As most folks following the upfolding Stanford Financial Group scandal know by now, Laura Pendergest-Holt was the first Stanford executive arrested in connection with the scandal.
If only a few of the allegations contained in the motion below are true, it looks as if the Justice Department and the SEC are well on their way to trampling the Constitutional rights of Ms. Pendergest-Holt, R. Allen Stanford and the other targeted Stanford executives in a manner that we’ve seen before.
Why do most pundits continue to characterize the billions of dollars that the federal government has loaned to AIG over the past six months as “the AIG bailout?”
As this WSJ weekend article and this subsequent Bloomberg article note, the funds that the Fed and the Treasury have loaned to AIG really bailout out Goldman Sachs and a number of other prominent banks, including some of Europe’s largest.
Thus, shouldn’t we be calling this the “Goldman Sachs bailout?”
By now, we all know what happened. AIG sold credit default swaps that provided the buyer of the CDS with insurance against default on bonds and other credit instruments that the buyers held.
However, insurance is only as good as the financial capacity of the insurer to pay claims on that insurance.
So, when it became apparent last summer that AIG had seriously blown the assessment of its risk in issuing CDS, the level of the credit risk that AIG had insured was well beyond its ability to pay potential claims on the CDS.
That’s not good news for a trust-based business.
Consequently, when bond defaults started hemorrhaging through the mortgage markets, the buyers of AIG’s CDS — namely Goldman and the Euro banks — had a similar problem to AIG’s. They had failed to assess the risk of doing business with their insurer accurately and they were facing huge losses on their CDS claims.
Well, under normal circumstances, that shouldn’t have been any big deal to anyone other than parties involved. AIG would have been floundered into chapter 11.
Goldman and the other big creditors would have assessed whether it made sense to reorganize the company or simply liquidate its constituent parts. The creditors would have converted their debt to equity in a new AIG or taken a haircut on their claims in return for receiving a portion of AIG’s liquidation proceeds.
Everyone would have licked their wounds and the profitable parts of AIG’s business would have emerged from bankruptcy with new owners highly incentivized to generate value for their ownership interest.
That’s the way markets have sorted out such errors in judgment for generations.
However, as we all know, that’s not what has happened this time. Instead, after stirring up a climate of fear, the federal government — led by supposedly free-market oriented Republicans — paid Goldman and the Euro banks full price for the unsecured claims that they would otherwise be asserting against AIG in a chapter 11 case.
And the new Democratic administration doesn’t appear to have any better understanding of what to do now that it is clear that the prior Administration’s gambit has failed miserably.
It really is not rocket science. Larry Ribstein concurs.
The Financial Times’ William Buiter summarizes the lesson that we all should learn from this:
The logic of collective action teaches us that a small group of interested parties, each with much at stake, will run rings around large numbers of interested parties each one of which has much less at stake individually, even though their aggregate stake may well be larger.
The organized lobbying bulldozer of Wall Street sweeps the floor with the US tax payer anytime.The modalities of the bailout by the Fed of the AIG counterparties is a textbook example of the logic of collective action at work.
It is scandalous: unfair, inefficient, expensive and unnecessary.
Another song from one of Houston’s treasures.
Writing in 1951 about popular attitudes toward income inequality in "The Ethics of Redistribution," Bertrand de Jouvenel observed the following (H/T WSJ):
The film-star or the crooner is not grudged the income that is grudged to the oil magnate, because the people appreciate the entertainer’s accomplishment and not the entrepreneur’s, and because the former’s personality is liked and the latter’s is not. They feel that consumption of the entertainer’s income is itself an entertainment, while the capitalist’s is not, and somehow think that what the entertainer enjoys is deliberately given by them while the capitalist’s income is somehow filched from them.
In arguably the best financial blog post to date in 2009, the Epicurean Dealmaker analyzes the skewed dynamics that led to the Merrill Lynch high-level executive bonus pool and observes, among other things:
It would not be outlandish to consider the Merrill executives’ bonus pool as the latest and largest campaign gift toward Mr. [Andrew] Cuomo’s 2010 gubernatorial run.
Meanwhile, Andrew Morris wrote the following in a letter to the WSJ editor (H/T Don Boudreaux):
At first, when I read your headline “States give gambling a closer look” (Mar. 3) I thought you were reporting on yet another “stimulus” or “bailout” bill in which politicians played games of chance with taxpayers’ money. Hardly news — just another “dog bites man” story.
Then I realized it was just a story about allowing ordinary people to risk their own money – now that’s a “man bites dog” story!
Along the same lines, the WSJ’s Notable and Quotable series provided the following excerpt from Friedrich A. Hayek’s "The Constitution of Liberty" (1960) on the illusory nature of progressive taxation and large increases in governmental spending:
Not only is the revenue derived from the high rates levied on large incomes, particularly in the highest brackets, so small compared with the total revenue as to make hardly any difference to the burden borne by the rest; but for a long time . . . it was not the poorest who benefited from it but entirely the better-off working class and the lower strata of the middle class who provided the largest number of voters.
It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.
And Jason Kottke noted the technological irony of the week:
Now you can go to the iTunes Store to buy the Kindle app from Amazon that lets you read ebooks made for the Kindle device on the iPhone.
Finally, legendary Houston trial lawyer Joe Jamail passes along this anecdote about the late, great Houston criminal defense lawyer, Percy Foreman:
In the early 1980s, Jamail represented his courtroom idol, Houston criminal defense attorney Percy Foreman, whose neck was injured when his car was rear-ended by a commercial truck. On direct examination, Foreman testified that he had not experienced any neck problems before the accident, and that he was entitled to $75,000 for lost income due to the injury.
But on cross-examination, the defense revealed that Foreman had been hospitalized nine times for neck problems prior to this accident.
“The jury looked at me, expecting me to give them an answer,” says Jamail. “So I told them that Percy had been a great lawyer throughout his life, but that he was now just an old man and was growing senile.”
At that moment, Foreman jumped up and yelled out across the courtroom, “You goddamned son of a bitch!”
“See what I mean,” Jamail immediately told jurors. “He doesn’t even know where he is right now.”
The jury awarded Foreman the sum of $75,004. Jamail says he never figured out why the extra $4.
This year’s Shell Houston Open during the first week of April is shaping up to have its best field in over 20 years. The Chron’s Steve Campbell reports:
Tournament director Steve Timms announced another flurry of player commitments Monday that includes No. 13 Paul Casey, No. 15 Steve Stricker, No. 22 K.J. Choi and former British Open champions Justin Leonard (No. 25) and Ben Curtis (No. 32).
With nearly a full month until the April 2-5 event at the Redstone Golf Club Tournament Course, the SHO has commitments from four of the world’s top eight players (Sergio Garcia, Padraig Harrington, Henrik Stenson and Robert Karlsson) and 13 of the top 30. And that’s not even taking into account former No. 1 Greg Norman making one of his infrequent appearances to tune up for the Masters. [. . .] What’s more, Timms has plenty reason to hope No. 3 Phil Mickelson, No. 4 Geoff Ogilvy and defending Masters champion Trevor Immelman (No. 29) will submit their entries by the March 27 deadline. That trio of major champions teed it up at Redstone last year, after all.
The SHO is one top-30 player away from having the most in its field since 1986 — the first year of the world rankings. . . . Just three years ago, only four top-30 players teed it up at the SHO.
In the era of the Tiger Chasm, that’s a darn good field. It’s looking as if the SHO’s recent move to the week before The Masters, coupled with The Players Tournament moving to mid-May, is really paying dividends. The Houston Golf Association’s attention to good conditioning of the Tournament Course at Redstone hasn’t hurt in attracting top players, either.
But think of the quality of the field that the SHO might attract if it was played on a golf course that the Tour players really enjoyed.
Another consequence of bad decisions?
With traditional newspapers folding left and right, it’s no surprise that the newspaper business is no bowl of cherries these days. According to this WSJ Digits blog post, that uncertainty is prompting Houston’s main daily newspaper — the Houston Chronicle — to consider some big changes:
Hearst said its newspapers plan to hold back at least some content from their free Web sites, launching the publisher onto the vanguard of print media companies to begin charging for their digital news and information.
A top executive at Hearst, which publishes 16 newspapers including the Houston Chronicle and Seattle Post-Intelligencer, said the company is mulling how much of its online offerings to keep free, while reserving some content exclusively for people who pay.
“Exactly how much paid content to hold back from our free sites will be a judgment call made daily by our management, whose mission should be to run the best free Web sites in our markets without compromising our ability to get a fair price from consumers for the expensive, unique reporting and writing that we produce each day,” Steven Swartz, the president of Hearst newspapers, said in a staff memo.
The text of the staff memo is included at the end of the blog post.
Meanwhile, financial blogger Felix Salmon, who has been following the newspaper website subscription issue for the past couple of years, thinks that the Wall Street Journal’s website subscription model — which is the business model that the Chron hopes to mirror — is doomed to failure:
My feeling is that [WSJ editor Robert] Thomson was entirely right when he said that [news] commentary had become commoditized, and that therefore you couldn’t charge for it; he also said the same thing about most news. But what he calls "specialized content" is to a large degree just taking commoditized news, and adding the kind of value that comes from informed commentators.
Yes, there are things which Dow Jones the WSJ can do and no one else can do in quite the same way — Thomson was interesting when he started talking about selling content on the subject of India to Japan, for instance. And in a world where Dow Jones is looking to individual subscriptions to make up the losses from corporate subscriptions, it’s going to be very difficult for them to start slashing those individual subscription rates to zero.
But I suspect that eventually the WSJ will do the math and work out that the best way to monetize and grow its large number of unique visitors is to maximize the time they spend on the site. And the best way to do that is to go free.
Give the Chronicle credit for taking risks in a battle for survival rather than simply fading away as many other newspapers are doing. However, I am not convinced that the Chron’s pay-for-some-content approach has much of a chance of succeeding.
Frankly, the Chronicle simply does not appear capable of producing the type of specialized content that is necessary even to have a chance of generating the level of individual subscriptions that will be necessary for success.
For example, the Chron was inexplicably behind other major newspapers and blogs in its coverage of the recent Stanford Financial Group scandal. Its follow-up coverage really has not provided any meaningful content that cannot be found elsewhere from free news sources and blogs.
Moreover, even where the Chron indisputably takes the lead in regard to a local story of national interest — such as the newspaper’s excellent coverage of the various legal cases involving former U.S. District Judge Sam Kent or its amazing coverage of Hurricane Ike — the information generated is still not sufficiently distinguishable from other free news sources so that readers will be likely to pay for the content.
Don’t get me wrong. The Chronicle is not without talent. Tech columnist Dwight Silverman is one of the most-respected writers in his field. Science reporter Eric Berger does a fine job, and Todd Ackerman has done a first-rate job of covering the Medical Center for years. Ditto for Nancy Sarnoff in regard to local real estate. The Chron sports bloggers Stephanie Stradley, Lance Zierlein and Zac Levine provide better content and analysis than the Chron’s sportswriters. I’m leaving others out who also do a fine job.
But is the specialized product that such talent generates sufficient to induce enough online readers to pay for content so that the Chronicle can transform itself into a profitable web-based news provider?
When even longtime Chronicle subscribers are seriously thinking about giving up their subscriptions, I have my doubts.
Former Hollinger International chairman and CEO Conrad Black‘s daily routine these days is not quite as civilized as the one followed by Winston Churchill, wouldn’t you agree?:
I get up just after 7 except on the weekends and holidays when it is possible to sleep in. I eat some granola and go to my workplace where I tutor high school-leaving candidates, one-on-one, though sometimes I have to deal with up to four at a time, around my desk, and talk with fellow tutors and other convivial people. I lunch around 11 with friends from education, work on e-mails, play the piano for 30 to 60 minutes, return to my tutoring tasks by 1, return to my unit at 3, deal with more e-mails, rest from 4 to 6, eat dinner in the unit then, and go for a walk in the compound or recreation yard for a couple of hours, drinking coffee well-made by Colombian fellow-residents, and come back into the residence about 8:30, deal with e-mails and whatever, have my shower etc., around midnight, read until 1-1:30 a.m. and go to sleep. On the weekends it is pretty open. [. . .]
The days and weeks tend to resemble each other. Time does go by quickly but a bit imperceptibly. I have quite a lot of e-mail and correspondence and limited telephone traffic. Essentially, I try to keep as well in touch with people and events as possible and I am lucky that many friends outside want to correspond. I psychologically live outside this facility most of the time.
My wife and I attended the annual Houston Livestock Show and Rodeo Barbeque Cook-off at Reliant Park over the weekend, so we again were reminded of the wasteful land use represented by the Astrodome.
With the rodeo and related activities cramped for space and Reliant Park desperately in need of more convenient parking, why do our local leaders persist in chasing rainbows over an obsolescent stadium that is expensive to mothball and has no alternative use absent a massive and risky governmental subsidy?
Meanwhile, with our local governments already locked into tens of millions of dollars of subsidies in regard to a proposed stadium for Houston’s minor league soccer club, perhaps a few of our local leaders should review this AZCentral.com article about the bath that Glendale, Arizona is taking in regard to bailing out the Phoenix Coyotes National Hockey League team, which is the primary tenant of the Glendale’s local arena. The Coyotes have lost over $200 million since moving to Glendale five years ago.
Thus, on one hand, Houston governmental leaders waste millions annually while they dither over what should be an easy decision regarding valuable government-owned property. On the other hand, local leaders have committed tens of millions of dollars in subsidies to a venture that is far more speculative than even a National Hockey League team.
In short, our leaders are fiddling while Rome burns. And, as Leo Strauss once observed, what makes matters worse is that those leaders not only fail to realize that they are fiddling, they don’t even appear to understand that Rome is burning.
