Obama admin seeks to recover political capital from banks

Obama's biggest political mistake was to bail out the banks shortly afer he took over as US President. At the time, he was (ill-) advised that this would help the economy recover, that "bailing out Wall Street"  was critical for the recovery of Main Street. Three years down the line,
- Main Street has not recovered
- unemployment is high, and the labour participation rate dropping.
- the economy is stagnating.
Most importantly, 
- elections are around the corner.


Something, clearly, has to be done. It seems unlikely that Obama will be able to do anything substantive to push the economy over the 12 months he has left to demonstrate any progress. Time for some optics, then, to show he is not on the side of Wall Street. Hence the move to sue US Banks for the quality of mortgage-backed paper they sold to Fannie Mae and Freddie Mac, now essentially custodians of the US tax-payer.


Little matter that these two housing agencies were supposed to have been expert at evaluating mortgages; were set up expressly with the purpose of expanding the market for housing loans. Hardly babes in the woods! See the second para (below) extracted from the Financial Time's blog, ftalphaville.


Commencing this vendetta against the banks is ironic for an administration that put them in ICU when they could have been allowed to die. Worse, it creates an adversarial relationship between the government and the banks, and sets up the apprehension that other arbitrary moves could be around the corner. This will inject more instability into a financial system that is already tottering. This will end badly. Very badly


From ftalphaville:

"Since Fannie and Freddie are in government conservatorship and Royal Bank of Scotland, another target of the action, is majority-owned by the UK government, the lawsuits have produced the unusual situation of Washington suing London over crisis-era losses on $30.4bn of securities.

Banks reacted angrily to the move."

Passing the Bucks:

BofA said Fannie and Freddie “claimed to understand the risks inherent in investing in subprime securities” and yet were “now seeking to hold other market participants responsible for their losses”. Deutsche Bank said the institutions were “the epitome of a sophisticated investor” and the bank would “vigorously defend against the action”.

Missing Sonia.

Is it a coincidence that Sonia Gandhi is not in 10 Janpath when UPA II is facing its biggest crisis?

According to one set of rumors surrounding her absence, hardly. Public pressure to fight corruption is massive, and Manmohan Singh is making some attempt to reveal the most corrupt. There is even a likelihood of India finally signing some kind of deal with Switzerland to make public details of 'secret' accounts held there. The long run-up to any such opening gives ample time to even the most tardy of horses to bolt.

School 1 has it that Sonia is away to tidy up her accounts, and stay one step ahead of the law that her party is now in charge of enforcing.

http://cplash.com/post/Sonia-Gandhis-Surgery980.html

School 2 has it that she is a closet drinker. Years of abuse have damaged her liver beyond repair, and she is undergoing a liver transplant.

School 3 believes that she was discovered to have cervical cancer a year ago. She was trying a miracle cure, but it did't work; now, she has undergone radical surgery to try and stem the advance of the disease.

The 4th statement I heard is a minor riff on the 3rd, namely that she is suffering from pancreatic cancer.

Poor Sonia. First to be so unwell; then to attract all manner of speculation. The fault is largely hers, though - a person with so much political power is a public personage. I think she and her family should be more open and transparent about her health, as was the Prime Minister's establishment when he needed to be hospitalised for a failing heart.

Be that as it may, Sonia has now appointed a Council of Regents to supervise matters in her absence. Clearly, the council is not working. Whether it has ill-advised the Grand Vazir, or he has kept his own counsel, they have shown extremely poor political judgement in the Anna Affaire. As a result, he is dictating terms to the Government.

Developments show how impatient and frustrated we Indians are with the ways of our government. We have had it up to here with corruption. The government's responses that it takes time to legislate are warranted, but in the mood of the times are seen as wheedling. The mood of the times are very dangerous for democracy as we know it. And, quite frankly, I am scared - whether it is Anna, Arvind Kejriwal, or Prashant Bhushan,  these are extremely self-righteous people with fascist tendencies. If they are given power, they will direct a great deal of it against progress as I see it, but most importantly against the very concept that you and I should be free to make our own decisions.

Unfortunately, it is the smugness of MMS and UPA II that created the political room for Anna and his self-righteous brigade to seize center-stage. They do not have the political backing or power to hold it for long. Nevertheless, the center has yielded, shown how weak it is. Once the Lok Pal Bill fever dies down - in a fortnight or two - other opportunists will challenge the center. It will require a great deal of savvy for it to hold. Whether it is MMS, Rahul, or the Council of Regents, I do not see it being possessed of the ability to manage the crises that will follow. Tough times.

Why our politicians are such slimes - a grassroots perspective

Over the last 3 years, I have been dealing with a gent - let us call him Bharat - in Nainital district. As he calls himself  'political-type', I find his behaviour quite instructive about the nature of local 'leaders', and their dynamic with the environment in which they operate.

Bharat is about 40, and comes from a relatively privileged family in Haldwani, the premier trading and commercial city in Kumaon. He went to one of the better schools in the area, and speaks English with reasonable ease, though he is more comfortable in both Hindi, and the Kumaoni dialect. I ran into him when he let it be known that he had bought some land adjoining one of my homes in the Nainital hills, and there was likely to be some clash over title to specific parcels. We were put in touch with each other by a mountain neighbour of mine, who went to school with him, but shared little else. Our common friend asked me to speak to him, "just so you you know the kind of person who is buying land on our hillside".

Bharat is sharp, and a man in a hurry. Though he adopts many surface courtesies, he has little value for other human beings. He is never on time for an appointment at the court, even though I have often traveled overnight from Delhi to transact our business. He has several balls up in the air at any time - in this case, scores of land registration papers, which he has bought, or taken an option on, by way of paying a small advance. These are carried around in a plastic shopping bag, by his driver and factotum 'Mike'. Honest, that is what he is called. Hopefully, the appropriate one can be pulled out when needed in the court!

Having zoned in on the land on my hillside, Bharat got all the relevant details from the tehsil office. On one occasion when we sat down to iron out the remaining 'border disputes', Mike sauntered up from his office with the original cloth map of land holdings, which is the badge of office of the 'patwari', the lowest level revenue official. Once he had all the details, he put village brokers on the job of finding title holders in villages scattered across the mountains and the 'terai', the moist plains at the foot of the Kumaon. The lands in our area have not seen revenue consolidation for 3 generations now, and the ownership for a single piece of land could now be held by as many as 12 people. Signatures were extracted by payment of whatever worked - small sums, bottles of liquor, force, threats.

Piecing together various bits of information over the three years I have been dealing with Bharat, my sense is that he paid an average of Rs. 45,000 per 'naali' of land - where a naali is the local measure, approximately 200 square meters. The sale price he was able to command was in the region of Rs. 300,000. This amount of arbitrage is the surest sign of an inefficient market; in this system, the inefficiency stems from 3 factors:

-firstly, the lack of transparency of data. I have several times tried to obtain similar data from the patwari and tehsil: I have been told the data is not available, or they are not permitted to release it.

-secondly, consolidating land titles and holdings should be a routine revenue task; our British rulers carried it out regularly, but it is something our adminstration has shirked.

- thirdly, the fact that the joint-holders are so scattered, and difficult to contact. The latter is changing, as most families now have at least one cell-phone, and the former is due largely to the second set of factors.

The net result is that the system has created a milieu in which huge value accrues to a 'fixer'. I had seen the value to consolidating the land around me by the mid-90s, and was on-site, as it were. Having made some efforts, I discovered that the administrative costs were too high; in other words, the system is rewarding, not foresight, but the ability to extract information from holders of public office, and extort signatures to title.

In one moment of heart-to-heart conversation with my wife, Bharat had spoken to her of his ambition - "I am trying to make lots of money, fast, so I can fund my elections*". So that, I guess, he can make even more lots of money. Sounds like Mayawati. Bharat often tried to get into conversation with my wife - he is part of the lower echelons of the Congress Party, and knows that her aunt is the Governor of his state of Uttarakhand, and a long-standing senior functionary of the Congress.

Once, he called me to ask whether I could take up with the said aunt a 'file' concering a friend's relative who was a government servant, currently employed in Andhra Pradesh, seeking a transfer to Uttarakhand. I said I had never asked my aunt-in-law for favours, and never intended to. "I understand", he said, "lekin hammey to yeh sab karna padta hai - ham political type ke hain, na."

This is the construction of 'political work' at the grassroots - someone who can game a contorted, opaque system, and trade favours. As long as this is the reality of our governance, only the Bharats who are best at this game will rise to become Councillors, MLAs, and MPs. If they are truly masterly at the game, they will become Kalmadis. And it will require talent of the most vaultingly ambitious kind to become a Mayawati, or a Sharad Pawar.

Anna Hazare and Kejriwal burning some paper in Delhi will do little to transform this reality. 

* In this behaviour, Bharat is conforming to type. In a paper in The World Financial Review, Bibek and Laveesh write:
The 5th Report of the Administrative Reforms Commission quotes from the Vohra Committee Report and we end on that sobering and unsatisfactory note. “An organized crime Syndicate/Mafia generally commences its activities by indulging in petty crime at the local level, mostly relating to illicit distillation/gambling/prostitution in the larger towns. In port towns, their activities involve smuggling and sale of imported goods and progressively graduate to narcotics and drug trafficking. In the bigger cities, the main source of income relates to real estate – forcibly occupying lands/buildings, procuring such properties at cheap rates by forcing out the existing occupants/tenants etc. Over time, the money power thus acquired is used for building up contacts with bureaucrats and politicians and expansion of activities with impunity. The money power is used to develop a network of muscle-power which is also used by the politicians during elections.”⁹ There are no easy answers to this problem.

The American fiscal crisis and isolationism

http://www.project-syndicate.org/commentary/hill8/English

In which the author speaks of American isolationism against the backdrop of the fiscal crisis.

This was inevitable; the sharp heat of 9/11 brought this to my mind - for many ordinary Americans, the attacks on the twin towers were a punishment by foreigners for the unwanted presence of American troops on their soil.

And now that the fiscal crisis is - in effect choosing American presence in Afghanistan over schools in their backyard - this is not going to swim.

In places like rural El Paso County, on the eastern plains of Colorado, far from the federal budget debate’s epicenter, spending cuts are the order of the day. School districts are increasing class sizes as they shed teachers, as well as deferring maintenance projects and curtailing the school-bus service. These cuts are having a very real and immediate impact on El Paso County’s residents. Can they, and other Americans who are losing vital services, really be expected to rise above it all and support funding to build new schools in Afghanistan?

Cheap food no one wants

On July 11, the Economc Times carried a graphic feature showing that India is buying more of high-value food.


The share of cereals in verall spending is down from 18% to 15.6% in rural India, whereas that for pulses is up from 3.1 to 3.7; for milk from 8.5 to 8.6; and for eggs, meat and fish from 3.3 to 3.5.

Meanwhile, the NAC has been barking up the tree of pulses, and pressuring the broke exchequer to up the allocation of cereals to the poor, and the non-poor. This only echoes the fixation of our entire food and agriculture system with grains  for several decades, as a result of which we have a glut of grain, the depots are choked, and we are considering exports.

Centralised planning is always behind the curve.

The World of Make Believe

When the debt crisis hit the US in 2008, the Mark-to-market rule for valuing balance sheets was suspended. If it had continued to be enforced, bank balance sheets would have been extremely vulnerable, despite billions of dollars of funding from the US government. As a result, the derivatives that helped ignite the crisis are still sitting in bank books, and valued as the banks would like them to be.


It seems as if the banks are waiting for asset inflation to take place, so that some one can announce, "Game Over", and every one can move into reality mode. Which is why the Fed is trying so hard to ignite inflation with its zero-interest-rate-policy, ZIRP.

Some commentators believe that recent commodity price inflation has been a result of cheap money; many believe that only supply-demand imbalances can sustain price increases. I would tend to side with the latter, while noting that cheap money penalises savers, incentivises consumption at the cost of saving and hence investment, and hence leads to higher commodity prices through the obvious demand route.

Be that as it may, when crude oil prices seemed to threaten the recovery all over again, this June, the IEA coordinated a release of 60 mn barrels from various emergency stashes. The impact on prices was sharp, but it didn't sustain very long. Interestingly, the buyers were not largely speculators or hedge funds, with the exception of a small punt by Barclays; the bulk were oil companies, suggesting that those on the ground (or below it!) are finding supply lines squeezed.

From a gaming point of view, IEA is in danger of having mis-fired - if the release of stocks was intended - even partly - to show OPEC it had some firepower, the threat may have proved to ineffective.

 The most recent egregious example of governments trying to game markets comes from the ECB. Dealing with the Greek crisis, European bankers got hit with a severe Moody's downgrade of Portuguese sovereign debt. However, since Portugal will inevitably require further funding, and commercial loans are not viable, the ECB will have to extend funds to Portugal. With the downgrade, collateral requirements will go up.

Or would, if the ECB had not decided to suspend normal rules for evaluating collateral. This suspension of reality led to the following from Bernd Volk, of Deutsche Bank:

"Given severe rating consequences for Portuguese covered bonds resulting from the downgrade of the sovereign bonds by four notches to Ba2 and also other peripheral covered bonds facing subinvestment grade risk (e.g. Greek covered bonds by Fitch in case of Greek sovereign debt rollover), we suggest a significant “Rating deleveraging” of the financial system, i.e. less use of rating requirements in laws, regulatory requirements, bond prospectuses and other contractual agreements. Instead so-called “indeterminate legal terms” (“unbestimmte Rechtsbegriffe”), to be determined by the respective institution of market participant, could be used."

Tongue firmly in cheek, no doubt.

Birthday thoughts

Here's Seth:

When did you get old?

At some point, most brands, organizations, countries and yes, people, start talking about themselves like they're old.

"We can't stretch in that direction," or "Not bad for a 60 year old!" or "I'm just not going to be able to learn this new technology." Even countries make decisions like this, often by default. Governments decide it's just too late to change.

The incredible truth is this: it never happens at the same time for everyone. It's not biologically ordained. It's a choice. It's possible to put out a hit record at 40, run a marathon at 60 and have your 80 year old non-profit change its business model. It's not as easy as it used to be, but that's why it's worth doing.

TRUE!

The other thing I read recently was, as you get older, you tend to spend more time thinking about the past. This is a clear trap - not only is it a waste of time, but it can also lead to regrets, and guilt, baggage we can do without. Something in my nature/nurture means I don't go here, which is wonderful.