This is an important article for anyone who has student loan debt. The more your debt, and lower your imcome, the more important the article.

The new repayment option — the Income Based Repayment (IBR) plan — went into effect on July 1, 2009. It limits what borrowers have to pay to “15% of the difference between their gross income and 150% of federal poverty guidelines.”

What exactly that means, is up to your lender to determine, as I understand it. But it does appear that payments can be as low as $0.00. That’s bad, because interest accrues and is added to the outstanding balance, but it’s good because after borrowers “make payments on loans” for 25 years, the balance is forgiven.  (But what does “make payments on loans” mean?  What if those “payments” are $0.00?)

Bottom line is that everyone who feels burdened by their student loans should read this article, and its links, and figure out if this new plan is something for them. If it is, take action.

Problem is, how to figure all this stuff out? It may be so important, and complicated, that some people might want/need professional advice. That’s actually something I’ve long been interested in, but it’s been low on the priority list compared with my other projects. I would love to hear from any of you with the relevant knowledge, experience, and drive to setup a web- and phone-based business providing student loan consulting (in partnership with me). I’ve already got a good domain name: StudentLoanConsulting.com. I guess I could always sell or license that name as well. If you’re interested in any of this, just contact me.

Now on to the article:

New Plan Ties Reduced College Loan Payments to Income
By Jonathan Glater
2009-6-29
New York Times

For the first time in years, there is good news for college students who borrow to pay for their education.

Starting Wednesday, the federal Education Department will begin offering a repayment plan that lets graduates reduce their loan payments, based on their income.

“We know today’s borrowers are concerned about their ability to repay student loans in the current economic environment,” Arne Duncan, the education secretary, said in a statement. “This new plan addresses the issue head-on by giving them the option of a reduced monthly payment tied to their annual income.”

Also on Wednesday, the interest rate on new federal Stafford loans, the most widely used federally guaranteed student loan, will drop to 5.6 percent, from 6 percent. By 2012, the rate will fall to 3.4 percent, under a schedule mandated by Congress.

The changes come as student borrowers face a difficult job environment and after many families have found it harder or impossible to use home equity loans to pay for college. Since the credit crisis, it has also become more difficult and more costly to obtain private student loans, which are not guaranteed by the government and which typically carry variable interest rates determined by borrowers’ credit histories.

“These benefits are guaranteed, no matter what happens in our economy, and are kicking in at exactly the right time for millions of Americans,” said Representative George Miller, Democrat of California and chairman of the House education committee.

While the interest rate cut applies to new loans, the new repayment option is available to borrowers who took out federal loans or who used a federal consolidation loan to combine their higher-education debts.

The extended payment program, called “income-based repayment,” limits what borrowers have to pay to 15 percent of the difference between their gross income and 150 percent of federal poverty guidelines. After borrowers make payments on loans for 25 years, the balance is forgiven. (The Education Department already offered an “income-contingent” repayment plan, which was similar, but less generous.)

“These programs are such an enormous victory,” said Christine Lindstrom, director of the higher-education access program at U.S. PIRG, the consumer advocacy group. “It enables all borrowers to be able to face their life circumstances and know there is some flexibility and responsiveness based on what life throws their way.”

To help borrowers understand the program, the Education Department has set up a Web site with a calculator to determine monthly payments based on income and family size.

The extended payment plan is intended to work with another program that forgives federal loans taken out by people working in public interest jobs. If borrowers make payments under the income-based plan, the balance on their loans is forgiven after 10 years.

There is a catch, though. To participate in the program, borrowers must shift their loans into the federal Direct Loan program, in which the government extends credit directly. The forgiveness is not available for loans made by banks or other loan companies, like Citigroup or Sallie Mae.

The definition (PDF) of public service under the forgiveness program is broad. Jobs in government, public schools or colleges, nonprofit organizations, public interest law, early childhood education, public health or public libraries all could qualify, according to the Education Department.

The forgiveness benefit could lead to even greater interest in public service jobs, which are already drawing more applicants. For example, in the 2008-9 academic year, more people than ever applied to Teach for America — 40 percent more than the year before, said Kerci Marcello Stroud, a spokeswoman.

The earliest anyone working in public service could see any benefit from the forgiveness program is 2017, because the program began in 2007. So someone who started teaching in 2005, for example, would not get credit toward the 10-year period for working in 2005 and 2006.

Due to the length of the program, people interested in participating will have to be careful to document their public interest employment and to make sure they have the right kind of loans. Neither of the new programs help with repayment of private loans made by banks or other lenders.

This article has been revised to reflect the following correction:

Correction: July 1, 2009
An article on Tuesday about a new student loan repayment plan by the Education Department that lets graduates reduce their loan payments based on their income misstated the current interest rate on federal subsidized Stafford loans. It is 6 percent — not 6.8 percent, the rate for unsubsidized loans.

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(click to watch the video)

Just time for a quick post to mark the end of another great Reboot. This year’s theme was Action (last year was Free).

I gotta keep this post short, but below are some interesting links and my pics.  Check back over time, as new and updated content will be posted.

• Andrew Turner: OpenStreetMapping Party!
• Bruce Sterling: Closing keynote
• Leisa Reichelt: Bare Naked (open source) Design
• David Weinberger: Cyberutopianism + Activism
• Flemming Funch: The art of not-doing: Being in sync with what wants to happen (link to slides)
• Flickr: reboot11 tag
• HashTags.org: #reboot11 hashtag
• Heidi Harman: User-driven Innovation – a means for Social Innovation
• Martin Källström: Reboot11 participants jumping in slow-motion
• Niels Hartvig: How to start an open source project… with or without code
• Sebastian Deterding: Persuasive Design
• Tor Nørretranders: Evening talk
• Vimeo: My Reboot photo/music/video
• Vimeo: reboot11 tag
• YouTube: reboot11 tag

Regarding the BuzzPal t-shirt promo mentioned here, we gave away two t-shirts at Reboot (via this tweet) and are giving away one more right now to someone on the sign-up list. The winner is Jesse V, whom we are emailing now. Jesse has one week to claim the t-shirt, otherwise we’ll draw a different winner from the list. We’ll do more promos in the future, too, of course.

2009-7-2 UPDATE: @jmvanderpol just claimed his free BuzzPal t-shirt! Congrats, Jesse! We’ll be giving away more freebies soon. Just follow @buzzpal and signup here: http://bit.ly/dYtNN.

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Unity of Greater New Orleans is a group of amazing people working to end homelessness (in New Orleans).

We all want to help reduce homelessness everywhere, so this is just one charity of interest in that department, but it’s a good one.  We have to help each other, one person at a time.

Read the following article and let me know what you think: New Orleans Times-Picayune: “Squatters hidden in N.O.’s abandoned houses often need more help than other homeless people”: http://bit.ly/TT3V1 (Google Doc) or http://bit.ly/gh72s (PDF).

So did you read that article? That’s why I just made a donation to them through the Network For Good. Here’s the link to Unity of Greater New Orleans’s donation page in case you’re inspired, too. Either way, maybe re-share this post? Thanks.

PS: Pics and video from my latest trip to New Orleans, in April 2009.

Barack Obama:
Change will not come if we wait for some other person or some other time. We are the ones we’ve been waiting for. We are the change that we seek.

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A year and a half ago, Nouriel Roubini gave us his recipe for financial meltdown, The Twelve Steps to Financial Disaster, each of which unfolded in sequence. Now Nassim Nicholas Taleb gives us his Ten Steps for a Black Swan-proof World (below).

Roubini’s steps were the inevitable outcome of a flawed system. Sadly, perhaps, Taleb’s steps are not inevitable.

Additional reading:

• Selected Roubini articles on this blog
• Nouriel Roubini’s Global EconoMonitor blog
• Nassim Nicholas Taleb’s Fooled by Randomness blog

Now on to the article:

Ten Principles for a Black Swan-proof World
By Nassim Nicholas Taleb
2009-4-7
Financial Times

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable (on Amazon.com: book or CD).

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Just time for a quick market update (here’s my prior update) and explanation of my May 6th tweet (the time stamp says 9:46 PM because I’m in Sweden, six hours ahead of USA ET, where it was 3:46 PM):

Just closed out all stock positions (long) I put on in the beginning of March: http://bit.ly/3299rF. Biggest gain: RIMM 89%; loss INTU -8%.

Comments on the chart below:

1. Monday (#1 on the chart) saw a gap up and new high for the rally on low volume.  That’s the first red flag. Tuesday formed a doji candlestick, which can sometimes be a warning after a long move (such as this monster rally of the March lows).
2. Wednesday (#2 on the chart), at the end of the day, when the entire daily candlestick and volume was almost completed, is when I sold the positions I put on March 17th (see tweet).  Wednesday’s action entailed a gap up at the open, then a new high for the rally, then an intra-day reversal to close virtually unchanged from the day before.  This occurred on high volume, which means it was churning.  Also the candlestick formation was a hanging man.  All of this was enough for me to cash out.
3. Thursday (#3 on the chart) was a nasty intra-day reversal.  The NASDAQ closed down 2.5%, as did other major indexes, some more, some less, but still suffering intra-day reversals on higher volume. It was the first major distribution day of the rally, and was likely confirmation that the 2-month rally is over (or at least due for a pause). Ideally (for longs), the market just rests for a few weeks while volume remains light, allowing stocks setup new (tight) bases.

Note: None if this is a prediction of what will happen next week or at any time after.  It’s just a record of what I was thinking and doing.  In a nutshell, the “patient” (the market) was not looking healthy, so I bailed.  Also, now that I’m back in Sweden, I need to focus on getting our apartment unpacked, cleaned, and organized after the kitchen and bathroom renovation).  Plus I need to get back cranking on BuzzPal, which I am doing!

Bonus Chart:

Here’s a weekly chart, showing the potential new bull market I discussed (and compared with the prior bull market) here.  After the March low, we had the monster rally, which printed eight consecutive up weeks.  This week we had the intra-week reversal, the first of the rally.  The reversal came on higher volume (but not the highest weekly volume of the rally).  There you have it!

Roubini’s Take (from a few weeks ago):

End of Economic Gloom? Not as Early as You Wish

EXCERPT:

The stock market’s latest ‘dead cat bounce’ may last a while longer, but three factors will, in due course, lead it to turn south again.

First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects.

Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low.

Third, financial shocks will be worse than expected.

[Read the entire article here.]

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A long, but interesting and important article.

The Quiet Coup
By Simon Johnson
2009-05
The Atlantic

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

One thing you learn rather quickly when working at the International Monetary Fund is that…

…no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Click the chart above for a larger view

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths

To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

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UPDATE: Here’s a master page of New Orleans pics and videos: www.buzzpal.com/no.

Here’s the first batch of pics from my 9-day road trip down to Pearl River, Mississippi, and New Orleans, Louisiana.

Why/how’d I go on this trip?

To help my friend Alan move all his stuff down to his and his wife Amy’s organic blueberry farm, Pearl River Blues. Plus I absolutely love great road trips, and what could be better, especially if you love music, than a road trip to Mississippi and New Orleans, the birthplace of jazz, funk, and blues?

This first set of pics starts out at our old building in Adams Morgan, where I met Alan in 1994, when I moved in (he moved in a few years earlier).

Helping carry his stuff down three flights of stairs and into the truck were Alan, Kevin, Marc, Philip, and me. Max was in charge of beer, pizza, and truck packing. I think it took about five hours, at a medium pace.

After getting everything packed, we took showers and Alan said his goodbyes to his home of 20+ years and his life as a native Washingtonian. Then Alan and I hit the road, driving a couple hours to get the truck full of goodies out of the hood. We spent our first night (Saturday, March 28th) at Richard and Irene’s summer house, near Old Rag, Virginia.

Sunday morning we set off early and drove down to stay with Alan’s high school friend, Barbara, and her husband and kids in Huntsville, Alabama, home of NASA’s Space & Rocket Center. (Sorry, no pics of our stop in Huntsville.)

Monday was an easy drive to Pearl River, Mississippi, where we were greeted by Amy, Cirillo, four dogs, two cats, 80 chickens, and one (tired) rooster.

Amy made us an amazing lunch/dinner of pork chops and gravy with a side of green bean salad with bacon and olive oil (fresh bread and homemade salsa, too). After lunch, we took power naps and then Alan and I got to work unpacking the truck while Amy and Cirillo did some farm work.

Tuesday, after Cirillo’s delicious breakfast of huevos rancheros (fresh eggs from the free-range chickens) and homemade salsa (Mexican-style), we hit the road for our first day/night trip into New Orleans, which is about an hour and a half southwest of the farm. On the way in, Amy took us on a guided Katrina tour (Amy is from New Orleans). Pictures below.

Next stop was Central Grocery for a Muffuletta, stuffed artichoke, Barq’s (root beer), and Zapp’s Cajun Crawtators (potato chips), which we ate on a bench in Jackson Square Park. Yum!

After that was walking around the French Quarter, stopping off at the Louisiana Music Factory, and then meeting up with Amy’s cousin, Caroline, at the Ugly Dog Saloon and BBQ joint. Also hangin’ that night were Pittsburgh John and Mr. Andy.

Before heading back to the farm for the night, we stopped off at Cafe Du Monde for latte’s and beignets. I think we made it home at 3:30 and spent the next 30 minutes on the porch sipping Hornitos and going through the Offbeat magazine and other papers we scored to plan our music for our upcoming nights.

BTW, you still have time to get tickets and get down to Jazz Fest later this month and first week of April. I’ve only been once, but hope to go back again next year with Susanne and some of my original Jazz Fest crew, John and Steveo from my Georgetown MBA dayz (Jumbo Jet, guys. Good times. Are you with me?). For streaming music: WWOZ’s website.

The rest of my pics, and some videos, are coming in the next few days or so (check back). Before we get to them, though, I want to share a touching, and hopefully motivating article, plus my personal thanks and comments to Alan, Amy, Cirillo, April, Carolyn, Mr. Andy, Chris, Sam, and all the other people I met and hung out with on this adventure.

First, the article, which I found on the front page of The Times-Picayune on my flight back from New Orleans Monday morning:

Squatters hidden in N.O.’s abandoned houses often need more help than other homeless people [PDF]

Why do more people not care? What can we do? We can start by standing up for others. I don’t mean our friends and family, or the people who can do anything for our careers or desires, but for the weakest and most vulnerable among us. Also by communicating with our elected officials, and by taking it to the streets (hey, I’m from DC and attended my first protest/rally in 1984). And, of course, by giving what we can to whom we can, even if it’s just a smile or acknowledgment.

Next, my personal comments (originally in an email to Alan):

Thanks again for everything and apologies for almost certainly catalyzing, encouraging, and over-extending, so much back-to-back-to-back Nawlins action and otherwise delaying the settling in of your your settling-in process. For what it’s worth, the entire trip was a super-duper, over-the-top blockbuster for me. I mean crazy great! From the drive down, to the farm, to Nawlins and all moments, sites, smells (except the occasional Bourbon St stank), tastes, sounds, and more.

I made a lot of friends as I wandered the streets on my own this weekend, many of whom you will see photographed and videoed (once I get things processed and posted). This ranges from the pair of guys at the bar where I had lunch (one from DC, one from Jacksonville), to the reluctant forced-to-dress-like-a-pirate-event-flier-hander-outer I met at Jackson Square Park, to the pair of buxom pirates we chatted with, to my two drinkin’- and jammin’-buddy girl friends (from Jacksonville) I partied with at Cafe Negril (check out the accordon player who was there), to my Acme oyster-eattin’ buddy, who happened to be from Columbia Heights, Washington, DC, to the four Nawlins natives (attorneys) who bought us many drinks and some tacos from the taco truck on Frenchmen Street Saturday night, to the best breakdance-troupe I’ve ever seen (and I’ve seen a few), to the tween trumpeter who rocked it with the Treme Brass Band, to the tromboner and brass band who had people dancing in the streets, to the just-married couple who popped out of the cathedral just as a happened by (pics coming), to the horse who poked his head into the bar to listen to the music, to the Rock & Bowlers, to the keyboardist at Maple Leaf, and the…. it goes on and on. Yes, I was up ’till 4:00 AM a few nights and close to it a number of others (power naps are the key). I cannot believe so much fun was sandwiched into such a short time. Thank you!

You, Amy, Cirillo, and April made it all possible. You know I am a minimalist as far as stuff goes, that’s because I am an “experience guy,” specifically a “sharing experiences” guy. We did that. You guys did that. Thank you, thank you, thank you (that’s one for each of you, Amy, and Cirillo) and thanks to April, Caroline, right, and everyone else.

Special mention to Mr. Andy, who is living proof that anyone can change their lives dramatically, if they’re willing to (it’s a choice) escape the known, free their minds, free themselves, and launch into the unknown, to where our dreams live. Follow the white rabbit.

Now, finally, on to the pics

On the phone to Susanne, in Sweden

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Just time for a quick follow up to my March 11th blog, which nailed the March 10th low. Since then, we’ve had multiple follow-through days, however volume has been suspiciously low, which could, actually, be interpreted bullishly (in a “double bluff” kind of way, to make a poker analogy).

Since the follow through last week, I’ve accumulated small positions in six stocks (see my March 18th tweet).

As shown above, during the first week of March 2009, we retested and undercut the November 2008 panic lows.  In a minute, I’ll show you the chart covering the 2002/2003 low.

Remember those fall 2008 lows?!  Credit spreads exploding, “Blue Chips” imploding, option volatility shooting the moon, all the while my man Nouriel Roubini dancing a jig in the end zone and coming into view of the trembling herd of CNBC-loving sheeple, as his Twelve Steps to Financial Meltdown scenario came true.  I hope you were paying attention, because what you witnessed was a rare event, a panic combined with a slow-motion capitulation, as a I blogged about and documented as much as I could: Lots of great images and comments here and here, and this one even saw respected VC, blogger, and twitterer, Fred Wilson drop by to comment.  Wow!  Crazy dayz.  It’s really important to soak those kinds of experiences in, they’re invaluable.  Same thing for the reverse, the exuberant peaks, such as in winter/spring 1999/2000 with tech stocks and 2004, when the 2nd-derivative of price housing price change was peaking — and I sold my residence and started selling my Montana real estate.

Anyway, this possible “fall low, then spring retest” bottom reminds me of  the 2002/2003 bear-market low (see chart, bel0w), which followed a similar sequence, except most stocks and indexes did not undercut the fall lows on the spring retest (they did this time).

The question now is: Was the March 2008 low “the” bear market low, or just the launching pad for bear-market rally #2? Seems about 50/50 to me, but like I said last fall, most bear markets last longer than this one, but most aren’t this steep, either.

Also in that article is this chart, which shows the duration of a set of economic slowdowns. In the US, the recession officially started in December 2007 and was “announced by the NBER in December 2008 (see my Dec. ‘07 blog about private fixed investment and how it syncs with recessions and foreshadows the NBER).  If it’s a 2-year recession, it will end at the end of 2009.  If that’s the case, and if the forward-looking stock market does what it’s supposed to do (look forward 6-9 months or so), a spring 2009 bottom make sense.  If, however, an L-shaped recession, it might not end until 2010+, which would mean, “Buckle your seatbelt, Dorothy, ’cause Kansas is going bye-bye.”

One more point on the prior bear market: As shown and discussed last fall (bottom of this blog), the prior bear market had two rallies that showed on a quarterly chart.  We’ve only had one so far.  Could March 10th have been the start of another one.  Highly possible, but won’t know for sure a while.

What did I do?  I legged in last Tuesday, going from 100% cash to 12% stocks, then 14% stocks this morning.  Kind of cautious, I know, which actually suggests (in a non-statistically-significant way) that there’s more room to run (because many/most other people also have — too much? — dry powder).  On the other hand, we’re up 23% in less than two weeks, and we’re nearing the 200-day moving average from below, so some profit-taking is in the offing.  Cheers!

News of the day:

“U.S. stocks rallied, capping the market’s steepest two-week gain since 1938.”  More here, including stuff on the Treasury’s Public-Private Investment Program (PPIP): Bloomberg: “U.S. Stocks Jump, Capping S&P 500’s Best 10-Day Gain Since 1938.”

BONUS VIDEOS!

• Jon Stewart Bashes CNBC and Rick Santelli
• Jon Stewart vs. Jim Cramer on The Daily Show Face 2 Face
  
• Jim Cramer On “Daily Show”: Full Unedited, Uncensored Video

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Just a quick post to mark the first day of a new rally attempt, lead by financials, lead by Citigroup (NYSE: C). Look for follow-through (or failure) next week. I am slightly exposed to this rally, but not “all in,” especially with me living out of a suitcase for the past month (and for another two months). Cheers!

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Not sure who wrote this (if you know, please put the credit in the comments), but I like it. Received it today from a friend in London.

Related

• CDO Fantasy (to the tune of Bohemian Rhapsody)
• Chuck Norris on the Credit Crisis
• The Sub-Prime Mess (PowerPoint download)

“The Financial Crisis in Terms I Can Understand”

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers – most of whom are unemployed alcoholics – to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into Heidi’s bar.

Taking advantage of her customers’ freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi’s borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS.

These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager of the bank (subsequently fired, of course, due his negativity) decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi’s bar.

However, they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

The suppliers of Heidi’s bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy; her beer supplier is taken over by a competitor.

The bank is saved by the government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on non-drinkers.

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Rob and Hugo

Fourteen months have gone by since I wrote the following letter, on December 21, 2008, the day after my wife Susanne’s godfather, Hugo, died, at his home in Gothenburg, Sweden.

I’ve wanted to share it for a long time as a memorial to Hugo and to remind myself, and maybe help others remind themselves, that life is beautiful, that we need to cherish it, be kind, pay it forward, live in the present, and generally try to do no harm and leave this earth better than we found it.

The reason I publish this letter today is two fold:

1) Yesterday, sitting in my parents warm home here on the Eastern Shore of Maryland, working on my MacBook, twittering away on Twhirl, I saw a tweet from Alex Hoye — this tweet, which no longer exists (screenshot of his tweet and my reply below).

I don’t know Rob, and barely, if at all, know Alex (through last year’s Seedcamp week in London) but I saw this tweet in a sea of updates and I knew a life was at risk.  Today I learned that Rob did not make it: TechCrunch UK and TechCrunch (with screenshots of all the tweets).  I send my condolences and support to Rob’s friends and family.

2) Today I was emailing with a new friend, Evan, about adversity.  I will leave out the details of that conversation, only to say that out of adversity can come strength, depending on many factors, possibly the most important of which is perspective and choice.  Evan and I know this first hand, as I’m sure do many/most of you.

For those two reasons, I post my letter:

Susanne’s godfather, Hugo…

He passed away Thursday afternoon. He was 85. He died at home, in the building next door to us, with loved ones by his side. We spent the entire afternoon and into the evening with Kirsten, Hugo’s wife, Birgitta, Susanne’s mother, and Claes, Kirsten’s nephew (he’s 10 years older than me), at Kirsten and Hugo’s apartment, with Hugo in his bed, where he died.

This may sound strange, or it may not, but it was actually quite a beautiful afternoon, I mean of course with many tears, but also with lots of wonderful stories.

The various Swedish doctors, nurses, and others came through, first to write-up the cause of death (kidney failure) and then to wash Hugo and set him up nicely in his bed, with a candle by his side. They then left, telling us to call when we were ready and they would come and get Hugo.

So we had coffee and visited with each other in the various rooms of Hugo’s and Kirsten’s apartment, which is nicely decorated, with antiques and original drawing and paintings, some made by a famous relative of theirs.

We circulated through the living room, which had been made into Hugo’s bedroom since he moved home from the hospital, Kirsten’s bedroom, where we had our coffee and told stories, and the kitchen, where we had some sandwiches and cookies. Individually and together, we periodically visited with Hugo. And then, before it got too late, Birgitta called for them to come for Hugo.

Forty minutes later, two very nice and well dressed men came, Nikolas (the junior) and Johan (the senior). They quietly, and with great and visible respect, setup their rolling stretcher, prepared Hugo in his sheet and carefully slid him onto the stretcher. Then they carefully wrapped the sheet around him, buckled him in, and gently slide a pillow under his head. They then asked if we wanted Hugo to have anything, such as a flower. We gave Johan a piece of Hugo’s favorite candy (“Lala” as Hugo and Kirsten called it) for one hand and a flower for the other, which he carefully and gently placed into Hugo’s hands. Then they closed the sheet and placed a black velvet cover over the stretcher, that was held in place at its four corners and pulled taught, so it looked like a very nice and dignified temporary casket. They then slowly and carefully rolled him away.

We visited with Kirsten some more. Then Claes left, then Birgitta went home. Susanne and I stayed. A little while later, Birgitta came back to spend the night with Kirsten and Susanne and I went home.

All in all, I don’t think anyone could have asked for anything nicer.

Hugo will be buried in the family grave in Jönköping. His funeral will, hopefully, happen at the church where Susanne and I were married. The priest will, hopefully, be Åsa, the woman who married Susanne and I. Åsa was also the one who officiated last year at Susanne’s grandmother’s (Astrid), funeral (she was 95).

You could say that Hugo got to live a whole second life for free after WWII, when his ship was attacked and sunk by Germans. Many people died in that attack, but Hugo was saved, pulled unconscious from flaming water, with scarring burns over much of his body. He could have died then, but he didn’t. He went on to do many things, including meeting and marrying Kirsten and becoming Susanne’s godfather, Santa Claus, father figure, playmate, teacher, discipliner, her everything… he was THE man in Susanne’s life. And they are both very lucky for that. And I am thankful for that.

It has me crying writing this note, but crying because it touches me again to write this… not because it makes me sad, but because it makes me remember again that we are all so lucky and life is so beautiful and precious. Thank you is all I want to say… to you, to Susanne, to my parents, to everyone who shares and makes life together.

With much love,
Chris and Susanne

Snow Falling on Dog

Today at my parents’ house in Cambridge, Maryland, USA. Looks pretty, but the snow is wet, heavy, nasty!

BTW, for those of you who don’t know Izzie, she is my parents’ dog, a 9-year-old Doberman. She is extremely sweet. Here’s a pic I took of here a few years back.

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Just time for a quickie:

1. NYT: Bailout Plan: $2.5 Trillion and a Strong U.S. Hand
2. NYT Graphic: The Government’s $8.8 Trillion Bailout Tab
3. Nouriel Roubini: Treasury’s Financial Stability Plan: Will It Work?
4. Nouriel Roubini: It Is Time to Nationalize Insolvent Banking Systems
5. Video and My Comments: Obama and Henrietta Hughes at Town Hall Meeting

UPDATE: Two additional articles:

1. NYT: Stopping a Financial Crisis, the Swedish Way
   (September 2008)
2. Matthew Richardson and Nouriel Roubini: Nationalize the Banks! We’re all Swedes Now (current)

Henrietta Hughes

I’ll start with number four, which came up today when a friend told me she just got back from a business trip to Florida. That triggered me to recount what I saw and heard the night before, as I watched Obama at what I think was his first-ever “town hall” meeting as President, specifically his interaction with Henrietta Hughes.

Instead of just recounting the story, however, I decided to check YouTube for the video.  This is the first one I found, so I sent left a comment (see below) and sent it through.  NOTE: This video from ABC News is much better than the YouTube one.  The only reason I’d say look at the YouTube one is to see some of the comments left there, WTF?!

My comment on YouTube and to my friend was this:

• I don’t understand why we accept this.
• Why we have money to run around the world forcing our ideas on people, bullying them, bombing them, killing them.
• Why a living, breathing human is worth less outside of America than a stem cell is inside America.
• Why we have money to bail out the richest people and companies, over and over again.
• Yet not enough to help people like this lady and her family.
• And not enough so that everyone here has health care, among other things.
• It doesn’t make sense.
• Why is it “me, me, me” instead of “we”?

NYT: Treasury’s Financial Stability Plan: Will It Work?

I’ll just put a link in here and let you read it on your own.  As usual with the New York Times, there are some excellent multimedia presentations, including this one, which adds up total U.S. government committments to date.  It’s a whopping $8.8 trillion dollars.  As you can see in the graphic I published in this September 2008 blog, to put it in perspective, $8.8 trillion is larger than all economies in the world except for the USA, which is (or was) almost a $14 trillion economy.  Yeah, “wow” is right.

Nouriel Roubini: Treasury’s Financial Stability Plan: Will It Work?

I’ll post the full text of this Roubini article.  You can find lots more by him on his blog, including the one I linked to in the intro: It Is Time to Nationalize Insolvent Banking Systems:

1. recapitalization together with  the purchase by a government “bad bank” of the toxic assets;
2. recapitalization together with government guarantees – after a first loss by the banks – of the toxic assets;
3. private purchase of toxic assets with a government guarantee and/or – semi-equivalently – provision of public capital to set up a public-private bad bank where private investors participate in the purchase of such assets (something similar to the US government plan presented by Tim Geithner today for a Public-Private Investment Fund);
4. outright government takeover (call it nationalization or “receivership” if you don’t like the dirty N-word) of insolvent banks to be cleaned after takeover and then resold to the private sector.

See here on my blog for a articles and comments related to Roubini (going back for years).  Now on to the “Will It Work” article:

On February 10 Treasury Secretary Timothy Geithner presented the administration’s Financial Stability Plan to deal with the financial system’s toxic asset overhang and ease, if not reverse, the ongoing decline in bank lending to households and corporations. Out of the three broad options available -including nationalization, ‘good / bad bank’, backstop guarantee on ring-fenced toxic assets- the administration plan offers elements of all three.

The first program involves a mandatory ‘stress test’ for all banks with $100bn-plus assets which should also shed some clarity on the individual banks exposures and valuations of toxic assets. The Treasury’s Capital Assistance Program stands ready with preferred shares / warrants injections where needed, only this time with clear lending requirements and strict limits on dividends, stock repurchases and acquisitions next to a $500,000 compensation cap. Any capital investments made by Treasury under the CAP will be placed in the Financial Stability Trust. However, it is still unclear what the options are for institutions that are severely undercapitalized or that fail to attract public capital on a recurring basis (see e.g. Bank of America, Citigroup after the 2nd bailout.) The program aims at ensuring full transparency disclosing all relevant information on capital recipients at www.FinancialStability.gov.

The second program, the Public-Private Investment Fund (PPP), aims at setting up a new lending/guarantee facility by leveraging an initial private capital commitment with government funds to an initial scale of up to $500bn (can be expanded to max. $1 trillion.) The aim is to involve private capital on a large scale that sits currently on the sidelines while also allowing private market forces to determine the price for currently troubled and illiquid assets.

A similar experiment was tried before with the private sector sponsored M-LEC vehicle that ultimately proved unviable due to asymmetric toxic asset exposures of participating banks and due to still unresolved asset valuation issues. Commentators agree that for a similar plan to work this time, the government will have to assume a potentially substantial downside in order to induce otherwise unwilling investors to participate in view of the size of potential losses.

As we noted before, the size of the entire shadow banking system lacking liquidity is $10 trillion of which $6 trillion are assets held in the U.S. Not all of these assets will turn bad but at RGE we expect total losses on these shadow banking assets plus traditional loan losses to reach $3.6 trillion (of which $1.8 trillion borne by U.S. banks.)

One practical example is the Federal Reserve’s Maiden Lane portfolio of toxic Bear Stearns assets. If that performance is any guide, the upside left in these toxic assets might in reality be more limited than previously assumed. Cumberland Advisors reports that this particular portfolio has lost over 10% of its value, and losses are mounting. Indeed, the authors see ‘no prospect for a profit’ on this portfolio.

Renowned distressed debt experts such as Edward Altman and Martin Fridson note that the best time to invest in distressed debt is when default rates peak. Mind that high-yield default rates are set to rise to 15-20% sometime in 2010 from currently 4-5% due to very bad credit quality at the outset of the cycle.

The third program put forth by Secretary Geithner is an expanded version of the previously $200bn Federal Reserve Term Asset Backed Securities Loan Facility (TALF) program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury’s rescue funds, and include aid for commercial real estate markets.

Geithner points out that securitization created about 40% of the demand for new loans extended to consumers, students, and auto buyers. The decline of securitized lending to the tune of $1.2 trillion between 2006 and 2008 leaves a hole that needs to be filled if a severe lending contraction should be prevented.

Nouriel Roubini in his latest writing It Is Time to Nationalize Insolvent Banking Systems argues that, ultimately, nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer. Moreover, it bypasses the asset valuation issue as any overpayment goes back into taxpayers pockets. “With the government starting stress tests to figure out which institutions are so massively undercapitalized that they need to be taken over by the FDIC the administration is putting in place the steps for the eventual and necessary takeover of the insolvent banks.” This might well explain some of the negative market reaction.

The Treasury has stressed that while the ongoing price correction will stimulate home demand, there is a need to reduce foreclosures, which otherwise adding to the excess overhang of homes pose the risk of price over-correction, pushing more homeowners into negative equity. The Treasury plans to announce a Housing Program in the next few weeks to help refinance mortgages and contain foreclosures by reducing monthly payments for homeowners. The program will be financed by using $50 billion from the remaining TARP funds. To increase lender participation, the plan makes it compulsory for banks using government funds under the Financial Stability Plan to participate in foreclosure mitigation. In order to stimulate home demand and help the current homeowners refinance, the Treasury and Fed will continue with their November 2008 plans use $600 billion to buy MBSs and debt of the GSEs using and reduce mortgage rates to the 4-4.5% range. More importantly, the plan will increase flexibility to modify loans under the Hope Now and FHA Programs started in 2007-08 to help increase participation and foreclosure prevention.

Efforts to stimulate demand reducing mortgage rates and offering tax incentives will be largely ineffective as they are a small factor in determining home demand relative to factors such as tighter lending standards, changing dynamics for households – job and income loss, wealth erosion, rising savings rate, and low expectations of income or asset appreciation. These factors will constrain home demand in the short run while potential buyers await further price correction and banks don’t see the viability in offering mortgage for a house whose value is expected to fall.

As a result, the government needs to focus on the supply side of the market by refinancing at-risk mortgages and preventing foreclosures that will only add to the existing overhang of houses. Moreover, government’s loan modification program should reduce mortgage principal rather than just reducing the mortgage rate or extending the loan maturity, which has been the case in past government programs. Unless the problem of insolvency among a large number of households is addressed, default on modified mortgages will also continue. Also, given the large number of homeowners with negative home equity, the program will need much larger funds – over $600 billion to $1 trillion though the actual cost might be much less, since the government will receive a share from future home appreciation. Monetary incentives for servicers are also low and ineffective. Even the number of homeowners the program plans to target, 1.5-2 million is a very small fraction of the over 12 million homeowners with negative equity. In fact, several Democrats are pushing a legislation to allow bankruptcy judges to change mortgage terms that would allow lenders to reduce the mortgage principal for primary homes and bring down monthly payments. To increase participation, they support offering monetary incentives for servicers while lenders will be entitled to a share if the homeowner sells the house and also have the government share any losses on the modified mortgage.

As we have argued before at RGE Monitor, looking at the shortcomings of past government programs such as the Hope Now, Housing Retention and FDIC programs, the new program should be mandatory for lenders in order to increase participation. The government will also need to share the cost of modifying the loan, by matching the principal or the interest rate cut in a proportionate or less than proportionate amount. By guaranteeing the loans, the government will be the senior debt holder. The new interest rate should be based on the risk assessment of the borrower and all three parties – homeowner, lenders and servicers, and the government should share the cost of modification. However, determining the extent of principal reduction based on the true value of the house, and dealing with second lien mortgages and the diverging interests of mortgage servicers will be challenging.

Under the new guidelines for compensation issued by the Treasury, firms receiving federal aid will be subject to shareholder say on pay and will be required to cap executive compensation at $500,000 with any additional compensation given out in restricted stocks which can be cashed only after the government has been repaid or the bank has satisfied repayment obligations, and met lending and stability standards. Moreover, bonuses and compensation for other top executives will also be reduced. The Treasury requires disclosure of the compensation structure and strategy, and expenditure on luxury items.

While government intervention is warranted, the compensation reform does little to align risks with rewards. Large share of the compensation can and will still be given out in restricted stocks including compensation for several traders and funds managers who are not under the lenses of the current plan. Government measures also give a green signal to those who have already received large compensation and severance packages at the troubled banks. More importantly, the measures might act a disincentive in attracting credible executive talent to these troubled institutions in the future who can help deal with the bank losses and overhaul. Wall Street compensation is determined in a competitive market with CEOs joining a firm offering the most attractive pay packages and perks. Many banks are already reluctant to seek capital injection from the Treasury or are contemplating to payback past borrowings in order to avoid government scrutiny over their compensation packages.

To reduce excessive risk-taking in the short-run, compensation, bonuses and even severance packages should be based on the long-term performance of the employee relative to the risk undertaken with large part of the payments given out in restricted stocks that can be redeemed over a longer period of time.

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Yesterday, sitting here in Sweden and emailing my friends back home in Washington, DC, is when the adrenaline-pumping excitement really hit me (for the second time – this was the first).

We are at:

1. The end of a dark era that spread fear, turned “us” against “them,” and “we” into “me.”
2. And the beginning of a new era!

While I know it won’t be easy, I believe Obama and his team represent the best — by far — that we could hope for right now.  It’s a tough job, and I know it’s not possible to please everyone inside America, let alone also outside America, but I believe he can/will do better than any of the others could have.

 But before we get to work, we’re going to party!

Here’s a list of 44 ideas for free things to do and below are the events on my calendar for this weekend and next week:

• Saturday Night: Arrive in DC, hang with friends, probably crash early from time-zone change.
• Sunday Day: We Are One concert at the Lincoln Memorial: Bono/U2, Bruce, Beyonce, and many more.  SIDENOTE: I saw Bruce this summer, on the 4th of July in Gothenburg, Sweden.  Great show (was broadcast live in the US).  First time I saw him was at the Vote for Change finale concert in Washington, DC in October 2004.  Another great show, broadcast live on cable TV.
• Sunday Night: Still figuring. Maybe Moby at 9:30 Club.  I need a miracle.
• Monday Day: The Aretha Franklin at the Kennedy Center and the Million Shoe March
• Monday Night: Maybe Beastie Boys, Sheryl Crow, and Citizen Cope at 9:30 Club.  Need a miracle here too.
• Tuesday Day: Inauguration Day stuff (official schedule).
• Tuesday Night: Art of Change event (think Burning Man meets Obama Inaugural Ball).
• Wednesday: Recovery day and go visit parents before Mom leaves for Vienna, Austria (IAEA) on Thursday.

What Obama represents to me:
(what about you?)

• Courage, not fear
• Hope, not despair
• “We,” not “me”
• The future, not the past
• Light, not dark

Obama knows we must be the change we want to see in the world. He knows there is no path to peace. Peace is the path.  Yes we can (had to say it!).

Closing quotes:
(the ones above are Gandhi)

• Cowardice asks the question – is it safe? Vanity asks the question – is it popular? Expediency asks the question – is it political? But conscience asks the question – is it right? There comes a time when one must take a position that is neither safe, popular, or political; but because it is right. –Dr. Martin Luther King, Jr. (Monday is MLK Day in the USA).
• A single act of kindness throws out roots in all directions, and the roots spring up to make new trees.  The greatest work that kindness does to others is that it helps them be kinder themselves. –Amelia Earhart

Closing video:

Eddie Vedder sings “Don’t Be Shy” by Cat Stevens.  From Michael Moore’s movie, Slacker Uprising.  The video clip starts with Moore giving an interview to the press — ok berating them!

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I’ve posted a bunch of stuff from these guys over the years:

• Here’s an especially good David Einhorn speech from October 2007: What’s Wrong With the Credit Ratings System?
• And at the end of my 11/21/08 market update are two Michael Lewis articles: Hank, Let Me Help You Help This Great Country and The End.

Here’s the latest:

Titles:

1. The End of the Financial World as We Know It
2. How to Repair a Broken Financial World

By Michael Lewis and David Einhorn
2009-1-4
New York Times

In the past year there have been at least seven different government bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

OP-ED CONTRIBUTORS
The End of the Financial World as We Know It

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

Continued at “How to Repair a Broken Financial World.”

Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

OP-ED CONTRIBUTORS
How to Repair a Broken Financial World

By MICHAEL LEWIS and DAVID EINHORN
Continued from “The End of the Financial World As We Know It”

Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.

Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”

Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.

THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”

In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.

This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.

If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.

We should begin by breaking the cycle of deteriorating housing values and resulting foreclosures. Many homeowners realize that it doesn’t make sense to make payments on a mortgage that exceeds the value of their house. As many as 20 million families face the decision of whether to make the payments or turn in the keys. Congress seems to have understood this problem, which is why last year it created a program under the Federal Housing Authority to issue homeowners new government loans based on the current appraised value of their homes.

And yet the program, called Hope Now, seems to have become one more excellent example of the unhappy political influence of Wall Street. As it now stands, banks must initiate any new loan; and they are loath to do so because it requires them to recognize an immediate loss. They prefer to “work with borrowers” through loan modifications and payment plans that present fewer accounting and earnings problems but fail to resolve and, thereby, prolong the underlying issues. It appears that the banking lobby also somehow inserted into the law the dubious requirement that troubled homeowners repay all home equity loans before qualifying. The result: very few loans will be issued through this program.

THIS could be fixed. Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans. To work, the program needs to be universal and should not require homeowners to file for bankruptcy.

There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.

End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.

Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.

The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.

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This was one of the best displays I’ve ever seen — and I’ve seen a bunch of good ones on the National Mall in Washington, DC on July 4th. These Swedish guys rocked it! See this video of the grand finale (click “watch in high quality” mode, expand to full-screen mode, and turn up the sound).

The last pic is from our balcony about 8 minutes after midnight, after a 15-minute barrage of fireworks from everywhere (all over the city). The fireworks were going all night up to the midnight finale (video clip shot from our balcony).

The four  bonus pics after that are from our New Year’s Day walk.

Overall, it was a great New Year’s Eve with Annica and Henrik and a great New Year’s Day with Birgitta and Roy!  Happy New Year to you!

Smoke Clearing over Liseberg
(pic from our balcony)

New Year’s Day Walk

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(Wingsuit BASE Jumping from Ali on Vimeo.com)

If you haven’t heard of wingsuit BASE jumping (aka wingsuit flying), you gotta check it out! To get you started, check out the video above, shot in Norway.

According to my friend Todd, who lived in Tahoe back in the day, the video is narrated by JT Homes, “a youngster from Tahoe I skied with a handful of times. We went to Alaska the same year and I remember he said he was nervous! Doesn’t look like he’s nervous anymore! Crazy shit!”

If you like this video, also check out this blog post Freeskiers Make Sport Cool Again and this YouTube video: Peak 7601 Alaska (Terje on a snowboard).

Cheers!

PS: I never got as extreme as these guys, but I hucked myself off some rocks back in the Colorado dayz (1989 to 1993). Good times (except for two nasty accidents, both of which resulted in broken bones and surgeries and could have killed me).

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Just a quick update on last week’s post noting the high and tight downward-sloping handle (in indexes and stocks).

Today (December 16th), we got the upside breakout/follow-through, and it came  on increased volume, but the volume was below average, which is a question mark, perhaps the kind of question mark that leaves some doubt/worry, which is what can sustain rallies.

The news of the day was the U.S. Fed cutting continuing to push on it’s little string, cutting its Fed Funds target rate to a record low 0% to 0.25% (Washington Post article and LA Times article).  Now that it’s out of bullets there…

…it’s left to quantitative easing (Bloomberg article) and other measures (fiscal and monetary).  Cheers!

PS: Here’s the most optimistic blog posting I found today: Next stop 10400 Dow and 1040 S&P.

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