On Sunday March 15, 2009, American International Group, Inc. revealed the identities of some of the beneficiaries of about half of the nearly $180 billion the US government has committed ($173 billion actually paid out so far) to support the ailing international financial giant. As we now know, AIG sold credit default swaps (CDS) that paid off if the market value of some bonds fell. (I use the term “bond” here generally to refer to the alphabet soup of CDO, CLO, MBS, etc. – all of which are debt that is sold to the public.) Most CDS only pay off if the borrower fails to make payments – something that hasn’t happened in the case where AIG is making payments. The geniuses at AIG – and we know they are geniuses because they earned $165 million in bonuses for the effort – took on completely unknown risks for, apparently, insufficient premiums, resulting in the need for an emergency $85 billion loan last September from the Federal Reserve Bank of New York (courtesy of my buddy Tim Geithner) to “avoid severe financial disruptions”… as if that worked!
Whatever. So, now AIG is letting us know who got our money: $22.4 billion for payouts on the CDS and $27.1 billion to buy the bonds underlying the CDS (so some of the CDS could be cancelled). That’s about $50 billion so far for derivatives – no one knows how much more they’ll need. Here’s a summary by the country where the recipients are based:
Numbers in billions. $4.1 billion paid to “other” not included here. Numbers won’t total to $49.5 billion due to rounding.
There was also $12.1 billion paid to US municipalities (states, cities, school districts, etc.) – where states invested, for example, bond proceeds prior to expenditure. In those cases, the municipalities invested in assets with guaranteed rates of return (another genius idea at AIG!). The bigger numbers belong to the states that had recent large bond issues – for example, $1.02 billion to California which has yet to distribute a dime of the bond money raised for stem cell research (due to on-going litigation).
The most interesting bit, perhaps, are payments of $43.7 billion to securities lenders – those stock and bond holders who lend out their shares to enable short sellers. This means that AIG borrowed stocks so they could short sell them – make an investment that paid off only if the prices fell. (If you don’t know what short selling is, here’s a five minute video that explains it in a light-hearted way.) Bottom line – it gave AIG incentives to push down market prices. And their announcements and actions at the end of 2008 certainly achieved that goal. Way to go, geniuses!
A day or so after he was on CNBC, Warren Buffett went on Bloomberg Television and told them that he’ll continue to sell derivatives contracts. He’s getting deeper into investments that he has called “financial weapons of mass destruction.” Apparently he’s betting that there will not be a crash (which would require a payout) in corporate junk bonds, muni bonds or stock markets in the UK, Europe and Japan. Here’s the punch line: his stock is up 17.2% since he started talking!
Berkshire Hathaway shares peaked last year at $147,000 each when Buffett was buying energy companies. The price is so very high because they have a policy of never paying dividends. Therefore, all the company’s earnings are put back into investments. If you tried to use a standard finance model to determine the appropriate price for these shares, the answer would be “infinity” because you can’t divide by $0 dividends. Anyway, two months after the peak, the shares were in the tank – relatively speaking – at $77,500 per share. By the end of the week before his TV appearances, the shares were even lower, at $72,400. The day of the CNBC interview: Berkshire Hathaway shares closed at $84,844 – a cool 17.2% gain. Remember, this is the man who said he is fearful when people are greedy and greedy when people are fearful.
On March 12, Berkshire Hathaway lost its triple-A credit rating from Fitch Ratings because of potential losses from those derivatives. Not that we should believe everything Fitch says – Fitch is among the credit rating agencies that gave triple-A ratings to subprime mortgage bonds, and look what happened to those investments! For what it’s worth, Fitch gives Berkshire a “negative” outlook, meaning another cut is possible within a couple of years. The two other big ratings agencies, Moody's Investors Service and Standard & Poor's, still rate Berkshire triple-A.
Former Illinois Governor Rod Blagojevich's arrest, impeachment and removal from office assured his place as another famous name in our state’s corruption hall of disrepute. But it turns out the selling of President Obama’s Senate Seat was only a minor part of Blagojevich’s misdoings – and some of this could have greater national political fall-out than is commonly imagined.
As the Justice Department looks at Blagojevich’s machinations, the scope is likely to widen. Operation Board Games, the formal name of Justice Department's investigation of Blagojevich, is about more than just Blago’s seat-selling or about Democratic Party political fundraiser Tony Rezko shaking down individuals for campaign contributions.
Perhaps the most fertile ground for the investigation centers on the awarding of a gambling license in the Chicago suburb of Rosemont, as The Chicago Tribune reported in 2005. Because of the negative attention drawn to placing a casino located in the Chicago Mob-linked suburb of Rosemont, Blagojevich needed to make the situation look more respectable.
So who was brought in to try and make Rosemont look acceptable? None other than Eric Holder, the current newly installed Attorney General. Rosemont didn't get the casino because of pressure applied by former FBI agent Jim Wagner on the Illinois Gaming board. Wagner is the guy who publicly raised the question of Eric Holder's connection with Blagojevich.
A day before his arrest, former Gov. Rod Blagojevich was hit with a sweeping federal subpoena seeking eight years of calendars, correspondence, e-mails, logs, notes and other records involving everyone from his wife to Chicago Tribune owner Sam Zell
The "everyone" includes Valerie Jarrett and David Axerod, individuals who are very close to President Obama.Tony Rezko appears to be a link between Rod Blagojevich and Barack Obama. All of this could get pretty messy before it’s all done.
The second part in the series on East St. Louis gives views of downtown today, shows how its history can be seen in the city, and explains why the city could still be a good place for new development.
Part I discusses the origins and development of East St. Louis as an industrial city.
Part III will explore ideas put forward for (re)development of the city, including cultural tourism based on the city's African American heritage and use of vacant land for farming to create a local food source for the St. Louis metropolitan area.
Michael R. Allen is the Assistant Director at Landmarks Association of St. Louis. He edits the blog Ecology of Absence, "a voice for historic preservation and a chronicle of architectural change in St. Louis, Missouri and its region".
Alex Lotz is an undergraduate film student in his final year at Chapman University.
Democratic lawmakers from California recently took a break in the midst of “intense state budget negotiations” to travel up to a wine-country lodge complete with gourmet food, rooms, and cocktails with a trio of interests footing the $14,000 bill.
At the time of the retreat, the Consumer Attorneys of California (who, along with labor unions, had been pushing to roll back some labor rules) the California Professional Firefighters (seeking to protect funding for fire safety programs) and the Northern California Carpenters Regional Council (lobbying for greater roles for private contractors in state construction) all had strong interest in the proceedings.
The getaway came a day after Gov. Schwarzenegger declared a state of fiscal emergency and ordered the Legislature to discuss a series of proposals to plug a projected $42-bilion budget gap.
For the most part, each group had its interests protected in the budget package passed in February – though each group denied the retreat had anything to do with the budget.
Such extravagance gifted to lawmakers is not uncommon; groups with business before the state commonly bankroll such outings. Dinner at Morton’s Steakhouse with a $144 price tag, tickets to Disneyland, and $13,211 trip to Egypt, Jordan, and Israel, among many others, were revealed last week in documents filed by lawmakers.
Indecent lobbying goes down best with a vintage cabernet.
Over the past year, transit ridership has risen and that is a good thing. At the same time, driving has declined, due to both higher gasoline prices and the economic downturn. Some analysts have implied that people are giving up driving and using transit instead. An analysis of just released transit and urban roadway usage indicates no such thing. During the fourth quarter, the transit increase from a year earlier represented just 0.7 percent of the driving decline. This is even lower than the 2 to 3 percent figures registered in the first through third quarters. Of course, the principal reason why people do not substitute transit for driving is that it is not available for the overwhelming majority of urban trips.
A reader forwarded along this video of a bustling recent weekend at La Gran Plaza, a shopping center serving the Latino market in Fort Worth, TX. Just a few years ago, La Gran Plaza was a failing conventional shopping center before developers purchased it and completely redesigned and repurposed the mall to cater to Latinos. Partly because it serves a more insular, cash based clientele and largely because of brilliant design and programming choices, this mall seems to be thriving during a very tough period for retailers.
The days of the nu-cu-ler presidency may be over, but nuclear energy continues to be a hot-button issue, even if pronunciation isn’t the problem.
As it stands, President Obama plans to “slash the budgets of the U.S. Nuclear Regulatory Commission and the national nuclear waste facility at Yucca Mountain, Nevada,” reports eco-watcher Paul Taylor.
The 104 nuclear power plants spread across the United State currently supply around 20% of the nation’s power and have eliminated 8.7 trillion tons of carbon dioxide released into the atmosphere.
Technological improvements in nuclear facilities have also led to a typical power plant operating at 90% annual efficiency – whereas wind and solar power generally operate at 25% efficiency.
The U.S. may operate about a quarter of the 430 nuclear power plants worldwide, but “nuclear energy” continues to be a polarizing subject – safety may have improved, but Chernobyl and Three Mile Island continue to be associated with the energy’s potential hazards.
Despite the memories of Karen Silkwood, Americans appear to be increasing their approval of nuclear power. The number of American citizens in favor of expanding nuclear power is up to 50% in 2007 from a 44% approval rating in 2001.
The energy harvested from one pound of uranium fuel is equivalent to 1.3 millions pounds of coal energy. The decisions Obama will make about the nuclear program will undoubtedly be closely watched by those concerned with stable, domestic energy supplies as well as GHG emissions.
In a potentially ominous development, Television New Zealand reports that the Obama government has postponed free trade agreement discussions under the proposed Trans-Pacific Strategic Economic Partnership (P4) with New Zealand, Singapore, Brunei and Chile. Along with the United States, Australia, Peru and Vietnam were to have been involved in the expanded free trade area. It is reported that the postponement is related to an assessment of trade policy by the Obama administration. An inward turning US trade policy, favored by President Obama's organized labor allies even before the economic meltdown, could set the nation on a protectionist course not unlike the measures that prolonged the Great Depression.
Imagine the following scenario. John, Paul, Ringo and George are the only members of a society and each has amassed a pile of currency over his lifetime. John and Paul each have 100 utils, Ringo has 300 utils and George has 500 utils. All told, the size of the entire system is 1000 utils.
John and Paul decide to enter into a private contract. Under the terms of their agreement and in exchange for an apartment on the ultra-hip Upper West Side, John will pay Paul 40 utils up-front, 1 util a month for 5 years, and 1,000 utils in a lump sum at year 5. While the insanity of such a contract is undisputed, there are two approaches for a government to take once the impossibility of its satisfaction becomes clear.
The first, simpler and more sane approach allows the two parties to work out an eventual default between themselves. In fact, most economic systems, like ours, anticipate these types of failures and have time-honored methodologies for dealing with them once they occur.
Approach two -- the one that seems to be favored by our government at every turn -- turns on the printing press, prints enough additional money and hands it to Paul (the non-defaulting party) in satisfaction of John's (the defaulting party) obligation. While the second approach appears charitable and seems noble enough, it has ramifications throughout the entire society. John and Paul might both be satisfied that their contract can be completed. Ringo and George, however, will each have their share of the society's resources seriously diluted by the government's action.
By virtue of the government's actions in our little story, George's ownership of the society's resources falls by half from 500 of 1000 utilts at the beginning of our story to 500 of 2000 utils at the end -- all by virtue of the bad behavior of other societal actors and the government's choice of response.
I bet that, upon reflection, George might favor of the first approach!