Supreme Court Justice Souter to Retire

NPR is reporting that Justice David Souter plans to resign in June, at the end of the Court’s current term:

Factors in his decision no doubt include the election of President Obama, who would be more likely to appoint a successor attuned to the principles Souter has followed as a moderate-to-liberal member of the court’s more liberal bloc over the past two decades.

In addition, Souter was apparently satisfied than neither the court’s oldest member, 89-year-old John Paul Stevens, nor its lone woman, Ruth Bader Ginsburg, who had cancer surgery over the winter, wanted to retire at the end of this term. Not wanting to cause a second vacancy, Souter apparently had waited to learn his colleague’s plans before deciding his own.

Souter, who’s 69, was appointed by President George H.W. Bush in 1990 and was expected to join the conservative majority — but has, instead, consistently voted with the liberal wing, including on decisions as important as Planned Parenthood v. Casey, where his written opinion argued for upholding Roe v. Wade.  Just yesterday, Souter defended the federal law that provides broader oversight to voting rights.

It’s very interesting timing, of course; the Democrats now have a new member, who sits on the Senate Judiciary Committee.  The upcoming nomination battle should prove a real test of Arlen Specter’s principles.  Specter voted to confirm Samuel Alito to the Court in 2005 despite Specter’s own pro-choice views.  That shows a willingness to put party before principle that, honestly, might work out nicely for the Democrats — unless Specter wants to make a point of his independence by opposing a new appointee, in the same way he seems to be standing firm on his opposition of Dawn Johnsen for OLC.  Further than that, Specter said his votes for Alito and Roberts were based on believing they were qualified for the jobs — which would seem to set him up to vote for any liberal candidate that Obama brings forward.

Just by the numbers, though, Specter’s vote on the committee might matter less than the totals on the Senate floor.  With any luck, the Democrats will have added another member — Al Franken — to the fold by the time the vote hits the floor, and it seems possible they might be able to recruit a Republican-lite other than Specter, should he decide to defect, to fight any filibuster threat.

The next question, of course, is who Obama will select — and when he’ll name the nominee.  Salon offered a nice list of 10 probables in November, and Sonia Sotomayor still seems to be the favorite.  Beyond that — I’d love to see Elena Kagan in the spot, but I imagine the administration doesn’t want to fight a Supreme Court battle at the same time they have to look for a new solicitor general.  On that one, I assume there will be wild — one might say pandemic — speculation in the next few days.

Luckily, the president has nothing else going on right now, and it’s not like the Court matters, so I’m sure this will be easy, quick, and painless.  Right?

A Hot Wheels Primer to Chrysler Bankruptcy Day

Remember Hot Wheels?  I used to have a few, many of which I raced and then crashed off the roof of my Barbie dream house.  They were great, simple toys, and they were even better because they were such exact replicas of the real versions that there was a certain satisfaction in playing with them.  It made me feel like I really understood cars.  I didn’t, of course, but it did offer some insight into the basics: for instance, don’t drive a car off the roof.

I think Hot Wheels cars can be useful again for getting a surface understanding of the Chrysler deal.  Specifically, the Dodge Viper:

It glitters!  Ah, the good old days.

Anyway.  As you may remember, today (April 30) is the deadline for Chrysler to return to the government with a viable restructuring plan.  If it does, it gets a cookie — in the form of about $8 billion in additional government financing to see it through.  If the plan is unsatisfactory, Chrysler heads to bankruptcy.

The good news from this week and weekend is that Chrysler managed to get a Treasury-approved deal worked out with the United Auto Workers.  The New York Times reports that members approved on Wednesday “a complex deal that changes work rules, cuts benefits and gives the union a 55 percent stake in Chrysler as partial funding for its retiree health care trust.”  A deal with Fiat is expected to be signed, well, right now, or by tomorrow, that will offer Fiat a 20 percent stake up front, with management control, and a possible expansion to 35 percent equity going forward.  Welcome to the new Chrysler:

But though the UAW has agreed to this deal, and Fiat seems on the verge of agreement, the whole thing is being held up by Chrysler’s lenders.  I wrote about this earlier, when the Wall Street Journal reported that J.P. Morgan Chase was leading the charge not to forgive any of Chrysler’s debt.  Well, now it turns out that JPMC and the other three largest lenders to Chrysler have agreed to take a significant cut in what they’re owed.  Here’s what’s currently outstanding to lenders at Chrysler:

That’s a total of $6.9 billion.  The Treasury Department has worked out a deal where the lenders — all 46 of them — would get $2.25 billion, cash, in exchange for relieving Chrysler of its debt.  That means the four biggest debt-holders would see a $1.5 billion return on their $4.8: a total loss of $3.3 billion.  The other lenders would see $350 million on their owed $1.1 billion — a total loss of $750 million.

And yet it is these smaller lenders that are holding up the process, not the four big banks.  Why?  As the Wall Street Journal and Felix Salmon tell it, the big banks bought Chrysler debt at full price, back in the day (I do not know what day); the smaller lenders, including hedge funds, bought the debt at a huge discount, once it became much riskier that Chrysler wouldn’t be able to pay up.  If Chrysler goes into bankruptcy, they stand at the front of the line to get money back — and they might stand to make a profit, whereas the big banks are going to lose something either way.

It’s these smaller lenders, the hedge fund folks, who are currently torpedoing the talks.  You might wonder, as I did, why this even matters — if the four biggest lenders are on board, isn’t it enough to have their votes?

Well, apparently the proceedings here are more like the Senate than the House: Rhode Island gets the same number of votes as California.  The guy who holds $1 million in Chrysler debt has the same say as the guy holding $1 billion.  That’s not just some weird fairness decision — it’s apparently because the Obama administration is worried about legal challenges to the deal if everyone doesn’t agree.

So, where does that put Chrysler today?  I’m guessing it puts Steve Rattner, the Car Czar, locked into a small room with crappy coffee and at least eight very unhappy bankers, until midnight eastern time.  And if they can’t work out a deal, what will Chrysler look like?

Oh, OK, nothing quite so dramatic, probably.  Strangely, the Obama administration is of two minds on this one.  At his press conference, the president said he’s “hopeful” that Chrysler could go through a “very quick type of bankruptcy.”  But The Wall Street Journal reports Treasury is singing a different tune:

Treasury officials remain concerned that a Chapter 11 filing could lead to a loss of control of the car maker’s future. Some Chrysler creditors could argue in court that the company is worth more to them in liquidation than they are granted in the Treasury’s deal, which offers the creditors about 29 cents on the dollar in cash. Some of the creditors have signaled they are prepared to fight the matter in court.

Whether this is going to end that badly or not, we might not know for a while.  But whether that direction is likely… well, that we should hear within the next twenty hours.

Beep, beep.

92 Days of Timothy Geithner

It’s President Obama’s 100th day in office, and he’s going to get a lot of coverage for it.  So much coverage, in fact, that I already find myself with nothing new to add to the “How’s Obama Doing?” conversation.

Instead, I thought I’d focus on what I think is quite possibly the worst job in the administration right now: Secretary of the Treasury.  It’s been 92 days since Timothy F. Geithner was sworn in.  What’s that guy been up to?

Sworn in by Joe Biden, Jan. 27, 2009.  Remarks:

Treasury’s tradition is to defend the integrity of policy, to respect the constraints imposed by limited resources, and to limit government intervention to where it is essential to protect our financial system and improve the lives of the American people.

Here we go, a brief, only slightly serious history of Timothy F. Geithner’s tenure as 75th Secretary of the Treasury.

Day 1: Announced new rules “designed to crack down on lobbyist influence over the financial-rescue program and make sure that political clout isn’t a factor in awarding bailout money,” as part of the President’s Emergency Economic Stabilization Act.

2: Announced all contracts relating to the TARP would be posted online.  I, for one, have lost hours here.

7: First mention in “The Onion.”  “Cheney Dunk Tank Raises $800B for Nation.”

9: Geithner, Obama announce $500,000 salary cap for executives at bailed-out firms.

15: Geithner announces Financial Stability Plan — or, more accurately, announces that there IS a Financial Stability Plan, but leaves the details at home.  Oops!  Markets tank.  Geithner testifies before the Senate Banking Committee.

16: Geithner testifies before the Senate Budget Committee.  New record: most hours in front of Congress saying nothing… no, just checked, that’s still held by Jimmy Stewart.

19-20: G7 Ministers and Central Bank Governors meeting in Rome, where U.S. stimulus is attacked by cheapskate fiscally conservative countries.

22: Treasury Receives G.M., Chrysler Restructuring Plans.  Upon realizing the plans are written on the back of well-used bar napkins, Geithner fires every appointee who works for him, twice, and 0-0 being 0 (even with deflation), has the same number of staff he did when he started.

23: Geithner announces additional $200 Billion in funding to Freddie Mac, Fannie Mae.

28: Trading begins on InTrade on whether Geithner will resign before June 30, 2009.  It reaches a peak of 1:12 odds in mid-March.

36: Geithner testifies before House Ways and Means Committee about President’s budget.

37: Geithner testifies before Senate Finance Committee about President’s budget.

38: Geithner testifies before House Budget Committee about President’s budget and hopes no one notices he’s reading the same testimony for a third time.

39: Called to testify before House Mean Budget Financing Senate Committee, Geithner figures out too late it’s just another one of Orzsag’s funny, funny little jokes.

40: Saturday Night Live opens with a Geithner sketch featuring the Treasury Secretary offering $420 billion to anyone who can figure out how to fix the problem:

41: The Onion: “Sixteen hours and 25 cups of coffee into into a Treasury Dept. strategy session, Tim Geithner proposes nationalizing CitiGroup, Bank of America, all nine seasons of Seinfeld, toast, Albania, and the third law of thermodynamics.”

43: Geithner finds out about $165 million in promised AIG bonuses.

44: Geithner calls AIG CEO Liddy about bonuses.  Also, issues statement in advance of G20 meeting.

45: Geithner testifies before Senate Budget Committee.  That night, he calls Obama about bonuses. 

46-47: In Europe for G20 meetings.  Of note: $1 Trillion increase in IMF funding.  Also: no hug from the Queen.

48: Launch of “Daily Geithner,” a tumblog providing a photo/quote mash-up of Geithner.  My favorite involves pistachios, though the Zoolander reference is good, too.

49: Obama, Geithner at White House for to make angry statements on AIG bonuses.

50: Launch of “Hey Paul Krugman,” featuring the Geithner-referential chorus of “I listen to him, all I hear is blah blah blah.”

51: President Obama says he has “complete confidence in Tim Geithner and my entire economic team.” Intrade bets on Geithner resignation spike.

54: Geithner Plan, AKA the Public-Private Partnership Investment Program (PPIP) is leaked, guaranteeing a despairing Paul Krugman’s home computer a great deal of job security.

56: Geithner unveils the details of the “Geithner Plan.”  Tries (unsuccessfully) to rename “toxic” assets as “legacy” assets, among other sleights of hand. 

57: Geithner, Bernanke Testify on Capitol Hill.  The Geithner/Maxine Waters exchange is great theater.  Bonus Geithner eye-rolling.  Also: Launch of “The Treasury Secretary Song” in response to “Hey Paul Krugman.”

Creepiness quotient: medium high.

58: In a speech at the Council on Foreign Relations, Geithner answers a question about a recent Chinese proposal to increase special drawing rights at the IMF that somehow translates to Representative Michelle Bachmann and the currency markets as an immediate plan to overthrow the dollar in favor of, I don’t know, coins made from bone pieced together after every sane person in the world suffers simulataneous brain explosion from the impact of the dumb.  He is forced to issue a correction, using very small words.

59: Geithner calls for major regulatory reform, including giving Treasury the power to “unwind” large non-bank financial institutions.  “Our system failed in fundamental ways,” he tells the House Financial Services Committee.  I can’t make any jokes about this.

62: Geithner goes to Colombia for Inter-American Development Bank Meeting and reaffirms administration support for expanded IMF aid to developing countries during the crisis.

63: Treasury’s Car Czar announces G.M. CEO will be fired.

65: Appointed, with Secretary Clinton, as a Special Representative for the U.S. to the U.S. China Strategic Economic Dialogue.  Beats getting a hobby.

69: Geithner says on “Face the Nation” that he will consider firing CEO’s at underperforming banks.  Much of business blogosphere laughs itself to sleep.

74: Poll shows majority of Republicans and Democrats have “significant doubts” about Geithner.  In unrelated news, Geithner spends afternoon working out cost-benefit analysis of getting a dog.

85: First Cabinet meeting, and Geithner is stuck underneath cameras and boom mikes and elbowed by Joe Biden whenever he tries to speak, “neither seen nor heard” being the new White House Geithner Plan.  Contra that plan, Geithner testifies before Congressional Oversight Panel.

86: Portfolio publishes critical cover story: “The Reeducation of Tim Geithner,” which features a list of “no comments” from people who were up-beat about Geithner’s term in an earlier January feature.  Benefits now outweigh costs of dog dramatically.

88: Geithner plays host to G7 and G8 ministers, holds press conference: Markets Survive!

89-90: World Bank-IMF meetings.

91: New York Times cover story profile, “Geithner, Member and Overseer of Finance Club,” published, along with an entire year of Geithner’s daily schedule at the New York Fed. Highly critical of many meetings Geithner had with bank leadership during his tenure at the Fed.  Quickly becomes one of the most-blogged pieces at NYT, as readers are invited to submit their observations about his calendar.

92: I assume he took this day off to train the new dog.  Or cry.  Whatever.

^{Peter Orszag reminds you, Many of these things are made up.}

All right, all right, clearly not an exhaustive list.  But a little something different, and I’m always happy to throw out lame Tim Geithner jokes to an audience that might get them just enough to offer sympathetic groans in the comments.

Special Saturn Note: This also marks the end of my own 100-posts-in-100-days experiment.  Did I get there?  No.  Did I get close?  Yeah, not bad.  I’ll keep trying.

Nightmare Scenario: Chairman Specter (D-Penn.)

I’m late to the news of the day: Arlen Specter says he’s a Democrat now, and is going to run as a Democrat in 2010.  Woohoo!  Right?  Well, maybe.  Specter claims he’s making his switch based on principle — that the Republican party moved to the right, and also, by extension, so did the Democrats.  He says he’s not going to change his positions, so he won’t be a reliable 60th vote on many issues.  Matt Yglesias summarizes some Wonk Room posts on Specter’s positions:

On labor rights, as you know, he’s flip-flopped and now stands firm against employee free choice. On climate, Specter has tended to join forces with moderate Democrats in undermining effective action to tackle the climate crisis.

On health care, Specter’s record looks quite a bit better on a number of specific issues. Still, there’s a bloc of senators out there who sound generally supportive of health care reform, but seem opposed to every possible way of paying for comprehensive reform. To me, Specter’s “no” vote on the 2010 budget gives me some worries on that score as well.

Long story short, while Specter’s clearly not the most conservative guy in the senate, he’s not much of a progressive either. The extent to which the right is glad to be rid of the guy is a sign of how far-right mainstream conservatism has gone.

The question today really isn’t whether Specter is conservative or progressive.  The question should be, “Is Arlen Specter a Democrat?”  The answer is no.
It’s impossible to come up with a universally accepted, exhaustive definition of what it means to be a member of either party, though if we worked together, we could come up with a general list of issues that tend to be advanced by Democrats.  Currently, that would include national health care, support for labor, stimulative spending during recessions, action on climate change, and a general lean toward being pro-choice.  Take any one of these issues and interview Arlen Specter, and you might find his position to be closer to the traditional, mean Democrat position than the mean Republican stance right now.  I’m not saying look at his votes — I’m saying, look at how Arlen Specter defines himself, and you will probably find a guy that’s a little closer to the D than the R at this moment. 

Is self-identification enough to make you part of the party?  If I say I’m a Democrat while I vote against EFCA and work pretty hard to block the president’s budget, in my mind I’m still a Democrat, but my actions… my actions are not.

Arlen Specter is, at this point in his career, an Indepedent.  He doesn’t belong in the current Republican party — Pennsylvania’s Republican voters could tell you that.  But he doesn’t belong in the Democratic Caucus, either.  If Arlen Specter gets a leadership position — a committee chairmanship, say, or a sub-committee — will he, as chairman, represent the interests of the Democratic party en total?  Or will he represent his own, Independent interests?

This isn’t idle speculation: The agreement Senate Majority Leader Reid and Specter have worked out would give Specter rank equivalent to having been a Democrat all along.  To give you an idea of how crazy that is, it means that Arlen Specter now outranks John Kerry in the Democratic Caucus.  There are seven Democratic Senators (Byrd, Kennedy, Inouye, Leahy, Baucus, Levin, and Dodd)¹ that have more seniority than Arlen Specter.  One of them has already stepped down from the leadership (Byrd); two others seem unlikely to still be holding leadership positions after 2010 (Kennedy, Dodd).  Specter currently sits on the Judiciary Committee, where he’ll still be second to Patrick Leahy, and Appropriations, where Daniel Inouye has him beat.  But one guesses he might fight for leadership of a sub-committee — Tom Harkin’s Labor, Health, and Education Subcommittee might be a tasty plum, and Specter has him beat, as Mike Lillis at the Washington Indepedent noted today.

Who doesn’t want Democrat Arlen Specter making decisions about which labor bills get to the floor?

I’m happy to welcome a new Democrat to the fold.  But if he’s joining the party, he’d better be a part of the party — the national party.  Otherwise, this deal Reid worked out to maintain Specter’s leadership position is going to come back and haunt us all.

¹ Doesn’t everyone have a Senate seniority Excel spreadsheet handy?

Fiat’s Chrysler Buy: Just the Ideas, Ma’am

Here’s the question that matters this week: If you had $14,000, would you buy this car?

It’s the Fiat 500, and the concept most likely to be coming soon to a Chrysler plant near you, should the Fiat/Chrysler merger come together.  Sergio Marchionne, Fiat’s CEO, has been saying since last year that he’d like to bring the 500 to the American market.  And Chrysler’s been encouraged by the government to produce smaller, more fuel-efficient cars pronto.  The 500, which would fit in my car’s trunk, gets 46 miles to the gallon on its base model (a more eco-friendly version gets 67 mpg, with carbon emissions nearly equal to a Smart car).  Did I mention it currently goes for 10,500 euro ($14,000)?

The 500 and its Fiat brethren (The Fiat Panda seems a likely companion, but only for people who never listen to Top Gear’s Jeremy Clarkson) are the future of Chrysler.  They are, in fact, what Fiat is “buying” into Chrysler with — the company is offering no money at all to take a 20 percent stake in the company.  Instead, they’re offering concepts and techonology — $10 billion worth.

It’s probably a good deal.  The government viability report [.pdf] on Chrysler mentioned again and again that the company was, basically, out of ideas.  It spent everything it had to keep pace with its larger competitors, putting everything it had into production, so that it had cut back sadly and deeply on research and development.  The merger will offer Chrysler a way back into the new-car market, putting its plants to work on constructing cars based on Fiat-researched models.  What we’ll get won’t be the 500 — Ford took that name already — but a twist on it, a Fiat with the familiar Chrysler wings on front.  Sounds like a happy ending, right?

Except what we’ve come to is that an Italian company is going to buy an American car-maker not on the strength of its money, but on the value of its ideas.  In that respect, it’s hard to think of Fiat as the savior of the American manufacturing industry.  If innovation is the problem, well, it’s hard to think of a way to save the industry at all.

Gov’t for Grown-ups: I have Federal Reservations for 3

I’ve neglected this series for a long time.  Not for very good reasons — it can mostly be summed up by “writer’s block,” having to do with a precipitous drop in my ability to write about Congress in an informative manner instead of one laced with profanity.  So I’m back, and I’m refocusing my attention, at least for now, on institutions, instead of political positions.  If I’m going to want to burn something down, better it be an entire building constructed from marble than a man in a suit.

So, let’s talk The Fed.

This is going to be a long talk, so I’m breaking it into three tasty pieces: A Brief History of U.S. Banking (1790-1930ish); The Federal Reserve, from Depression to Inflation (1930ish to 1980ish); and The Post-Modern Fed (1980ish to current) — if the TALF is still alive by then.

There will be a one-week guacamole intermission between posts.  Guacamole making and consumption is also encouraged while reading — if you need to step away, I’ll still be here.  Take your time.

A Brief History of U.S. Banking.

At the same time America became a country, it was also, in the great American tradition, broke.  A debate ensued about what to do — pay off the debts incurred by states before they were even states?  Say “screw it” and move on?  It was hard to decide what to do — individual states, and sometimes even individual cities and banks, were using different notes to denote debts, so it was hard to say what was even owed.

Enter Alexander Hamilton.  I should at this point again disclose a fascination and admiration for Hamilton, the father of the U.S. banking system and probably a total jerk to hang out with.  In 1791, Hamilton, the first Secretary of the Treasury, convinced Congress to create the First Bank of the United States, arguing in part that a strong financial institution would benefit everyone by making the nation itself stronger and more certain to survive:

[A]n attentive consideration of the tendency of an institution immediately connected with the national government which will interweave itself into the monied interest of every state, which will by its notes insinuate itself into every branch of industry and will affect the interests of all classes of the community, ought to produce strong prepossessions in its favor in all who consider the firm establishment of the national government as necessary to the safety & happiness of the country, and who at the same time believe that it stands in need of additional props.

This was a hard argument to make to a country skeptical of any broad central grant of power.  Yet Hamilton, who also established the U.S. Mint, managed to win a 20-year guarantee for the First Bank.  Sadly, it outlived him, then lost its own duel with Congress — by one vote, the bank wasn’t renewed in 1811.

Yet by 1816, the U.S. was hungry for some central, organizing force to look over banks, bankers, and monetary policy.  So the Second Bank of the U.S. came to life.  You probably know how this story ends, but let’s let the White House history of President Andrew Jackson tell it:

The greatest party battle centered around the Second Bank of the United
States, a private corporation but virtually a Government-sponsored monopoly. When Jackson appeared hostile toward it, the Bank threw its power against him.

Clay and Webster, who had acted as attorneys for the Bank, led the fight for its recharter in Congress. “The bank,” Jackson told Martin Van Buren, “is trying to kill me, but I will kill it!” Jackson, in vetoing the recharter bill, charged the Bank with undue economic privilege.

So, back to no bank.  Ho-hum.  The U.S. muddled on with no national currency until the National Banking Act of 1863 essentially black-mailed people into adopting national notes, by a) creating them and then b) establishing a tax on state-issued notes, but not federal notes, which were backed by treasury securities.  Yes, yes, they had securities back then, too.  People still traded in state-based notes, because people are irrational, but the spread of national currency gained some footing.

Yet this “national banking system” had its own snags [.pdf]:

Under this system, “country banks” were required to hold reserves at larger banks as well as in the form of cash. ”Reserve city banks” were required to hold reserves in cash and as deposits in “central reserve city banks.” Central reserve city banks were required to hold their reserves in cash. The Treasury Department altered reserve levels by adding or draining funds that it kept on deposit at central reserve city banks. The large city banks were unable to respond adequately to seasonal and cyclical variations in the cash and credit requirements of the economy. The years were marked by periodic financial crises that were resolved primarily through emergency actions of private bankers.

Those “bankers” we led by J.P. Morgan, who was kind enough to bail out the system in 1893 when panic ensued.  In 1907, he did it again — and public opinion, long opposed to the very idea of a central bank, suddenly swung more decisively toward desirous.

But hey, this is government — why rush into anything?  Congress, being Congress, appointed a commission to look into the best way to tackle the banking problem.  Meanwhile, William Jennings Bryan stormed the country cheering for the Silver Standard (and was immortalized as the Cowardly Lion in “The Wizard of Oz” for his efforts).  Finally, President Wilson leaned on Congressman Carter Glass to get something done, and in 1913 the Glass-Willis bill, known as the Federal Reserve Act, birthed the modern Fed, a bouncing several-million-dollars baby.  It established:

• Twelve regional bank districts
• That all national banks had to buy into the Fed at a rate of six percent of the bank’s current capital stock, in exchange for voting rights
• That should the Fed not have sufficient money through bank and personal buy-ins, the Treasury Department would buy in.
• The Federal Reserve Board’s power to examine “accounts, books, and affairs” of member banks
• Individual regional boards’ power to set Discount Rates — the interest rates at which banks could borrow from the Fed.
• The Federal Reserve as the “lender of last resort,” where banks could turn when they faced a panic.
• The Federal Reserve as the primary issuer of Federal Reserve Notes — what we now know as “dollars.”  A sample from the first run, Series 1914, is seen above, starring Grover Cleaveland.

The four big provisions that came out of the Fed’s charter were “to
provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

Ta-Da!  A Central Bank at last.  The actual responsibilities of the bank, other than to provide stability to the system, were somewhat undefined for the next two decades, however.  The bank dabbled in the 1920s with some Open Market interventions, but with little success — though aware of the speculation bubble of the late 20s, it did little (and some might argue it could do little) to stop it; it did even less to alleviate the stress on banks as the downturn turned into a full-blown Depression.  In fact, the Reserve Board and the governors raised some rates in the early 30s and wanted to raise rates further, through a sell-off of treasury securities, even as things got bad again in 1932.

Which takes us to the fall of the first Fed system, with the introduction of Franklin D. Roosevelt’s financial policies and politics.  But if you’ve made it this far, I’d guess you’re as ready for a guacamole break as I am.  So we’ll pick up here next time — though in the interim, if things are unclear above, throw me questions in the comments.  I’m trying to compress many sources into one long explanation, so I may have made things blurrier — and I’m happy to help clarify, as I can. Likewise, if I’ve skipped something vital — well, you’ll tell me, right?

Till next time, then.

Murphy Wins NY-20 Race

I never get to write about good news, because I’m usually to involved in reading all the bad crap.  But today, I’m about to take some fairly awesome mocha-butter-cream frosted chocolate cupcakes to a pleasant afternoon meeting, and on my way out the door I’ve noticed something else that’s right with the world: Scott Murphy has officially won his Congressional race in New York.

Almost a month after a special election in a heavily Republican congressional district, the Democratic candidate claimed victory Friday when his GOP opponent conceded in a race that focused attention on President Barack Obama’s stimulus plan.

That last line is an interesting set-up for discussion of the race as a whole, and makes it seem like the close race — it came down to 400 votes — is a reflection of the current public sentiment about the stimulus plan.  In reality, it seems like a stretch to even say that this reflects with any accuracy the thoughts of New York’s 20th on the stimulus plan, since any number of issues drove voters to the polls.  But NY-20 was a conservative, though Democrat-leaning, district, so if things were closely divided there a month ago about the president’s stimulus plan, well, that’s not bad news.  If the GOP was going to pick off a district based on spending plans, this would’ve been the place to start.

Instead, it’s one more Democrat in the House, a Democrat with business experience, and a Democrat endorsed by the President.  (And, interestingly, a Democrat who went to the same Missouri high school as a few of my family members.  Though not at the same time).  Not a bad way to start the weekend.

Cupcake?

WSJ: Chrysler Heads to Bankruptcy, Or Fiat, Or Not, Or…?

The Wall Street Journal has a rambling piece about the possible future of Chrysler that starts with this:

Chrysler LLC is preparing to file for Chapter 11 bankruptcy protection as soon as next week, whether or not it reaches a deal with its lenders or forges an alliance with Fiat SpA, said several people familiar with the matter.

This sentence kicks off an 1,100 word article in which only three words — “in its totality,” in the last line — are attributed to anyone by name.  The rest of the article quotes:

• “these people” (x4)
• “people familiar with the matters”
• “people familiar with the matter” (again)
• “Fiat” (no clarification on whether that’s the whole company, the signage out front, or someone’s talking car)
• “The Obama administration” (again, no clarification on whether they spoke united)
• “an administration official”
• “one person”
• “people familiar with the situation” (x2)
• “Obama advisers”
• “Officials with President Barack Obama’s auto task force”
• “people familiar with the talks”

That final quote from Fiat CEO Sergio Marchionne came from a conference call.

From this combination, it’s hard to figure out whether there’s any original reporting at all in this story.  It’s also hard to tell what qualifies one to be a person familiar with the situation — let’s hope it requires more than just reading WSJ coverage every day.

The point the story starts out making — that Chrysler is going into bankruptcy even if it cuts a deal with its lenders — is seriously undercut by anonymous quotes within.  We start with the above lede, then travel to someone in the administration and an unnamed Fiat negotiator saying that bankruptcy won’t be necessary, travel to a Chrysler source saying to lenders (via some third party source) that yes, they’re going into bankruptcy so Fiat can pick and choose pieces of Chryster, then finally land on Marchionne’s quote that Fiat is “interested in Chrysler ‘in its totality.'”  In the middle, there’s a side-show story about Fiat seeking a possible merger with G.M. — and the story says both that this will be only a takeover of G.M. European Opel division and a way for Fiat to spread into the American market.

I should not be more confused at the end of the story than I am at the beginning — unless the point of the story is to show the chaos that’s currently reigning within automaker negotiations.  What I get a sense of here instead is the chaos in the newsroom of a paper that sees itself as the premiere source of business news in the country.  Really, it took five reporters to write this?

A friend on OS asked a while back why there aren’t any embeds in the financial crisis — people on the ground, covering the story from within, sending reports back from the front lines.  I spent some time trying to answer this, and kept coming back to the same problem: Embedding a reporter in a bank — in any private enterprise — would seem to be a breach of privacy.  At best, even assuming a reporter did get internal access to the major goings-on, I figured we’d end up with some Bob Woodward-like book on the financial crisis a year after things are concluded, revealing who made who do what and for how much (read that in any way you want — I assume it’s all very messy in the banking industry right now).

But while real-time insider reporting might not be feasible, actual reporting is necessary.  As I rarely spend a day making any calls myself, I’m lecturing from a glass podium on a stage made of very thin crystal — but I’m an unpaid opinion writer, whereas the five reporters who contributed to this Wall Street Journal article about what could be one of the more important financial incidents in a year that hasn’t yet been boring get paid to go out and report the news.  That means not just talking to sources, but getting them to go on the record — and when they won’t go on the record, it means finding more sources who will.  It means telling a story that makes sense, and that’s credible, and that can be tracked and proven.

It also means reporting without a pre-set agenda.  Consider these three paragraphs:

Reorganizing three auto makers on three continents could move the world-wide car industry a big step toward the kind of large-scale consolidation that long has been overdue. For years, auto makers have struggled with excess capacity that has fostered intense price competition and squeezed profits.

The problem has festered because stronger car makers have steadily added plants while governments often have stepped in to prop up ailing car companies to preserve jobs.

Any bid to restructure three auto makers is likely to prove highly complex and risky for the companies involved and the Obama administration. Chrysler is in such bad shape precisely because its cross-border merger with Daimler AG ended in failure after eight years.

That may all be true, but I have no idea who’s claiming it.  Who says consolidation is long overdue?  The reporters?  Half of the reporters?  An unnamed source?  The Wall Street Journal itself?

Hundreds of experts exist in the U.S. who would have been willing to assist in this story, even on a Thursday when there’s good new T.V. to watch.  Likewise, though perhaps no one directly involved with the ongoing negotiations might be willing to go on the record, official sources at all of the companies involved get paid to answer media inquiries, and I bet even their non-denial denials of the statements above would have told us something.

Beyond even that, every time the government thinks about making a deal, a tree dies.  There’s paper out there.  Someone must have been willing to hand over a report or a sketch of where things could be headed.  Someone must be already working on the court filing for Chrysler.

I agree whole-heartedly with Glenn Greenwald that anonymity is being granted all too often these days, and I think we’re in more danger of being complacent about it when it appears in an article full of numbers and semi-familiar economic arguments.  The more complex the argument, the more carefully it should be explained.  The more controversial the event, the higher the bar for granting anonymity.

The more I read of the Wall Street Journal, the more frustrated I get.

GM Defaults?

The Wall Street Journal is reporting that G.M.’s Cheif Financial Officer said  today that the company won’t be making its June 1 $1 billion debt payment.  The statement is unclear as to whether G.M. isn’t going to make the payment because it believes there will already be an alternative arrangement — either a debt-for-equity swap or bankruptcy, the latter of which CFO Young calls “probable” — in place, or whether they are simply saying that, yes, they’re going to default because they can’t pay.  It’s so unclear, in fact, that the WSJ headline is “GM Plans to Skip $1 Billion Debt Payment,” and, skipping being the recognized economic term that it is, the article is getting some pretty amusing responses in the comments.

So I contacted G.M., and here’s their statement:

A successful bond exchange is an essential element of our out of court restructuring efforts, and we are working aggressively to launch an exchange.  That exchange could still be in process on June 1.  In which case, we would not expect to make the June 1st Series D bond payment.  Should we be required to finish our restructuring within the court process, the June 1 bond payment would be unlikely as well.

It sounds like G.M. is trying to acknowledge both reality — they’re not going to make this payment — and fiction — but they could if they wanted to.  The benefit of the former is that a G.M. default has been talked about for a long time, so acknowledging the inevitable isn’t a bad strategy.  The benefit of the latter is that it sort of makes it look like G.M. is getting pushed into default by the government or its creditors — which might play to some (though not perhaps the best and brightest) as this being Not G.M.’s Fault.

But it is.  Maybe the default will scare some sense into its large bondholders, and the debt-for-equity swap will happen.  Really, though, this makes bankruptcy seem very, very likely.

Small Wonder: A Terrible Day for Tim Geithner

Felix Salmon had a nice post today suggesting that major U.S. banks holding Chrysler’s debt are willing to let the company go into bankruptcy instead of taking a haircut on their debt in part because there’s no real way the public could think less of them.  Being the automatic villain gives one a certain freedom to be horrible, and J.P. Morgan Chase and friends certainly find themselves there.

What this made me wonder is, at what point will Tim Geithner hit the so-hated-he-can-do-whatever stage?

I mean, this has been a totally sucky week to be Geithner.  Consider he went into the weekend with Paul Krugman’s “it’s gonna get so much worse” column and Rachel Maddow having invited the “Hey Paul Krugman” singer onto her show (for the 5 people who hadn’t already heard him sing, “Timothy Geithner, he’s like some little weasel,” via the Internet).  Yesterday, he had the hey-guys, cut-your-budgets Cabinet meeting (check out the body language here, too — that’s Geithner slumped next to Biden).  At this point, I’m not sure the man could buy friends (though I have no doubt at least one commenter will say he’s tried).  Just take the last 24 hours:

• The Special Inspector General issued his report, which initially made news for saying that, contrary to the Secretary’s earlier assertions, firms who wanted to participate on either side of the Public-Private Investment Partnerships would be subject to compensation limits.
• Then it made news because, at The Economist, that sounds like the end of the PPIP.
• Then it made news because there are already 20 fraud cases being investigated.
• Then Felix Salmon pointed out that, within the report, there’s open speculation that it could encourage out-right criminal organization money-laundering schemes.
• The IMF also released its Global Financial Stability Report today, and said that bank losses are over $4 trillion, with more than half of that originating in the U.S.  Oh, and we’re going to need substantial additional investment to recapitalize banks, and may need to nationalize some at least temporarily.  And soon.
• All of this before the real fun started: Geithner testified before Elizabeth Warren’s Congressional Oversight Panel.  You may remember her as the woman who made Jon Stewart feel better last week, or the one who released the highly critical — and commendable, at that — report on the Treasury’s plans so far.  Wanna guess how that meeting went down?  Let Andrew Leonard summarize:

The pattern is now sufficiently well established to be definitive. The treasury secretary appears before a congressional committee, and is asked tough, detailed questions by members of both parties. He invariably compliments and thanks the questioner for a “thoughtful” and “important” question, and then proceeds to answer in vague generalities, rarely committing himself to specifics.

I’ve watched or pored over the transcripts of almost all of Geithner’s testimony before Congress, and it’s getting harder and harder to make a case in defense of his brief tenure. Tuesday’s hearing, before the Congressional Oversight Panel empowered by Congress to watch over the TARP program, ranks as one of his least satisfying performances so far. 

(I would say it was sort of like watching the robot from Small Wonder face off with Minerva McGonagall from Harry Potter — you start off rooting for both sides, but by the end, you just want McGonagall to put the robot out of her repetitve, wide-eyed misery).

• The stock market did rally a bit over Geithner’s assertion that “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”  That sounds like great news, until you realize he never said that (he skipped those pages, somewhat dramatically, in his testimony).
• Also, even if he had said that, it was meaningless and earned, again, bafflement and concern (and use of the word “ominous” in the first paragraph) from Paul Krugman.
• Finally, The Wall Street Journal ran an interview with Geithner (“Geithner Weighs Bank Repayments“) where he said he’s considering whether to let banks repay their TARP debt early or not.
• Finance blogger Nemo and a reader point out that, no, he can’t do that — he has to let banks pay the money back whenever they want to.  Strike… what? 56 or so? for Geithner.

It’s those last two points that bring us to the importance of the villain question.  The two banks currently talking about repayment are Goldman Sachs and J.P. Morgan Chase.  Paying back TARP funds would free these two from compensation limits — present and looming — and also make them look strong and solvent.  JPMC CEO Jamie Dimon has called TARP assistance a “scarlet letter,” and he’s looking to shed it as quickly as possible.  This would possibly inspire further investment in these banks and certainly encourage concentration of power into their hands.

Which is partly why the Treasury Department isn’t keen on just letting them repay so quickly.  Banks shedding TARP funds could make other banks want to jump ship — banks whose life-vests aren’t properly inflated.  So you could see Bank of America trying to pay back TARP, and either failing after payback, or failing to payback at all — and either way looking so weak as to inspire (who thought it was possible) less confidence than even now.  Which would, of course, benefit those who do survive the leap — probably a big part of the JPMC/Goldman dream right now.

In fact, the only reason that a firm wouldn’t leave TARP right now is a desire NOT to piss off the U.S. Treasury Department.  It’s in their individual interests to run, even while it might be in the interest of the entire system for them to stay a while.  So let me ask you this: Is Tim Geithner someone you’d want mad at you?  Does a real villain lurk somewhere within the Small Wonder facade, just waiting for the day when it no longer matters what Wall Street thinks — and if so, was today that day?  Does he have enough power, inside or out of the Treasury, to make things more uncomfortable for these banks than they already are?

My guess?  If there’s pressure to be brought to bear, it will have to be done by the President — and if that’s the case, Geithner’s days at the grown-up table are going to be limited.