Dumb politics, v. 2.0

Can I rant once more this week?

I've spent a lot of my adult life with people or in places where there is a decidedly liberal bent. I've routinely been in cultures or climates where a conservative American viewpoint is unfathomably naive and foolish. Only the uneducated, those who muscle their way past one another to quarrel on Jerry Springer or watch tractor pulls, could possibly follow such a backward worldview.

I've also spent most of my overall life living in one of two of the most conservative states in the US - Utah and Texas. This week I was in a conversation with two guys I admire a great deal and one of them expressed his opinion that the only way someone could become liberal is to simply not be fully educated in the truth.

So it is very clear to those centered in either American party that if people were simply fully educated, they would clearly see the world their way.

My impression is that the good thing about a multi-party system is that sometimes two or more truths may intersect at an issue where they become mutually exclusive so we have to choose the better of two truths, which is rarely simple unless you don't think too long about it, reduce it to sound bites and slogans, or hold one of the truths far more strongly than the other (and expect that others should as well).

A prime example of this for me is the abortion issue. For most, this is reduced to a sound bite and a slogan. For some, either choice or life is so clearly more valuable than the other that this is a non-issue. However, I think for most, when we think deeply about this, there's truly a paradox in play. Even someone who is ardently pro-life would agree that choice is important and there is a point at which choice is paramount, even if that is before conception (e.g., a woman should have a choice of who she sleeps with and when. She should not be a victim - she has choice). Even someone who is ardently pro-choice would agree that life is important and there is a point at which life is paramount, even if that is after birth (e.g., a woman should not have a choice about killing her three day old infant). So at the extremes we can agree that early on, choice prevails and later on life prevails. But when does that switch get flipped? For some it is at conception, for others it is shortly thereafter, for others at "quickening", for others during first trimester, for others at birth, etc. So we are not pro-choice or pro-life, but we are all both, with a disagreement over timing. Lawyers who are active in this debate know that the whole question is about timing - very few of the rest of us understand this, or at least acknowledge it.

My point in this is not really to debate abortion, a topic so visceral, but to make a point using a visceral topic, that politics is beautiful when it creates tension between truths and makes us stretch our minds to comprehend those tensions and make choices and trade-offs, individually and collectively.

Unfortunately, politics is rarely beautiful or philosophical. Instead of marrying a tension between two truths, it is generally a tension of two falsehoods or criticizing one another's truths. Somehow I got on Planned Parenting's mailing list and routinely get letters asking me to donate so they can fight against the "anti-choice" zealots. So you are either anti-choice or anti-life. Nice. The pro-life lobby could never have convinced me so well of their validity and usefulness as the Planned Parenthood did, though entirely unintentionally.

A Sunday School teacher I admire greatly once taught me that ethics and truth are rarely interesting when they lie along lines that are well-established. The interesting parts come about in the gaps between these truths. I would simply add that they are also interesting when they intersect and sometimes oppose one another. Perhaps my liberal and conservative friends might take solace in knowing that many times they are both right.

Dean's ring

Here's an mpg of Dean's ring from his earlier post.

Dumb politics

So everyone's convinced that we're headed into recession. All sorts of indicators are lining up in its favor. I'm positive we are because I hold the keys to the most correlated indicator - I'm making a push for partner. :)

At any rate, I'm a bit exhausted this week with the political rhetoric I've been listening to on the way to and from work and have to vent a little. I feel like I've heard at least 50% of our congress say the same line this week - "If this administration can rush to bail out a big, fat, greedy Wall Street bank, why can't they spend some energy finding ways to bail out mortgage holders who now may lose their homes through no fault of their own to the big, fat, greedy mortgage companies." Pffft.

I'm actually quite sure the politicians that are saying this know what they are saying but say it anyway. Just want to make sure you do.

Let's dissect this just a smidge and understand it. So the big, fat, greedy Wall Street bank in question is Bear Stearns. Even by Wall Street standards they really are big, fat, mean and greedy and had more than a few enemies. A few weeks ago their stock price was around $100/share. They only had a few 1,000 employees in New York - most of this value was held by the public markets - index funds, 401ks, pension funds, etc. Some hedge funds (also mean, fat and greedy) recognized that Bear had a lot of exposure to the subprime mortgages and start to short the stock (read: sell it). As the value of Bear Stearns started to drop, something happened that completely destroys a trading company - people lost trust that they were going to make it. If what you do for a living is trade, and people don't trust that you can make good on your trades, and no one wants to trade with you, you're dead. This is called an abrupt shift in trading liquidity. Their stock plummeted. On Friday they closed at ~$35/share. Monday morning it was clear they would be bankrupt ($0/sh). JPMorgan offered to keep the company alive and buy it for $2, but only if the Fed would back up the credit in the company to the tune of $30B, if I remember correctly. So the net effect was that the owners of Bear Stearns basically lost everything -98% of the value- in a matter of about a week. What was $18B in value fell to $240M.

Who lost 98% of their money? Mostly pensions, 401ks, investors, and the employees that had shares in the company. You, the reader, probably lost some of that value somewhere deep in one of those Fidelity mutual funds in your 401k. James Cayne, chairman of Bear Stearns, had been one of the wealthiest men in America (#388 on Fortune's Top 400 Wealthiest Americans), worth $998M two weeks ago. He sold his stake today for $61M (still a lot of money, admittedly).

I lived through a very similar situation a few years ago. I'm amazed no one has talked about the parallels between this situation and the Enron trading situation. I believe the reason is that no one really wanted to understand what happened at Enron. Kinda like this time. Everyone wanted to blame all those lost pensions and employee fortunes on big, fat, mean and greedy Ken Lay. I need to be careful here not to defend the guy because he really was big, fat, mean and greedy. However, the collapse of Enron was not about shady deals or off-balance sheet vehicles, at least not directly. Those were the stimuli that created a loss of confidence in a trading company (energy trading instead of mortgages). Shady deals were to Enron what subprime mortgages were to Bear Stearns. People lost confidence in Enron (who was #5 on the Fortune 500 at the time), so they couldn't trade.

Let's step back and give an example of what happens. If Bobby owes June $100 and June owes Billy $100 and Billy owes Jake $100 and Jake owes Bobby $100, everyone's comfortable because everyone's going to get their $100 and no one's too worried about it as long as everyone trusts each other. But if suddenly everyone realizes that June doesn't have $100 and is moving to Buenos Aires, the system is shocked. Jake freaks because he realizes Billy isn't going to get $100 from June to pay him with. The whole system starts to fall apart. Now realize that trading companies by their nature have a lot of obligations like this, but they are all "closed" - I've lent from company A and to company B. If I put $100 in the bank and they turn around and use that $100 to give someone a loan on their home, you see how this works. I don't have "open" trades unless I borrow without lending or lend without borrowing. I can have some open trades, but not many, before I need an awful lot of cash to cover.

After Enron collapsed, I worked for one of the Jakes or Billys of the energy industry. They had done nothing wrong, but their portfolio was now in utter disarray because all the trades on their books were now open and exposed (by the way, these are trades where revenue has already been booked due to mark-to-market accounting). We worked feverishly for a month to try to save the company and unwind deals the best we could. That entire industry basically unravelled. Everyone knows about Enron, but people outside of energy generally don't realize that the damage cascaded through the entire industry, destroying people's retirement plans and causing hundreds of thousands of layoffs.

What the Fed did in saving the skeleton of Bear Stearns is they tried to keep this from happening. The fat, greedy guys lost 98% of their value. Many of them had already lost their jobs. The trick was to make sure this did not roll through Wall Street. It wasn't a bailout of greedy, fat guys unless you think Americans are fat and greedy. It was an attempted bailout of the financial sector - remember, asset-light energy trading effectively evaporated.

Should the government bail out homeowners as well? Some of the same logic applies, but there are a few differences.
1) Incentives - if you bail people out (see: hurricanes and home insurance), they have no incentive not to take undue risk. Take on risk and the government will save you. The counterargument is that now businesspeople have the same incentive problem. Um, the owners of Bear Stearns lost 98% of their value and the credit managers long ago lost their jobs. I think they have a pretty strong incentive not to do this again.
2) Bear Stearns shareholders lost everything, or at least 98% of everything, but can keep people employed and the machinery working if they don't go away. Bailing out homeowners keeps them from losing anything. In many cases they don't have much to lose since their home is a borrowed asset. They go from little net worth to little net worth and bad credit living in an apartment. They don't lose everything - the creditors just take back what never was theirs, or at least only marginally so.
3) The mortgage crisis isn't a loss of faith in large trading partners, it is a reduction in faith of many. The banks never trusted mortgage holders, they just mistrusted them less than they should have. Credit management is about estimating how many people will reneg on their commitments. They were wrong in their estimates, but no one is saying, "Wow, I've been trusting the public all these years and now the public is going away. I best not trade with the public anymore."
4) I think most importantly there's a massive difference in the real value of what the Fed would have to do. In the case of Bear Stearns they put up a large guarantee, but hope not to have to exercise the guarantee. It should cost the taxpayer nothing, but could cost $30B. They just lose a bit of interest because the Fed reduced the borrowing rate. The Economist estimates the loss of value from mortgage defaults will be about $300B - real money. It's hard to come up with that kind of cash. (By comparison, the current estimate for the war in Iraq so far is over $500B)

Let's be clear. The Fed is not in the business of saving anyone, private or corporate, for sympathetic or ethical reasons. They do it to stave off economic shocks. They saw Bear as a shock that the economy could not weather, with a relatively low cost to acheive, but so far believe mortgages do not have that same precipitous impact. Perhaps the mortgage crisis needs some intervention, but it is NOT because of some sort of equitable treatment thing between mortgage holders and Bear Stearns. It is also worth considering that today's interest rates, at a nearly negative real yield, are effectively a bail out - homeowners with equity can refi at an awfully low rate and save their homes. (if they have equity - if not, again, they aren't losing THEIR house)

That, undoubtedly, is the longest most rambling post evar. I'd edit it down (same content, half as long) but I gotta get to work.

How To Be Mugged

I heard this story on NPR this morning on the way to work and had to share it. I was mugged once and guarantee I did not have Julio's perspective or quick thought.

Click here.

Ready for the big game

I believe January is the best month for high-end TV sales in the US, even higher than the Christmas season, due to preparations for Super Bowl parties.

We bought our TV before moving to Chicago in 1996 because we knew we would be starving students without a way to buy one later. The logic was to buy a TV right away before we had no money and would decide raman would be more prudent. Good move - we didn't starve and it became the mecca for watching Jazz/Bulls Finals and the Utes' trip to the Final Four. It has lasted through about nine moves, several generations of video game consoles and a lot of Super Bowls, most of which we probably didn't watch.

Well last week we finally replaced the TV. Yesterday Katie brought home the new couch to complement the TV, rounding out my ability to successfully avoid exercise and watch reruns of Arrested Development instead.

As I plopped down on the couch last night and took the remote lovingly in hand I thought about the fact that there's a big game coming up. It's not the Super Bowl. It's not even March Madness since the Utes are irrelevant this year. Nope, this year and this time the big game is coming up next weekend. When I sustain Pres. Monson as the new leader of the church, I'll be able to see every pore in his face. Then I'll snuggle into the cushions of my new couch until time to make Conference Brunch and lament being so far from family for Katie's favorite time to be with family. The waffles and bacon never taste quite the same when it's only (!) the eight of us.

By the way, Boo asked us to call JB and invite her to come over for conference, so consider yourself officially invited. Just drop by. We've got a big screen and plenty of room on the couch.

Moore's Law's Effect on Education

Will technology blow up the classical concept of education? Ty and Aaron are probably closest to this. Cool article by Cringely.

O Jogo Bonito

Happy Easter