular marginal tax rate on their income rather than the capital gains rate that allows them to hide billions from the federal government. Surely, because they believe in capitalism and the level playing field so much, they'll get right on that.

I don't have a problem with investors acting purely in their economic interests, but government has a role to play in making sure those interests aren't as perverse as this, where a minority of investors (the bigger banks signed off on the 28 cents-on-the-dollar deal) can throw a company into bankruptcy because of the side bets. And those investors can own up to the fact that their desire for CDS money left them rooting for bankruptcy. It'd be the honest thing to do.

The Hedge Funds Destroy The Economy, Again

Over the last 30 days, Chrysler secured deals with their union. They got the bondholders to take 28 cents on the dollar. They made a deal with Fiat. They lined up pretty much every stakeholder and got them all to share in the pain. And then the hedge funds said no and forced them into bankruptcy.

Chrysler LLC is going to file for bankruptcy, an administration official confirmed to CNN Thursday.

The filing comes after some of the company's smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.

Chrysler officials had no comment on the bankruptcy report. The company faces a Thursday deadline from the Treasury Department to reach deals with creditors who had loaned the company about $7 billion.

But the filing will not mean the halt of operations or liquidation for the troubled 85-year old automaker. Instead, the administration expects to use the bankruptcy process to join Chrysler with Italian automaker Fiat.

In addition, the United Auto Workers union announced late Wednesday night that its membership at Chrysler had overwhelmingly ratified a concession contract reached between the company and union leadership on Sunday night.

This will be a quick bankruptcy, since most of the deals are in place. But in this case, the hedge funds (they are the "smaller lenders" referenced in the article) are more likely to get a better deal from a bankruptcy judge. And we're certainly going to see if anyone trusts buying a car from a company in bankruptcy. So Chrysler comes out of this, but diminished, because the hedge funds demanded payment.

Now can we tax their income as income instead of capital gains?

...Obama on the hedge funds, just now:

While many stakeholders made sacrifices and worked constructively, I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees, its families and communities. I stand with Chrysler's management, its dealers and suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don't stand with those who held out when everybody else is making sacrifices.

Obama had an interesting bit last night where he talked about the enormous scope of the political landscape, and how "I can't get the banks to do what I want them to." It was a telling example.

...By the way, the biggest windfall for the hedge funds is that they bought lots of credit default swaps that they can now cash in on to hedge their investment with Chrysler. They stand to gain much more money with Chrysler in bankruptcy. And ultimately, that was the decision they made. We're talking billions.

I Keep Forgetting To Regulate*

As much debate and consternation as there has been over the Geithner plan for toxic assets, we are seeing today a move forward on overhauling financial rules, which to my not-economist ears sounds fairly good. In particular, regulating hedge funds and CDS traders makes a ton of sense.

WASHINGTON — The Obama administration will detail on Thursday a wide-ranging plan to overhaul financial regulation by subjecting hedge funds and traders of exotic financial instruments, now among the biggest and most freewheeling players on Wall Street, to potentially strict new government supervision, officials said.

The plan, which would require Congressional approval, would give the government vast new powers over “systemically important” banks and other financial institutions that are so big that their collapse would jeopardize the economy as a whole.

The government would have the power to peer into the inner workings of companies that currently escape most federal supervision — insurance companies like the American International Group, multibillion-dollar hedge funds like the Citadel Group and private equity firms like the Carlyle Group or Kohlberg, Kravis & Roberts.

If regulators decided that a company had become “too big to fail,” as was the case with A.I.G. in September, they would subject it to much stricter capital requirements than smaller rivals and much closer scrutiny of its borrowing levels and its trading partners, or counterparties.

But the most striking new proposals, and the ones that may provoke the most heated opposition from the industry, would regulate so-called private pools of capital — hedge funds, private equity funds and venture capital funds — and the gigantic market in financial derivatives, including instruments like credit-default swaps, the insurancelike instruments that allow investors to hedge against bond defaults.

Hedge funds and private equity funds manage money for wealthy individuals and institutions like pension funds. They operate almost entirely outside the regulation of either the Securities and Exchange Commission or the Federal Reserve.

Under the administration proposal, hedge fund, private equity and venture capital fund advisers would for the first time have to register with the S.E.C. They would be required to provide the government — on a confidential basis — information on how much they borrow to leverage their investments as well as information about their investors and trading partners.

The S.E.C. would then share those reports with a new “systemic risk regulator.” At least for the moment, Mr. Geithner is ducking the crucial question of who the powerful risk regulator should be, a contentious issue among Democratic lawmakers.

A plan, of course, is one thing - getting it through Congress is quite another. And there's a compelling strain of thought that the laws on the books today could have stopped much of this crisis, and what we actually lack is regulatory will. Perhaps taking this completely out of the realm of politics AND Wall Street - I've no idea how, maybe hiring the Blue Moon Detective Agency - would help, but essentially the regulators have to WANT to regulate to protect the public. And yet, we have the elites we have:

Joe Donnelly asked Tim Geithner whether we ought to eliminate naked default swaps. Geithner said that it's too hard to distinguish hedges from gambling. Donnelly pointed out that we're taking money out of truck drivers' pockets and waitress' pockets to pay off Wall Street's gambling debts. Ultimately, though, Geithner said we don't need to--and that it would be very hard to--do that.

I guess the truck drivers will still be asked to pay off rich men's gambling debts.

Maybe Lord Stern's idea for an independent international body with an endowment and no possibility of recall makes the most sense. Because I don't have a lot of trust in anything resembling independence on this side of the pond.

* - Anyone who knows the provenance of the headline gets a cookie.

More Regulatory Authority? How About Using What You've Got

At their joint hearing with the House Financial Services Committee, both Tim Geithner and Ben Bernanke advocated for regulatory authority over non-bank financial institutions. I'm trying to get a handle on this. First of all, the investment banks all went under this past fall, so Goldman Sachs, under current law, is a bank. JP Morgan is a bank. So is Merrill Lynch. AIG stands out as the exception to the rule, but regulating their PRODUCTS would seem to be the key, not granting emergency authority to seize them. What's more, states regulate insurance companies, and while I think there ought to be a federal overseeing authority, that could get messy. And as you'll read below, the financial products unit did have federal oversight. Then there are hedge funds and the like, but again, I see the regulatory needs in the product line and not necessarily the ability to seize. FWIW here's Bernanke's argument:

The decision by the Federal Reserve on September 16, 2008, with the full support of the Treasury, to lend up to $85 billion to AIG should be viewed with this background in mind. At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG. Unfortunately, federal bankruptcy laws do not sufficiently protect the public's strong interest in ensuring the orderly resolution of nondepository financial institutions when a failure would pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures. However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as central bank to maintain financial stability. We took as collateral for our loan AIG's pledge of a substantial portion of its assets, including its ownership interests in its domestic and foreign insurance subsidiaries. This decision bought time for subsequent actions by the Congress, the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.

Yves Smith sounds the right notes in her skepticism.

AIG, poster child of insufficient regulation, was overseen at the parent level (which is where the black hole creating Financial Products unit sat) by the Office of Thrift Supervision (no joke), which is an agency of the Treasury! So the Treasury is acting like it needs more authority to prevent future AIG's when its own agency was responsible for the doomsday machine part of AIG.

And the hedge fund supervision bit probably means less than meets the eye. Even if a lot of them have operations in Fairfield County or Manhattan, a lot are domiciled in the Caymans or Luxembourg. You do need to observe certain forms to make sure the designation sticks (have local counsel, have annual meeting there, etc.) but after the Bear Stearns hedge funds screwed up on that front (setting up funds there but not taking other steps consistent with having them domiciled offshore), other funds may have cleaned up their act [...] The problem is not regulatory authority, the problem is the lack of a special resolution regime of the sort the UK has for putting big complex financial firms into receivership. Merely giving Treasury authority is insufficient without putting in place needed bankruptcy type provisions [...] Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out.

After the events of last week, Congress has little appetite for giving Treasury or the Fed more authority. Steny Hoyer shot it down today. Regulations are nice, but regulatory will appears to be what's lacking here, and giving the same people who want to bail out the whole sector with no strings attached more power doesn't seem advisable.

AIG Gets Their Day On The Hill

Edward Liddy, the maxed-out McCain donor who now runs AIG (when will McCain give the money back?) takes to the Washington Post's editorial pages this morning. I imagine this will also be his opening statement before the House Financial Services Committee, where he testifies today. Here's the part about the bonuses:

To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place. As has been reported, payments were made to employees in the Financial Products unit. Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago. It was distasteful to have to make these payments. But we concluded that the risks to the company, and therefore the financial system and the economy, were unacceptably high [...]

What lessons can we draw from AIG's experience? There must be safeguards against the systemic consequences of failures of large, interconnected financial institutions. Where safeguards are lacking, such companies need to be restructured or scaled back so they no longer come close to posing a systemic risk. We have seen all too clearly where the brink lies; our corporate structures need to be pulled back from that edge.

In America, when you owe people money, you pay them. We are pressing forward with our plan to return money to taxpayers, protect policyholders, and give employees a vision of success and a path for achieving it. With the understanding and patience of the American people and the continued support of the Federal Reserve and the Treasury, we can resolve AIG's challenges and help its businesses contribute to a global economic recovery.

Well, half the people who received these retention bonuses left the company and were thus not retained. His reference to "risks to the company" suggests that the "time bomb" scenario, that AIG Financial Products employees would sue for breach of contract or that they would blow up the credit default swaps part of the business. Liddy is actually not wrong when he says, essentially, that "if it's too big to fail, then it's too big." But of course, the line about how "if you owe people money, you pay them" applies more to executives and foreign banks and even hedge funds who bet on the housing market to fail rather than taxpayers.

This hearing will consist of little more than grandstanding, of course. Right now every member of the subcommittee is being allowed to make a little speech before the questions even begin. The solution will present itself, either with Treasury deducting the bonuses from the fourth bailout given to the company, or from the excise tax plan, whether Charlie Rangel likes it or not.

The larger problem is the crisis of confidence in political leaders who are seen as continuing to shovel money to elites with a lot of fake outrage.

Reimagining Fiscal Responsibility

President Obama's budget has been leaked to major news organizations in time for the Sunday papers, and it seeks to close a yawning deficit over the long term through entirely unobjectionable means like ending unnecessary wars and ensuring that everyone pays their fair share for using the public commons.

Obama proposes to dramatically reduce those numbers by the end of his first term, cutting the deficit he inherited in half, said administration officials, speaking on condition of anonymity because the budget has yet to be released. His budget plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion in 2013 -- still high in dollar terms, but a more manageable 3 percent of the overall economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, a senior administration official said. The budget assumes that the nation will continue to spend money on "overseas military contingency operations" throughout Obama's presidency, the official said, but that number is significantly lower than the nearly $190 billion the nation budgeted for Iraq and Afghanistan last year.

Obama also seeks to increase tax collections, primarily by making good on his promise to eliminate the temporary tax cuts enacted in 2001 and 2003 for wealthy taxpayers, whom Obama defined during the campaign as those earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule for the 2011 tax year, when the top tax rate would rise from 35 percent to more than 39 percent.

Obama also proposes to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year. And he proposes "a fairly aggressive effort on tax enforcement" that would target tax havens and corporate loopholes, among other provisions, the official said.

Overall, tax collections under the plan would rise from about 16 percent of the economy this year to 19 percent in 2013, while federal spending would drop from about 26 percent of the economy, another post-war high, to 22 percent.

The other big elements of this would be to eliminate the hedge fund loophole, which would tax their income as income instead of capital gains, and to institute a cap-and-trade plan for carbon emissions, which would provide revenue to the federal government by selling carbon credits at auction. And while floating a deficit equal to about 3% of GDP in 2013, which would be remarkable given the investments being made, we would have a more efficient health care system that costs less and covers more people in return.

The budget also puts in place the building blocks of what administration officials say will be a broad restructuring of the U.S. health system, an effort aimed at covering some of the 46 million Americans who lack insurance while controlling costs and improving quality. Many lawmakers said they had expected a health care overhaul to be pushed off while Obama deals with the economic crisis, but administration officials stressed they intend to forge ahead with comprehensive reform.

"The budget will kick off or facilitate a focus on getting health care done this year," the senior official said, adding that the White House is planning a summit on health care. The event has been delayed by former senator Tom Daschle's decision to withdraw from consideration as health secretary because of tax problems, a move that left Obama without key member of his health team.

Administration officials and outside experts say the most likely path to revamping the health system is to begin with Medicare, the federal program for retirees and people with disabilities, and Medicaid, which serves the poor. Together, the two programs cover about 100 million people at a cost of $561 billion in 2007. Making policy changes in those programs -- such as rewarding physicians who computerize their medical records or paying doctors for results rather than procedures--could improve care while generating long-term savings, expert say. It also could prod private insurers to follow suit.

They are talking about reducing Medicare eligibility to age 55, and also getting rid of the grossly inefficient Medicare Advantage, which is essentially a $35 billion dollar payoff to private insurance companies.

I know people are worried about the fiscal responsibility summit. Words matter, and using the language of those who have been trying for 40 years and longer to gut the social safety net is problematic. However, I am willing to judge the Administration on what they do. This budget is a Democratic statement of priorities, which states pretty clearly that we need a more responsible and progressive tax system that makes sure corporations and the wealthy are paying their fair share. It strives for progress in health care and climate change and a winding down of commitments to foreign military adventures. And it ends blatant giveaways to industry.

There will be details that come out that I imagine not to particularly like, and I'll certainly fight the off the books chicanery designed to prop up elites. But the budget is a major document. And this one is, so far, a very respectable manifestation of liberal principles.

All Cox' Fault?

Looks like the GOP has found a scapegoat for the financial meltdown. John McCain said today that he would fire Chris Cox as the chairman of the SEC. Now, Presidents don't have the power to do that, but clearly that showed a lack of trust in Cox on the part of the Republican nominee, and now CNBC is reporting (no link) that Cox will resign at the end of President Bush's term. In a way, McCain got what he wanted. And expect lots of articles about how lax SEC oversight was the proximate cause of this mess.

But how true is that? McCain tried to lay the blame at Cox' feet for the practice of naked short selling, which is when you can bet on a stock to go down without owning it, sort of like playing the ponies without owning the horse. This isn't exactly the best thing for the market, and Andrew Cuomo is launching an investigation to see if it's fully compliant with current law.

New York on Thursday began a probe into possible illegal short-selling in the stocks of Wall Street companies such as Goldman Sachs Group Inc and Morgan Stanley, Attorney General Andrew Cuomo said.

Cuomo said on a conference call with reporters: "I want the short-sellers to know today that I am watching. If it is proper and legal then there is nothing to worry about." [...]

The New York State prosecutor said his office also would look back into illegal short-selling that may have occurred in stocks of Lehman Brothers Holdings Inc and American International Group Inc, two companies at the heart of the crisis.

In the past week, Lehman has gone bankrupt and the insurance giant was rescued by the U.S. government.

Cuomo has asked the SEC for a freeze on short-selling.

But to suggest that this is why the markets are in turmoil is crazy. It's like blaming the guys betting on the horse for the horse carrying 200 extra pounds and stumbling to the finish line. The banks lent money to people who couldn't pay them back, and then hid the debt in all sorts of tricky new assets and securities that they tried to shovel out the door. That's the main problem, and no change in short-selling would alter that. The other problem is leverage, which may or may not be the SEC's fault.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind.

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

You can credibly charge Cox with failing to conduct meaningful oversight and indeed encourage over-leveraging, but that's not what McCain said.

He talked about short selling, which is perfectly legal, thanks to the masters of the universe like Phil Gramm, who encouraged and supported the casino-like atmosphere on Wall Street that led to this mess.

If you want to know what happened to blow up the financial markets, it's relatively simple. The banks let anyone buy a house, securitized the mortgages, and over-speculated and over-leveraged themselves, so that investors were buying worthless pieces of paper that they thought were valuable. The fixes are also simple:

Reform One: If it Quacks Like a Bank, Regulate it Like a Bank. Barack Obama said it well in his historic speech on the financial emergency last March 27 in New York. "We need to regulate financial institutions for what they do, not what they are." Increasingly, different kinds of financial firms do the same kinds of things, and they are all capable of infusing toxic products into the nation's financial bloodstream. That's why Treasury Secretary Hank Paulson has had to extend the government's financial safety net to all kinds of large financial firms like A.I.G. that have no technical right to the aid and no regulation to keep them from taking outlandish risks. Going forward, all financial firms that buy and sell products in money markets need the same regulation and examination. That will be the essence of the 2009 version of the Glass-Steagall Act.

Reform Two: Limit Leverage. At the very heart of the financial meltdown was extreme speculation with esoteric financial securities, using astronomical rates of leverage. Commercial banks are limited to something like 10 to one, or less, depending on their conditions. These leverage limits need to be extended to all financial players, as part of the same 2009 banking reform.

Reform Three: Police Conflicts of Interest. The conflicts of interest at the core of bond-raising agencies are only one of the conflicts that have been permitted to pervade financial markets. Bond-rating agencies should probably become public institutions. Other conflicts of interest should be made explicitly illegal. Yes, financial markets keep "innovating." But some innovations are good, and some are abusive subterfuges. And if regulators who actually believe in regulation are empowered to examine all financial institutions, they can issue cease-and-desist orders when they encounter dangerous conflicts.

The SEC could have handled reform 2, but that's about it. There are also reforms that we can do to ensure that people stay in their homes, which would be novel, protecting ordinary people instead of the executives who caused this. AND, we could actually tax hedge fund managers on their income the way we do any other income-generating American, increasing federal revenue and having the people at least somewhat responsible for this mess partially finance the bailouts, as they are no longer creating public wealth.

This remains a scary time. China could decide that holding US dollars doesn't make any sense and divest, which would lead to what Michael Bloomberg has called a next wave crisis.

But you'll see that short-selling, which actually doesn't affect the market as much as claimed, because on the way down you have to buy the stock to cover the sale, isn't on anyone's reform list. The bottom line is that simple regulation that is actually implemented is much cheaper and more efficient than bailing out everyone on Wall Street with phantom money that is just created out of thin air and ends up becoming debt for our children and grandchildren. John McCain is out of touch with what is needed to soothe the markets, but it sounds manly to "strike forth" and fire a guy you decide is responsible. The responsibility lies with Republican love of deregulation, not any one person. You can scapegoat Chris Cox all you want, but it's a smokescreen.

...funny, too, how McCain can stand up to Chris Cox but not George Bush.

In private late Tuesday evening, the McCain campaign circulated a draft statement on the Wall Street crisis that attacked the Bush administration for a slow and "inconsistent" response, and charged that executives at several financial firms had made "misleading and false" statements.

But the criticism never appeared. After being circulated not only among McCain aides but also major campaign donors who have worked in the investment industry, the language was softened.

Bob Johnson's A Fool

Bob Johnson, the founder of BET (which doesn't actually reflect well on him or do much to "lift up" Black America, considering that their almost entire output it Hot Ghetto Mess and 106th and Park), said a really stupid thing yesterday, obliquely citing Barack Obama's drug use as a teenager, and then lying about it.

"To me, as an African American, I am frankly insulted the Obama campaign would imply that we are so stupid that we would think Hillary and Bill Clinton, who have been deeply and emotionally involved in black issues — when Barack Obama was doing something in the neighborhood; I won't say what he was doing, but he said it in his book — when they have been involved," Johnson said.

Obama wrote about his teenage drug use — marijuana, alcohol and sometimes cocaine — in his memoir, "Dreams from My Father."

Johnson later said his comments referred to Obama's work as a community organizer in Chicago "and nothing else. Any other suggestion is simply irresponsible and incorrect," he said in a statement released by Clinton's campaign.

Actually, Bob Johnson is irresponsible and incorrect. A community organizer is not only a noble profession, but Saul Alinsky, the "godfather" of community organizing, was one of Hillary Clinton's heroes. His comments make no sense if he was referring to community organizing.

The real problem here is that the Clinton campaign is allowing Bob Johnson to speak for them at all. Johnson has a horrible economic past, having gleefully sat on Bush's "privatize Social Security" board, having called the estate tax "racist" and having lobbied against tax fairness for hedge fund managers. No respectable Democrat would ever share the stage with him. I agree with Matt Stoller that this offers a real opportunity for Obama:

Obama should use this moment to go after big media and outclass Clinton with substantive and sharp distinctions on policy that show him as a forward-looking and deep candidate. He is already out with the policy that diversity of media ownership is critical to a healthy media system, now is a good moment to make that explicit and go after the media monopolies.

Better that than continue this identity fight, which, because of the stereotypes being thrown around, he will probably lose. He's doing much better in the recently released Washington Post poll, that shows the race nationally at 42-37-11. Obama has already garnered increased support from African-Americans because of the Clinton campaign's attacks combined with his Iowa victory, leading to Clinton practically pulling out of South Carolina. It's time to get back the white liberals. Moving off of racial identity and on to some substantive and noticeable fight would be a way to do that.

Media ownership is one of Stoller's pet causes, but in this case he's absolutely right. Johnson is a creature of a diseased media oligarchy, and the causes he's supported feed right out of that. He's an example of the narrowness of out discourse. Rather than harp on the racial nonsense and the smearing, Obama could offer a direct critique of the kind of economic inequality someone like Johnson wants to maintain. Otherwise, I do fear that Obama is being lured into a trap.

And so it's worth wondering if there's not a coordinated strategy among the Clintons to force a conversation over race. Not a conversation that will be harmful to Obama -- the Clintons have, after all, had to spend a fair amount of time apologizing, and clarifying -- but a conversation that will be harmful to his message. If Obama has to spend a lot of time talking about race, it's hard for him to be the post-racial candidate. If he has to spend a lot of time on divisive topics, it's hard for him to make an appeal for unity. And if he gets thrown off message at this point in the campaign, it will be exceedingly hard for him to blunt Clinton's momentum. And, whether it's a coordinated strategy on the part of the Clintons or not, it's definitely what's happening.

And when you add in the voter suppression effort that Clinton surrogates are engaged in, trying to make it harder for union members to vote, you have to question the win-at-all-costs strategy here. I don't think Obama's campaign has been squeaky clean, but I've yet to see voter suppression tactics. Meanwhile John Edwards seems completely apart from this debate, and he's doing pretty darn well in Nevada considering the media blackout. If Obama would short-circuit the debate and talk about the ECONOMIC reasons to reject Bob Johnson's comments, he would reap a bounty. Instead, it's identity politics, his coalition isn't big enough, and Clinton is likely to benefit.