All About 'The Blob'

Read it and weep.

Video: Review of 4-Part Frontline Financial Crisis Series 'Money, Power, and Wall St.'

The PolyCapitalist is kicking May off with a number of must watch videos, and this epic 4-part Frontline special follows the crisis from what is arguably its point of genesis: a 1994 JP Morgan retreat in Boca Raton, Florida which of led to the creation of the first credit default swaps.

Frontline has done an incredible job getting many of the key players and insiders, including a number of top Wall St. bankers, to go on record about what happend. Even if you've read all the books, seen the earlier Frontline financial crisis special, and think you know all you need to about the financial crisis, this is still must watch.

The big new item for me, and I'm a bit surprised this has not received more ink, was the March 2009 battle between Larry Summers and Tim Geithner over what to do with the megabanks. My prior understanding was that Summers and Geithner were two peas in a pod. Not always it turns out.

According to Frontline, in March 2009 Summers, along with fellow economist Chritina Romer, pushed for what was called 'Old Testament Justice', meaning firing a bank CEO and or possibly nationalizing one of the megabanks. In contrast, Geithner, who it would appear is more of a protege of Bob Rubin than Summers, fought hard to treat the banks with kid gloves and use stress tests to help instill confidence back into the marketplace.

Obama ultimately sided with Geithner, which seems to contradict earlier reporting that Geithner had ignored Obama's instructions to dissolve Citigroup. Frontline definitely presents Summers in a better light and Geithner and Obama in a worse one.

I have only a minor gripe with this Frontline series, which is the annoying editing. In a multi-part, complex story, reusing clips to aid telling the story is probably unavoidable. However, I felt they recycled too many from within the four part series, as well as from an earlier Frontline special on the financial crisis from a couple years ago. But this is a minor, forgivable quibble given the extraordinary job the Frontline team did to compile and document the crisis up through present day.

Overall, perhaps the key point made in the series - and one I could not agree more with - is that the financial crisis still has not ended. Where it will go from here is as much dependent now on politics as markets or economics.

'Government Bank Bailout Was Profitable' Myth Receives Another Nail in the Coffin

Bravo to Jonathan Weil of Bloomberg, who uses the U.S. Treasury's own footnotes and figures to dispel the myth that the bank bailouts were profitable to taxpayers here.

Video: Simon Johnson's White House Burning

Video: Goodbye, Geithner!

Should Obama be re-elected call me sceptical that we'll get someone better than Turbo Tax Timmy, but in the meantime lets all shout a collective Hallelujah!

Video of Geithner breaking the news that he won't be around next term after the jump:

What If We Paid Off The Debt? The Secret U.S. Government 'Life After Debt' Report

This secret report was obtained through a Freedom-of-Information request by NPR:

The copy of Life After Debt we obtained reads "PRELIMINARY AND CLOSE HOLD OFFICIAL USE ONLY." 

The report was intended to be included in the official "Economic Report of the President" — the final one of the Clinton administration. But in the end, people above Jason Seligman decided it was too speculative, too politically sensitive. So it was never published.

Here's more:

The report is called "Life After Debt". It was written in the year 2000, when the U.S. was running a budget surplus, taking in more than it was spending every year. Economists were projecting that the entire national debt could be paid off by 2012. 

This was seen in many ways as good thing. But it also posed risks. If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world. 

"It was a huge issue.. for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration.

The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds. 

But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.

Banks buy hundreds of billions of dollars' worth, because they're a safe place to park money. 

Mortgage rates are tied to the interest rate on U.S. treasury bonds. 

The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track. 

If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?
"I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it," says Jason Seligman, the economist who wrote most of the report.
It was a strange, science-fictiony question. 

Full story and audio clip here.

h/t Barry.

Default Myth Busting: Sorry Simon and James, the U.S. is not a Default Virgin

Professor Simon Johnson and James Kwak of The Baseline Scenario have an article at Vanity Fair about the geopolitical importance of credit in late-18th century France, Great Britain, and (especially) the United States. Their article, however, fails to mention an important detail which also happens to contradict their claim that "the (U.S.) federal government would always honor its debt".

The consolidation/conversion of U.S. revolutionary state debt into federal debt, which took place in the early 1790s, and which the authors refer to in the paragraph prior to the above quote, represented a U.S. sovereign default. (For more on this event see Reinhart and Rogoff (click on the U.S. tab) or Sylla, et al, which describes the 'haircut' bondholders received (6% to 4%).)

The notion that the U.S. has never defaulted has unfortunately been repeated often enough that, like the incorrect claim that TARP was "profitable", otherwise well-informed people have come to believe it.

In terms of other U.S. defaults, Reinhart and Rogoff also count Franklin Roosevelt's 1933 prohibition on owning gold and the subsequent devaluation of the U.S. dollar vs. gold as a default.

It's not very surprising to see Vice President Biden promoting the myth that the U.S. has never defaulted (in his case following a visit to the U.S.'s largest creditor, China). Professor Johnson, however, should know better.

If Not Obama, Who Does Secretary Geithner Take Orders From?

Here's the story about how Treasury Secretary Tim Geithner, perhaps emboldened by his ability to get away with tax evasion, decided in March 2009 to ignore President Obama's directive to dissolve Citibank.

As MIT Professor Simon Johnson and others have pointed out, the most recent financial crisis marked the third time in the last three decades that Citibank has needed a taxpayer financed bailout. In other words, once every 10 years on average Citibank goes bust.

Obama, perhaps aware of this fact, maybe thought it was time to put an end to the joke that Citibank and its lackluster management can stand on its own two feet without government backing. Why didn't Geithner agree with his boss?

Friends of Bob: Summers, Orszag and Geithner

Yves Smith has a theory. Another possibility is that dismantling Citibank would have put an end to the #1 preferred post-government destination for officials looking to cash-in like Robert Rubin, who pocketed hundreds of millions of dollars in compensation as Chairman of Citibank following his position as Treasury Secretary, and Peter Orszag, who left the Obama administration for a similar lucrative position with the megabank.

And what consequences has Geithner suffered for his supposed insubordination? Apparently none based on the fact that Obama purportedly had to beg him to stay on through the 2012 election.

Chart of the Day: U.S. Debt Ceiling Over Last 30 Years

FDIC's Bair: "They Should Have Let Bear Stearns Fail"

Today's must-read interview is with just-departed FDIC Chairwoman Sheila Bair, who sets the record straight on:

• where Paulson, Bernanke, and Geithner went wrong (e.g., bailing out Bear Stearns)
• the disconnect between President Obama's 'heart' and the people he chose for his economic team 
• what the future holds for Too Big (or more accurately 'Too Bigger') to Fail

Bair's argument on letting Bear fail is that it would have sent a strong signal to the larger, more systemically integrated firms, like Lehman, that they should raise capital because the government was not going to bail out everyone. Whether Lehman could have in fact raised sufficient capital in the wake of Bear being allowed to fail is a great counterfactual question. 

One has the impression from reading Sorkin's Too Big to Fail that Dick Fuld and Co. either expected Paulson to bail Lehman out, or that the storm would pass soon enough for the prices of Lehman's assets to recover. Paulson purportedly appealed directly to Fuld to raise capital on numerous occassions in 2008. However, given the Federal Reserve's bailout of Bear, Fuld's skepticism that the systemically more important Lehman would be allowed to go under is understandable. If Bear had been allowed to fail Fuld likely would have come away with an entirely different interpretation of how things might play out should his back get pushed up against the wall, as it did during that fateful September of almost three years ago.

The interview also makes reference to former CFTC head Brooksley Born. For anyone who hasn't watched it already I highly recommend Frontline's profile of her battle with Greenspan, Rubin and Summers on the regulation of derivatives, a Wall Street product which Warren Buffet has called "financial weapons of mass destruction".