U.S. Economy

Piece de resistance quote:

"We've had a phenomenal run in asset classes across the board," said Dan Greenhaus, chief economic strategist for Miller Tabak & Co. in New York. "If he was a Republican, we would hear a never-ending drumbeat of news stories about markets voting in favor of the president."

But we don't, for a plethora of reasons, ranging from the comprehensive critique best articulated by Simon Johnson -- who argues convincingly that the failure to meaningfully reduce the size of banks will make the next crisis even worse than the most recent one -- to the raw truth of the state of labor markets right now.

The Labor Department announced today January employment numbers broken down by state.

Bloomberg:

The unemployment rate decreased in nine U.S. states in January and climbed in 30, signaling the thawing of the labor market is not broad-based.

Rising unemployment in 30 states in January translates to more problems with state finances, and more cuts in services. And that, in turn, means that the judgment of people, as opposed to money, is a little less than overwhelmingly positive.

 

University provost David Kliger said there were reports of protesters carrying clubs and knives, but Clark could not confirm those reports.

No arrests had been made at the school.

An advisory posted on its Web site urged people to avoid the campus because of safety concerns. It also said protesters had photographed the license plate of a staff member trying to enter the campus.

Marches, strikes, teach-ins and walkouts were planned nationwide in what was being called the March 4th National Day of Action for Public Education.

Organizers said hundreds of thousands of students, teachers and parents were expected to participate in the demonstrations.

Some university officials said they supported the protests as long as they remained peaceful.

"My heart and my support are with everybody and anybody who wants to stand up for public education," University of California President Mark Yudof said in a statement. "Public education drives a society's ability to progress and to prosper."

At the University of California, Berkeley, a small group of protesters formed a human chain blocking a main gate leading to the campus. Later in the day, hundreds more gathered for a peaceful rally against major cuts to higher education funding.

"We're one of the largest economies in the world, and we can't fund the basics," said Mike Scullin, 29, a graduate student in education who plans to become a high school teacher. "We're throwing away a generation of students by defunding education."

The steep economic downturn has forced states to slash funding to K-12 schools, community colleges and universities to cope with plummeting tax revenue.

Experts said schools and colleges could face more severe financial trouble over the next few years as they drain federal stimulus money that temporarily prevented widespread layoffs and classroom cuts.

Protest actions were held at most of the 10 University of California campuses, 23 California State University campuses and many of the state's 110 community colleges.

Demonstrations were also planned at universities in New York, Wisconsin, Alabama, Michigan and Massachusetts.

Students, teachers, parents and school employees from across California gathered in Sacramento for a midday rally at the Capitol to urge lawmakers to restore funding to public schools.

Linda Wall, a state Department of Mental Health employee, said she had two children attending Sacramento State University. Hikes in student fees and mandatory furloughs for state workers have strained her budget.

"Their tuition has taken a big chunk of my paycheck and my paycheck is shrinking, so it's a double whammy," Wall said.

Large regional rallies were planned at San Francisco Civic Center, Pershing Square in Los Angeles, Balboa Park in San Diego and public plazas in other cities.

Education cuts have been particularly devastating in California, which has been grappling with massive budget shortfalls for the past two years.

In response to a 20 percent reduction in state funding, the University of California and California State University systems have imposed furloughs on faculty and staff, sharply reduced course offerings, turned away thousands of qualified students and raised tuition by more than 30 percent.

"You're paying more and you're getting less for it," said Katelyn Rauch, a senior majoring in political science at California State University, Channel Islands. "Classes are being cut, students aren't able to graduate on time, entire majors are being closed."

California's K-12 schools were preparing to lay off tens of thousands of teachers, pack more students into classrooms and scrap many academic programs because of deteriorating finances.

Many of the demonstrations Thursday were being organized by student groups, faculty associations and employee unions that often have a contentious relationship with the universities.

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Associated Press Writers Marcus Wohlsen in San Francisco and Robin Hindery in Sacramento contributed to this report.

"How do you explain to an innocent citizen of the free world the importance of a credit default swap on a double-A tranche of a subprime collateralized debt obligation?" writes Lewis.

I'm betting Lewis was grinning as he wrote that sentence, because if you wanted to summarize "The Big Short" in just one line, it might be: the most lucid explanation yet offered to readers as to the importance of a credit default swap on a double-A tranche of a subprime collateralized debt obligation. Which might not sound like a whole lot of fun, but turns out to be a blast. As someone who has struggled for years to penetrate the obtuse world of structured finance and the role it played in blowing up Wall Street, I must give credit where credit is due. "The Big Short" is superb: Michael Lewis doing what he does best, illuminating the idiocy, madness and greed of modern finance.

Even though I have long been a huge Lewis fan, dating all the way back to "Liar's Poker," his hilarious and enlightening account of life as a bond broker in the go-go '80s, I did not anticipate something this good, something capable of carrying its weight as a bookend to "Liar's Poker's" delights. My heart actually sank when the galleys of "The Big Short" arrived in the mail. A library of books exploring the financial crisis has already been published, with many, many more yet to come. My bedside table groans under the weight of their unfinished tomes. What could Lewis have to say that hadn't already been said a million times over?

But then I made the mistake of glancing at the first chapter and literally could not put "The Big Short" down. Lewis achieves what I previously imagined impossible: He makes subprime sexy all over again.

The secret to Lewis' success is a mixture of strategy and craft. Most books on the financial crisis find their locus inside the Wall Street firms at the heart of the action. The general theme: Hubristic banksters are oblivious to what they've wrought until it is too late. Chaos ensues. Lewis takes a different tack. "The Big Short" tells the stories of an odd collection of brilliant misfits who recognize that Wall Street is wearing no clothes, become convinced a massive calamity is nigh, and seek feverishly to profit off of their understanding. They are, in Wall Street parlance, the "shorts" -- speculators who bet that the price of a given stock or bond or commodity or any derivative thereof will fall, rather than rise. Most shorts pick on a single company, or have a dour view of the direction of the price of corn or pork bellies. "The Big Short" is a little more ambitious: It's a bet on financial sector collapse.

That's the strategy. Today you can find plenty of people who claim to have seen financial disaster looming, but in "The Big Short" Lewis captures protagonists who put their money on the line. That they did so by employing Wall Street's latest financial innovations against itself makes the story all the more fascinating. A typical Lewis "short" first figures out which mortgage lenders are making the absolutely crappiest loans, then determines which mortgage bonds (or collateralized debt obligations created out of slices of crappy mortgage bonds) are constructed from those loans, and then buys insurance, via credit default swaps, against the chance of those bonds or CDOs going bust.

In doing so these money managers have to war against their own self-doubt, the trepidation of their investors, the arrogance of Wall Street bankers, and the giddy momentum of financial markets that defy all logic for far longer than makes any rational sense. (There's also a good question as to whether what they are doing should even be legal -- the "shorts" are buying insurance on "properties" that they don't even own!) But the loner-against-the-crowd mentality delivers a dynamic sense of tension that propels "The Big Short" merrily along. We know, as readers, exactly what will happen at the end, and yet still the ride feels nail-biting.

But what truly sets Michael Lewis apart from other writers is his craft. Watch him describe Steve Eisman, a man whose desire to make money shorting subprime mortgage-backed concoctions is inseparable from his growing sense of rage that Wall Street is getting away with a rigged game.

The focal point of his soft, expressive, not unkind face was his mouth, mainly because it was usually at least half open, even while he ate. It was as if he feared that he might not be able to express whatever thought had just flitted through his mind quickly enough before the next one came, and so kept the channel perpetually clear. His other features all ranged themselves, almost dutifully, around the incipient thought. It was the opposite of a poker face.

When you combine an ability to evoke someone's essential character in a few spare sentences with an equal facility at deconstructing the financial engineering that goes into creation of a collateralized debt obligation, you are dealing with an exceptional talent. There are passages in "The Big Short" that get seriously wonky -- where most writers would be content to simply talk in generalities about "slicing and dicing up risk" -- but Lewis makes a game effort to communicate the nitty-gritty of how the structured finance con game actually worked. It can be intimidating, but if you stick with it the end result is devastating.

Lewis does not attempt to explicitly resolve some of the bigger questions as to how it was possible for Wall Street to run so far off the tracks. If you're looking to plug "The Big Short" neatly into a political narrative you may find it wanting. By now everyone has chosen their own favorite villain -- some blame the dismantling of regulatory oversight, others point at government efforts to boost lower-class home ownership. Everybody's mad at housing speculators and people who take out loans that they can't afford. The ratings agencies, regulators, mortgage lenders and banks all clearly failed us.

It's quite the toxic stew. But sitting at the center of the spider's web are the investment banks -- Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank, Bear Stearns, Lehman Brothers. These banks were not creating complex derivatives tied to subprime mortgages because of government policy pushing homeownership or because individual homeowners were irresponsibly prone to lying about their income. Far from it; these banks had discovered that billions of dollars could be made transforming lousy mortgage loans into securities supposedly safe enough that they could be sold to pension funds or anyone else. So they had a huge financial incentive to encourage the creation of even more crappy loans.

And even then, there wasn't enough raw product! The hunger for garbage that could be turned into gold was beyond anything the craziest real estate markets in California or Arizona or Florida or Nevada could provide. The smart brains at Goldman Sachs found many innovative ways to get around this obstacle, to the point of taking the collateralized debt obligations that already, uh, sliced and diced subprime bonds, and reslicing those into synthetic CDOs that were even further removed from actual humans living in real houses.

And even that wasn't enough, so they created a superstructure of credit default insurance swaps to buy and sell, ostensibly to protect against the possibility that their synthetic CDO or subprime mortgage bond might collapse, but really, just to have another way to make another speculative bet, in a world where there actually were physical limits to how many real mortgages could be created.

It all adds up to an extraordinary demonstration of how markets can fail disastrously. The tragedy, however, is that we appear, as a society, not to have learned anything lasting from this debacle. The most depressing part of "The Big Short" is realizing that now, more than a year into a new presidential administration, we have done nothing substantive to prevent a similar mess from occurring again in the future. The investment banks are minting money again, while millions of Americans have lost their jobs and their homes.

In the introduction to "The Big Short," Lewis observes that when he wrote "Liar's Poker" he thought he "was writing a period piece about the 1980s in America, when a great nation lost its financial mind." He "never imagined ... that the future reader might look back on this ... and say, 'How quaint.' How innocent." But he was wrong. The madness continued. "There was no scandal or reversal, I assumed, sufficiently great to sink the system."

And here we are, in 2010, shell-shocked after witnessing and living through the "most purely financial economic disaster in history" and absolutely nothing has changed.

From Glenn Beck and his followers to John McCain, Walker is the favorite expert of the harshest critics of the Obama administration’s stimulus spending (and any other federal effort to increase employment). During his presidential campaign, McCain promised that if elected, he would hire Walker to help balance the federal budget.

As for Beck, he has conducted more than one fawning interview with Walker; in fact, the excitable Fox News personality hosted him two weeks ago to discuss his latest book, titled "Comeback America." Beck clearly feels that Walker’s worries about fiscal balance somehow support his own demagogic predictions.

But Walker’s fans on the right may not be so quick to mention his latest insight, for as he reveals in an important essay he co-authored with Lawrence Mishel of the Economic Policy Institute, he now believes that employment is the overriding issue that must be addressed before any attempt to reduce deficits.

Mishel and Walker explain that the only way to bring spending back in line with revenues is to stimulate growth and employment. The entire piece is well worth reading, especially because the authors come from different sides of the political divide, but these paragraphs summarize their argument well:

Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses.

With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. Persistently high unemployment drives poverty up, makes it harder for families to find decent housing, increases family stress and, ultimately, harms children’s educational achievement. For young workers entering the workforce, the current jobs crisis reduces the amount they will earn over their lifetime.

In deep recessions, businesses tend to make fewer critical investments in research and development that can improve our economy’s productive capacity over the long term. Entrepreneurs usually find credit hard to obtain if they want to start a new business. These factors hurt U.S. global competitiveness and growth potential.

That’s why we agree that job creation must be a short-term priority. Job creation plans must be targeted so we can get the greatest return on investment. They must be timely, creating jobs this year and next. And they must be big enough to substantially fill the enormous jobs hole we’re in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years. 

So government must create more jobs now, for economic as well as moral reasons. The current deficit matters much less than growing the economy out of recession. And the nation's future depends on spending more, not less.

All this is precisely the opposite of current Republican policy and conservative ideology, including the imbecile slogans of Beck and his tea-party drones. If the Democrats were any smarter, they would bring Walker up to Capitol Hill to tell them why federal jobs spending is imperative -- and then we would see what Beck, McCain and the rest of the wingers would say about the wisdom of their erstwhile idol. 

For example, the following passage, in which Buffett delivers a not-so-implied criticism of your average financial institution CEO, rings true with some heartfelt disgust.

Charlie [Munger] and I believe that a CEO must not delegate risk control. It's simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books... If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.

In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he's incapable of handling that job, he should look for other employment. And if he fails at it -- with the government thereupon required to step in with funds or guarantees -- the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country's largest financial institutions. Yet they have borne the burden, with 90 percent or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been "bailed-out" is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price -- one not reimbursable by the companies they've damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

It is instructive to compare Buffett's sense of corporate responsibility with a brief snippet from "The Big Short," Michael Lewis' superb new book on the financial crisis (not officially published until March 15th, but beginning to trickle out here and there via excerpts).

Lewis devotes much of "The Big Short" to a short-seller named Steve Eisman who becomes convinced that the entire subprime mortgage industry is a house of cards -- with special emphasis on the securitization games being played by the big Wall Street investment banks. (Italics mine.)

On the surface, these big Wall Street firms appeared robust; below the surface, Eisman was beginning to think, their problems might not be confined to a potential loss of revenue. If they really didn't believe the subprime mortgage market was a problem for them, the subprime mortgage market might be the end of them. He and his team now set about searching for hidden subprime risk: Who was hiding what? "We called it The Great Treasure Hunt," he said.... He'd go to meetings with Wall Street CEOs and ask them the most basic questions about their balance sheets. "They didn't know," he said. "They didn't know their own balance sheets."

As we watch the parade of Wall Street lobbyists and CEOs complain about what new financial regulation will mean for their businesses, we should remember that their own record suggests that they don't have a very good handle on what they're actually doing, and their self-inflicted wounds, absent a government bailout, would have been far more lethal than anything coming out of Washington.

The combined group will be the leading life insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines, as well as the biggest foreign life insurer in China and India, Prudential said.

Prudential shares fell 11 percent to 535.5 pence on the London Stock Exchange following the announcement.

"Whilst in the longer term we can see the advantages of this audacious and opportunistic acquisition, on a 12 month view, we think that the shares will underperform," said Barrie Cornes, analyst at Panmure Gordon.

Prudential said it expected to complete the acquisition in the third quarter, subject to approval from regulators and shareholders.

"This transaction is hugely exciting and a one-off opportunity to transform the group," said Prudential CEO Tidjane Thiam.

"Asia has been very clearly a major driver of value for Prudential for several years and in 2009 it accounted for 44 percent of new business profit (post-tax)," he added. "The combined group would have 60 percent of 2009 new business profit coming from Asia and puts us in a strong leadership position in all the critical growth markets in the region."

Prudential estimated pretax savings of $340 million per year within three years.

"This acquisition is not about cost savings," Thiam said in a conference call. "We are making this transaction because we believe there is extraordinary growth in Asia."

Prudential said its sales were up 42 percent in the fourth quarter in Asia, which the company calls "the engine of the group's future growth."

Prudential released its 2009 results ahead of schedule on Monday, reporting a net profit of 676 million pounds ($1.01 billion) compared to a loss of 396 million pounds in 2008.

AIG said Friday it lost $8.87 billion in the fourth quarter as its general insurance business remained weak. The U.S. government now holds an 80 percent stake in the company.

The Prudential deal will involve creating a new company, also to be known as Prudential PLC and listed on the London Stock Exchanges, which will acquire the assets of the existing company and of AIA, Prudential said.