Warren Buffett NYT Op-Ed

[Goatnapper'96]

Buckley was a big supporter of Barry Goldwater.

Being conservative is not the issue, being unelectable is the issue. In some states being too conservative makes one unelectable.

[Jacob]

Being conservative is not the issue, being unelectable is the issue. In some states being too conservative makes one unelectable.

Barry Goldwater was unelectable as a presidential candidate, yet Buckley supported him. Just a little factoid that is contrary to your reliance on Buckley's "rule." The point being, that Buckley didn't always follow this "rule" himself and you can't always predict ahead of time who is the most electable candidate.

I'm reminded of Dick Morris' presidential 2008 predictions. he was making these back in 2006 and 2007. His claim, and it was somewhat conventional wisdom, was that Hillary will be the nominee, and no republican can beat her, except McCain, who the republicans will never nominate. Instead, in 2008, The "elecetable" McCain was in fact nominated and lost to the no-experience amateur Obama who is likely much more liberal than Clinton.

[DapperDan]

Barry Goldwater was unelectable as a presidential candidate, yet Buckley supported him. Just a little factoid that is contrary to your reliance on Buckley's "rule." The point being, that Buckley didn't always follow this "rule" himself and you can't always predict ahead of time who is the most electable candidate.

Perhaps that was a teaching moment for Mr Buckley.

[Jacob]

Perhaps that was a teaching moment for Mr Buckley.

Or perhaps he felt that it was better at that point in time that the "true" conservative case had to be made rather that merely supporting a more electable and less conservative candidate. That's a respectable position. And one could argue that the Goldwater candidacy paved the way for a Raegan (Reagan was also involved inteh Goldwater campaign, IIRC).

Again, the point is that there is more to take into account than a cold analysis of "who is more electable" especially when such a determination is not an easy one. And especially when small groups of people don't make these cold calculations in back rooms. The voters get to decide.

[Uncle Ted]

Dear Uncle Sam:

Yes, it is always nice to have our rich uncle to bail us out when we get ourselves into a mess. This way we can party hard and take huge risks knowing that you always have our backs. Who knows? We might just make it big or we might just put ourselves into bankruptcy (again). If it is the latter you will just give us the money we need to get ourselves back on feet. OK, so now that we are back where is the next bubble to risk it all on? Can you create some new laws and regulations to create one like you did the last time? We are ready to go again.

Thanks again Uncle!

Your grateful, spoiled nephews,


The "too big to fails".

[KillerDog]

The "too big to fails".

I read that book.

[statman]

If we hadn't passed TARP, we might actually be in better shape right now. On the other hand if we didn't pass TARP we might be in an all out depression and economic collapse.

I wouldn't want a do over to see if maybe not passing it would have turned out better.

Kind of reminds me of those who now claim Bush was mistaken for going to war with Iraq. Well, how do you know for sure. Maybe both Iraq and Iran would be in a race to get the nukes right now.

If we hadn't passed TARP and our banking system survived though the end of 2008, we might be in better shape right now. But very few directly involved in banking thinks we would've survived 2008...

Once Lehman collapsed, we had two choices 1) suspend banking reserve regulations and hope the banks play nice until things settled down, and hope simultaneously that the public doesn't decide to start a run on any banks, or 2) create by fiat, and then lend the banks the money they needed to meet banking reserve regulations. There simply wasn't enough cash in the economy to do anything other than option 1 or option 2.

#2 was really the only option - too much risk in #1 - risk that either struggling banks would do something crazy to survive, or that the public would panic. And either could easily bring the whole thing down. As it was, we still lost 2 of our biggest banks and only survived there because the government guaranteed the losses from having slightly more solvent banks take them over. TARP was the lesser of two evils...

[Pheidippides]

If we hadn't passed TARP and our banking system survived though the end of 2008, we might be in better shape right now. But very few directly involved in banking thinks we would've survived 2008...

Once Lehman collapsed, we had two choices 1) suspend banking reserve regulations and hope the banks play nice until things settled down, and hope simultaneously that the public doesn't decide to start a run on any banks, or 2) create by fiat, and then lend the banks the money they needed to meet banking reserve regulations. There simply wasn't enough cash in the economy to do anything other than option 1 or option 2.

#2 was really the only option - too much risk in #1 - risk that either struggling banks would do something crazy to survive, or that the public would panic. And either could easily bring the whole thing down. As it was, we still lost 2 of our biggest banks and only survived there because the government guaranteed the losses from having slightly more solvent banks take them over. TARP was the lesser of two evils...

I was very very close to the situation in many ways, and I agree with this. I am still convinced that TARP, distasteful though it may have been, was a no-brainer at the time. I was literally wondering if we were going to have to go back to living in caves without it.

[statman]

Why was it time for him to go? Over voting for TARP?

Team Tea Party doesn't like TARP. They're wrong, of course. And ignore the opinions of those who are also conservative and actually know what they're talking about. But why let reasoned positions get in the way of a good knee-jerk reaction?

Black and white is ALWAYS better than gray...

[pellegrino]

You have just described why the Utah Caucus system is so great.

Yes, I do prefer political systems that can be dominated by a small minority of the people.

[Pheidippides]

It was the only thing at the time but a terrible mistake in context of the opportunity post-Bear, niku. When Bear went down, it should have gone down (to zero), triggering CDS and forcing the come to jesus moment on wall street. we opted for japan style bailout, which is to say we've opted to be subject to years of what we are experiencing now, vs. taking the swedish alternative and taking down the large banks in structured fashion (a la GM).

equity goes to zero, debt written down, RTC-like entity takes on the bad debt/toxic stuff and we allow all of the culprits to restructure and come out of bankrupcty clean and recapitalized. We go through a period of pain (1 year?) but emerge like a phoenix (note GM tonight pricing a highly successful re-emergence on the public scene).

TARP was likely our only choice at the time, but only after making the worst policy/monetary mistake of the millenium to get there. Treasury knew about the risks and potential outcomes as bear went down...there can be zero doubt of this. They simply caved to the bank lobby, as is happening now. No army can stop the bank lobby.

I agree, or maybe agree in part and disagree in part. I still support the TARP in concept (let's leave the changed course of it aside for a second) at the time. If what you are saying - and I'm not sure it is - is that it was our only option at the time but that the post-bear environment has done little to change risk, I agree. I think that banks have not had the come to Jesus experience, as you put it, and that is a problem of significant size. Restore the liquidity enough to prevent total doom and meltdown (which is what I saw happening inasmuch), then make the hedges prune themselves - or prune them ourselves if needed.

If that's what you're saying - and saying failed to happen - I agree.

I think your GM example is a good one. I'm not sure your Japan-style bailout is, however, because there are additional details there that I think are significantly different. Don't ask me how unless you're willing to give me a week to dig up the papers I wrote on the subject in a different life where I actually understood math and such.

The more I deal with banks (and it is frequently) the more I am struck by the utter stupidity of many bankers at the big shops (no offense intended to anybody here). They are great at making nifty models with sexy assumptions and putting them into appealing spreadsheets. But they are pretty poor at actually evaluating risk correctly, especially when those models are off. They don't stop to ask "why" so long as they know the answer to "how much".

[statman]

I'm sorry but i don't buy this at all. The FDIC--as they did, in effect--would have gotten emergency treasury funding and stepped in and guaranteed the entire deposit base in the US.

Who said anything about deposit base? The problem was loan loss reserves, not deposit reserves.

Besides the general failure of the mortgage and housing markets, two big problems directly lead to the immediate crisis: 1) as a very well communicated quid pro quo to banks for complying with CRA guidelines in all their lending practices, regulators allowed (even encouraged!) banks to hold "risk free" MBSs in their reserve accounts. The payback was the returns that MBSs yielded over treasuries which were traditionally the only non-cash assets banks were allowed to hold as loss reserves. From an historic return perspective MBSs WERE "risk-free" - there had never been a major loss even with mortgage derivatives.

2) Mark-to-market accounting rules, coupled with lehman's sale of it's MBS/ABS portfolio at ~26% of par, set the new value that all banks suddenly had to value their MBS holdings.

Say you were running Citi's Treasury, and you were looking at an expected annual loss of 3.2% on your total receivables of nearly $1 trillion (about right for pre-2008 loss rates). That's $32 billion in reserves that must be held to cover expected foreseeable losses. To keep shareholders happy and to giver Citi the lowest net cost of funds in the industry, say 50% of the $32B was held in MBSs, with the rest in treasuries and cash.

When Lehman sold MBS's at a huge loss, it became the new 'market price.' Literally over night, Citi's treasury had to:
1) move completely out of MBS in their reserve accounts. Need- $16B.
2) cover $12B loss in MBS portfolio that had been in reserves backing up other losses (~$30 billion cumulative)
3) reserve for incremental losses from MBS holdings in general ($50-$60 billion total - call it $85 billion cumulative).
4) reserve for incremental expected losses on receivables/managed assets not in MBS portfolios - their forecasted loss run-rate was ~11.5% by the end of 2008. That's an additional $115 billion in loan loss reserves ~$200 billion in cash needs that had to be held as soon as they restated loss rates - and that's just Citi. Some cash they had. Some they got from a series of TARP loans/asset purchases. Some they borrowed from the emergency lending facility at the Fed.

Total cash needs to meet loss capitalization requirements would've been similar at BoA, a bit lower at Chase, lower at Wells, higher at some others. It's pretty easy to see how the ~$800B in TARP funds got burned through pretty quickly. And even then, some of the TARP bailouts came in terms of Fed loss guarantees (with or without equity stakes for the Fed) that allowed banks like Citi and BoA to reserve less. They were guarantees where no cash actually changed hands, but reserve minimums were lowered nonetheless. They were very real bailouts.

All this being said, TARP was NOT cheap for those that took it. My current company was told to take ~$3.6 billion in TARP funds. We paid it back within about 18 months, and had to get permission to pay it back. In total, we paid an annualized effective interest rate (interest, fees and penalties) of nearly 20% on the money. And we didn't even ask for the cash. We were told that we had to take it...

[statman]

They are great at making nifty models with sexy assumptions and putting them into appealing spreadsheets. But they are pretty poor at actually evaluating risk correctly, especially when those models are off. They don't stop to ask "why" so long as they know the answer to "how much".

The ability of senior level bankers to evaluate non-modeled risk died 15 years ago - when the modelers took over. Models work - inasmuch as the 'black swan' situation fails to materialize. And since no knows the likelihood of a "black swan" event, the models assume it to be zero. It isn't of course, and that's the failure.

But on this point, regulators are in neck deep as well. In order to open up CRA rules to as many people and as many loan products as possible, regulators began abolishing 'rule of thumb,' non-statistically derived risk rules. When I was at Citi, we called them 'fatal origination criteria' or just 'fatals.' They were things like the old stand-by debt to income ratios, or total consumer debt loads, or any 3+ cycle delinquencies, or any non-medical collection items, etc. We had about a dozen of them. If you failed any one of these criteria, we didn't give you a loan, regardless of what the rest of the risk models said.

Regulators HATED non-statistically derived risk criteria. They tended to decimate CRA populations. So they told us to stop using them. If we couldn't support a 'rule of thumb' risk rule statistically, and show that it actually predicted future losses, we had to exclude it, regardless of "how much sense it made." Otherwise, we would have been out of compliance with CRA provisions and guidelines set by regulators - as well as perhaps ECOA, reg b, reg z, and anything else they wanted to threaten us with...

During the limited analytic window our regulator forced us to use to prove our fatal criteria were "predictive" most of our non-statistically derived criteria were shown to not be predictive of future losses (when anyone with access to credit had multiple 0% balance transfer offers waiting for them in their mailbox on any given day, and when they could refinance their mortgage with a phone call, losses became rare. It was pretty hard to accurately predict losses - especially when the analytic window that some regulators would accept shrunk to 12 months or less. So in citi's consumer lending business, we eliminated all but two of our fatal "common sense" lending criteria - not because we wanted to, but because our regulator said we had to...

[I.J. Reilly]

Besides the general failure of the mortgage and housing markets, two big problems directly lead to the immediate crisis: 1) as a very well communicated quid pro quo to banks for complying with CRA guidelines in all their lending practices, regulators allowed (even encouraged!) banks to hold "risk free" MBSs in their reserve accounts. The payback was the returns that MBSs yielded over treasuries which were traditionally the only non-cash assets banks were allowed to hold as loss reserves. From an historic return perspective MBSs WERE "risk-free" - there had never been a major loss even with mortgage derivatives.

I have read and researched a lot about the crisis and I had never realized the bolded portion above. Either it never came up in what I was reading or I just overlooked it. I had always been under the impression that reserves were strictly cash or treasuries. Hmmm...

[statman]

I have read and researched a lot about the crisis and I had never realized the bolded portion above. Either it never came up in what I was reading or I just overlooked it. I had always been under the impression that reserves were strictly cash or treasuries. Hmmm...

It absolutely happened in my company. Because there had never actually been losses in MBSs, the assets were essentially considered 'risk free' and the higher return they offered was intended to help make-up for the higher losses encurred by companies in lending to the CRA-target populations. Basically we were told "we know your losses are going to be higher, but we'll offset that by letting you hold some reserves that yield double what you normally get from your reserve accounts"...

This isn't something that anyone would readily bring up - regulators aren't proud about allowing it or using it as a quid pro quo ("You ENCOURAGED them to hold MBS's in their reserve accounts?"), regulators are also not really all that proud about the aggressive way they pushed CRA into all lending portfolios. It specifically targeted mortgages. But it's precepts were aggressively extended to credit cards, car loans, other consumer credit, etc. Banks aren't really too proud that they did something so foolish that made things even worse when things got bad...

But that's not the dumbest thing banks did. European regulators generally allowed banks to hold Credit Default Swaps to be applied as reserves for major parts of their Tier 2 capital (high risk assets as defined by Basel II). The idea was that if losses on Tier 2 capital went over a certain level, the swaps came into the money, and their value increase linearly as losses increased. They were a perfect hedge.

the problme is, of course, that there are only a small number of companies writing these CDS contracts, and a whole lot of banks that were "insuring" huge sums of money using the contracts. If the economy were to go south, there's no conceivabl. And regardless of what the banks are saying now - they ALL KNEW that there was no conceivable way that that the AIGs of the world were actually insuring anything. The banks were buying a hollow piece of paper, and they knew it. They did so because it allowed them to pay a relatively low insurance premium, and have a big portion of their high-risk reserves met.

Regulators interpretation/implementation of Basel II allowed CDS to be used in this manner not because they thought those high-risk tier 2 assets were actaully covered by the contracts, but because they thought that allowing the banks to reserve for high-risk losses in this manner would encourage them to be more'transparent' in their assessment of their risk. They'd be more honest and up-front about what their potential high-risk losses were. And they were - European banks WERE more honest and open. They generally hbad bigger high-risk portions of their portfolios identified. Problem was, if you identify the higher risk, but then don't actually reserve for it in a meaningful way, you're just as screwed. But at least this way, the Euro banks can all blame AIG for their problems. They're full of shit, but most people don't understand that...

And that is the dirty little secret of the AIG bailout - the reason why Geitner said that the details of the AIG bailout were sealed as a matter of national security (literally - look it up! Some of that info has now been released, but there are still major portions of it record that are redacted). The vast majority of the AIG bailout went not to US investment banks (lots of outcry over Goldman getting money), but rather into propping up the high-risk loss reserves of european banks. In essence, every man, woman and child in the US mailed a $300 check to Europe in 2008, and unlike TARP, this is money that we are NEVER going to see again...