Wanted: #2 boss for free world (some executive experience required)

(thanks Timmy)

Bailout bill bails out cyclists

From the San Francisco Bicycle coalition.

The SFBC is happy to announce that after seven years of slogging, the federal Bicycle Commuter Benefit suddenly became a reality last week as part of the $850 billion bailout bill signed by the President on Friday. The "Emergency Economic Stabilization Act of 2008" contains language (scroll to p. 205) that will amend the U.S. Tax Code to permit employers to reimburse employees, tax free, for "reasonable" expenses related to bike commutes, including bike and equipment purchases, repairs, and storage if the bicycle is used as a "substantial part" of the commuter's trip to work for the month. The benefit option will go into effect for tax year 2009 (so start saving those receipts come January). Thanks to Oregon Congressman Earl Blumenauer and Senator Ron Wyden for their years of work on this initiative (though, as it happens, neither Blumenauer nor Wyden voted in favor of the massive bailout bill!).

Hindsight is allright

I have to hand it to the NY Times's Gretchen Morgenson. She's been on top of this mortgage meltdown every step of the way. She's the first person I remember writing about the credit default swap implosion, and it's interesting to read her Feb 2008 column about these products today.

Equally interesting is this Aug 2007 column by Ben Stein, downplaying the whole situation. Stein writes:

The rate of loss in subprime mortgages keeps climbing. In time, perhaps it will double, maybe back to $67 billion. This is a large sum by absolute standards, and I would sure like to have it in my bank account.

But by the metrics of a large economy, it is nothing. The total wealth of the United States is about $70 trillion. The value of the stocks listed in the United States is very roughly $15 trillion to $20 trillion. The bond market is even larger.

Much more to the point, the fears and terrors about subprime mortgages have helped knock off 6.7 percent of the stock market’s value in recent weeks. This amounts to about $1.1 trillion, or more than 30 times the losses so far in the subprime market. In other words, these subprime losses are wildly out of all proportion to the likely damage to the economy from the subprime problems.

In that same issue of the NYT, Morgenson explained why the mortgage crisis had begun to spread, or the reason that traders were giving at the time.

It's easy to do a quick superficial analysis of something and come up with an opinion. But to do some real reporting, and figure out what's really going on when it's not conventionally understood. That takes real reporting. It's comforting that some people, like Morgenson, are allowed to do that in this era of click-whoring and superficial journalism.

The Glob is back

After a, what, 1 year hiatus, James MacDougall's Glob & Wail is back, along with many cat, dog & bird photos. Let's hope we don't have to wait much longer or the crazy video postings. That was always my favorite part. Good to have you back, Jimmy.

Ralph Stanley's Obama ad

Wow.

From the Boston Herald.

With banjos picking in the background, Stanley opens the folksy 60-second ad with, "Howdy, friends ..." He claims Obama will cut taxes for "everyday folks" and invest in rural areas to keep children from leaving home to find jobs.

I can't sleep, but not because of the bailout

When we reporters talk about CEOs we sometimes make it sound like they are somehow the owners of the companies they run, or manage really. Usually that's not true. In publicly traded companies the CEO owns, at best, a fraction of the enterprise. Bill Gates owns way more than a typical CEO -- just under 9 percent of Microsoft -- the company's current CEO, Steve Ballmer, even less.

We forget this, but CEOs are really middle managers -- people in between the real owners, the shareholders, and the company.

So what is their real incentive? To help out those faceless shareholders, or to do the best they can for themselves and their families? Nobody hires a CEO for his sense of altruism.

I think Americans intuitively understand this. That's why some many of us are upset about this bailout. We don't want to pay for someone else's mistakes... not if we don't have to.

Take AIG. A few years ago, a middle manager there named Joseph J. Cassano came up with the idea of selling insurance on debt to protect the policy holder in the event that the debt couldn't be repaid. These credit default swap products were a pretty good business for AIG, and other insurers. According to the NYT credit default swap market has grown fast:

Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.


At AIG, Cassano's group of 377 employees was soon generating 5 percent of the 116,000 person company's revenue. Because the credit default swap market was unregulated, AIG could write policies without having a whole heck of a lot of cash to back them up, so it was a gamble for the company, but it paid off for Cassano & his team. Over the past seven years this 377-person group was paid $3.56 billion (yes billion) in compensation. (the whole story is here)

So AIG is now part of the federal government, because nobody wants to buy up all the money they own, now that these gambles have gone south. But will anyone recoup this $3.56 billion? Of course not. Though this intuitively feels like fraud, there's no mechanism to get the money back or to punish those who cocked up.

In the free market world, the company is supposed to go out of business, and people who make bad bets and risky business decisions shouldn't be able to get jobs. But when everyone is doing it... time for a bailout.

This American life had a great episode about this scandal today, and how it was starting to affect short-term corporate credit. I don't remember reading this in any of the reporting I'd seen, but apparently these credit default swaps could be purchased by anyone on any type of debt. I guess it was a hedging instrument, but as the show points out, it was really just a form of gambling, like short selling. They say it was as if your neighbor could take out fire insurance on your house. So if it burned down, he'd collect too. That's what helped it really get out of hand.

This American Life also notes that there's supposedly an option in this bailout bill for the Treasury to buy a stake in these banks instead of just purchasing the bad loans. It may be socialism, but in these bailout days, the argument against socialism seems to amount to "screw the taxpayer," so this also may be good business for the US government.

Anyhow, Dave (my oracle on all things financial) says we've hit a fork in the road. Bailout=inflation. No bailout=deflation. Makes sense to me. I don't see any other way of paying for these big-government Bush administration programs except inflating the debt away.

That's why I'm putting all my money into gold and Martian real estate. I want to be on the ground floor for the next speculative boom in 2100.