Mad Magazine´s Ode to HOPE
MAD ushers in an era of hope – with their latest hopeless issue! This is their tribute to President Obama by examining what the crowd was thinking during his inauguration – and taking a look at the first 100 minutes of his presidency! Funny Stuff! Perhaps a hint?
Popularity: 16% [?]
The following is a full transcript of United States President Barack Obama’s interview with al-Arabiya Television:
Q: Mr. President, thank you for this opportunity, we really appreciate it.
OBAMA: Thank you so much.
Q: Sir, you just met with your personal envoy to the Middle East, Senator Mitchell. Obviously, his first task is to consolidate the cease-fire. But beyond that you’ve been saying that you want to pursue actively and aggressively peacemaking between the Palestinians and the Israelis. Tell us a little bit about how do you see your personal role, because, you know, if the President of the United States is not involved, nothing happens – as the history of peace making shows. Will you be proposing ideas, pitching proposals, parameters, as one of your predecessors did? Or just urging the parties to come up with their own resolutions, as your immediate predecessor did?
OBAMA: Well, I think the most important thing is for the United States to get engaged right away. And George Mitchell is somebody of enormous stature. He is one of the few people who have international experience brokering peace deals.
And so what I told him is start by listening, because all too often the
United States starts by dictating — in the past on some of these issues — and we don’t always know all the factors that are involved. So let’s listen. He’s going to be speaking to all the major parties involved. And he will then report back to me. From there we will formulate a specific response.
Ultimately, we cannot tell either the Israelis or the Palestinians what’s best for them. They’re going to have to make some decisions. But I do believe that the moment is ripe for both sides to realize that the path that they are on is one that is not going to result in prosperity and security for their people. And that instead, it’s time to return to the negotiating table.
And it’s going to be difficult, it’s going to take time. I don’t want to prejudge many of these issues, and I want to make sure that expectations are not raised so that we think that this is going to be resolved in a few months. But if we start the steady progress on these issues, I’m absolutely confident that the United States — working in tandem with the European Union, with Russia, with all the Arab states in the region — I’m absolutely certain that we can make significant progress.
Q: You’ve been saying essentially that we should not look at these issues — like the Palestinian-Israeli track and separation from the border region — you’ve been talking about a kind of holistic approach to the region. Are we expecting a different paradigm in the sense that in the past one of the critiques — at least from the Arab side, the Muslim side — is that everything the Americans always tested with the Israelis, if it works. Now there is an Arab peace plan, there is a regional aspect to it. And you’ve indicated that. Would there be any shift, a paradigm shift?
OBAMA: Well, here’s what I think is important. Look at the proposal that was put forth by King Abdullah of Saudi Arabia –
Q: Right.
OBAMA: I might not agree with every aspect of the proposal, but it took great courage –
Q: Absolutely.
OBAMA: — to put forward something that is as significant as that.
I think that there are ideas across the region of how we might pursue peace.
I do think that it is impossible for us to think only in terms of the
Palestinian-Israeli conflict and not think in terms of what’s happening with Syria or Iran or Lebanon or Afghanistan and Pakistan.
These things are interrelated. And what I’ve said, and I think Hillary Clinton has expressed this in her confirmation, is that if we are looking at the region as a whole and communicating a message to the Arab world and the Muslim world, that we are ready to initiate a new partnership based on mutual respect and mutual interest, then I think that we can make significant progress.
” Now Israel is a strong ally of the United States. They will not stop being a strong ally of the United States “
Now, Israel is a strong ally of the United States. They will not stop being a strong ally of the United States. And I will continue to believe that Israel’s security is paramount. But I also believe that there are Israelis who recognize that it is important to achieve peace. They will be willing to make sacrifices if the time is appropriate and if there is serious partnership on the other side.
And so what we want to do is to listen, set aside some of the preconceptions that have existed and have built up over the last several years. And I think if we do that, then there’s a possibility at least of achieving some breakthroughs.
Q: I want to ask you about the broader Muslim world, but let me – one final thing about the Palestinian-Israeli theater. There are many
Palestinians and Israelis who are very frustrated now with the current conditions and they are losing hope, they are disillusioned, and they believe that time is running out on the two-state solution because – mainly because of the settlement activities in Palestinian-occupied territories.
Will it still be possible to see a Palestinian state — and you know the contours of it — within the first Obama administration?
OBAMA: I think it is possible for us to see a Palestinian state — I’m not going to put a time frame on it — that is contiguous, that allows freedom of movement for its people, that allows for trade with other countries, that allows the creation of businesses and commerce so that people have a better life.
And, look, I think anybody who has studied the region recognizes that the situation for the ordinary Palestinian in many cases has not improved. And the bottom line in all these talks and all these conversations is, is a child in the Palestinian Territories going to be better off? Do they have a future for themselves? And is the child in Israel going to feel confident about his or her safety and security? And if we can keep our focus on making their lives better and look forward, and not simply think about all the conflicts and tragedies of the past, then I think that we have an opportunity to make real progress.
Obama praised Saudi King Abdullah for his Middle East peace plan
But it is not going to be easy, and that’s why we’ve got George Mitchell going there. This is somebody with extraordinary patience as well as extraordinary skill, and that’s what’s going to be necessary.
Q: Absolutely. Let me take a broader look at the whole region. You are planning to address the Muslim world in your first 100 days from a Muslim capital. And everybody is speculating about the capital. (Laughter) If you have anything further, that would be great. How concerned are you — because, let me tell you, honestly, when I see certain things about America — in some parts, I don’t want to exaggerate — there is a demonization of America.
OBAMA: Absolutely.
Q: It’s become like a new religion, and like a new religion it has new converts — like a new religion has its own high priests.
OBAMA: Right.
Q: It’s only a religious text.
OBAMA: Right.
Q: And in the last — since 9/11 and because of Iraq, that alienation is wider between the Americans and — and in generations past, the United States was held high. It was the only Western power with no colonial legacy.
OBAMA: Right.
Q: How concerned are you and — because people sense that you have a different political discourse. And I think, judging by (inaudible) and
Zawahiri and Osama bin Laden and all these, you know — a chorus –
OBAMA: Yes, I noticed this. They seem nervous.
Q: They seem very nervous, exactly. Now, tell me why they should be more nervous?
OBAMA: Well, I think that when you look at the rhetoric that they’ve been using against me before I even took office –
Q: I know, I know.
OBAMA: — what that tells me is that their ideas are bankrupt. There’s no actions that they’ve taken that say a child in the Muslim world is getting a better education because of them, or has better health care because of them.
In my inauguration speech, I spoke about: You will be judged on what you’ve built, not what you’ve destroyed. And what they’ve been doing is destroying things. And over time, I think the Muslim world has recognized that that path is leading no place, except more death and destruction.
Now, my job is to communicate the fact that the United States has a stake in the well-being of the Muslim world that the language we use has to be a language of respect. I have Muslim members of my family. I have lived in Muslim countries.
Q: The largest one.
OBAMA: The largest one, Indonesia. And so what I want to
communicate is the fact that in all my travels throughout the Muslim world, what I’ve come to understand is that regardless of your faith — and America is a country of Muslims, Jews, Christians, non-believers — regardless of your faith, people all have certain common hopes and common dreams.
And my job is to communicate to the American people that the Muslim world is filled with extraordinary people who simply want to live their lives and see their children live better lives. My job to the Muslim world is to communicate that the Americans are not your enemy. We sometimes make mistakes. We have not been perfect. But if you look at the track record, as you say, America was not born as a colonial power, and that the same respect and partnership that America had with the Muslim world as recently as 20 or 30 years ago, there’s no reason why we can’t restore that. Andthat I think is going to be an important task.
But ultimately, people are going to judge me not by my words but by my actions and my administration’s actions. And I think that what you will see over the next several years is that I’m not going to agree with everything that some Muslim leader may say, or what’s on a television station in the Arab world — but I think that what you’ll see is somebody who is listening, who is respectful, and who is trying to promote the interests not just of the United States, but also ordinary people who right now are suffering from poverty and a lack of opportunity. I want to make sure that I’m speaking to them, as well.
Q: Tell me, time is running out, any decision on from where you will be visiting the Muslim world?
OBAMA: Well, I’m not going to break the news right here.
Q: Afghanistan?
OBAMA: But maybe next time. But it is something that is going to be important. I want people to recognize, though, that we are going to be making a series of initiatives. Sending George Mitchell to the Middle East is fulfilling my campaign promise that we’re not going to wait until the end of my administration to deal with Palestinian and Israeli peace, we’re going to start now. It may take a long time to do, but we’re going to do it now.
We’re going to follow through on our commitment for me to address the Muslim world from a Muslim capital. We are going to follow through on many of my commitments to do a more effective job of reaching out, listening, as well as speaking to the Muslim world.
And you’re going to see me following through with dealing with a drawdown of troops in Iraq, so that Iraqis can start taking more responsibility. And finally, I think you’ve already seen a commitment, in terms of closing Guantanamo, and making clear that even as we are decisive in going after terrorist organizations that would kill innocent civilians, that we’re going to do so on our terms, and we’re going to do so respecting the rule of law that I think makes America great.
Q: President Bush framed the war on terror conceptually in a way that was very broad, “war on terror,” and used sometimes certain terminology that the many people — Islamic fascism. You’ve always framed it in a different way, specifically against one group called al Qaeda and their collaborators. And is this one way of –
OBAMA: I think that you’re making a very important point. And that is that the language we use matters. And what we need to understand is, is that there are extremist organizations — whether Muslim or any other faith in the past — that will use faith as a justification for violence. We cannot paint with a broad brush a faith as a consequence of the violence that is done in that faith’s name.
And so you will I think see our administration be very clear in
distinguishing between organizations like al Qaeda — that espouse violence, espouse terror and act on it — and people who may disagree with my administration and certain actions, or may have a particular viewpoint in terms of how their countries should develop. We can have legitimate disagreements but still be respectful. I cannot respect terrorist organizations that would kill innocent civilians and we will hunt them down.
But to the broader Muslim world what we are going to be offering is a hand of friendship.
Q: Can I end with a question on Iran and Iraq then quickly?
OBAMA: It’s up to the team –
MR. GIBBS: You have 30 seconds. (Laughter)
Q: Will the United States ever live with a nuclear Iran? And if not, how far are you going in the direction of preventing it?
OBAMA: You know, I said during the campaign that it is very important for us to make sure that we are using all the tools of U.S. power, including diplomacy, in our relationship with Iran.
Now, the Iranian people are a great people, and Persian civilization is a great civilization. Iran has acted in ways that’s not conducive to peace and prosperity in the region: their threats against Israel; their pursuit of a nuclear weapon which could potentially set off an arms race in the region that would make everybody less safe; their support of terrorist organizations in the past — none of these things have been helpful.
But I do think that it is important for us to be willing to talk to Iran, to express very clearly where our differences are, but where there are potential avenues for progress. And we will over the next several months be laying out our general framework and approach. And as I said during my inauguration speech, if countries like Iran are willing to unclench their fist, they will find an extended hand from us.
Q: Shall we leave Iraq next interview, or just –
MR. GIBBS: Yes, let’s — we’re past, and I got to get him back to dinner with his wife.
Q: Sir, I really appreciate it.
OBAMA: Thank you so much.
Q: Thanks a lot.
OBAMA: I appreciate it.
Q: Thank you.
OBAMA: Thank you
Popularity: 6% [?]
I was working a shift in the Emergency Room as John McCain conceded defeat. As I recall, it was already early afternoon Sydney time.
“Congratulations! We won!” my effusive, grinning co-worker said to me as I was standing there at the X-ray viewer, trying to interpret a chest film.
“Congratulations for what?” I replied, irritated at having my train of thought broken. “What are you talking about?”
The ecstasy on my co-worker’s face melted away and devolved into something akin to puzzlement and total mystification, and she looked at me as if I had a third eye, or was born without a belly-button, or something else along those lines. “You don’t know? WE won! Obama won!” she said, seeking signs of affirmation in my countenance.
They were not particularly forthcoming. “Oh, I’m sorry”, I replied in a manner that was not offensive, but was not really apologetic at all. “I voted for McCain”, I added firmly.
At this point, the expression on my co-workers face turned once again, but this time, to one of embarrassment, as if she had somehow overstepped her bounds. What followed as a pregnant, uncomfortable silence, which ultimately went unbroken as she turned and walked meekly away, with the demeanor of someone who had just had her lunch eaten by a bully. At the time, I was reminded, of all things, of the film “Forrest Gump”. To paraphrase a line from that film – “I’m sorry I spoiled your little Barack Obama party.”
This encounter, with small variations, replayed itself several times over the next few days. Overjoyed Aussie Obamites congratulated what they thought was yet another Yank expatriate who had come to Australia to escape the Dark Age of an America ruled by Conservatives for much of the last eight years.
The collective Aussie ecstasy over the advent of Barack Obama is completely understandable, given the “rock star” treatment he was given here in the Land Down Under by the media – which of course, was overwhelmingly pro-Barack. The Australian press followed the campaign with a rigor that really took me by surprise. I was floored by the amount of interest there was in another sovereign nation’s political affairs, and in general, by the amount of airtime devoted to the United States on the nightly TV news, regardless of the election. By comparison, how much does your average American care about what’s going on in Canada or Mexico?
Nevertheless, the pro-Obama orientation of the Australian media was plainly obvious. The preponderance of air-time was devoted to the Obama camp, while the McCain campaign was treated as a kind of annoying postscript – a necessary afterthought hastily added at the end of the news segment, if only to maintain some semblance of objectivity and, hence, good journalism.
Australian news segments devoted to Obama looked like they were produced by Spielberg himself. There was Obama, at some packed, outdoor political rally, beautiful fall foliage in the backdrop, with crowd shots carefully selected to show the multiracial diversity of the crowd. Then there was Obama himself – jaunty, confidently strutting up to the podium, with that perfect smile on his photogenic face – the very flower of youth and vigor. Segments depicting McCain were very different – always filmed in dark, indoor settings, with crowd shots showing an all-white, staid (Middle American?) audience – sequences that accentuated Mac’s semi-shuffling gait, the fact that Cindy McCain towers over him, or that the movement in his left arm was limited, as if he were some kind of invalid. I remember thinking that the Australian media’s treatment of Senator McCain somehow reminded me of Emperor Palpatine from Star Wars. With coverage like this, it is no surprise that the Australian public came to perceive McCain as old, worn, infirm, weak, and out of touch. Too bad that they could not see that Mac’s bum left arm was not really a sign of infirmity at all, but instead, a badge of honor. A badge of honor earned by enduring, honorably and courageously, as a POW in some of the most freakish and horrible of circumstances imaginable.
So, with this Princess Diana-esque media treatment, how could the Aussie public not come to adore Barack Hussein Obama, and come to expect the very best from an Obama Presidency that promised “Change” and “Hope” (and, let’s not forget, “Sharing the Wealth”), aphorisms of a New Golden Age for the United States and the rest of the world? As an American who loves his country and only wants the best for it, I can only hope that these sentiments turn out to be real core values for Mr. Obama and his appointees, not just punchlines delivered at the denouement of a political rally.
Unfortunately, in my mind at least, all of this hype and adulation has resulted to a certain extent in an obscuration of the facts, blinding many of us to the real issues. Any cursory review of human history will show that it is rife with instances in which style has triumphed over substance, often with disastrous consequences. The same co-worker I mentioned at the beginning of this piece approached me again a few days later to flat out ask me why I didn’t vote for Obama. Apparently, the whole episode had been preoccupying her. As we were talking, I noted that she was wearing a Rosary bracelet – which to Catholics is a devotion to the Virgin Mary. “So, you’re Catholic I take it?” She replied in the affirmative. “So,” I said, “did you know that Senator Obama has one of the most radically pro-abortion voting records in Congress? And that he supports initiatives that limit funding to Catholic hospitals because they are Pro-Life?” A stunned silence ensured once again. Her mouth was agape. So much for her Obamessiah.
So, how do Aussies feel about the upcoming inauguration? From my own personal perceptions, and interactions with others – talking to my Aussie friends and sometimes, my patients – I have come to the conclusion that the feelings and expectations of the different segments of Australian society largely mirror the deep divisions within the United States. I have a varied group of Aussie “Mates” – running the gamut from physicians and attorneys, to independently wealthy landowners, to small business owners and software engineers, to the guy who cleans the blood and urine off the ER floors. Also, as an Emergency Physician, I am guaranteed an almost daily exposure to the parade of humanity that comes in and out of the ER doors. Upon hearing my “Yank” accent, many of my patients are only happy to share with me their thoughts and opinions about what is going on in “The States” – and refreshingly, I am glad to report that Aussie notions of political correctness are not as highly developed or “nuanced” as ours.
Those Aussies who work in high-powered, executive level jobs, occupying corner offices in the gleaming office buildings of downtown Sydney with million-dollar views of the Harbor Bridge and the Opera House, have embraced Senator Obama and his slogans of “Change” and “Hope”. They indeed are hungry for “Change” – anything to lift the global economic morass and restore the easy flow of money and big salaries. Let’s hope, then, that these people, who go home to their exclusive gated communities on the beaches north of Sydney, will also be willing to embrace the blood, sweat and tears that will be required to bring about this new Era of Global Harmony – with low carbon emissions, of course. Politics can indeed make strange bedfellows, and interestingly, the Obamania of the monied, educated, largely white socioeconomic stratum is matched only in Australia by the enthusiasm of the burgeoning Islamic population here – who, like the rest of the Islamic world, are happily anticipating the prospect of a more sympathetic resident at 1600 Pennsylvania Avenue. The guy’s middle is Hussein, correct?
My fellow physicians, being the idealistic lot they are, have surprised me with their level of ambivalence regarding Mr. Obama. I was wrong to initially tag them as Obamites. From my conversations with my colleagues, they are aware of Obama’s plans to create a universal healthcare system – and I think that their own misgivings stem from looking at their own failing National Health Care System, which is beset by cost overruns, corruption, poor quality, and inefficiency.
For the nurses, paramedics, police officers and those patients of mine who largely originate from the blue collar, rough-and-tumble Western Sydney suburbs where I work (the part of Sydney you don’t see in the travel brochures), the view of Senator Obama’s Presidency is different yet again. From the working class, for whom real physical exertion is required to put food on the table – often living hand to mouth in the current hardscrabble economic climate – the sentiments regarding the then-upcoming Inauguration were certainly more measured, cautious, and pragmatic ones. With these folks, there is no evidence of any airy, unbridled optimism or naïve, youthful positivity. Their views are much more sober. From what William Davis Hanson calls “the muscled classes”, I tend to hear comments along the lines of “I figure Obama is kind of weak…he doesn’t look like he has any backbone” and “What has he really done to deserve being President?” I’ve also heard a lot of comments like “I reckon McCain deserved it because he served his country”. Whether this is the sage wisdom of the working man, only time will tell.
Once again, I can only report that Australian sentiments regarding the Presidency of Barack Obama are as widely divergent, and I daresay, divisive, as those present in my own beloved America. What else can we expect? I remember that the events of last autumn split my own family right down the middle in terms of whom we voted for. The people in the Land Down Under are almost as deeply divided as those back home. We cannot deny, based on voting demographics, that the general feeling in places like New York City and San Francisco will be very different from that in small towns like Whiting, Indiana, and Hamilton, Montana…small towns where Old Glory flies in front of every home, and words like Duty, Honor, Patriotism and God don’t make people blush. As an American who loves and misses my country, I can only hope that our differences somehow become a source of strength, instead of further weakening our great nation.
“E Pluribus Unum”, anyone?
*****
AlChristian Cosca Villaruz is TSR´s Contributor from Australia.
Popularity: 6% [?]
Statement of the Shadow Financial Regulatory Committee on
An Open Letter to President-Elect Obama
December 8, 2008
In addressing the current financial crisis your new administration will face three critical tasks. The first is managing the ongoing mess. The second is to effect an orderly unwinding of the emergency measures the previous administration put in place to bolster financial institutions and markets. The third is to develop a comprehensive policy strategy that will help to shape the financial system of the future.
Effective crisis management solutions must address fundamental causes rather than symptoms. Among the many causes of the crisis are government credit-allocation schemes that distort incentives and adversely affect the function of markets while undermining the effectiveness of private and government supervision. As in this case, such incentive distortions eventually produce financial crisis.
Unfortunately, most of the current administration’s remedies ignore the incentive distortions and treated financial institutions’ problems in rolling over their debts as arising from a shortage of market liquidity rather than doubts about the solvency of troubled institutions. Ad hoc and short-sighted interventions inevitably have adverse longer-term consequences. For example, much of the financial architecture put in place in the 1930s was crafted in the heat of crisis resolution. Despite the effectiveness of some of the emergency interventions of the 1930s, other policy responses were unwarranted and ended up hobbling financial institutions for decades, with significant unintended adverse consequences for financial system efficiency and bank risk management.
Many factors contributed to the current crisis, including a prolonged period of low interest rates from 2002 to 2005. Most importantly, government policies (especially policies toward Freddie Mac and Fannie Mae) to encourage housing have distorted risk management, prudential supervision, and pricing in the mortgage market. Inadequacies in banking supervision and regulatory policies, and the outsourcing of due diligence by both regulators and private sector market participants to rating agencies when coupled with private-sector agency and incentive problems have encouraged excessive leverage and poor underwriting standards.
The Shadow Financial Regulatory Committee would like to highlight what it sees as important lessons from the current crisis in five key areas requiring ongoing policy attention, and articulate principles that should guide long-term reforms and the unwinding of the emergency measures put in place to bolster financial institutions and markets. The five areas are: 1) government policies to subsidize affordable housing, 2) rules defining the limits of safety net protection for the financial system, 3) policies governing financial institution consolidation and competition, 4) prudential regulation and supervision of financial institutions, and 5) disclosure standards and other rules ensuring transparency in financial transactions and positions.
U.S. housing policies have used off-budget expenditures and mandates to increase the availability of housing. This approach operates by distorting the incentives of market participants in order to achieve government objectives. Government policies affect the housing market by lowering interest rates, encouraging high loan-to-value ratios and high lender leverage, and expanding the supply of mortgage credit. Policies have done so in a variety of ways including: the creation of specialized and implicitly subsidized mortgage institutions (i.e., Freddie Mac, Fannie Mae, the Federal Home Loan Banks, FHA, and Ginnie Mae) and the rules that govern their lending policies, favorable tax treatment of mortgage interest, lower risk-based capital standards for financial institutions on mortgage loans, and bank regulations that encourage mortgage lending such as the Community Reinvestment Act, which together constitute the most important policy initiatives. Particularly problematic has been the behavior of Freddie and Fannie, which exploited their once implicit government guarantees to dominate the mortgage business.
As the result of their expansion into risky mortgage lending from 2004 to 2007, they amassed huge risk, leading to losses that led them to be placed into conservatorship. The U.S. government is now managing approximately $5 trillion of mortgage-related assets. Of that amount, estimates are that Freddie and Fannie now hold more than $1.5 trillion in subprime and Alt-A mortgage-related assets, constituting roughly half of the total amount of subprime and Alt-A mortgage debt outstanding. The risks associated with these mortgages are now even more likely to be visited on the U.S. taxpayer. The Federal Home Loan Banks were also indirect conduits of funds into the mortgage market, for example, by supplying more than half of the funds to the now failed thrifts, Countrywide and IndyMac.
Your administration must not only figure out what the future of these institutions and their assets will be, but also what the structure of mortgage finance in the U.S. should be going forward. The Committee believes that it is imperative that the assets and activities of the GSEs be completely returned to the private sector as soon as feasible. Possible alternative resolution methods include sale, liquidation, breakup or re- capitalization.
Whatever alternative is chosen, deliberations should be preceded by a reevaluation of how government housing support is structured. Experience has shown that past policies have failed and that running subsidies off-budget through mortgage markets creates financial instability. Government support for the GSEs was a quid pro quo for their relaxation of underwriting standards in mortgages targeted toward low-income borrowers. This approach encouraged substantial increases in loan-to-value ratios and relaxed risk standards. We urge that strong consideration be given to use of alternative means of promoting access to housing, including direct subsidies, which can be explicitly targeted to desired recipients (such as new homeowners) at known costs that are on budget.
In a head-spinning sequence of evolving policy interventions over the past year the Fed and Treasury have implemented scores of new ad hoc policies that broaden and deepen government protection of financial institutions, depositors, and various financial instruments. Fed lending (sometimes with Treasury support) has been expanded to accept new types of collateral, including very risky financial instruments. Fed loans have been made for new purposes (e.g., loans to investment banks, loans supporting assisted acquisitions of investment banks, and loans to foreign markets in need of dollars). The Fed and Treasury have intervened to buy money market instruments directly to stabilize those markets. Deposit insurance has been expanded to cover larger deposit balances and non- depository liabilities of banks and government guarantees have been made available to money market mutual funds. The Fed, Treasury and FDIC have pursued a variety of creative resolution policies that have selectively offered different forms of bailouts to numerous financial institutions (e.g., government injections of funding of various kinds, guarantees of assets, and subsidies to assist acquirors of distressed institutions).
All of this has been done in the absence of a policy strategy that would define the limits of safety net protection to institutions, financial instruments, and depositors under varying economic circumstances, or any statement of mechanisms and rules that would govern the provision of protection under those varying circumstances. These ad hoc policies pose four problems for the new administration.
First, because policy has been hard to predict, even potentially helpful interventions have sometimes produced shell-shocked uncertainty in markets about how future policy is likely to evolve. With an aim to reduce uncertainty caused by unpredictable policy, your administration should clearly define its overall crisis management strategy, so that the stabilizing effects of policy interventions can be realized.
Second, as the crisis passes, the government must devise a process for the orderly unwinding of government protection. For example, at some point the Fed will have to stop buying commercial paper, stop lending against risky assets, and start the process of shrinking its balance sheet, which currently contains a large amount of hard-to-sell risky assets. Managing this withdrawal of protection in an orderly manner will be a challenge. Your administration must roll back the expanded protection of bank liabilities. This will be a daunting political task because large banks and community banks both have a strong stake in continuing these protections.
Third, the adverse long-term consequences of increased protection must be addressed. The precedents established by the dramatic expansion of government involvement and protection in markets and institutions could create enormous moral- hazard costs, if market participants anticipating future government support choose to increase their risk taking at taxpayers’ expense. In particular, there is a danger that market participants will load more positions onto risks that tend to affect many market participants together, and thus tend to invite more government protection. The threat to government deficits and to long-term efficiency in the allocation of financial resources from moral hazard is real and potentially large. Your administration must develop a strategy that properly protects taxpayers and ensures efficiency of the financial system by promoting competition and limiting the extent of anticipated future bailouts.
Fourth, to deal efficiently with future turmoil, it is imperative that your administration develop a new long-term policy strategy that identifies and announces operational processes and standards and loss-sharing rules associated with systemic intervention. This would include criteria for selecting candidates for assistance in crisis circumstances. This strategy must articulate credible and clear intervention mechanisms for the future that provide assistance in ways that minimize moral-hazard costs. The FDICIA of 1991 represents a model on which to build going forward. In that Act, extraordinary support for uninsured bank deposits or other debt can only occur under well-defined processes, and entail specific ex post loss sharing rules. These procedures make authorities more accountable by creating a need to justify publicly any and all ad hoc deviations from benchmark policies.
Several large financial institutions have either failed, were merged out of existence, or were sold to acquirers through assisted transactions. All required explicit or tacit regulatory approval under current antitrust laws. In each case, approvals were justified and normal antitrust standards or deposit concentration limits that might have precluded many of the transactions did not apply. The result has been the consolidation of many large banks and the virtual disappearance of the nation’s large, standalone investment banks which either failed, were merged into commercial banks, or adopted the bank holding company form of organization.
The U.S. banking system is now more topheavy than ever. If there was any doubt that the top tier institutions were too-big-to-fail, that doubt has now become a certainty as these institutions are clearly viewed as too large to permit to fail or be liquidated. The industry structure is barbell-shaped, comprised of a handful of huge institutions and many small community and regional banks who must operate without the government’s implicit guarantee. The implementation of the TARP program has reinforced the trend toward consolidation and also raised a number of concerns relating to the uneven distribution of government protection. Reportedly, government discretion has been used to pick winners and losers in the acquisition arena. The result is that some smaller banks face an uncertain future as the result of policy uncertainty, which raises issues both of fairness and efficiency.
An important longer-run issue is how consolidation will evolve, and how it will shape the future structure and performance of banks. Moral hazard resulting from too-big- to-fail is a significant and even larger issue. Recent experience has suggested that large institutions were difficult to manage and, in particular, experienced difficulty in controlling their risk taking. If that is so, then they have become even larger and more complex as the result of the consolidations that have taken place. Government policies should not tilt the financial system toward further consolidation. Instead, policies should recognize the disproportionate systemic risks posed by large, complex institutions. As the risks to the safety net are unlikely to be linear in measures of bank size and complexity, the Committee recommends the imposition of an ex ante systemic risk premium surcharge to internalize the social costs of managing systemic risks in the financial system.
The depth of the current financial crisis has been blamed widely on the failure of market forces to impose sufficient discipline on risk-taking by a series of interconnected large financial institutions. Adherents to this view conclude that the way to reduce the frequency and extent of future market turmoil is to require the government to undertake more stringent regulation of risk-taking by banking, securities, and insurance firms.
However, a careful reading of the evidence produces a more nuanced view. While the crisis shows the limits of market discipline, the failure to control private risk taking is the product of a breakdowns in government and private supervision. In particular, the failure of private parties to undertake sufficient due diligence in making and securitizing high-risk loans was compounded by incentive defects in government supervision. These defects explain the failure to monitor and respond to the safety net implications of decisions by financial institutions to shift leverage and other risks off balance sheet, or to respond to rating organizations inflated opinions about credit quality.
The goal of government regulation and supervision is to manage the costs and benefits of the financial safety net, but this goal can be compromised by clientele pressure. The breakdown of the risk-control process underscores the existence of this incentive conflict in supervision and the tendency of lobbying pressure and regulation-induced innovation to weaken a supervisor’s incentives to enforce capital and other prudential requirements on a timely basis. Managers of financial institutions know that reducing the transparency of their claims on the safety net by embedding outsized risk exposures in complicated off-balance-sheet instruments would benefit their shareholders. But they could collect and dividend out profits earned from regulatory arbitrage only as long as they could hide their increased leverage and resulting reputational risks from supervisors and creditors. In tolerating ongoing declines in transparency and the effectiveness of capital requirements, supervisors encouraged the under-pricing of risk; the correction of this mispricing triggered the crisis. The price correction punished three groups: investors who accepted more risk than they wanted, borrowers who overleveraged themselves, and taxpayers who are being made responsible for cleaning up the mess.
Regulators and supervisors have a duty to see that risks can be fully understood and fairly priced by investors. This requires not more government regulation, but an efficient layering of private and governmental disciplines.
In dynamic markets, regulations and their enforcement must be dynamic. They must also adapt to changes in the environment that change their effectiveness. To reduce opportunities for forbearance by regulators, this committee has supported the concepts of the Prompt Corrective Action program (PCA) and Structured Early Intervention and Resolution (SEIR) as specified by the FDIC Improvement Act of 1991 (FDICIA). PCA and SEIR mandate a ladder of increasingly harsh regulatory sanctions. We also recommended expanding the information available to regulators by requiring banks to issue subordinated debt that would be priced by the market. These data would supplement other market and supervisory signals about the financial health of the issuing institution.
The history of conventional depository institution regulation—in terms of its ability to keep these institutions out of trouble—has been dismal. The savings and loan debacle in the late 1980s and early 1990s cost the taxpayers at least $150 billion and was accompanied by the failure of almost 1600 commercial banks. Despite the adoption of FDICIA in 1991, the banking system has sunk again into crisis.
Long before the current crisis, the Shadow Committee recognized that PCA, by itself, was not sufficient to ensure timely intervention to prevent abuse of the safety net and large bank losses. In Statement No. 160, we provided a blueprint for reform of bank capital standards that revolved around a proposal for a minimum subordinated debt requirement for large US banks. The central goal of that proposal was to provide credible early warning of increasing bank vulnerability through a carefully created requirement that banks issue uninsured debt held at arms length. The ability of banks to continue to issue subordinated debt into the market at low yields would provide an indicator of market beliefs about bank risk by entities with “skin in the game,” and that signal could be used to inform regulatory policies, including PCA. A minimum subordinated debt requirement was included as a potential regulatory mandate in the Gramm-Leach-Bliley Act of 1999, which required that the idea be evaluated by the Fed and the Treasury. Although a Fed study produced evidence that supported the efficacy of such a requirement, bank lobbying efforts killed the idea.
In view of continuing evolution in financial instruments, the Committee now reiterates to you its recommendation that supervisors draw on additional information about the riskiness of large financial institutions provided by new financial instruments as they emerge. One instrument that promises to be especially useful in helping supervisors to assess risk is the credit default swap (CDS). A CDS provides insurance against defaults of securities that is priced by the market because they trade regularly. While CDS prices are not a perfect substitute for a properly crafted subordinated debt requirement, CDS prices can provide regulators with more current and accurate information on an institution’s financial well-being than accounting statements or less frequently traded debt. Signals from the CDS market can alert regulators more promptly of the need to intervene and impose sanctions on floundering institutions.
Another way to encourage prompt use of information from emerging instruments would be to tie compensation of high-level supervisors and regulators to longer-run measures of the quality of their agency’s performance in managing the costs and benefits of the safety net and financial innovation.
In addition to improving the regulators’ use of information, your administration should ensure that banks and bank holding companies make themselves more transparent to investors, creditors, and counterparties. This goal would be promoted by requiring regulators to develop metrics and indicators of risk-taking that would be published on a regular basis by the regulated institutions. The information provided by these indicators would enable market participants, including investors, creditors, and counterparties to better assess the extent of an institution’s risk-taking. In developing appropriate indicators, regulators would be required to consult with analysts and the regulated institutions. Since the indicators would cover the entire banking industry, they would permit a better understanding of the relationship between an institution’s risk posture and its profitability, thereby removing the incentive for competitors to take excessive risk.
Popularity: 7% [?]
During the 20 months that Fisher-Price spent developing the innards and software of its latest animatronic Elmo, engineers gave the project the code name Elmo Live. And sure enough, they made him more animate than ever: He moves his mouth in time with the stories he tells, shivers when he gets scared, and has a fit when he sneezes.
When they were finally able to test the doll on children, they were struck by how immediately the kids blocked out all other stimuli in the room and began interacting with Elmo. “It was as if Elmo were part of their family,” says Gina Sirard, Fisher-Price VP of marketing. “To a child, he really is alive.”
So the code name stuck, and over the past few months legions of $60 Elmo Live dolls have joined families everywhere. Some are certainly doomed to join previous Elmos in a new pastime: robotic-toy torture. YouTube is full of videos of idiots dousing Elmo with gas, setting him on fire, and laughing as his red fur turns to charcoal and he writhes in a painful dance.
I’ve seen videos of the incineration of T.M.X. Elmo (short for Tickle Me Extreme); they made me feel vaguely uncomfortable. Part of me wanted to laugh—Elmo giggled absurdly through the whole ordeal—but I also felt sick about what was going on. Why? I hardly shed a tear when the printer in Office Space got smashed to bits. Slamming my refrigerator door never leaves me feeling guilty. Yet give something a couple of eyes and the hint of lifelike abilities and suddenly some ancient region of my brain starts firing off empathy signals. And I don’t even like Elmo. How are kids who grow up with robots as companions going to handle this?
This question is starting to get debated by robot designers and toymakers. With advanced robotics becoming cheaper and more commonplace, the challenge isn’t how we learn to accept robots—but whether we should care when they’re mistreated. And if we start caring about robot ethics, might we then go one insane step further and grant them rights?
First, the science: The brain is hardwired to assign humanlike qualities to anything that somewhat resembles us. A 2003 study found that 12-month-olds would check to see what a football-shaped item was “looking at,” even though the object lacked eyes. All the researcher had to do was move the item as if it were an animal and the infants would follow its “gaze.” Adults? Same reaction.
The perennial concern about the rise of robots has been how to keep them from, well, killing us. Isaac Asimov came down from the mountaintop with his Three Laws of Robotics (to summarize: Robots shouldn’t disobey or hurt humans or themselves). But what are the rules for the humans in this relationship? As technology develops animal-like sophistication, finding the thin metallic line between what’s safe to treat as an object and what’s not will be tricky. “It’s going to be a tougher and tougher argument to say that technology doesn’t deserve the same protection as animals,” says Clifford Nass, a Stanford professor who directs a program called the Communication Between Humans and Interactive Media Lab. “One could say life is special—whatever that means. And so, either we get tougher on technology abuse or it undermines laws about abuse of animals.”
It’s already being considered overseas. In 2007, a South Korean politician declared that his country would be the first to draw up legal guidelines on how to treat robots; the UK has also looked into the area (though nothing substantial has come of it anywhere). “As our products become more aware, there are things you probably shouldn’t do to them,” says John Sosoka, CTO of Ugobe, which makes the eerily lifelike robot dinosaur Pleo (also tortured on Web video). “The point isn’t whether it’s an issue for the creature. It’s what does it do to us.”
We live in an age of anxiety—about the economy, the environment, terrorism. And now even about our toys, which are forcing us to question the boundaries of humanity and compassion. Back on Sesame Street, Elmo Live’s creators have an answer: Keep soul-searching to a minimum and recognize that you’re buying a product, pure and simple. “This is a toy,” Fisher-Price’s Sirard says. “There shouldn’t be any laws about how you use your toys.” Happy grilling, Elmo!
Source: Wired
Popularity: 13% [?]
They can use it as a marketing tool. But many execs don’t even know the micro-blogging service exists.
“Just had a cup of our Guatemala Casi Cielo … It means ‘almost heaven’ in Spanish,” a Starbucks manager wrote in a recent Twitter post.
The coffee giant is one of many U.S. companies using Twitter, the trendy micro-blogging platform, as a speedy marketing tool. “What are you doing?” is the simple question that Twitter users answer in short posts, or “Tweets,” from their computers or cellphones. Other Twitter users can respond to the posts, and discussion threads are created that can let companies monitor what customers are saying about them. Companies can also release news in Tweets. Internet marketing firm Hubspot estimates that 5,000 to 10,000 new Twitter accounts are opened each day.
Despite Twitter’s success in the U.S., the three-year-old company’s service hasn’t caught on in Europe. According to Twitter’s search tool, Twitter Scan, there is one account under Tesco, the U.K.’s largest retailer, but it has only one outside comment so far. The same goes for financial services firm HSBC, which has 18 followers but no status updates.
Most European companies haven’t even heard of Twitter, and some might think it’s a time waster. A spokeswoman for energy firm Total says that Chief Executive Christophe de Margerie has no idea what Twitter is. British Telecom says it doesn’t have a Twitter account and doesn’t plan to open one. Nestle’s communications manager says using Twitter “just never came up within the group strategy.” In general, experts say Europeans don’t latch on to new social networking technologies as quickly as Americans.
“If the E.U. business community wants to have efficient conversations with customers and partners like U.S. companies have, they will get to Twitter, sooner, faster and in greater numbers,” says Shel Israel, author of the forthcoming book Twitterville.
Loic Le Meur, founder of video-blogging company Seesmic, agrees. “If European CEOs think it is a waste of time to Tweet, it is arrogant and a wrong step in their company’s strategy,” he says. “Twitter is an efficient way to get closer to your clients.”
Le Meur moved from France to San Francisco, where Twitter is based, to start Seesmic, which has been called the video version of Twitter. “I Tweet all day,” Le Meur says. “The other day I was complaining [on Twitter] about the fact that Sprint, my cellphone company, didn’t have the new Blackberry. Ten minutes later, Sprint replied. Twitter is like a free focus group; they can monitor what clients are saying in real time.”
And that can be good news if fast responses are needed. Ford Motor used Twitter on Dec. 9 to counter allegations that it was shutting down fan Web sites with cease and desist orders. A day later, General Motors used Twitter to squelch rumors that it was shutting down its Volt electric car factory. And Home Depot and Whole Foods used Twitter during last year’s U.S. Gulf Coast hurricanes to tell people where they could get emergency generators and fresh water.
But Twitter also has its downsides. Some company accounts have been hacked. Last September, Exxon Mobil discovered that “Janet,” who is not a company employee, was posting unauthorized Tweets on behalf of the oil giant.
And according to Benoit Raphael, who runs new media information site Le Post in France, Twitter’s technology needs to improve. “Twitter’s interfaces may be too complicated for users,” he says. “Twitter still has to create tools to make it easier for mainstream people. It may be too geeky and recent to be used by businesses.”
Popularity: 10% [?]
On the heels of NBC’s decision to consolidate its studio and network operations, ABC announced Thursday it will merge ABC Entertainment and ABC Studios into a single unit, ABC Entertainment Group.
Network Chief Steve McPherson will become president of the new division, while studio head Mark Pedowitz will move into a senior advisory role focused on business, emerging media and labor issues for the Walt Disney owned company.
“The landscape of our business, and an opportunity to coalesce the creative process dictated this change in structure,” Anne Sweeney, co-chair of Disney-Media Networks and president of Disney-ABC Television Group, said in a statement. “By operating these units in a coordinated fashion, we’ll be able to present the industry with a unified, cohesive creative vision for ABC programming, which will serve us well as we move forward.”
McPherson spoke candidly about the need for sweeping changes to the current broadcast model given both the current economic climate and the general state of the industry at last week’s Television Critics Association’s semi-annual confab in Los Angeles. “The world has shifted underneath these businesses, and we really need to be incredibly diligent and bold in what we do going forward,” he said, “otherwise we’ll be left by the wayside.”
So far this season, ABC has struggled to lure the big audiences they’d enjoyed in previous years. The network, home to long-running hits like Desperate Housewives, Grey’s Anatomy and Lost, is still reeling from last year’s writers’ strike. After launching just two new shows this fall (Life on Mars andOpportunity Knocks), only one remains on the air (Mars). Worse, Knocks, a reality series from Hollywood heavyweight Ashton Kutcher, was yanked from the schedule after only three poorly rated episodes.
According to Nielsen Research, ABC’s total viewership was down 10% for the first half of the season, compared to the same period a year earlier. For viewers aged 18 to 49, a demographic advertisers pay a premium to reach, that decline was an even more pronounced 14%.
In search–and need–of a spring-time do-over, ABC heads into the latter part of the broadcast season with an ambitious slate of new series. Among the offerings: The Unusuals (a police dramedy featuring Amber Tamblyn), Castle (a Nathan Fillian police procedural) and In the Motherhood (a one-time Web comedy staring Cheryl Hines).
Popularity: 10% [?]
On the eve of Barack Obama’s inauguration as president of the United States, Wharton finance professor Richard J. Herring discussed with Knowledge@Wharton some of the advice offered to the new chief executive by the Shadow Financial Regulatory Committee, a group of economists, former regulators and lawyers, of which Herring is a co-chair.
In an open letter to Obama, the committee suggested that the government should quickly extract itself from the investments it made to rescue the financial system and devise a new regulatory framework for preventing future crises. Herring also assessed the deepening woes at Citigroup.
Knowledge@Wharton: Professor Herring, thank you for joining us today. Perhaps you could tell us just in a few short sentences what the Shadow Financial Regulatory Committee is and what it does.
Herring: It’s a group of economists, former regulators and lawyers who meet quarterly in Washington to take a look at recent regulatory initiatives, or initiatives that ought to take place, and write press statements. Usually, we’ll have interviews that are strictly off-the-record with policymakers. And then we will issue press releases on the following [day at] noon.
It’s a group that has been together for a little more than 20 years. It has had, in some cases, some very important impacts on public policy. And so it has had a long history of looking at the very kind of problem that we’re confronted with today.
Did the latest session of the Shadow Committee include briefings from the incoming administration?
Not yet. We’ve talked to some people who may be involved in the incoming administration. But typically, the briefings will be by current policymakers. They do so only on the grounds, of course, that we never repeat what they say. But it does help us keep in touch with what’s [happening] on the inside, as well as what we know from our own research and simply keeping abreast of the news.
Based on its most recent meeting, the committee has produced an open letter to President Obama about the nation’s response to the financial crisis. Have you seen anything about the Obama plan that gives cheer to the Shadow Committee?
It’s really very early to say. They obviously have made some very good choices for people who are involved. Although, even the structure of how things will be formulated is unclear. There are some doubts about who will be secretary of the Treasury. And exactly the role Paul Volker plays versus Larry Summers is not so clear, either. But Obama has certainly put together a credible team of experienced players.
One of your committee’s recommendations is that the government should move as quickly as possible to remove itself from the banking system. Why is that so important?
Because the more deeply the government gets into actually owning and controlling the banking system, the closer we may come to a system of government-allocated credit. We know, from literally hundreds of examples, that ends badly for overall long-term growth.
It may be necessary for the government to temporarily intervene. They actually have a very good legislative framework for doing that with the banks, called “bridge banks,” where they form a temporary charter. It’s usually for two years–renewable, I think, for another two years. And it gives them time to figure out the best disposition of the bank. It’s a much better way of proceeding than to have a shotgun merger over a weekend where nobody knows what exactly the banks are worth.
Moreover, that kind of approach inevitably leads to a bigger and bigger banking system. A particularly bad example of this policy was the attempt to put Citi together with Wachovia. Wachovia was bankrupt–well, it was clearly headed for insolvency. And to find Citigroup as a rescuer suggests that the regulators really didn’t know much about the true value of Citigroup, even though they have been living inside them for literally decades.
What does that say about our ability to regulate the banking industry?
I think it says that we need to rely a lot more on market discipline and a lot less on supervisory discipline. Because time and again, the supervisors have shown themselves incapable of preventing this sort of crisis. It also shows we need to re-think the fundamental regulatory framework.
Another very good example of just how hard it is to do these things in a hurry was Morgan Stanley’s attempt to sell itself to Wachovia. Morgan Stanley is widely regarded as one of the premier institutions for valuing other institutions in the world. Yet it was trying to sell itself to a bankrupt institution two weeks before it went under, which suggests that we really do not have sufficient disclosure for outsiders to make intelligent guesses about what’s going on. Although certainly the markets have had much better information about this than one would glean from either the regulatory statements or from the ratings agencies, which inevitably lag.
What was it about the regulatory framework that contributed to the current crisis?
There were obviously failures all around, not least of all in the private sector. But the government does deserve an enormous proportion of the blame, for which most people don’t really have a clear view. And it has to do with the perfectly laudable motive of creating more homeowners. But the wrong way to do that is to give greater leverage to people whose incomes are very volatile and uncertain in the first place.
If you want to make stable homeowners, then you should give them grants that can be targeted, monitored and evaluated. Congress didn’t want to do that. And the failure goes all the way back to the Johnson administration. When President Johnson wanted to have both guns and butter during the Vietnam War, he spun off Fannie Mae as a quasi-private institution and Freddie Mac was created to have some quasi-competition between the two. Their role was to enable people to leverage up more to buy houses.
Over time, they received more and more pressure to be involved in funding low-income housing. They also saw opportunities to make more money by actually directly holding mortgages. During the last five or six years, they got more and more pressure from congressional committees to be more involved in low income housing. And they negotiated a deal to satisfy that requirement by buying highly rated tranches of subprime mortgage securitizations.
They ended up with about 50% of the market. That was an enormous stimulus to demand. It meant that investment banksthat were creating these products had much stronger incentives … and I think it led to the deterioration of the credit standards all the way down the line. And of course it led to the collapse of Fannie and Freddie in the end.
Another huge failing was in 2004, when the SEC, in response to pressure from the Europeans, agreed to set up a voluntary regime in which they would be responsible for the oversight of the investment banks using Basel II-type rules, which meant they gave up their leverage requirements and based their requirements on risk-weighted assets. They judged that investment banks had very little risk attached to them. And so investment banks leveraged up.
They were usually, most of them, about 30 to one. Now, if you’re leveraged 30 to one, you’ve got to have an almost perfect portfolio; there’s no scope for error. And when you get hit with the kind of shock that happened to housing markets, which should have been foreseeable, you’re finished. Any institution that is that highly leveraged is simply doomed. We chose to talk about it as a liquidity problem and wasted an entire year creating liquidity facilities that were simply forbearance and didn’t really accomplish any of the cleaning up that has to be done.
The Shadow Committee’s report also urges the new administration to define its overall crisis management strategy. How can they do that in an environment in which the crisis has thrown so many curves at regulators already?
It’s very hard for the market to anticipate what the rules of the game are. Maybe the best example of that is the difference between the way they treated Bear Stearns and the way they treated Lehman Brothers. Bear Stearns was bailed out essentially through a shotgun marriage with JPMorgan Chase, where the regulators put in a $29 billion guarantee in the end. And it was done largely on the grounds that they feared the consequences that Bear’s collapse might have on the rest of the system. It’s very hard to argue the system was more vulnerable in March than it was in September. Bear was half the size of Lehman Brothers. It had half as big a dealer position. It had half as many assets. It was simply not nearly as big. And the market foresaw that coming, if you look at the spreads, which are the markets’ measure of how likely a bank is to default.
In about the same way, they saw a collapse at Lehman Brothers. But at Lehman Brothers, they suddenly decided that they were going to try to end the moral hazard they had created with Bear Stearns and with Fanny and Freddie to some extent by simply stepping aside and letting it go through bankruptcy. It may have been that they believed that they understood enough about Lehman Brothers, because they had been looking at it in a way they had not been able to look at Bear Stearns for a long time. It may have been they were very annoyed with the management that lost opportunities to recapitalize. But it’s also probably true that they thought they could handle the spillover consequences. They thought the spillover consequences would be in the credit default swap markets and in the repo markets. And they set up facilities to handle those.
But it turned out the really big hits were on the money market funds, which are the very lifeblood of financing corporate America because they hold commercial paper and they’re usually considered to be nearly as safe as guaranteed bank deposits and almost as safe as treasury bills. So it caused them to have to, without any planning at all, put forward a full guarantee for money market mutual funds. It’s just a very slippery slope. Moreover, the failure to deal with Lehman in an orderly way, because a bankruptcy was completely unplanned, led to a situation where they hadn’t really thought through the international consequences.
Lehman had something like 40 subsidiaries in 20 different countries. And each of these countries had a different way of dealing with insolvent institutions. It turns out in the U.K.–where a huge amount of the activity had gone, especially the prime brokerage activity–the funds of hedge funds were actually mingled with the firms’ own funds. Those may be tied up for a decade or more as the administrators try to figure out what’s going to happen. So, the hedge funds were forced into hurried sales of their other assets, which depressed markets that were already illiquid. We had a virtual meltdown of the system.
It was such an excruciating experience that the group of seven met early in October and one of the headlines out of the meeting was, “Never Another Lehman Brothers.” Now, I’m not suggesting that Lehman Brothers should necessarily have been saved. What I am suggesting is there was surely a more orderly way to deal with it. A bridge bank would have been a possibility if they had sought permission to do that earlier. But maybe even more importantly, it would have been better not to save Bear and set up the expectations that Lehman was too big.
Are there parallels in that chain of events to what’s happening with Citigroup right now?
Citigroup is the horror show of all failures because Citigroup is in nearly 100 countries, if not more. It has 2,500 majority-owned subsidiaries, and that’s not counting all of the off-balance sheet, special-purpose vehicles that have caused so much loss. It is unclear that they could even map Citi’s activities into the entities that would have to be taken through bankruptcy if they went into it. The regulators have simply permitted these institutions to adopt corporate complexity that defies resolution. The top 16 financial institutions have two-and-a-half times as many majority owned subsidiaries as the top 16 corporations. And that’s entirely due to regulation–or getting around regulation, more particularly.
So, one of the things that they could do–that regulators world-round should do–is require every single institution to have a live bankruptcy plan that gets updated every quarter, in the same spirit they have business continuity plans. Because winding them down is just as important as keeping them going. Because, as we’ve seen, if you wind them down clumsily, you can have really serious systemic impact.
The committee’s report also suggests that the government’s financial rescue efforts have created too much “moral hazard,” which occurs when investors take risks they would otherwise avoid because they think they’ll be bailed out if their investment goes bad.
The government has in virtually every case except Lehman hugely extended the problem by offering full guarantees. After the Lehman debacle, they increased deposit insurance with virtually no discussion, and more than doubled it. And they extended it even to creditors who were not even depositors. So that one source of discipline was lost.
There are multiple problems with this. One of the problems is, What’s your exit strategy? We know from literally dozens of studies of countries that have been through this before–and you know, we’ve had 138 such crises — that it’s enormously difficult to unwind these guarantees once you’ve offered them. There’s never a good time to take them away because somebody’s always depending on them. And it enormously increases the burden on supervisors because the market has no real incentive to discipline these institutions.
An interesting suggestion in the committee’s letter deals with compensation, but not for executives. The letter proposes tying the compensation of regulators and supervisors to their performance in overseeing these institutions over a number of years. How would that work and what would the impact be?
One of the problems is we don’t pay supervisors nearly well enough and so we don’t have the pool of talent we need to oversee these very, very sophisticated institutions. But having said that, there’s almost no accountability for supervisors, partly because we’re very vague on what their objectives are. Supervisors get very heavily criticized when an institution goes under, but often that’s the very best thing that could happen. Probably the most flagrant abuse that we’ve seen recently is what happened with IndyMac. IndyMac was overseen by the Office of Thrift Supervision.
IndyMac should have been subject to prompt corrective action measures; it should have been closed when its equity-to-asset ratio reached 2%. In fact, it had virtually $10 billion in losses before it was shut down. And it’s simply because the [regulators] were really trying to keep it going and were acting like social workers rather than simply implementing the law.
What’s the accountability for that? Not much. There may be some for the supervisor who allowed them to backdate some capital injections, but you really need a different kind of incentive system to make supervisors accountable for actually carrying out their responsibilities. But that involves being very clear in what their objectives are, having clear standards of measuring them and having some significant proportion of their pay, which should be higher, withheld for a long enough period so that you can tell that they performed well.
A lot of what we’ve discussed here today seems to come back to the high level of complexity in regulatory systems and financial instruments. Is part of the answer here a simpler regulatory scheme that does not create incentives for designing such complex financial products?
The market is, in some sense, doing that on its own. You’re no longer going to be able to sell CDOs [collateralized debt obligations] or CDO squareds or CDO cubes. SIVs are dead. There is an aversion to complexity at this point that exceeds anything the regulators were likely to have done, with good reason, because it simply became unclear. I think an enormous challenge is bringing securitization back. There is some level of securitization that is enormously beneficial. But it’s the very transparent kind, where you can really easily judge what something’s worth. I hope that gets restored, but at this point, that’s destroyed as well.
There are going to be enormous calls for simplifying the structure of the U.S. regulatory system. There is no denying that we have the most hideously complex, uncoordinated system in the world. However, it’s very hard to argue that it had a major role to play in our failure, because the streamlined system of single regulators and integrated regulators which now dominate in 36 other countries really didn’t do a better job.
The FSA in London that is widely admired really screwed up in a significant way. Maybe the best example is Northern Rock, which was one of the first fatalities of the credit crunch. Its primary regulator, the FSA, permitted it to start Basel II, the new capital approach, using the advanced internal models approach, which reduced its capital requirement by nearly 30%. And they were permitted to pay that out as dividends to their shareholders something like six weeks before they collapsed. So there was utterly no sense of what the real risk exposures were or how they should be handled.
Moreover, they really weren’t sharing information with the Bank of England or the treasury, which both have to be involved. And they tried to manage the crisis by committee, which lead to a series of market unsettling reversals and embarrassing 180-degree turns in policy statements that simply made things worse.
There will be a lot of attention to structure, and we certainly could think of better structures for the U.S. It’s unlikely to happen, but this may be our best opportunity ever to clean up what is something that sort of grew historically and randomly. But there are so many entrenched interests in keeping the current structure alive, not least of all in Congress where various committees have oversight over various pieces of the system. And the regulatees are enormous sources of funding for the campaigns of these members of Congress.
So I think it’s going to be very tough going–even if the administration can make a very lucid argument, as I’m sure they can–for making these simpler, more straightforward structures that would be more comprehensive.
Source: Knowledge@Wharton
Popularity: 8% [?]
WASHINGTON – After the flub heard around the world, PresidentBarack Obama has taken the oath of office. Again. Chief Justice John Roberts delivered the oath to Obama on Wednesday night at the White House — a rare do-over. The surprise moment came in response to Tuesday’s much-noticed stumble, when Roberts got the words of the oath a little off, which prompted Obama to do so, too.
An Oath do-over
Don’t worry, the White House says: Obama has still been president since noon on Inauguration Day.
Nevertheless, Obama and Roberts went through the drill again out of what White House counsel Greg Craig called “an abundance of caution.”
This time, the scene was the White House Map Room in front of a small group of reporters, not the Capitol platform before the whole watching world.
“We decided that because it was so much fun …,” Obama joked to reporters who followed press secretary Robert Gibbs into the room. No TV camera crews or news photographers were allowed in. A few of Obama’s closest aides were there, along with a White House photographer.
Roberts put on his black robe.
“Are you ready to take the oath?” he said.
“Yes, I am,” Obama said. “And we’re going to do it very slowly.”
Roberts then led Obama through the oath without any missteps.
The president said he did not have his Bible with him, but that the oath was binding anyway.
The original, bungled version on Tuesday caught observers by surprise and then got replayed on cable news shows.
It happened when Obama interrupted Roberts midway through the opening line, in which the president repeats his name and solemnly swears.
Next in the oath is the phrase ” … that I will faithfully execute the office of president of the United States.” But Roberts rearranged the order of the words, not saying “faithfully” until after “president of the United States.”
That appeared to throw Obama off. He stopped abruptly at the word “execute.”
Recognizing something was off, Roberts then repeated the phrase, putting “faithfully” in the right place but without repeating “execute.”
But Obama then repeated Roberts’ original, incorrect version: “… the office of president of the United States faithfully.”
Craig, the White House lawyer, said in a statement Wednesday evening: “We believe the oath of office was administered effectively and that the president was sworn in appropriately yesterday. Yet the oath appears in the Constitution itself. And out of the abundance of caution, because there was one word out of sequence,Chief Justice John Roberts will administer the oath a second time.”
The Constitution is clear about the exact wording of the oath and as a result, some constitutional experts have said that a do-over probably wasn’t necessary but also couldn’t hurt. Two other previous presidents have repeated the oath because of similar issues, Calvin Coolidge and Chester A. Arthur.
Source: Associated Press writer Phil Elliott
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The banking crisis took an ugly turn for the worse Tuesday.
Shares of major banks plunged as investors feared that Washington’s bailout efforts were stalling, potentially forcing President Barack Obama’s newly installed government to take far more dramatic steps to prop up the U.S. financial system.
No major bank was spared the carnage. Bank of America’s shares plunged 29 percent; Citigroup’s 20 percent. State Street Corp., which reported sharply lower earnings, saw its shares plummet 59 percent.
“The financial stocks got murdered,” said Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago. “They were basically cut in half.”
At the core of the free fall in bank shares were concerns that U.S. officials would need to overhaul their program of shoring up financial institutions, a day after Britain announced its second financial bailout package for its own struggling banks in three months.
Investors are also becoming disheartened that banks such as State Street are continuing to report sharply worse results despite all the bailout efforts to date. The broader economic downturn is only compounding the pain by sapping demand for loans.
The country’s economic problems were already high on Obama’s priority list, but the breakdown of confidence in the country’s banks, occurring on the same day of his inauguration, gave the matter fresh urgency. Attention will remain focused on the banking system on Wednesday as Obama’s choice for Treasury Secretary, Timothy Geithner, begins Senate confirmation hearings.
“The honeymoon is already over for the new administration with the way these stocks were beaten down,” said Edward Yardeni, an independent market analyst. “This is not a vote of confidence.”
The market’s faith in the outgoing Bush administration’s $700 billion bailout effort was already waning, with critics in Congress and on Wall Street saying there was little to show so far despite the massive outlays of taxpayer money. The government had already veered from its original goal of buying up toxic assets from banks, choosing instead to make direct injections of capital into banks, with few strings attached.
“The fear is that the government will come first and shareholders will come last,” Joe Battipaglia, market strategist for the private client group at Stifel, Nicolaus & Co. “It’s a de facto nationalization because the government has run out of choices.”
Many experts believe Obama’s administration will have little choice but to pump more money into the banking sector or create an entity to buy banks’ soured assets such as subprime mortgages so they’ll start lending again.
Both moves would signal a dramatic increase in the government’s involvement in the banking sector, possibly threatening shareholders whose holdings could be wiped out in the event of a government takeover.
Evidence that the banking crisis is worsening overseas also rattled investors. On Monday, the Royal Bank of Scotland forecast a loss of $41.3 billion in 2008, leading the British government to increase its stake in RBS to nearly 70 percent and launch a new round of bailouts for the country’s banking industry.
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