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Felix Salmon:
Finance Blog - Market Movers by Felix Salmon: Unpacking the Risks in the CDO Market - Portfolio.com: I think it's worth teasing out exactly what the different risks in the CDO market are...[:]
First, there's the risk that holders of subprime mortgages will default on their loans. This is a known and relatively easy to quantify risk. Subprime mortgages issued in 2005 and 2006 already have high default rates, and those rates are likely to rise even higher when the mortgages reach their second birthday and higher adjustable rates start kicking in.... [T]he key risk in the market for any mortgage-backed security is not default risk but prepayment risk, and that a high mortgage default rate, in and of itself, is not necessarily particularly worrisome from the point of view of a CDO holder.
Second, there's the risk that CDO tranches, especially the riskier equity tranches and the ones with relatively low credit ratings, will start to default.... A key problem here is one of transparency: with many CDOs investing largely in other CDOs, it's very difficult often to get a handle on what the underlying cashflows are and how likely they are to be impaired.
Third, there's the discount which investors are currently demanding in order to buy illiquid securities with precious little transparency. There's talk in the market that triple-A rated CDO tranches – which, we can reasonably assume, are very unlikely to actually default – are getting bids at 270 basis points over Treasuries, or more. That huge spread is not a credit spread; rather, it's a good old-fashioned wide bid-offer spread on extremely illiquid securities. CDOs are similar in some ways to private equity, in that they tie up money for a long period of time and hope to provide excess returns over that time. They're not designed to be instruments which can be liquidated easily or quickly. If investors start being forced to liquidate their CDOs, then the price they receive might well be much lower than the actual credit risk on those CDOs might suggest.
Fourth, there's what used to be called rollover risk. If investors start liquidating their CDOs, that means there's going to be a pretty large supply of cheap CDOs on the secondary market. In turn that means that there's going to be much less demand for expensive CDOs on the primary market.... This is the credit crunch that many people are so worried about.... These four risks form a nice little circle.... But while all the risks are real, the linkages between them all are far from clear, and the different risks don't necessarily cascade onto and exacerbate each other in this way. They might – or they might not. If investors turn out to have reasonably strong stomachs, they might not want to liquidate at prices well below their entry points. And CDOs themselves, even the ones based on subprime mortgages, might not default nearly as much as homeowners. And without the passthrough mechanism of risks two and three, the vicious cycle loses a lot of its teeth.
So there is cause for concern, to be sure. But there isn't cause for panic.
Brad Setser:
RGE - The Economist still isn't convinced the RMB is undervalued ...:Half a trillion dollars apparently doesn't get the respect it used to. Neither the author of last week’s Economics Focus column nor Morgan Stanley’s Stephen Jen think that the Chinese yuan (or RMB) is undervalued, despite annual reserve growth that would have been around $350b last year but for $100b or so of debt purchased by Chinese state institutions and that could approach $500b this year. The Economist, for all its free market barnstorming, apparently doesn’t mind massive government intervention in the foreign exchange market – intervention that necessarily means governments will be big players in a host of asset markets.
Indeed, it often seems that the larger China’s current account surplus (it looks set to rise above 12% of China’s 2006 GDP), the faster China’s reserve growth, the faster Chinese exports growth (30% y/y in the latest data) and the more net exports contribute to growth (2-3% of GDP in q1, about the same as in 2006), the more the Economist (and, to be fair, some economists) insists that China’s exchange rate isn’t truly undervalued.
The Economist includes many different voices. This week's leader on the lessons from the 1997 crisis includes a welcome call for China to let its exchange rate move more. But I think it is fair to argue that its main editorial line consistently has emphasized that the RMB isn’t obviously undervalued even as China's trade surplus soars -- while suggesting that other currencies (the Saudi riyal, the Japanese yen) are....
[R]ather than encouraging China to mark the RMB to market, the last week's Economist argues we should all mark the RMB to a model, and specifically to a behavioral equilibrium exchange rate model. Fair enough. But marking-to-model poses its own risks, not the least the challenge of picking the right model. I cannot quite figure out what a behavioral equilibrium exchange model tells us about the currency of a country that manages its exchange rate as heavily as China. Movements in China’s real exchange rate clearly have been shaped more by central bank policy – notably the dollar peg – rather anything else.
The behavioral equilibrium exchange rate approach – at least as I understand – says that it is impossible to determine whether an exchange rate is under or over-valued based on macroeconomic fundamentals, so it is better to instead to try to find variables that help explain how the country’s real exchange rate has moved in the past: "This [approach] does not attempt to define long-term economic equilibrium. Instead it analyses which economic variables, such as productivity growth, net foreign assets and the terms of trade, seem to have determined an exchange rate in the past, and then uses the current values of those variables to estimate a currency's correct value."
Given China’s policy decision to peg to the dollar, though, the variable that will appear to drive movements in China’s real exchange rate will be the variable that moves when the dollar moves. If a weaker dollar leads to higher net foreign asset growth (because it produces a weaker RMB), the model might argue that the even higher foreign asset growth implies an even weaker RMB....
I do not doubt that determining whether or not a currency is misaligned is difficult – and different models produce different results. But some cases are easier than others. $500b [a year] in intervention does provide a bit of a clue...
Matt McIntosh consigns me to the Ninth Circle of Libertarian Hell. The company is very good, but it's cold in here...
Jim MacDonald:
Making Light: The Latest Iraq Surge: Have y’all noticed that over the last two weeks the word from everyone (Bush, at the Naval War College for example, where everyone in the audience already knew better) is that we’re fighting Al Qaeda in Iraq. Everyone who’s resisting is Al Qaeda. Everyone who’s fighting is Al Qaeda. Everyone who’s killed is Al Qaeda.
What’s with that? They aren’t insurgents any more. Or Sunni fighters, or Shiite militias. or even Baathist dead-enders. All the bad guys are Al Qaeda.
Kinda reminds me of Vietnam:
“How do you know he’s Viet Cong?” “He’s dead, isn’t he?”
Six years after 9/11 this is the only card left in Bush’s hand.
If he’s so hot on Al Qaeda isn’t it time to find Osama bin Forgotten? Y’know, the guy who actually attacked us?
Joe Klein
A Note on Al Qaeda - Swampland - TIME: Several readers have been grumbling about the increased use of "Al Qaeda" to describe the enemy in Iraq. There is, I think, good reason for this usage, but only in the context of the current U.S. offensive. The group in question is actually Al Qaeda in Mesopotamia, what the military calls Al Qaeda in Iraq (AQI), which represents the most dangerous sliver--no more than 5%--of the Sunni insurgency. This is also the group, founded by Abu Musab al-Zarqawi, that is the spine of the so-called Islamic State of Iraq.
In the past, AQI has had a close working relationship with many of the indigenous Sunni insurgency cells.... [I]t has offended the Sunni tribes and the Baathist remnant of the insurgency. As I'll explain in the coming edition of the magazine, AQI has been pretty much kicked out of al-Anbar province because it tried to impose a Taliban-like rule--forced marriages, Sharia etc--on Sunnis mostly pissed off at the U.S. for invading their country and imposing a Shi'ite regime. These more secular elements of the Sunni insurgency have turned on AQI and are providing the U.S. with--for the first time in this war--actionable intelligence. And so, the current nationwide operation, Phantom Thunder, is focused upon this insurgent sliver--the 5% represented by AQI.
There is a belief, which I don't buy, that the rest of the Sunni insurgents will now reconcile with the Shi'ite government....
Meanwhile, the Shi'ites have a lunatic fringe of their own: the Mahdi Army Special Groups.... (As I learned first hand--I found myself underneath a table during dinner as missiles landed nearby on my first night in Iraq--the Mahdi Army Special Groups, not Al Qaeda, are the people shelling the Green Zone most nights, according to military intelligence sources.)
So, bottom line: Others may be painting with a broader, and inaccurate, brush, but when I refer to Al Qaeda in this context, it only means the enemy in the current phase of battle, one particular sliver of the Sunni insurgency. There are other enemies of stability in Iraq, and other battles to come. I remain convinced, as I was before I went to Iraq, that our ability to influence these battles is minimal at best... and that a careful drawdown of troops, starting now, remains our best option.
John Ward Anderson:
Residents Say 17 Killed by U.S. Were Not Insurgents - washingtonpost.com: The U.S. military is investigating the killings of 17 people in a U.S. helicopter attack north of Baghdad a week ago, after residents of the area complained that the victims were not fighters from the group al-Qaeda in Iraq, as the military originally claimed, but members of a village guard force and ordinary citizens.
A U.S. military spokesman, Lt. Col. Christopher C. Garver, said the June 22 incident in Khalis, about 30 miles north of Baghdad, was under investigation "because of discussions with locals who say it didn't happen as we reported it." The attack occurred in the opening days of Operation Arrowhead Ripper, an offensive against al-Qaeda in Iraq that is centered on Baqubah, about 10 miles southeast of Khalis.
A U.S. military statement on the day of the incident called the dead men "al-Qaeda gunmen" and said they were killed after trying to sneak into Khalis.
"Iraqi police were conducting security operations in and around the village when Coalition attack helicopters from the 25th Combat Aviation Brigade and ground forces from 3rd Brigade Combat Team, 1st Cavalry Division, observed more than 15 armed men attempting to circumvent the IPs [Iraqi police] and infiltrate the village," the statement said."The attack helicopters, armed with missiles, engaged and killed 17 al-Qaeda gunmen and destroyed the vehicle they were using," it said.
Garver said townspeople claim "the individuals were not al-Qaeda, but members of the community." He said additional details were not available, pending completion of the investigation.
The investigation came to light after the BBC reported on its Web site that residents of Khalis were "incensed" that the dead men were accused of being members of al-Qaeda in Iraq. Villagers "say that those who died had nothing to do with al-Qaeda. They say they were local village guards trying to protect the township from exactly the kind of attack by insurgents the U.S. military says it foiled," the BBC reported.
McClatchy Washington Bureau | 06/29/2007 | Bush plays al Qaida card to bolster support for Iraq policy: Jonathan S. Landay: WASHINGTON — Facing eroding support for his Iraq policy, even among Republicans, President Bush on Thursday called al Qaida "the main enemy" in Iraq, an assertion rejected by his administration's senior intelligence analysts.
The reference, in a major speech at the Naval War College that referred to al Qaida at least 27 times, seemed calculated to use lingering outrage over the terrorist attacks of Sept. 11, 2001, to bolster support for the current buildup of U.S. troops in Iraq, despite evidence that sending more troops hasn't reduced the violence or sped Iraqi government action on key issues.
Bush called al Qaida in Iraq the perpetrator of the worst violence racking that country and said it was the same group that had carried out the Sept. 11 attacks in New York and Washington."Al Qaida is the main enemy for Shia, Sunni and Kurds alike," Bush asserted. "Al Qaida's responsible for the most sensational killings in Iraq. They're responsible for the sensational killings on U.S. soil."
U.S. military and intelligence officials, however, say that Iraqis with ties to al Qaida are only a small fraction of the threat to American troops. The group known as al Qaida in Iraq didn't exist before the U.S.-led invasion in 2003, didn't pledge its loyalty to al Qaida leader Osama bin Laden until October 2004 and isn't controlled by bin Laden or his top aides....
"The only way they think they can rally people is by blaming al Qaida," said Vincent Cannistraro, a former chief of the CIA's Counter-Terrorism Center who's critical of the administration's strategy...
Media Matters on the clown show that is Fred Hiatt's Washington Post editorial board:
Media Matters - Will Wash. Post reconsider its Supreme Court endorsement criteria after Roberts, Alito?: In September 2005 and January 2006, The Washington Post editorial board endorsed the nominations of John G. Roberts Jr. and Samuel A. Alito to the Supreme Court, asserting in both instances that Democrats should defer to President Bush's choices.... On September 18, 2005, the Post endorsed Roberts, praising him as "overwhelmingly well-qualified, possess[ing of] an unusually keen legal mind and practic[ing] a collegiality of the type an effective chief justice must have."... The Post's January 15, 2006, endorsement of Alito made similar arguments.... A president's "well-qualified" judicial nominees are "due deference," and "Judge Alito is superbly qualified. His record on the bench is that of a thoughtful conservative, not a raging ideologue. He pays careful attention to the record and doesn't reach for the political outcomes he desires."...
However... this term... the Post has repeatedly excoriated opinions written or supported by Roberts or Alito.... A June 29 editorial blasted the court's decision in Parents Involved in Community Schools v. Seattle School District No. 1.... In a June 26 editorial on... Federal Election Commission v. Wisconsin Right to Life.... A June 17 editorial on the case of Keith Bowles.... In an April 19 editorial on the Court's decision in Gonzales v. Carhart...
It's not as if the impact of adding Roberts and Alito to the Supreme Court was unpredictable or unpredicted, was it? Will the means and you will the end.
Felix muses on Murdoch's acquisition-to-be of Dow Jones and the Wall Street Journal. I interject comments:
Finance Blog - Market Movers by Felix Salmon: Why Murdoch Can Make Money On His Dow Jones Investment - Portfolio.com: Brad DeLong and Paul Krugman both cogitate today on the implications of Rupert Murdoch buying the Wall Street Journal. Krugman is unenlightening: his argument is basically "Fox News is bad, therefore Murdoch is bad, therefore Murdoch buying the WSJ is bad"...
Paul Krugman may be boring, but that doesn't mean he is wrong. Fox News is bad. Murdoch is bad. Whether his acquisition of the Journal is good or bad from the standpoint of those of us who want to see a flourishing Habermasian public sphere of thoughtful and well-informed citizens depends on the exact form his badness takes, and whether it does more to undermine the good or the bad aspects of the Journal. And I think it more likely than not that the acquisition is bad news for those of us who want to see, et cetera.
Felix goes on:
DeLong is more interesting. Is Murdoch basically just a multibillionaire buying himself a new toy? If that's the case, then watch out.... Is Murdoch, on the other hand, a multibillionaire buying one of his sons a new toy? If that's the case, "then the Murdoch purchase is probably good news.".... And there's a third possibility...
the one that Salmon likes, and that he argued for. As I put it:
Rupert Murdoch thinks that in the age of new-media convergence the Wall Street Journal has the brand and the authority and the staff to make it an excellent launching pad, worth a $2 billion bet. Can Murdoch synergize the Journal's brand on TV and via new media in a way to further boost his fortune? Perhaps.... Why, Murdoch may be asking himself, should the biggest fortune be made by Michael Bloomberg and not by him?...
But, I say:
if Murdoch had a real chance at the synergies, there would be other bidders by now.
Felix Salmon parries:
DeLong's an economist, which means he's naturally predisposed to arguments which say that if some course of action is profitable, then the market would have done it already. But I think there's a strong case to be made that News Corp is one of the very few entities capable of turning the WSJ into a powerful global electronic platform.... Why? One answer is... Roger Ailes. Much as the likes of Paul Krugman despise him, the fact is that he's a visionary and a genius.... News channels are a dime a dozen; only one has managed to beat CNN....
The other answer is that the WSJ needs to be run by a newspaper company... [which] simply don't have the cashflow to invest in... domination of the electronic world.... [P]ublic companies who don't own newspapers don't have Murdoch's time horizon... as NBC Universal CEO Jeff Zucker told the FT.... It's a bit embarrassing, but true, that the 76-year-old Murdoch has a longer time horizon than a public company which will almost certainly exist in some form for many generations yet.... Yet it explains why Murdoch can profitably spend $5 billion on Dow Jones even when no one else can.
Well, I am an economist. And I am naturally predisposed to arguments which say that if some course of action is profitable, then the market would have done it already. It does seem possible that $5 billion ($2 billion net, after selling off the pieces of Dow-Jones Murdoch doesn't really want) is low enough that it makes it profitable for Murdoch but high enough that it makes it unprofitable for everybody else. But is it likely? What, exactly, does Rupert Murdoch do with the Journal to make new-media synergy money that nobody else could do in his stead?
Notes: Quotes from Ron Suskind 2003), The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill (New York: Simon and Schuster: 0743255453).
Joshua Micah Marshall watches as the Washington Post writes as if it has just broken the story of the psychotic Cheney administration:
Talking Points Memo: by Joshua Micah Marshall: June 24, 2007 - June 30, 2007 Archives: (June 29, 2007 -- 11:33 AM EDT // link): Yesterday David Broder wrote a column which one TPM Reader, more or less fairly, described as Broder's expression of shock, shock at just what Dick Cheney has been up to over the last six-plus years. And this is a good opportunity to say that the Post's 'Angler' series seems to be becoming the trigger for that transition moment where consensus establishment opinion goes from seeing the vice president as the powerful administration heavy with a sometimes creepy but largely comic penchant for secrecy to an altogether more nefarious force who has used his unprecedented power as vice president to advance an agenda of official secrecy, non-accountability, untrammeled executive power, legitmized torture and general degradation of the rule of law.
But this is far too easy. Because the simple fact is that we've known almost all of this for years.
Don't get me wrong. I'm not knocking the series, which is quite good. In journalism, details, the specifics are all. But the story in general has been out there for years, as well as a good number of the specifics, strewn over hundreds, probably thousands of newspaper and magazine articles, online and off.
In other words, when it comes to recognizing Cheney's profoundly damaging effect on American constitutionalism as well as his guiding role in essentially all of the administration's most disastrous policies, the train already left the station some time ago.
Sorry.
Well, I will knock the claims that the Post makes for the series. The Post ought to be ashamed of the way it is selling it. Gellman and Becker are building on a lot of work by other, better journalists and commentators earlier. They ought to acknowledge that. Their honor is at stake.
Thus, when David Broder writes that:
http://www.washingtonpost.com/wp-dyn/content/discussion/2007/06/09/DI2007060900033.html: [T]t would have been nearly impossible to duplicate the Cheney series reporting until after the reelect of the Bush-Cheney ticket...
And:
It took a year of digging by Bart Gellman and Jo Becker to begin to crack the cone of secrecy around Cheney...
I say: what about Ron Suskind? Remember Ron Suskind's book, The Price of Loyalty. What does it say about Cheney?
Archive Entry From Brad DeLong's Webjournal: Notes: Quotes from Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill.
Ron Suskind (2003), The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill (New York: Simon and Schuster: 0743255453).
Mr. Cheney welcomed Mr. O'Neill and Federal Reserve Chairman Alan Greenspan into the foyer of his two-story brick town house, where boxes were packed for the move to the vice president's mansion. It was late in the afternoon of Jan. 14, the Sunday of the final week of the transition. They settled at the kitchen table, three men in ties, blazers, and slacks, CEO casual, making final preparations for the coming era.... Two hours passed. Mr. Cheney moved to close the circle. The shape of things to come? Tax cuts, Mr. Cheney said, front and center. A task force on energy, which he would run. And everyone stay in close touch about the condition of the economy. All other matters would move on a slower track. Mr. O'Neill left the meeting with a glimpse of the future: that Mr. Cheney would be the most powerful vice president of modern times...
[January 14] All this became clear to Paul O'Neill and Alan Greenspan at the same instant, midway through the waning afternoon. When the centerpiece of the President-elect's plan for America--the $1.6 trillion, ten-year tax cut--was discussed, neither man felt comfortable mentioning the secret "trigger" pact [to make the tax cuts conditional on continued surpluses] to Dick Cheney. They couldn't be sure what Dick would think...
[January 23] [T]he third day of the Bush administration.... Bush had O'Neill's memo--Paul figured they'd talk about that--and then they'd discuss whatever came up.... O'Neill... offered a fifteen minute overview on what he considered the informed opinion (that is, his and Greenspan's) [about the economy].... O'Neill referred to items of his memo.... There were a dozen questions that O'Neill had expected Bush to ask. He was ready with the answers. How large did O'Neill consider the surplus, and how real? How might the tax cut be structured? What about reforming Social Security and Medicare, the budget busters?... Bush didn't ask anything. He looked at O'Neill, not changing his expression, not letting on that he'd had any reactions.... O'Neill decided therefore to move from the economy to a related matter. Steel tariffs.... The President said nothing. No change in expression.... "I wondered, from the first, if the President didn't know the questions to ask," O'Neill recalled, "or did he know and just not want to know the answers? Or did his strategy somehow involve never showing what he thought? But you can ask questions, gather information, and not necessarily show your hand. It was strange"...
At this point in mid-March 2001, a very different model was becoming apparent. it caused confusion for senior officials like O'Neill, Powell, and Whitman.... Was it possible, O'Neill wondered, that the country thought it had elected a centrist when in fact it had empowered an ideologue? The incident with Whitman was the start of what O'Neill later called "a rolling revelation of the way this administration was operating." "What became clear to me at that point," he said... not long after he left office, "is that the presence of me and Colin and Christie helped convince people that this would... be an administration that would look hard for best solutions.... That's what the three of us were known for.... Thinking back about how all of us started to be banged up so early on, from the inside, it now seems like we inadvertantly may have been there, in large part, as cover"...
O'Neill began to view Mr. Lindsey as a partisan for deep tax cuts rather than an honest broker of competing proposals -- an advocate of one point of view who would soon sit about 30 feet from the Oval Office and a president with no experience managing national economic policy. It would be important to pick his moment carefully to make his concern known. It was late on a weeknight. Two lifelong workaholics were still at their posts: Mr. O'Neill and Dick Cheney.... "Dick, I think we need to talk," Mr. O'Neill said. He reasoned that Mr. Cheney would understand the importance of establishing sound processes to manage the White House and executive branch -- entities that were truly beyond human scale. Mr. O'Neill said that he was concerned that Mr. Lindsey was masquerading as the honest broker and was anything but. Without strongly positioned honest brokers and a rigorous, disinterested vetting of various proposals, Mr. O'Neill said, "all you've got are kids rolling around on the lawn." The need to really "run the traps" on every potential presidential move was more important for this Bush than for his father or Gerald Ford, both of whom had vast experience in the federal government. God knows, Mr. Cheney would understand that as well as anyone. Mr. Cheney listened, nodded, listened some more. Dick was not a talker. It was easy to paint what you hoped to see on Dick's concerned, pensive mien. But you could never be certain what he was thinking or what he would do. Mr. Cheney thanked Mr. O'Neill for his insights, and Mr. O'Neill left feeling that he had done his duty...
Sitting in his office in mid-July, Mr. O'Neill sketched some notes for another serious talk he wanted to have with Mr. Cheney about effective process -- a way to handle decision making so that policy didn't get served half-baked and larded with political calculations. In his personal experience, the president didn't appear to have read even the short memos he sent over. During his weekly one-on-one with Mr. O'Neill, Mr. Bush sat, often for an hour, offering no response. He rarely asked questions in meetings. "The only way I can describe it is that, well, the president is like a blind man in a roomful of deaf people," Mr. O'Neill said. "There is no discernible connection." Mr. O'Neill thought about how to add fiber to the policy process in this White House, and about how to persuade Mr. Cheney to take the lead. "I realized it would be hard to find things we did with Nixon or Ford that would be applicable for this president," Mr. O'Neill said later. He recalled Mr. Bush's unresponsiveness in large and small meetings. "This president was so utterly different from those men." He stopped by Mr. Cheney's office. The fears he had harbored during the transition -- about "kids rolling around on the lawn" -- had been confirmed, he said. "You can't just move on instinct. You end up making too many mistakes," Mr. O'Neill told the vice president. "We need to be better about keeping politics out of the policy process. The political people are there for presentation and execution, not for creation." As before, Dick nodded. He thanked Paul, as always, "for his sharp insights."
One problem was that [O'Neill] didn't have a chair in the White House senior staff meeting... each morning at 7:30. Robert Rubin... had considered attendance at this meeting... among his most important victories. It placed Rubin's finger on the White House's pulse each morning.... Summers.... O'Neill wasn't going to ask, himself; he had his chief of staff, Tim Adams, inquire several times whether the Secretary could attend. "There was foot dragging and then no response..." While no one would head-on confront an official as powerful as the Secretary of the Treasury...
[Budget Director] Mitch Daniels became agitated. He blurted out, "Well, yes, but if you can't do the right thing when you're at 85 percent approval, then when can you do the right thing? I think it's time to say no." Everyone looked with surprise at Daniels--he has a way of expressing what others are thinking but don't say. Often, he'd find himself doubling back when he got an arched brow from Cheney or Rove...
On Sunday, Feb. 10 [2002], Mr. O'Neill and Mr. Greenspan went to the vice president's house for lunch.... During the campaign, Mr. Cheney had made a commitment of support to steelworkers in West Virginia, a state the ticket carried. Karl Rove, the White House political director, was looking at Pennsylvania, Ohio and Michigan as crucial states in the upcoming midterm elections. They were inclined to impose major tariffs on imported steel, as a way of helping domestic steelmakers and protecting jobs in those states. What's more, the White House legislative staff was hoping that it could trade support for steel tariffs for a vote or two in the Senate for legislation giving the president authority to reach trade agreements largely without congressional tinkering. Mr. Cheney told Mr. O'Neill and Mr. Greenspan that Mr. Bush and he were going to make a decision on the steel issue. But, clearly, Mr. Cheney didn't want to end up in open debate with Mr. O'Neill, whose stance opposing curbs on steel imports was well informed, or with the unmanageable Mr. Greenspan, chairman of an agency independent of the White House. So, he had granted them an audience. They were getting in early.... Now was their chance, Mr. Cheney told them, to discuss their view of "the right thing to do." Their positions would be duly noted; there would be little more that they needed to say. Mr. Cheney said, "We'll make our decision and, then, that'll be that." Mr. O'Neill and Mr. Greenspan both made the case that the largely bipartisan consensus on free trade was one of the great victories of the last decade; that the president would confuse many constituencies by flouting that consensus. Mr. O'Neill explained that tariffs would do little to offer long-term support to the U.S. steel industry. Mr. Greenspan pointed out that tariffs might actually violate certain World Trade Organization agreements. Mr. Cheney didn't show his hand. Mr. O'Neill left concerned that the meeting was largely tactical -- that the vice president had already made up his mind...
This is what Mr. Cheney had been hoping to avoid -- a split. In fact, it was anything but a split. Nearly everyone seemed on one side; Mr. Cheney and Mr. Zoellick were on the other. A consensus on sound policy was colliding with a political favor. Secretary of State Colin Powell spoke. "Why are we thinking about doing this?" he asked in frustration. "I have heard good reasons today not to do it, but I haven't heard one good reason to move forward with tariffs. We can't even say this will improve our steel industry." Finally, it came back to Mr. Cheney. He mumbled that "imports are, in fact, way down from the surge. ... Our minimills are competitive," all arguments against tariffs. But then he added that whatever we do, the tariff-empowering statute says "we can review this in 18 months." In other words, if what we do now is go with tariffs, it will be political bait, and in 18 months -- after the 2002 midterm elections -- we can effect the switch. Meeting over...
Mr. Cheney had shown up at a few of the regular meetings of the economic team. He didn't say much -- he never said much.... Now, the group was meeting on the vice president's turf. As the meeting in Mr. Cheney's office progressed, it became clear that the vice president was ready to weigh in on what the president should do to bolster the economy, and his standing with voters worried about the economy, as the second half of his term began. A package of tax proposals, led by a 50% cut in the individual tax on dividends, had been all but buried since Mr. O'Neill took his stand against it in early September.... After the midterms, though, Mr. O'Neill could sense a change inside the White House.... Now Mr. Cheney mentioned them again, how altering the double taxation of dividends would provide some economic stimulus. Mr. O'Neill jumped in, arguing sharply that the government "is moving toward a fiscal crisis" and then pointing out "what rising deficits will mean to our economic and fiscal soundness." Mr. Cheney cut him off. "Reagan proved deficits don't matter," he said. Mr. O'Neill was speechless, hardly believing that Mr. Cheney -- whom he and Mr. Greenspan had known since Dick was a kid -- would say such a thing. Mr. Cheney moved to fill the void. "We won the midterms. This is our due." Mr. O'Neill left Mr. Cheney's office in a state of mild shock.... The inscrutable Mr. Cheney had finally shown himself...
Seems to me that Ron Suskind, back in 2003, had done more than "begin to crack the cone of secrecy around Cheney." Honorable men and women should not be ashamed to give him credit.
P.S.: One of the few moments--no, it turns out it's the only moment--Bush says anything substantive in the entire book:
p. 71 ff: President Bush echoed this view: "We're going to correct the imbalances of the previous administration on the Mideast conflict. We're going to tilt it back toward Israel. And we're going to be consistent. Clinton overreached, and it all fell apart. That's why we're in trouble," Bush said. "If the two sides don't want peace, there's no way we can force them." Then the President halted. "Anybody here ever met [Ariel] Sharon?" After a moment, Powell sort of raised his hand. Yes, he had. "I'm not going to go by past reputations when it comes to Sharon," Bush said. "I'm going to take him at face value. We'll work out a relationship based on how things go." He'd met Sharon briefly, Bush said, when they had flown over Israel in a helicopter on a visit in December 1998. "Just saw him that one time. We flew over the Palestinian camps," Bush said sourly. "Looked real bad down there. I don't see much we can do over there at this point. I think it's time to pull out of that situation."
And that was it, according to O'Neill and several other people in the room. The Arab-Israeli conflict was a mess, and the United States would disengage. The combatants would have to work it out on their own. Powell said such a move might be hasty. He remarked on the violence in the West Bank and Gaza and on its roots. He stressed that a pullback by the United States would unleash Sharon and the Israeli army. "The consequences of that could be dire," he said, "especially for the Palestinians."
Bush shrugged. "Maybe that's the best way to get things back in balance." Powell looked startled. "Sometimes a show of strength by one side can really clarify things," Bush said...
Duncan Black points out how easy it would be for Washington reporters to be journalists:
Eschaton: Journalism!: McClatchy:
WASHINGTON — Facing eroding support for his Iraq policy, even among Republicans, President Bush on Thursday called al Qaida "the main enemy" in Iraq, an assertion rejected by his administration's senior intelligence analysts.
The reference, in a major speech at the Naval War College that referred to al Qaida at least 27 times, seemed calculated to use lingering outrage over the terrorist attacks of Sept. 11, 2001, to bolster support for the current buildup of U.S. troops in Iraq, despite evidence that sending more troops hasn't reduced the violence or sped Iraqi government action on key issues.
Bush called al Qaida in Iraq the perpetrator of the worst violence racking that country and said it was the same group that had carried out the Sept. 11 attacks in New York and Washington.
"Al Qaida is the main enemy for Shia, Sunni and Kurds alike," Bush asserted. "Al Qaida's responsible for the most sensational killings in Iraq. They're responsible for the sensational killings on U.S. soil."
U.S. military and intelligence officials, however, say that Iraqis with ties to al Qaida are only a small fraction of the threat to American troops. The group known as al Qaida in Iraq didn't exist before the U.S.-led invasion in 2003, didn't pledge its loyalty to al Qaida leader Osama bin Laden until October 2004 and isn't controlled by bin Laden or his top aides.
There, see how easy it is?Everyone should bookmark McClatchy's new page, btw.
He quotes Paul Kedrosky on the iPhone as a disruptive, non-crippled technology:
Finance Blog - Market Movers by Felix Salmon: iPhone to Support Wifi Calling - Portfolio.com: Paul Kedrosky has an interesting op-ed in the WSJ today, saying that the reason people desperately want the iPhone is that it isn't crippled:
These people want to be liberated either from bad phones or from bad phone companies. They want to choose a device that does all the things they want to do -- calling, being entertained, consuming information -- not all the things their phone company thinks they should do (and then be charged $5 a month per feature for the privilege). They want phones that make it possible to do calls over wi-fi, to the point that cellular companies could potentially become irrelevant.
The massive upwelling of grassroots support for the iPhone shows that a revolution has been building for some time. Now it's here. Cell phone carriers are going to have to respond by cutting the length of contracts and eliminating exclusivity, and most important, by finally being responsive to their market. If not, iPhones (or their successors) will finish them off.
Of course, the irony here is that the iPhone is exclusively locked in to AT&T for the next five years; that it requires a two-year contract; that it won't make calls over wi-fi; and that in general it's not half as revolutionary as Kedrosky seems to imply that it is. But we're only at iPhone 1.0, today. Will wi-fi calls and the like come in the future? Surprisingly, the answer seems to be yes, according to an interview with Steve Jobs and AT&T CEO Randall Stephenson, also in the WSJ:
Mr. Jobs: We obviously thought about VoIP. You still need a cellular phone because you're not always going to be in a Wi-Fi hotspot. One you have a cellular phone plan, it costs you zero incremental dollars to use it when you're making the next phone call. VoIP, while an interesting technology, didn't seem to be a big breakthrough to us. But others might feel differently, and others may make Web-based VoIP clients available for the iPhone – I think someone's already working on that...
Mr. Stephenson: Absolutely -- in fact Wi-Fi is just an enhancement to your existing wireless capability.... You could not have thought of VoIP on a wireless handset until you start thinking about Wi-Fi capabilities on these handsets. That doesn't intimidate us at all. I think it's a very nice enhancement to an existing service.
This is great news. As Jobs knows full well, the incremental cost of the next phone call is not zero on a cellular phone plan: not if that phone call would take you over your allotted minutes, and certainly not if the phone call is international. It seems that Jobs and Stephenson are OK with wi-fi based calling, which will be a godsend to people who travel or call a lot internationally.
Ronald Reagan on the Caribbean!
Ronald Reagan on Free Trade!
Ronald Reagan on the Imminent Coming of the Lord!
Ronald "I Never Wanted to Trade Weapons for Hostages" Reagan!
Ronald Reagan on the Budget Deficit!
The Small Place of Economists in a President's Mind
Ronald Reagan on Survivable Total Thermonuclear War!
Ronald Reagan on Ambassador Hinton!
Robert Moomaw writes:
As has been pointed out before, Congress as a whole traditionally gets lower approval ratings than the President for the simple reason that people on BOTH sides of the ideological aisle can disapprove of it -- the people backing the minority party will naturally disapprove of it, but a lot of the people backing the majority party will also say THEY disapprove of it because they don't think their party is doing an enthusiastic enough job of trampling the opposition underfoot. (Indeed, it's almost unprecedented for a President to come as close to having a lower approval rating than Congress as Bush has managed to do.) So, if you really want to know what the voters now think of the two parties in Congress, you have to ask them separately whether they approve of the Congressional Democrats and the Congressional Republicans -- a question which actually does get asked fairly frequently.
Well, the latest pollster to ask it is Fox News today -- and, like all other post-2006 election polls on the subject, they indicate that at the moment the Dems have very little to worry about, election-wise. The voters, as a whole, do disapprove of the Congressional Dems by a 13-point margin -- but they disapprove of the Congressional GOP by a 26-point margin: the same type of huge difference we've seen in recent ABC and Harris polls: http://www.pollingreport.com/congress.htm.
In short, the Effortfully Balanced Broder-type critics among the Talking Heads still don't know what they're talking about.
From Douglas Brinkley, ed. (2007), The Reagan Diaries (New York: Harper Collins: 9780060876005).
Wed Jan 28 1981: Visit by P.M. Seaga of Jamaica, his wife and members of his admin. Our 1st state luncheon. He won a terrific election victory over a Cuban backed pro-communist [Michael Manley]. I think we can help him and gradually take back the Caribbean which was becoming a "Red" lake.
Thur Jan 14 1982: Jeanne K. tells me a Soviet ship designed to neutralize efforts to detect presence of Soviet Nuclear Subs has reached Cuba. First time such a ship has ever been in Am. waters. This definitely is an offensive weapon--thus a violation of '62 agreement.
Fri Jan 15 1982: An NSC meeting re Cuba. My own thought is that we should create a plan to urge Cuba and yes Castro to come back into the orbit of the Western Hemisphere. Castro is in trouble--his popularity is fading, the ec. is sinking and Soviets are in no position to help. We could start a campaign to persuade him and the disenchanted Cubans to send the Russians home and once again become a member of the Latin Am. community.
From Douglas Brinkley, ed. (2007), The Reagan Diaries (New York: Harper Collins: 9780060876005).
Thur Mar 19 1981: The auto task force met with Cabinet--still some disagreement about any quotas on Japanese imports. Some even with regard to a Japanese voluntary cutback. The V.P. summed it up nicely. He said we're all for free enterprise but would any of us find fault if Japan announced without any request from us that they were going to reduce their export of autos to America?
There was no dissent. I told them I'd heard enough I would make a decision. Privately I told Al Haig to call Amb. Mansfield and have Mike advise "Ito" before his visit that we were threatened by a bill in Cong. to set a quota. An announcement by Japan of a voluntary cutback could head that off. We'll see what happens. Al then told me he felt he was being undercut by other agencies etc. I worry that he has something of a complex about this. Anyway I've arranged that he and I meet privately 3x a week.
Kennedy Center in the evening for "Little Foxes" starring Liz Taylor. She was darn good--so was the show.
From Douglas Brinkley, ed. (2007), The Reagan Diaries (New York: Harper Collins: 9780060876005).
Fri May 15 1981: Met with Botha--F. Minister S. Africa. Then with the F.M. of Romania. An NSC meeting with Lebanon on the table. Latest message from Habib does not sound good although he said to make no decisions for a few days. Begin was more flexible than Assad of Syria (bolstered by Soviets) Habib going to Saudi Arabia to see if they'll lean on Assad. Sometimes I wonder if we are destined to witness Armageddon.
From Douglas Brinkley, ed. (2007), The Reagan Diaries (New York: Harper Collins: 9780060876005).
Fri Aug 23 1985: That was also the day I received a "secret" phone call from Bud Macfarlane. It seems a man high up in the Iranian govt. believes he can deliver all or part of the 7 Am. kidnap victims to Lebanon sometime in early Sept.... I had some decisions to make about a few points--but they were easy to make. Now we wait.
Fri Nov 22 1985: Back to the office for a brief NSC. Subject was our hostages in Beirut. We have an undercover thing going by way of an Iranian which could get them sprung momentarily.
Thur Dec 5 1985: NSC Briefing--probably Bud's last. Subject was our undercover effort to free our 5 hostages held by the terrorists in Lebanon. It is a complex undertaking with only a few of us in on it. I won't even write in the diary what we're up to.
Sat Dec 7 1985: I then had a meeting with Don R., Cap W. and Bud M., John P., Geo. Shultz and Mahan of CIA. This has to do with the complex plan which could return our 5 hostages and help some officials in Iran who want to turn that country from it's present course and on to a better relationship with us. It calls for Israel selling some weapons to Iran. As they are delivered in installments by air our hostages will be released. The weapons will go to moderate leaders in the army who are essential if there's to be a change to a more stable govt. We then sell Israel replacements for the delivered weapons None of this is a gift--the Iranians pay cash for the weapons--so does Israel.
Thur May 27 1986: Well let's start by saying we still don't know whether our hostages will be freed. Bud's call revealed that 2 of the Iranians who had involved us were on the phony side. However through them Bud was put in touch with a rep. from the PM's office.... [T]hey got back to the original price--sale of some weaponry--now we'll know possibly in the next 48 hours.
Sat Dec 6 1986: Radio script was on Iran. I admitted there were mistakes in the implementation of policy but not in the policy itself.
Rupert Murdoch is about to buy the Wall Street Journal. This is a big deal. But I think that almost everybody is thinking about what this means in the wrong way.
To understand what Rupert Murdoch's forthcoming purchase of the Wall Street Journal means, you need to start with the fact that there is a good Wall Street Journal and a bad Wall Street Journal. The good Wall Street Journal is the news pages as built up by Norman Pearlstine, with past and present stars like Al Hunt, Davie Wessel, Alan Murray, Ron Suskind, Walt Mossberg, Greg Ip, and a galaxy of others: the finest, smartest, hardest-working, and most professional group of star news reporters in the world. The bad Wall Street Journal is the editorial page of ethics-free right-wing--no, not right-wing, Republican wingnut--partisan hacks. As Ken Auletta put it in an excellent New Yorker article a couple of years ago, describing the bad Wall Street Journal:
Annals of Communications: Family Business: The New Yorker: the opinion page... Robert Bartley.... From 1972 to 2002... ran the editorial page... as if Bartley owned and operated his own private newspaper... a non-stop campaign on behalf of supply-side economics, a return to the gold standard... and prosecuting the Cold War.... The predominantly Democratic Bancroft family... would have preferred “a less acerbic editorial voice.... There is a lot that I think is beyond the pale.”... [T]he editorial page... omitted facts that contradicted its assertions.... crossed a line in advancing its ideology...
Henry Kissinger once famously said of a statement that "it had the added advantage of being true." For the bad Wall Street Journal of the editorial page--at least when I have dealt with them--truth is simply irrelevant: to show them person-to-person that they are factually wrong makes no impact at all. Few like the bad Wall Street Journal, not even those who usually find it useful. Here's one view:
On the Wall Street Journal Editorial Page: ...smug rich-guy arrogance... blithe indifference to actual human nature... "arrogant elites"... out in the open, brazen and unashamed... dubious factual assertions... mischaracterize... our views... hostile and insulting... [we need] to correct the record because [of] you and... [your] friends...
That's the perspective from National Review.
The contempt for the bad Wall Street Journal is returned. Here's Auletta from the New Yorker again, quoting Bartley on Norman Pearlstine, the head of the good Wall Street Journal:
When I asked Robert Bartley, the Journal’s former editorial-page editor, to describe Pearlstine’s legacy, Bartley... carved up his former colleague.... “[C]irculation was down. Advertising was down.... [R]eporters won prizes for writing books beating up on our subscribers and advertisers.... Norm’s a very creative guy--the three-section newspaper was his.... I don’t think he’s good at sustained effort”...
Bartley's criticism of Pearlstine's Wall Street Journal, in a nutshell, is that Pearlstine had forgotten what he was paid to do: Pearlstine thought he was paid to report the news and inform the subscribers, but in Bartley's view that was wrong--what Pearlstine was paid to do was to deliver eyeballs to advertisers by printing stuff that made subscribers and advertisers feel good and righteous.
Dr. Jekyll, meet Mr. Hyde.
Some Journal insiders--even some on the news side--say that this Jekyll-and-Hyde relationship is all to the advantage of the good Dr. Jekyll. Nobody serious believes the editorial page, they say; it serves as a comics page for the older and more-wingnutty subscribers, a source of daily comfort food for those who still denounce, "that Communist, Franklin Roosevelt," and who have always thought that the depth and duration of the Great Depression were the fault of the New Deal--that if the free-marekt tidal wave of falling wages and massive bankruptcies had been allowed to purge the economy for 1933 and 1934, by 1935 and 1936 all would have been well. But, this faction says, the editorial page delivers up perhaps half a million extra subscribers a year, and that money flow pays for the finest news-reporting operation in the world.
Other Journal insiders say that it is the bad Mr. Hyde that is sucking the blood of Dr. Jekyll. Nobody would pay attention to the wingnuts of the editorial page, they say, were it not for the fact that they come at the back of a very, very good newspaper. 50,000 people a month read the American Spectator, where Bartley's crew belongs. 1,000,000 people a day at least glance at the Wall Street Journal editorial page. The reporters in the news division are thus in a morally ambiguous position as journalists: the stories they write inform the public, and the public they attract then turns to page A16--and is there misinformed.
We outsiders speculate and argue about which of these perspectives is closer to the truth. We do not know. But we do know that this is the shape of the organization that Murdoch wants to capture.
Now Rupert Murdoch of the News Corporation has pulled a chair up to this poker table, and wants to buy the Wall Street Journal. Figure that he can sell off other parts of Dow Jones, Inc. for enough money that the long-term net investment by News Corp. will be on the order of $2 billion. Why might Murdoch want to spend so much money to do such a thing?
One possibility is that Rupert Murdoch likes to keep what he has and that he has sons: the thirty-something Lachlan and James (and a daughter, Elizabeth). His sons will already be rich beyond the wildest dreams of avarice. Giving his sons roles at News Corp. has proven difficult: he still wants to run the show, and people whom Murdoch has hired and had long-term relationships with want to go around them if they don't like what his sons are doing. But there is nobody at the Journal with strong personal ties to Murchoch. If Murdoch buys the Wall Street Journal and spins it off, then at least one of his sons can become an independent global power broker in his own right without Murdoch having to loosen the reins at News Corp. It's like a medieval German emperor creating his son Duke of Swabia: it's a real job, an important job, a very powerful job, and a job that keeps the son occupied without forcing the father to begin the surrender of his own power before he is ready. That might be what is going on. But if it is Murdoch is playing his cards very close to his vest.
A second possibility is that Rupert Murdoch thinks that in the age of new-media convergence the Wall Street Journal has the brand and the authority and the staff to make it an excellent launching pad, worth a $2 billion bet. Can Murdoch synergize the Journal's brand on TV and via new media in a way to further boost his fortune? Perhaps. Many fortunes will be made in financial news when the technological shift that has replaced the Mergenthaler and wood pulp with the microchip and the fiber-optic cable finally shakes itself out. Why, Murdoch may be asking himself, should the biggest fortune be made by Michael Bloomberg and not by him? That might be what is going on. But if it were, and if Murdoch had a real chance at the synergies, there would be other bidders by now.
A third possibility--by far the most likely, IMHO--is that Rupert Murdoch is one of the boys who just wanna have fun. It would be more fun shaping the opinions of the world through both News Corp.'s current properties and the world's preeminent global financial newspaper than through just News Corp.'s current properties alone--plus it would be more fun receiving the bowing and scraping that the world's powerful would engage in to placate the owner of News Corp. plus the Wall Street Journal than just the bowing and scraping that accrues to the owner of News Corp. alone. That is probably what is going on.
Which of these three possibilities is truest has implications for what is likely to happen to a Journal under Murdoch ownership, and whether the Murdoch purchase is a good thing.
If the first possibility is true--if the best analogy to what is going on is that this is the equivalent of a medieval German emperor creating a son Duke of Swabia--then it is surely good news for the world. A relatively young, energetic proprietor with deep knowledge of the news business--and Murdoch's children fit that bill--would in all likelihood be as good a steward of the excellent social asset that is the Wall Street Journal's news section. And it can't be bad for the editorial pages. Whatever happens to them has to be an improvement.
If the second possibility is true--that Murdoch wants to keep the Journal's strengths as he uses the brand as a new-media synergy launching pad--then the Murdoch purchase is probably good news for the world. Murdoch will then leave the news pages--the Journal's major strength--intact. And although Murdoch is as right-wing as Bartley and company, there is a key difference: Murdoch can be bought, or at least rented. A Journal editorial page run by Murdoch might well wind up supporting a Tony Blair or a Hillary Rodham Clinton: it would be wignutty when that was in Murdoch's interest; sane right-wing when that was in Murdoch's interest; centrist when that was in Murdoch's interest. A Journal editorial page run by the current regime would be wingnutty 24/7, as it is today. Neither would be a source of news or information--both would bear a completely random relationship to the truth--but the Murdoch version would be less destructive.
But by far the most likely is the third possibility. And if the third possibility is true, then Murdoch's purchase is probably bad news. It is true that the Wall Street Journal's editorial page will improve, as its positions are aligned less with winguttery and more with the interests of whoever has rented Murdoch for that particular afternoon. But the news pages will deteriorate. Murdoch will tell China's State Council and other political interests with whom he seeks to deal that the situation is delicate, that he cannot interfere openly with the news process, that it will take time, and so forth, but that if they make it worth his while he will do what he can do--and in the long run if they give him rope they will not be disappointed. Murdoch will tell his employees on the Journal news desks that he is under enormous pressure, that he understands the importance and delicacy of the situation, that it will take time, and so forth, but that they need to be patient and give him rope and they will not be disappointed. In reality, Murdoch will use the rope they give him to hang one or both of these groups--but which we will not discover for a while: Murdoch is a professional at this, after all.
So: as the Murdoch acquisition of the Journal moves forward, watch carefully. If Murdoch's children wind up being the effective proprietors of an organization run separately from News Corp., be happy. If Murdoch spends his time and energy leveraging the brand in new media space, reshaping things into the editorial pages to please his political contacts, and leaving the news pages alone to run themselves, then be happy.
But if Murdoch starts running the Journal the way he runs his other properties, be alarmed. Be very alarmed.
From Making Light:
David Broder of the Washington Post writes on Thursday morning:
David S. Broder - Cheney Unbound - washingtonpost.com: [W]hen presidential candidate George W. Bush chose Dick Cheney as his running mate, I applauded the choice.... Boy, was I wrong..... Cheney... used the broad authority given him by a complaisant chief executive to bend the decision-making process to his own ends and purposes, often overriding Cabinet officers and other executive branch officials along the way.... [H]e outfoxed even the veterans of past administrations when it came to the bureaucratic wars... shaped all of those decisions with his recommendations to the president -- often in ways that were unknown to the other players and unseen by Congress and the public.... Treasury secretary Paul O'Neill... [t]he secretary of state, the national security adviser and the chairman of the Federal Reserve Board also discovered to their surprise that Cheney had gone behind their backs to get his way with the president... used his intelligence and his grasp on the levers of power -- and most of all he used secrecy -- to outflank and outwit others and thereby shape the Bush administration's agenda.... [U]ltimately the president is responsible for... the resulting wreckage of foreign policy, national security policy, budget policy, energy policy and environmental policy under Cheney's direction and on Cheney's watch...
Broder has learned this today, June 28, 2007. He has learned this because he has read the news--which is a:
breathtakingly detailed series in The Post this week by reporters Barton Gellman and Jo Becker... a year of work that reveals more about the inner workings of this White House than any previous reporting.... Cheney shaped all of those [Bush] decisions... in ways that were unknown to the other players and unseen by Congress and the public. Secrecy was one of his tools and weapons.... [O]ther policymakers... discovered to their surprise that Cheney had gone behind their backs to get his way.... [A] political entrepreneur of surpassing skill operating under an exceptional cloak of secrecy. Thanks to Gellman and Becker, some of that secrecy has been removed.
Broder is going to have an online chat tomorrow, June 29, 2007. I have a question for him:
Dear Mr. Broder:
I was surprised to read you writing yesterday.... I was surprised because it seems to have been something that Gellman, and Becker, and you could have written back in July of 2001.
For it was back in July of 2001 that Bush subcabinet officials told me that:
- Cheney had overruled Treasury Secretary O'Neill and Federal Reserve Chair Greenspan on budget policy
- Cheney had overruled EPA Administrator Whitman and Treasury Secretary O'Neill on global-warming policy
- Cheney had overruled Secretary of State Colin Powell on North Korea policy
- George W. Bush had neither the patience nor the intelligence to master the issues
- it looked as though Bush had decided to rely on Cheney's opinion on pretty much everything.
Even before 911, as we learned no later than the end of 2003 when Ron Suskind published his Price of Loyalty, senior Republicans inside and outside the administration were having a great many quiet "what has happened to Dick?" conversations about Cheney's dysfunctional role. And we also learned that Cheney had blocked Greenspan and O'Neill again in their attempts to stop the steel tariff. And we also learned that Cheney had made Rumsfeld fire aides who actually were prepared to rebuild Iraq. And we knew--we knew an awful lot of stuff.
So why didn't you write about this back in July 2001? Are my sources--from Berkeley, 3000 miles away from you and Washington--really that much better than yours?
Sincerely,
Brad DeLong
Let me put my cards on the table. I think that Broder--like me--knew pretty much the story back in July 2001. I think that he didn't write about it because it didn't suit his purposes and interests for him to inform his readers what he believed to be the case about the workings of the White House. Now it suits his purposes and interests to pretend that Gellman and Becker are bringing a lot of genuinely new information to the table, rather than just filling in the details of a picture that has been known in broad outline for six years.
This raises the obvious question: Why should anybody get their news six years late from the Washington Post? Shouldn't people get the news earlier from more aggressive and less corrupted reporters who value their reputation as news disseminators like Ron Suskind, and perhaps from webloggers who feel honor-bound to tell the truth?
Hoisted from Comments: Bruce Wilder on the weak link theory of economic development:
Some years ago, I was privy to the efforts of a company trying to build maritime shipping containers in China.
A shipping container is not a particularly sophisticated manufactured product -- more sophisticated than simple textiles, certainly, but most shipping containers include no motorized machinery. The most sophisticated aspects are the forged corner parts, which bear weight and must interlock with mounting hardware, and the requirements for dimensional consistency. The sides are pressed from rolled steel, and the floors are hardwood (at the time, teak was still used, when available), and the structure is riveted, bolted and welded together.
Despite rock-bottom wages, the container plant in China was consistently unprofitable. Why? Parts did not arrive on schedule. The quality of steel, forgings, other parts and finishes (paint) sourced locally was irregular. The local power grid was unreliable: power failures interrupted production and voltage spikes and brownouts damaged equipment. Local workers required a lot of training and supervision, and there was considerable turnover. Industrial services necessary to maintain the production equipment were difficult to obtain. Parts and repairs for the production equipment could be time-consuming to obtain. The purity of local water supplies impacted production quality. The list went on and on, with always the same result: finished output and productivity in the plant sucked big-time.
The venture changed hands and I lost track of them, but I would assume that successors eventually succeeded.
Such a concrete example may be instructive in reminding that high productivity is a result of getting very nearly everything right in a complex system.
Saskia Scholtes and Gillian Tett of FT on mark-to-model:
Saskia Scholtes and Gillian Tett of FT: As head of the financial stability unit at the Banque de France, Imène Rahmouni-Rousseau travelled to America this month to look at the current turmoil in the US subprime mortgage world. Although initially that had seemed an all-American saga, Ms Rahmouni suspected that French and other European investors also held assets linked to subprime securities. So on behalf of her central bank she wanted to assess the risks. What she discovered surprised her. There was little confidence about how to value the holdings. “Pricing data are difficult to obtain,” she says. It is a discovery being shared by numerous other policymakers and investors around the world as the fallout widens from a subprime lending boom, in which US banks provided vast amounts in home loans to financially stretched borrowers who put little money down and gave no proof of income. Among the casualties have been two hedge funds run by Bear Stearns, the Wall Street investment bank.
Until recently, when late payments and defaults on these mortgages spiked higher, the problem drew little attention. This was because, through the magic of so-called structured finance, risky assets such as subprime mortgages could be packaged into attractive investment products. These elaborately constructed securities, called collateralised debt obligations (CDOs), are designed to yield juicy returns while also carrying high credit ratings. They have proved popular with hedge funds as well as with longer-term investors such as pension funds and insurance companies, many of which have bought billions of dollars of such securities in recent years – thus providing the liquidity that was then channelled into mortgage loans.
But heavy losses incurred at the two Bear Stearns hedge funds as a result of such financial haute couture have prompted fears that the CDO emperor may turn out to have no clothes. Such a revelation could threaten the value of investor portfolios around the globe – not just in the mortgage sector but in the way many sorts of company fund themselves. This is because unlike stocks listed on an exchange or US Treasury bonds, CDOs are rarely traded. Indeed, a distinct irony of the 21st-century financial world is that, while many bankers hail them as the epitome of modern capitalism, many of these new-fangled instruments have never been priced through market trading.
Instead, products such as CDOs, which are designed to be held until they mature, have often been valued in investor portfolios or on the books of investment banks according to complex mathematical models and other non-market techniques. In addition, fund managers and bankers often have broad discretion as to what kind of model they use – and thus what value is attached to their assets.
So when Wall Street creditors last week threatened fire sales of CDOs seized from the stricken Bear Stearns funds, thus creating a market price for them for the first time, they also threatened to create a wider shock for the system. Fire sales rarely realise anything close to the previously expected value of assets. But if these deals went ahead, they would provide a legitimate trading level that would challenge current portfolio valuations.
In the event, Bear Stearns’ creditors sold only a fraction of the assets put up for auction. Market participants suggest that this was in part because bids fell far below expectations, with traders increasingly reluctant to take on CDOs tainted with subprime exposure. But the crisis at Bear’s funds has left investors, brokers and regulators asking an uncomfortable question: can the pricing models that have provided the foundations for this new financial edifice really be trusted? Or will valuations turn out to be over-optimistic and result in further investor losses? “Investors are slightly more cautious, becoming more picky and asking more questions,” says Michael Ridley, co-head of high-grade debt capital markets at JPMorgan. “They want us to lift the lid off the box a bit more.”
To an extent, the valuation problem for CDOs reflects the fact that the frenetic pace of innovation seen in the financial industry this decade has outpaced the development of its infrastructure. It has often been the case that when new instruments emerge in the banking world, the market is initially quite illiquid, meaning that the level of trading is low. But the murky nature of new products has rarely had broad systemic implications, because they have typically occupied a small niche.What makes the CDO sector unusual is that it has exploded at such a breakneck pace with bankers packaging bonds, loans and other debts into ever more complex structures. Last year alone, about $1,000bn (£500bn, €745bn) in cash and derivatives CDOs was issued in Europe and the US, according to data from the Bank for International Settlements. More than one-third was composed of asset-backed securities, often including low-grade mortgages.
As this explosion has occurred, some corners of this universe have already become relatively widely traded and transparent. Every day in the London and New York markets, for example, billions of dollars worth of deals are struck involving indices of derivatives on well-known corporate bonds – making it easy to obtain prices.
However, many other such products are created by bankers directly with their clients and then simply left to sit on the books of an investor.
Since such instruments typically last three to five years – and the CDO boom is so recent – many have not come to the end of their life. Nor have they been traded. Christopher Whalen of Institutional Risk Analytics, a consultancy, says: “The lack of a publicly quoted market for CDOs and like assets is exacerbating the liquidity problems for these assets beyond the underlying economics, for example, in subprime real estate.”
To compensate, investment institutions and banks use a variety of techniques to assign a value to these instruments in their accounts. In some areas, third-party data groups exist that can offer price estimates. However, the pace of innovation is so intense that it is hard for these providers to keep up with all corners of the market. So in many cases, investors are turning to alternative techniques to create prices. One tactic used by hedge funds entails asking several brokers for price quotes and taking an average. Results vary – not least because dealer banks may hold positions in these instruments themselves.
“It is very easy for hedge funds to shop around to find valuations that suit them best and then book their assets at that,” says one banker who advises hedge funds. “Going back to the bank that sold you a CDO and asking for a price is rarely likely to produce an accurate picture.”
Another approach is to estimate valuations based on the ratings the instruments receive from credit rating agencies. Yet this does not offer a fail-safe valuation method either. The rating agencies have been downgrading bonds backed by subprime mortgages in recent weeks but critics say they have been slow to act and face difficulties in analysing the market.
Christian Stracke, analyst at CreditSights, a research company, says: “With so little truly relevant historical data on the behaviour of subprime mortgages, and with such massive structural changes having occurred in the mortgage landscape in recent years, any time-series analysis approach is little more than a not-so-educated guess.“ Moreover, while ratings attempt guidance on the chance of default, they offer no indication of how market prices could behave – as the rating agencies stress. As the BIS noted in its annual report this week, ratings reflect expected credit losses rather than the “unusually high probability” of events that “could have large effects on market values”.
That means that on the rare occasions that instruments are traded, a large gap can suddenly emerge between the market price and its book value. This week Queen’s Walk Fund, a London hedge fund, admitted it had been forced to write down the value of its US subprime securities by almost 50 per cent in just a few months. That was because when it was forced to sell them, the price achieved was far lower than the value created with the models the fund had previously used – which had been supplemented with brokers’ quotes.
But unless circumstances arise that force a market trade, valuations often remain at the investment managers’ discretion. While managers say they strive to assign honest values, these are often difficult for an outside accountant to verify, since the techniques used are invariably highly complex. Moreover, incentives do not always encourage fair valuations: hedge fund managers, for example, are typically paid a percentage of the profits they book, giving them a vested interest in reporting a high asset valuation. At best, this means that the valuations of CDOs, for example, may often lag behind any swings in broader asset classes; at worst, this ambiguity may enable hedge fund managers or investment bankers to keep posting profits – even when markets fall.
But Amitabh Arora, head of interest rate strategies at Lehman Brothers, points to a further potential impact from the Bear Stearns upheaval. “The bigger risk now is that it calls into question CDOs as a financing vehicle in the corporate credit market – I think in the next six to 12 months we will see a significant reassessment of CDOs as a financial vehicle not just in the subprime world but the corporate world too.”
Adil Abdulali, a risk manager at Protégé Partners, a fund of funds, recently studied the performance of hedge funds and discovered clear statistical indications that they tend to stage-manage their earnings [known in the industry as “smoothing” them] when they trade illiquid instruments. “Conservatively, 30 per cent of funds trading illiquid securities smooth their returns,” says Mr Abdulali.
Some bankers and policymakers argue that this is simply a teething problem that will fade as structured finance becomes more mature. History suggests that most opaque, illiquid markets eventually become more transparent when they grow large enough – and behind the scenes, the Bear Stearns hedge fund problems are prompting bankers and investment managers to re-examine their valuation techniques. “We are getting a lot of calls from worried people,” says one third-party data provider.
However, history also shows that large-scale structural dislocations – such as a serious mispricing of assets – are rarely corrected in an orderly manner. Thus the big risk now is that if thousands of banks and investment groups suddenly have to slash the value of the securities they hold, the wave of accounting losses might at best leave investors wary of purchasing all manner of complex financial instruments. At worst, it could trigger more distressed sales and a broader repricing of financial assets, not just in the subprime sector but in other illiquid markets too.
“If every CDO [manager] was forced to mark to market their subprime holdings, it would be – well, I can’t think of a strong enough word to describe what it would be,” confesses a US policymaker.
These assets do have finite lifetimes. Unless nominal asset values crash over the next five years, CMOs and CDOs held for the next five years until maturity will pay off at or close to their model value. Only those with faulty capital structures who are thus illiquid today are in trouble, and they aren't in big trouble unless the numbers of those willing, rich, liquid enough to take on the risk of holding more CDOs and CMOs and with the analytical capability to price them are small.
As long as underlying asset val