[Continued from yesterday's Part 1.]

Continuing the recap of December’s post, during December we looked globally (Dubai’s shadow bankruptcy) and locally (New York City’s public toilets).  Gotham City, the cradle of American apartments, also served as the setting for an Experiment in urban micro-living: Part 1, the pluses, and Part 2, the minuses:

It’s quite clear that the Prokops have made a conscious choice – foregoing large elements of what you and I would consider minimum acceptable living in exchange for security of tenure and controllability of occupancy cost, some potential for appreciation, and above all reduced occupancy cost.  They then have taken the resulting savings and spent it on things they value more than their mousehole apartment.

The welcome mat marks my territory

In making that choice, what have they renounced?

* Children

Unlike cats, they cannot be left alone all day, and unlike dry cleaning, they cannot be parked elsewhere overnight.

* Entertaining guests

She joked that the tiny apartment gets her out of hosting duties and dissuades long-term guests.

“No one ever stays too long,” she said. “It’s too small.”

Am I the only one who hears enforced brightness in their comments?

9. Christopher, 35, and Zaarath, 37, pop open a bottle of champagne.

The Big Apple also hosted a tussle over personal behaviors in the privacy of one’s own home, in Not illegal, merely despised:

And Audrey Silk, the founder of Citizens Lobbying Against Smoker Harassment, a nine-year-old advocacy group, said the trend was troubling from a civil liberties perspective.   “If we’re talking about annoying odors, where do you draw the line?” she said. “What about cooking odors, from fish or curry?”

In A Wild and Crazy Guy (1978), Steve Martin explained how, when asked by a fellow passenger on an airplane, “Mind if I smoke?” he would answer, “No, mind if I fart?”

“It’s one of my habits!”

“Yeah, they got a special section on airplanes for me now.”

These issues of urban cohabitation and coexistence are critical, for during 2009 humanity passed the majority-urbanization mark, homo urbanis overtaking homo agricolas, and whether or not we like it, we are hurtling toward the future city, such as the ultimate future city: Trantor:

Continuing our occasional series on the Ultimate Future City:

The Caves of Steel, by Isaac Asimov, 11/07

The Naked Sun, by Isaac Asimov, 11/07

The World Inside, by Robert Silverberg, 12/07

Diaspar, The City and the Stars, by Arthur C. Clarke, 3/08

Displaying our technology for the universe to see

The half-century in which we are living, which opened in 1975 and will close in 2025, will be without equal in human history for its urbanization.  In both its rate and scale, this fifty years will permanently remake our planet, as homo agrarius gives way to homo urbanis.  We are moving to the cities, and our world will never be the same.

Coruscant from Star Wars, modeled on Trantor

Shifting from the cities to the Mission Entrepreneurial Entities that develop, own, and operate affordable housing in those cities, I reported on my ULI Affordable and Workforce Housing Council meeting, where I moderated a debate on the Low Income Housing tax Credit, and where I also heard from long-time housing consultant Helen Dunlap, who offered Rumfeldian organizational suggestions in Knowing your unknowns: Part 1, real estate, and Part 2, organization and governance:

“Mission” (multiple bottom lines) is achieved when the business works, not the other way around.

Amen.

All you little mission Hulkamaniacs, take note

Too many MEEs think that mission will carry them, and that business principle and systems are to be avoided, at least an allergy, more often a positive infectious rash to be scrubbed out. 

An MEE is a business that pursues mission and redeploys its profits into expanding mission.  Any other orientation eventually fails.

Make the money first, then reinvest it in good works

Freshly back from a gates Foundation convening in Durban, South Africa, I posted what was for me the most personally moving event, my Pictures at an enumeration:

What is important is not principally what happened – it totaled a few hours’ work, and resulted in a stack of papers with information.  Papers that had legal validity to the city of Durban, hence economic, judicial, and political consequences. 

I realized with a shiver that I’d seen this dynamic before – at real estate closings.  The same curious convergence: months of work, negotiations, bringing people together, culminating in a gathering where papers are filled out and signed, then taken to government for recordation. 

Information becomes part of the legal reality.  A bargain is struck, a bargain with consequences. 

In a closing, it’s about property and money and future obligations.  So too in an enumeration – property and money and future obligations.

The city has now taken cognizance of this neighborhood, its people, and their property. 

Enumeration is the inauguration of urban citizenship.

Enumeration creates citizenship rights

Finally, Sherlock Holmes took time out from his intertemporal schedule to explain What makes a good consultant? Attributes of character, Part 3a and Part 3b:

It was always Watson’s place to listen actively

Continued from the previous Part 2b and Part 2a, which dealt with services and activities.]

[A previous trio, Part 1a, Part 1b, and Part 1c, covered the rules of engagement with clients.]

Quick to absorb and process new information

Holmes feared subconsciously anchoring his or his client’s expectations through half-baked theorizing and prescribing.  For that reason, he sought to ascertain and enumerate the whole ecosystem of facts surrounding a particular case before making any deductions:

“You don’t seem to give much thought to the matter in hand,” I said at last, interrupting Holmes’s musical disquisition.
“No data yet,” he answered. “It is a capital mistake to theorize before you have all the evidence. It biases the judgment.”

A Study in Scarlet, Part 1, Chapter 3

Start by examining the evidence

Voraciously he sought data:

“I am an omnivorous reader with a strangely retentive memory for trifles.”

The Adventure of the Lion’s Mane

Is constantly learning

 “Education never ends, Watson. It is a series of lessons with the greatest for the last.”

The Red Circle

So is a blog.

There is yet more to learn, Watson

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[Previous Months In Review available here: Nov 09, Oct 09, Sep 09, Aug 09, Jul 09, Jun 09, May 09, Apr 09, Mar 09, Feb 09, Jan 09.]

When the history of our global credit crunch is written, the last two weeks in December will be seen as an outbreak – the Patient Zero, as it were, of an epidemic of sovereign shadow bankruptcies, as posted in a five-part series Sovereign bankruptcy: Part 1, the Dubai double standard, Part 2, the bank has a problem, Part 3, the watershed moment, Part 4, the invention of bankruptcy, and Part 5, whither Islamic finance?:

Everyone’s credit is infected?

This multi-part post covers the upcoming sovereign bankruptcy of Dubai World, a shock of the first magnitude whose consequences that will reverberate for years if not decades.

Part 1 deals with the Dubai double standard of relations between debtors and creditors.

Part 2 reveals while the banking system, and by extension the world, now has a massive new problem.

Part 3 shows why this is a watershed event from which there is no going back.

Part 4 covers why the invention of bankruptcy in seventeenth-century Massachusetts was a critical advance in finance.

Part 5 asks the question, whither Islamic finance?

From the beginning of this extensive post, I’ve been positing that one should ignore all the warm words emanating from the emirates, which are mere palliatives, and instead look at the brutal facts:

1. Dubai World has repudiated its debts and announced a monetary default.

2. Abu Dhabi is not making any commitments to guarantee the shortfall.

3. Creditors have miserable alternatives since they cannot repossess the collateral and will have to sue the sovereign.

4. The enforcement provisions of Islamic finance are untested.

How much cash is that worth?

Scarcely a week later we got a partial answer, as posted in Dubai World: flinching or maturing?:

Capital is the world’s fastest asset, even faster than people.  By announcing its intention to repudiate the debts of its offspring, Abu Dhabi and Dubai are telling the entire world they are tricky counterparties.  People who have choices, and the capital they have, will flee.

Last week, the Islamic capital markets stated clearly that they were fleeing:

We’re afraid of the gnus

Dubai rocked world markets in late November when it requested a freeze on $26 billion of debt payments by Dubai World in order to restructure the conglomerate.

“I think Abu Dhabi saw the adverse market reaction to Nakheel debt restructuring news play out over several days and perhaps decided they had seen enough,” said Saud Masud, head of research at UBS AG in Dubai.

Clearly the AHI blog post was the tipping point.

If David writes one more word …

Analysts said Abu Dhabi’s decision to provide a further $10 billion to Dubai restored confidence in the federation.

With the default, Dubai World had been trying the same trick that George IV tried with his creditors: borrowing against the bond of blood, and seeking to welsh by denying the bond’s validity.

Though many in the capital markets relaxed, in our view it was just the Tip of the iceberg: Part 1, hitting submerged deficits, and Part 2, sinking the currency?:

Ay, there’s the rub – is there any reason to believe Greece will do so?

You should believe that I will lose weight after I eat

The treaty on monetary union banned bailouts of euro members, but senior European officials say there are ways around it.

Rules you don’t enforce are worse than useless.  If the EU does bail out Greece, it will have zero fiscal credibility, and who is to say that Iceland, Ireland, or Portugal will not feel like chumps for their not asking for a bailout? 

One option would be a loan from a financially strong country such as Germany.

Oh, they’d love that.

Sure, let’s lend money to Greece, okay chief?

Another constituency hoping to tiptoe away from accountability is the rating agencies, whose role in all this has been thoroughly documented and who are now hoping to Wriggle out: Part 1, what should happen:

Making this so exasperating is that the solution lies at hand, if only we had the wit to see it and gumption just to do it.  Capital markets are a large multi-player game with ever-changing participants.  Games have rules, and rules must be interpreted, adjudicated, and enforced by referees.  Referees, in turn, must be capable, disinterested, and accountable. 

The rating agencies could be the Referees of Risk Assessment, if their business model were circumscribed to make them capable, disinterested, and accountable.  Like this:

Simple, isn’t it?

It’s easier to remember that way, too

We do need rating agencies:

and Part 2, why it won’t:

Is that milquetoast soft enough for you?

Could you make it less scary,  please?

Academics and former rating agency employees who have been warning lawmakers about the Big Three for years say Congress is tiptoeing when it ought to be charging ahead.  

“I’ve had a few hedge funds call and ask me what I think of the rating agencies as investments,” said Frank Partnoy, a professor of law and finance at the University of San Diego School of Law, who has written extensively on the rating agencies. “If the dysfunctional regulatory structure stays put, the rating agencies soon will be back to business as usual, which will mean a continuing monopoly and sky-high operating margins approaching fifty percent.”

Partnoy’s complaint: so rotten it’s gotta be profitable

Translation: they’ll wriggle out of any meaningful punishment or restrictions.

Can nothing be done?  Look to unlikely heroes:

While Congress may be happy with cosmetic surgery, law enforcement officials are getting more aggressive. Dozens of lawsuits have been filed against the rating agencies, including a case filed on Nov. 20 by the Ohio attorney general on behalf of public pension funds. The Ohio suit, as well as the earlier suits, seeks billions of dollars in damages from the rating agencies and accuses the firms of negligence and fraud.

Though it’s hard to believe, I’m rooting for the tort lawyers.

Here’s for the tort lawyers!

At the other end of housing’s spectrum, we dealt with the simplest of questions, like how can we cost-effectively provide public toilets, in the battle of Wetware versus hardware:

Public toilets are the epitome of two classic problems in economics: the free-rider problem and the tragedy-of-the-commons risk.  Port-a-potties are sometimes unavoidable, but no one’s favorite:

Man’s best friend indeed – above and beyond the call of duty

New York City, the cradle of American apartment living, also served as the setting for two other posts:

[Continued tomorrow in Part 2.]

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[Continued from yesterday's Part 1.]

When the court adjourned yesterday, I was representing my client Rumpelstiltskin, doing business as Uncle Sam’s Club financing,

“You pays your money and you gets your loan.”

Mr. Stiltskin is single-handedly keeping the American financing system flowing with liquidity, and –

[Your Honor, must I listen to these public-gallery outbursts about "record deficits," "mortgaging the next decade," and "drunken-sailor spending"?  However true, they are irrelevant to the matter at hand.]

–        and the court will recall, yesterday we met my client, who heroically rescued flighty maiden “Dolly” Miller (not her real name), who had via securitization claimed she could spin straw (unrated mortgage instruments) into gold (ratable securities), and whose retail brokerage arm, Pied, Piper & Company, had sold to Cassius King and his extended family around the world.

Don’t forget, when we got stiffed, we took your children

Parties at interest in this litigation

“Prince” Charles Miller (bank)

“Dolly” Miller [not her real name], the investment banker

Cassius King (representing the retail customers)

Rumpelstiltskin (Treasury, my client)

Yesterday, quoting from the Grimm Financial Times (a/k/a the Wall Street Journal), After the Bailouts, Washington’s the Boss, I made reference to this statement:

John Taylor, a former Bush Treasury official who is now a Stanford University economist, says the government’s role will be far greater than Mr. Summers suggests.  “We have a bailout mentality in this country.”

To which I reply, on my client’s behalf, yes, we do.  And probably will need to have a muscular role for my client’s credit enhancement for the next five to ten years. 

“Notice who is conspicuously absent when my client is doing all the work.”

Under my client’s previous Treasury Secretary, Hank Paulson, my client intervened massively to prevent the Second Great Depression.  Having now caught the credit-enhancement bus, my client’s customers and counterparties now face the enormously difficult challenge of disengagement:

One concern: Even if the government withdraws, business will expect bailouts in the next crisis, and that will inspire another round of cavalier risk-taking. “If we don’t re-regulate the banking system properly, we’ll either get very slow growth from overregulation, or another financial crisis in just 10 to 15 years,” says Kenneth Rogoff, a Harvard University economist and co-author of a new book on financial crises since the Middle Ages. 

Mr. Rogoff is a tremendous individual, who’s never shied away from confronting unpleasant truths or challenging pompous incumbents:

“Pushing money around is not banking”

The essence of the ‘this time is different’ syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply.

–         Kenneth Rogoff, Harvard Economist and Historian

He recognizes, as does my client, that having rushed in to save the foolish alleged virgin Ms. Miller, my client gains no thanks for doing so and now must endure brickbats for simply expecting its counterparties to live up to their bargains.

In finance, the recovery has been striking. Since bottoming on March 9, the Dow Jones Industrial Average is up 60%, and financial stocks have more than doubled.

While this by itself does not assure the economy will recover – there are many reasons to remain deeply bearish in 2010 – consider the alternatives.

Where would the Dow have been without our interventions, hmm?

Global capital is running to America, largely due to my client’s actions, and the major financial institutions like Mr. Miller’s banks, and their investment banking arms like Ms. Dolly Miller’s financial wizards, are once again able to make money and realize stock market gains – again a result of steps my client took at their behest.

Yields on junk bonds, issued by companies with the highest risk of default, have fallen from almost 17 percentage points above yields on Treasury bonds in March to about 6.5 points higher now.

Seventeen hundred basis points’ of risk spread is categorically insane; compared with that, 650 basis points of spread is merely gluttonous,

That signals both an improving economy and a renewed investor appetite for risk.

Capital cannot work unless the world has a rational risk appetite.  This is an essential recovery sign.  More significantly, my client’s aggressively experimental actions threw a safety tarp over the major financial institutions, a critical move of confidence that has definitely succeeded.

Most big banks appear back on their feet. Of the $245 billion invested in bank shares by the Troubled Asset Relief Program, more than $175 billion has been repaid. Since the Treasury tested the financial strength of 19 large financial firms in May, they have raised $136 billion in equity capital and borrowed $64 billion without U.S. guarantees.

My client saved the global capital system.  Has he been thanked?

Could I get thanked?  But nooooo!

But the strengthening of the big banks may be distorting the market. Although smaller banks have long had a higher cost of funds than big ones, the gap has widened. The gap averaged 0.03 percentage point for the first seven years of the decade, but it jumped to a 0.66-point disadvantage for smaller banks in the four quarters ended Sept. 30, estimates Dean Baker of the Center for Economic and Policy Research, a liberal think tank.

Your Honor, that is precisely the sort of Wall Street whining to which my client objects.  Having rescued the nation’s largest financial institutions, and charged a below-market or equitable risk premium for so doing, my client must endure this sort of carping.  Observe that the price of being a smaller bank has effectively doubled, from 33 to 66.

That suggests investors think the government would bail out big banks, but not small ones, if crisis erupted anew, he says.

Or that investors think big banks are less likely to need bailout. 

Not all of the rescues look successful. The U.S. had to redo its initial bailouts of giant insurer American International Group Inc. –

Man, that AIG acquisition went bad, didn’t it?

– and of GMAC Financial Services, which was once a car-finance and mortgage firm and is now a bank holding company.

Final answer?

Both remain unable to raise private capital.

GMAC was special case as it was tied to automakers. 

The intervention comes with long-lasting costs, among them huge budget deficits that could eventually push up inflation and interest rates.

Of course it will; see Predictions for 2010, Part 1.

The International Monetary Fund estimates U.S. government debt will swell to the equivalent of 108% of annual economic output in 2014, from 62% in 2007 –

[Your Honor, will you instruct the galleries to stop hooting in derision?  Thank you.]

Entitlements for all my friends!

– absent politically difficult steps such as raising taxes or cutting benefit programs.

[Must I listen to these catcalls?]

Only 21% of Americans polled by The Wall Street Journal and NBC News in December said they trusted the government to “do what is right,” versus 64% shortly after the attacks of Sept. 11, 2001.

In conclusion, your Honor, I wish to make clear that my client has no designs on Wall Street beyond their first-born child, as specified in the original contract.

I’m being shortchanged and I demand my rights

The nature of post-crisis capitalism will depend in part on how the administration and Congress wield their new power. Inside Washington, there is profound ambivalence about this.

Herbert Allison, who left the private sector to run TARP, says, “We can’t wait to get out of these investments. We don’t view ourselves as a long-term investor.” But in the here and now, the government is torn between its roles as shareholder and guardian of the public interest.

Having provided the gold, are we not now in a position to make the rules?

Remember the Golden Rule?

The disagreements over how to wield power over business are playing out both within the Obama administration and between the administration and Congress – as is happening now in the auto industry.

The White House forced out a CEO of General Motors in March, and crafted car-maker bankruptcy restructurings that drew howls from some creditors. But it later lightened its hand. It appointed a board of private-sector directors and let that board oversee GM. The board, six months later, was able to fire a subsequent CEO without getting prior White House approval, according to Treasury officials.

Allow me to leave the final word to my amicus curiae co-counsel, the distinguished litigator from the 535-person fractious law firm at the other end of Pennsylvania Avenue:

Who says we’re fractious?

Congress isn’t so willing to surrender its leverage. That was clear when GM and Chrysler decided to terminate about 3,400 dealers. Many turned to their lawmakers, and Congress got involved, prompting the companies to reinstate about 110. But the dealers felt that was insufficient.

GM’s frustration with the process boiled over at a mid-November meeting in the office of Sen. Richard Durbin (D., Ill.). GM’s usually cool-headed chief lobbyist, Ken Cole, was too agitated to sit, say several participants. When Tammy Darvish, an executive of a dealership in Silver Spring, Md., pressed Mr. Cole about whether it would cost the company any money to reinstate a terminated dealer, the GM team started to pack their briefcases and threatened to walk out, according to Ms. Darvish and a government participant in the meeting. They say the GM team stayed only at the insistence of congressional staffers.

Congress later enacted a provision giving axed dealerships broadened grounds to appeal in arbitration procedures – broader than the White House or car companies sought.

A spokesman for GM declined to comment on the dealers meeting or Mr. Cole. But the auto maker, now 60% federally owned, said the arbitration law will hurt its efforts to turn a profit and repay the government, which has invested roughly $50 billion in the company.

I’m in charge now, remember?

My client in no way associates with the peremptory demands being made by those other bodies.  Leave it to them and any plan will be lit up like a Christmas tree.

Go easy on the earmarks, big guy, okay?

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If it please the court –

Comes now my client, your honor, the United States government, affectionately known as Rumpelstiltskin – who having rendered a valuable, nay an essential, service to the fair maiden investment banks and her father the banking industry, is now being both cheated of the compensation which he demanded and to which the parties agreed, and libeled for doing so.

Lot of straw, little lady, and not a lot of gold here, is there?

The essential facts are not in dispute. 

Parties at interest in this litigation

“Prince” Charles Miller (bank)

“Dolly” Miller [not her real name], the investment banker

Cassius King (representing the retail customers)

Rumpelstiltskin (Treasury)

The defendant and alleged victim was an investment banker.  Under our financial privacy shield laws, her name must be withheld so we will refer to as Dolly Miller.  Dolly claimed that via securitization, she could spin straw (unrated mortgage instruments) into gold (ratable securities), which her father the miller (major public banks) sold to Cassius King and his extended family, at vast profits.

[I note for the record that we will be joining other parties, such as the rating agencies, in derivative actions.]

My client’s skill – credit enhancement – is exceedingly valuable, and Ms. Dolly Miller coveted it for her personal gain and that of her bank. 

Sure I can turn this into that … but it’ll cost you something

Unfortunately, so impressed was Cassius King that he shut Dolly up in a tower with a spinning wheel (investment banking division) and demanded she make gold endlessly.  This she could not do, but that did not stop her from enjoying the fruits of her claims.  When she realized that it was nothing but straw, she begged my client’s help. 

“Let the record show the maiden was glad at my client’s arrival”

He gave it freely (Bear Stearns), arranging for a first consignment of straw to be transmuted into gold and acquired by another miller (JPMorgan Chase).  Dolly professed thanks. 

Oh, she was lovey-dovey enough then

Then she asked again for her wayward non-identical twins Fannie and Freddie, and again my client wrote an enormous check. 

At Fannie Mae and Freddie Mac, where the Treasury holds warrants allowing it to acquire stakes of nearly 80%, the administration has put public interest first. It has instructed their regulator to have them administer efforts to cut monthly mortgage payments for millions of Americans to avert foreclosure.

[Your Honor, will you please remove those disgruntled shareholders form the gallery?  Again I call the court's attention to the evidentiary stipulation that nothing in this case may be used by the outraged shareholders of Fannie and Freddie as the basis for a breach-of-fiduciary-duty claim against my client.  We shall defend that action at the proper time.]

“My client opened the vault for us”

Now that my client has rescued Dolly Miller and her father’s millery (bank) – indeed, without  my client, the entire milling industry would be bankrupt – the Miller family is libeling me whenever and however they can.

As evidence, I introduce this article from the Grimm Financial Times (a/k/a the Wall Street Journal), After the Bailouts, Washington’s the Boss:

In 2008 and 2009, Washington strove to save the economy. In 2010, Americans will get a clearer picture of how Washington has changed the economy.

Only as the recession recedes will it become fully evident how permanently the state’s role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.

One thing is clear: The government is a much bigger force in today’s U.S. economy than it was before the financial crisis. “The frontier between the state and market has shifted,” says Daniel Yergin, whose 1998 book Commanding Heights chronicled the ascent of free-market forces starting in the 1980s.  “The realm of the state has been enlarged.”

Is it all downhill from here?

This is inevitable and predictable – indeed, I predicted it (Banks, paying your rescuer and Catastrophe is a precondition to financial reform). 

The histories of depressions show that a period of economic chaos is invariably followed by a period of extremely rigid economic controls – during which all the variables, the only partially controllable factors like commodity speculation, unlimited credit, free marketing, and competitive wages get shut out.  There’s a new imperialism starting where we used to be free.

– James Blish, Earthman Come Home, pages 421-422

Now this is coming to pass, and my client intends to claim his payment:

My client’s legitimate demands are libeled with this type of cheap visual editorializing

To prevent crumbling housing and credit markets from sinking the broad economy, the Bush and Obama administrations and the Federal Reserve spent, lent and invested more than $2 trillion on one initiative after another. If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you.

“Behind your card is my client’s card”

Not to put too fine a point upon it, my client is single-handedly holding up the global financial system:

“That’s a great deal of gold my client lent or invested against straw”

Washington pumped $245 billion into nearly 700 banks and insurance companies and guaranteed almost $350 billion of bank debt. It made short-term loans of more than $300 billion to blue-chip companies. It propped up life insurers and money-market funds.

It bailed out two of the three U.S. auto makers.

Now owned 70% or so by Uncle Sam

It lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending.

Uncle’s behind every one of them

Today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis.

“80% owned by my client, and rising”

Your honor, my client regulates every financial institution, and is expecting to close 700 or more banks this year.  This is hardly a trivial service being provided.  Nor has my client suggested in way that he has dreams of world domination:

Lawrence Summers, President Barack Obama’s chief economic adviser, says the intervention was essential, short-term therapy, not a reinvention of capitalism. “Our overarching goal was to save an economy that was near the abyss, where depression looked like a real possibility,” he says.

(Pay no attention whatsoever to the embarrassing self-interested internecine squabbles among Mr. Stiltskin’s administrative staff; these are irrelevant to the larger issue.)

The bailouts “were designed to be, and have proved to be, temporary,” Mr. Summers says. “There is no aspiration of any kind to change the private-sector basis of our economy.”

Your honor, please also disregard Mr. Summers’ last statement.  He is not the Fed chairman, and regulation is a set of values in itself, whether the regulator knows it or not.

“In charge of shooting down bad ideas?”

Even so, he says government won’t return to its pre-crisis form. “The way our financial system was operating was much more fragile than many had supposed. Those events point up a need for substantial changes in the way in which we regulate the economy and regulate finance,” he says.

An expansion of legislative authority and international standards regarding financial instruments’ structure, disclosures, and collateral is of course necessary, for capital has de-materialized and gone fully and instantaneously global:

Law enforcement always lagged behind law violation.  Thus, in the old days following the invention of the automobile, state troopers could not cross state lines.  … They had no authority beyond their own jurisdiction, while the public enemies flitted unhampered from place to place.  … A man could perpetuate any financial crime imaginable without fear of consequences, for in an hour his money could be so far away from the scene as to be completely beyond the reach of the law.

– E. E. Smith, Galactic Patrol, pages 14-15, slightly modified

Future financial regulators of the world, unite!

Any suggestion that my client is a megalomaniac bent on imposing a dictatorial rule of bureaucracy over the fair maidens like Ms. Dolly Miller is the sheerest calumny:

John Taylor, a former Bush Treasury official who is now a Stanford University economist, says the government’s role will be far greater than Mr. Summers suggests. “While we may be past the emergency, we’re still in a mode that will create similar interventions for quite a while, even for minor emergencies,” he says. “We have a bailout mentality in this country.”

Allow me, therefore, to rebut these scurrilous accusations.

“Let me say this about that.”

[Continued tomorrow in Part 2.]

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WASHINGTON — Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Is this a real plan?  Or just the dog chasing its tail?

Just wait ”til I get it!

Bailout is a term debased through overuse.  Aside from its aura of undeserved relief, it tends to connote gift – or grant in a government context – rather than lending or simple liquidity. 

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors.

That distinction – writeoff dressed up as Potemkin-village debt and pre-refund gap loan – lies at the heart of why it’s being floated. 

That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

Liquidity problems?  Financially under water?

Not that the government is running out of money – for better or worse, we can always print more [Suppressing the hideous shudder accompanying that sentence – Ed.] – but that the FDIC insurance fund, a pot under particular control, might run dry. 

Since January the Federal Deposit Insurance Corporation (FDIC) has seized 94 failing banks, causing a rapid decline in the deposit insurance fund.  Despite a special assessment [Capital charge – Ed.] imposed on banks a few months ago to keep the fund afloat, its cash balance now stands at about $10 billion, a third of its size at the start of the year. (Another $32 billion has been set aside for failures that officials expect to occur in the coming months.)

Unlike the FHA, which as we saw is explicitly Treasury-backed, FDIC clings to its autonomy. 

From the NYT: Sheila C. Bair, head of the FDIC, would prefer not to tap a line of credit from the Treasury.

The FDIC, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury.

If the FDIC’s fund runs out, that would send the FDIC director running to Treasury to ask for an increase in her allowance.

The fund, which stands behind $4.8 trillion in insured deposits, could be wiped out by the failure of a single large bank, although the deposit insurance corporation could always seek a taxpayer bailout by borrowing from the Treasury to stay afloat.

Like the GSEs, Fannie Mae and Freddie Mac.  Like FHA. 

Wonder what entity’s next?

Under the law, the FDIC would not need permission from the Treasury to tap into a credit line of up to $100 billion. But such a step is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.

Are we seriously hearing that personal pique may drive our banking policy?

You must have misheard

“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”

Warning of bamboo shoots under the nails: Camden R. Fine

Previously I posted about the turf battle now playing out among Federal banking regulators:

In many ways our current banking regulation operates like the Articles of Confederation, where each regulator is akin to a sovereign state that can safely ignore what the others are doing, and may certainly ignore the dictates of any purported central regulator.  Now what Mr. Geithner wants is to force through a new federal financial Constitution that makes the Federal Reserve the truly national supra-regulator:

The administration’s proposal would give the Fed broad discretion to supervise any major U.S. financial company and would also create a “financial services oversight council” to coordinate policy and help resolve disputes among regulators.

One ring to rule them all, one ring to bind them.

One conference table to seat them all …

How power would be balanced between the Fed and this entity has emerged as a flash point, one that administration officials debated.

Signs point to political trouble

According to the story inspiring that post, Ms. Bair is angling for more FDIC power and her elevation into equality with Mr. Geithner of Treasury.  Asking him for an advance on the funds under her control undermines both her policy logic and her political leverage.

Instead of asking someone with power over you, why not ask those over whom you have power?  Maybe they’ll pass the hat!

Borrowing from the industry is allowed under an obscure provision of a 1991 law adopted during the savings and loan crisis. The lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary –

The premise, therefore, is that this is real debt – just an advance.  But here comes the stinger:

What stinger?

– and ultimately would be paid by the rest of the industry.

“Paid by the rest of the industry” = “tax on their profits.”

Translated into money-speak, which bankers understand, I regulate you, so lend me some money that I’ll pay back by taxing you.

Or even simpler, gimme some money.

Pound notes, bad checks, loose change, anything!

The bonds would be listed as an asset on the books of the banks.

Yes, we are.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

Some bankers, some lobbyists.

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

It’s all going around in circles anyhow; the question is whether the government (meaning us taxpayers) or the banks (meaning their shareholders) pays the bill.

Bankers worry that a special assessment of $5 billion to $10 billion over the next six months [A] would crimp their profits and [B] could push a handful of banks into deeper financial trouble or even receivership.

Risk A (profit-crimping) shouldn’t occur if the loan is a good loan, and if it’s counted as Tier 1 regulatory capital subject to nominal capital charge – all of which factors are within Treasury’s control, if not the FDIC’s. 

Please can I have some money?

Risk B (submerging marginal banks) is subsumed in Risk A – if the loans are good, and counted as good capital, why does that change the lending bank’s health or liquidity?

By the way, here’s the political reason:

And any new borrowing from the Treasury would be construed as a taxpayer bailout that could open the industry to a political reaction, resulting in a wave of restrictions like fresh limits on executive pay.

What, like the industry’s already so popular?

Isn’t the political backlash risk not against the already-reviled banks but against the Administration?

Any populist furor could be avoided, the thinking goes, if the government borrows instead from the banks.

Just fantastic, double optics: two reasons, both optical rather than substantive.

I see right through your facades

“Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family,” said Karen M. Thomas, executive vice president of government relations at the Independent Community Bankers of America, a trade group representing about 5,000 banks.

In case you’re wondering, the ICBA group is the little-banks-receiving-relief not the big-banks-providing-liquidity.  In short, completely not disinterested.

“It is much better for perceptions than having the fund borrow from somewhere else.”

Never mind that it’s worse for reality.

Ultimately, officials say, the deposit insurance corporation could settle on a plan that replenishes the insurance fund by doing some of both: [C] Borrowing from healthy banks to shore up the shorter-term liquidity needs of the fund –

Option C is justifiable – if it’s good debt, that is – and feasible with powers already available to the regulators, or at least to Treasury. 

– and [D] imposing a special fee on banks to increase the longer-term capital level of the fund.

Except that you can’t tax profits if you’re making losses, and if you tax a weak sector, you weaken the sector. 

Officials say that the FDIC will issue a proposed plan next week to begin to restore the financial health of the ailing fund.

There is no consensus among the five board members, consisting of Ms. Bair, two other FDIC officials, and the heads of the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Others may propose novel ways to replenish the fund, for example, by asking the banks to prepay the premiums that they were planning to make next year.

When in danger or in doubt, run in circles, scream and shout.

I’ll get it this time!

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