I hope all of you are having a wonderful day today. I want to thank you all for your continued interest and support.
Cognitive Commodities in the Neuro Marketplace h+ (hat tip reader David C)
Brewing Up a Civilization Der Spiegel (hat tip reader John D)
Animals ‘on the run’ from climate change Telegraph (hat tip reader John D)
Chimps use cleavers and anvils as tools to chop food BBC
S. Texas rancher sets aside 1,300 acres for ocelot Newsvine (hat tip reader John D)
Pentagon sees big savings in replacing contractors with federal employees Washington Post (hat tip reader John D)
Bernanke and the Corruption of Washington Culture Dean Baker, Counterpunch (hat tip reader DoctoRx)
Credit Cards Crank Up Abusive New Fees Bankaholic
Hamp, what is it good for? FT Alphaville
Fannie/Freddie support increased Rolfe Winkler. Really good detail here, bottom line, the stealth bailouts just keep getting bigger and bigger.
Norms of credit Steve Waldman. I’ve been distracted, and managed to miss this important post, which is a must read. I have only one minor quibble, which is this sentence:
But that doesn’t absolve a business from its responsibility to craft financial products in a manner that conforms to interpersonal expectations of fair-play.
Waldman posits a sharper distinction between legal and normative obligations than I believe exists. He does stress that even in a contractual context, norms are important (otherwise contracts would need to be specified to an absurd detail), but his sentence above implies, I think unwittingly, that businesses are not subject to standards of fair play (well, the conduct of plenty of firms over the past decade plus would seem to support that view). Their is a notion of good faith and fair dealing that is supposed to undergird contracts, and I’m aware of disputes where good faith arguments have prevailed (but my impression as a non-lawyer is that it is seen as a weak line of attack and therefore not often used)
Antidote du jour:
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I was writing a draft for a 2010 predictions list and included “the Fed will not stop buying MBS at $1.25 trillion”.
But reading the Winkler piece makes that look quaint already.
The HAMP piece suffers from the notion that the administration and Congress are really good faith actors here.
But all the evidence is that the HAMP is simply a scam meant to induce would-be walkaways to pay a few more installments before they default once and for all, or the bank’s interest is to foreclose. That’s why the thing’s set up the way it is, and that’s why there’ve been so few permanent mods.
As for the notion that we can expect any constructive action from Congress whatsoever, let alone vigorous action, that’s just silly.
That’s a good story on ancient booze. Post-collapse, post-fossil fuel we’re going to have to go back to those old ways. Wisdom of the ancients, in everything.
Regarding your comment on Waldeman …
If you put Waldeman back in context I don’t think meant to imply that businesses are not subject to standards of fair play. He is saying that the “hard nosed” norms of business are different than those of the norms of society at large which he appears to believe are “interpersonal expectations of fair-play”, and that those norms of society at large should be considered in crafting financial contracts.
But yes, he did make the unwitting implication. Sloppy on Waldeman’s part.
But Waldeman and McArdle both fail to address the greater deception that underpins their “strategic default” argument. The fact that business, with its hard nosed corporate values, has, through aggregate generational corruption, captured the government at all levels and now controls the scam ‘rule of law’ and media. The wealthy ruling elite now create the societal values (the norms) of those they scam, and yes, I am implying that corporate scamerica doesn’t have a fucking clue about fair play. The Waldeman and McArdle pissing contest is symptomatic of the greater deception and also that many of the marks are now on to the greater scam and saying fuck you to the deceptive ass wipes who conned them. And yes, they are fully justified. Unfortunately it is all part of the greater game plan of putting the masses (prudent vs not so prudent) in perpetual conflict with each other.
Deception is the strongest political force on the planet.
Agreed that I might have been a bit pedantic here, Waldman’s post was (as usual) very carefully argued, but I think it important NOT to indulge the idea, which seems to be becoming part of the collective psyche, that parties to a contract are entitled only to what it provides IF the one party behaves badly. If the wronged party can demonstrate that the other side acted in bad faith, that is grounds for litigation. Whether one has the money, time, and energy to pursue the matter, sadly, is another kettle of fish entirely, and that is the whole basis of “gotcha” practices and products that wind up getting the financially unsophisticated and/or undisciplined in over their head: they are virtually certain not to sue, even if they could make a case.
First, thanks for the blog! And thanks for the brewing article. I think I may just have a drink to celebrate.
Second, I am skeptical that adherence to ideas of fair play is more scarce (on a per capita basis) than it was in the past. I sincerely doubt (but obviously could be wrong) that many people in the past were constrained by ideas of fair play. I suspect that our notion that more ‘fair play’ existed in the past is because people were once more constrained by reputation (they dealt with the same principals over and over again, making reputation far more critical). Today, with greater anonymity and with greater concentration of market power in the financial sector (you deal with agents more than principals), this constraint is largely gone.
Breached contracts that have been enforced by legal means have never been more than a tiny, almost infinitesimal percentage of all the contracts that have been breached.
I once drafted a lot of contracts, and I was always sure to tell the client that he or she should in no circumstance believe that the document in question was going to “save” him or her. I usually describe contracts as road maps, hope certificates, whatever. They are useful in laying out the parties’ expectations in hopes of avoiding future conflicts. Whenever possible, I encouraged my clients to do business with people they trusted and/or people who had large incentives to protect and maintain their reputations. That advice is a thousand times more valuable than any contract I ever drafted.
People are fine adhering to standards of fair play in times of abundance. I suspect you will search long and hard for someone who will sacrifice something important because of the idea of fair play.
Anon,
Incorrect. Sumitomo Bank was in the 1970, the largest bank in Japan, its Citibank, aggressive and innovative.
Sumitomo provided loans to a refinery project in Newfoundland in the late 1970s, in a place called Come By Chance. It was doubly exposed to the venture. It was the main creditor to a Sumitomo group trading company, Ataka, which was funding the refinery (trading companies are highly geared by nature) and also lead managed the international loan syndicate to fund the project.
Tariffs on imported oil in the US were increased. The Come By Chance project was no longer viable. Ataka goes into bankruptcy. The loans that Sumitomo syndicated were set to deliver 100% losses.
Sumitomo took all the members of the syndicate out at 100 cents on the dollar. It was under no obligation to do so, and there was no precedent for this action.
The highest published figures for the losses that Sumitomo took from rescuing the other members of the syndicate was $818 million. That was when banks were much smaller than they are today and the yen was VASTLY weaker than it is now. That figure is inaccurate. Sumitomo took loses of over $2 billion. This was a nearly mortal wound to do what it considered to be the right thing to do.
Sumitomo’s action was unusual, but I grew up in the financial services in the industry in the 1980s. People did care about propriety and reputation, and that did constrain behavior.
“If the wronged party can demonstrate that the other side acted in bad faith, that is grounds for litigation.”
I strongly disagree with you here.
I think that if the wronged party can demonstrate that the other side acted in bad faith that is not only grounds for walking on the contract but also grounds to be made whole and seek retribution in whatever fashion one can. Indulging in that idea will get us more quickly to where we need to be.
It is that other, “kettle of fish entirely”, that you mention that makes this so (and yes, sadly, I agree with you). When the state fails to provide justice for the people then the people will and must provide their own justice. Further, the state creates the conditions for the scam products. It is the knowledge that people are, “virtually certain not to sue, even if they could make a case”, that allows and enables the con artists amongst us to create their fraudulent “gotcha” products.
They are in effect ‘state sanctioned’ scam products.
Yes, there are fantasy norms of equal justice that we all hold dear, and then there are the reality norms of the newer more pernicious greed scam ‘rule of law’, authored by the wealthy elite through their sell out puppets and selectively enforced against those of lesser means.
Some pigs are more equal than others, and it is those more equal pigs, who are responsible for the now rapidly evolving collective psyche. You will not change that rapidly evolving collective psyche by asking the deceived less equal pigs to honor the old vanilla greed norms.
You need to eliminate the more equal than others pigs. That is what Waldeman and McArdle should be focused on.
Norms of credit Steve Waldman
This has an antecedent blog post of whether it is OK to “strategically default” (you can make house payments, but you are losing money because your house is worth SUBSTANTIALLY less than your mortgage) on a house.
My view is that buying a house is not a vow of marriage – it is not a moral obligation, it is a business relationship.
It is governed by the mortgage contract, that specified that it is a non-recourse loan. Free enterprise is premised on the idea that financial exchanges BENEFIT BOTH the seller and buyer – otherwise rationally the exchange would not take place.
The whole issue of “normative conduct” steams me, because as construed with regard to paying your mortgage, it implies a “heads I win, tails you lose” philosophy that benefits financiers. To me, a unsophisticated homeowner, it was obvious that the home prices had all gone screwy. Yet financial types pushed these products with no concern whether the loans, or securities, could be repaid – screwing squared, not only screwing the person who took the mortgage, but the people who bought the mortgage back securities. And financiers apparently designed complicated products that “insured” these financial products that did no such thing.
If we want “normative” it should be that the CEO’s of all the companies that got bailed out should be reduced to penury. They caused the problem, and they should FIRST bear the burden for their ignorance (How the hell is it that these guys get paid 50 millions and can use the excuse that it was complicated – isn’t the justification for such large renumeration that you know what your doing???).
Thanks for referencing the preceding history of the exchange ‘tween Waldman – a fair observer in my book, and McArdle – an occasional eccentric but usually a complainer that things are not more draconian.
Yves – season’s greetings and thank-you for the best blog on the net…bar none.
for all the good little bankers and politicians a special gift
U.S. promises unlimited financial assistance to Fannie Mae, Freddie Mac
Friday, December 25, 2009
Washington Post
The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.
The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama’s current term.
But even as the administration was making this open-ended financial commitment, Fannie Mae and Freddie Mac disclosed that they had received approval from their federal regulator to pay $42 million in Wall Street-style compensation packages to 12 top executives for 2009.
The compensation packages, including up to $6 million each to Fannie Mae and Freddie Mac’s chief executives, come amid an ongoing public debate about lavish payments to executives at banks and other financial firms that have received taxpayer aid. But while many firms on Wall Street have repaid the assistance, there is no prospect that Fannie Mae and Freddie Mac will do so.
http://www.washingtonpost.com/wp-dyn/content/article/2009/12/24/AR2009122401588.html?hpid=topnews
Dear Santa,
U.S. promises unlimited financial assistance to Fannie Mae, Freddie Mac
A third Democratic institution will be wanting this same gift this year: The State Legislature of California. Don’t put your sleigh in the barn just yet.
I was writing a draft for a 2010 predictions list
This could be a useful collective project between now and 1-1-10. The Naked Capitalism Predictions for 2010. I have a topic that I’m still mulling over the prediction for:
State Government Budgets
Lotsa high voltage wires are connected to terminals at this sub-panel. The easy and obvious budget gimmickry was exhausted in 2008-2009. Now comes real decision time: cut spending, raise taxes, both.
Merry Christmas, Yves, and to everyone else!
Insecure Securities
http://www.project-syndicate.org/commentary/sinn29
Do away with non-recourse homeloans; the German “Covered Bond”; originating banks maintaining skin in the game. A damning indictment of America.