Monthly Archive for September, 2009

Understanding John Yoo and the Bush presidency

Brad DeLong is continuing to maintain his stand against John Yoo.  To my mind, there is one clear way that John Yoo’s torture memos can be reconciled with his earlier writing on Clinton: He believes in the absolute primacy of the United States above all other nations.

Taking that as a postulate, placing US troops under foreign command becomes axiomatically unacceptable and was hence labelled unconstitutional [1], but allowing US agents to torture foreigners is acceptable, albeit unpleasant, because the victims are not American.

In practice, this becomes the application to the international stage of Richard Nixon’s famous 1977 quote, “when the President does it that means that it is not illegal.” Indeed, Condolezza Rice argued this exact point earlier this year (2009):

by definition, if it was authorized by the president, it did not violate our obligations under the Convention Against Torture.

This is simply the logical application (to the arena of military torture) of the belief that America should ignore all international agreements that constrain it in any way because to do otherwise would impugn the sovereignty of the greatest and purest nation in the history of mankind. You really have to admire their mental fortitude in failing to acknowledge the reductio ad absurdum that the Bush torture doctrine represented for that belief.

[1] To almost all Americans (including lawyers), the word “unconstitutional,” especially when applied in a political setting (and when is it not?), essentially means “against my ideology.”

Inglourious Basterds

Dani and I saw it last weekend.

I think the phrase “Tarentino movie” has two meanings – it’s a movie by Tarentino, but the man has been so successful that it’s also a genre in itself.

As a Tarentino movie (the genre), I thought it was masterclass; quite possibly the best I’ve ever seen (and I’ve — like most Tarentino enthusiasts — seen damn-near all of them).

But I do think part of the value of a Tarentino film is in the surprise of not having seen one before.  I was certainly surprised during the film when stuff happened, but I didn’t walk out with any enduring sense of shock in the way that I did with Reservoir Dogs.  Suppose we took a group of people who had never seen any Tarentino films before and we showed them all of his films with each person seeing them in a random order, and then asked them each to rank them.  I think that people would generally most like whichever one they saw first, but perhaps Inglourious Basterds might just come out on top.

Dani was weirded out by the alternate history – she’d never come across the concept in film or literature before, which blew me away.  She felt like it was wrong, somehow, to rewrite history in general and WW2 in particular; that something in the story of the Nazi Germany meant that it should never be presented as anything but the truth.  But, of course, the shocking-to-the-politically-correct-crowd aspect was always part of Tarentino’s style and the holding up of the Nazi’s as the ultimate evil in human history has always rankled me.

I’ve heard it described as a Jewish revenge fantasy, and it’s clearly that.  I’ve read people worrying that it’ll inspire angry Jewish kids to take up violence, and inducing that sort of reaction was certainly one of Tarentino’s goals.

But it is never schlock gore.  We don’t see people spurting blood all over a room or people taking near-sexual pleasure from inflicting the violence.  There’s casual satisfaction in it by the characters, even pride in a job well done, but it’s all motivated by a sense of morals or grim necessity.  To my mind, part of the brilliance of this film is in finding a way to show Tarentino-style violence as part of — I can’t believe I’m about to type this — the normal human condition.  I came away thinking that even though they were caricatures, I could imagine every one of the Basterds in the US army when they went to Iraq to “kill me some sand niggers.”

The writing, as ever, is sharp and fun to listen to.  Dani noticed that the Americans, Germans and British characters were all caricatures, but the French were normal people.  I’m sure that was deliberate, but I’m not sure why.  I guess since it’s set in France it needs a semi-normal background?

Even having seen all the Tarentino films before, the climax was still a climax, although afterwards it all seems so obvious in how the plot developed.

My one complaint contains the only real spoiler of this post:

When Marcel — Shoshanna’s projectionist — goes down to lock the auditorium, there were no guards anywhere.  With all the high-command of the third reich inside, that was an obvious and absurd plot hole.

Okay, one last spoiler:  Hans Lander (“The Jew Hunter”) is a fantastic character.

Regulation should set information free

Imagine that you’re a manager for a large investment fund and you’ve recently been contemplating your position on Citigroup.  How would this press release from Citi affect your opinion of their prospects?:

New York – Citi today announced the sale of its entire ownership interest of three North American partner credit card portfolios representing approximately $1.3 billion in managed assets. The cards portfolios were part of Citi Holdings. Terms of the deals were not disclosed. Citi will continue to service the portfolios through the first half of 2010 at which time the acquirer will assume all customer servicing aspects of the portfolios.

The sale of these card portfolios is consistent with Citi’s strategy to optimize the assets and businesses within Citi Holdings while working to generate long-term profitability and growth from Citicorp, which comprises its core franchise. Citi continues to make progress on its strategy and will continue to pursue opportunities within Citi Holdings that create the most value for stakeholders.

The answer should be “not much, or perhaps a little negatively” because the press release contains close to no information at all.  Here is Floyd Norris:

A few unanswered questions:

1. Who is the buyer?
2. Which card portfolios are being sold?
3. What is the price?
4. Is there a profit or loss?

A check of Citi’s last set of disclosures shows that Citi Holdings had $67.6 billion in such credit card portfolios in the second quarter, so this is a small part of that. Still, I can’t remember a deal announcement when a company said it had sold undisclosed assets to an undisclosed buyer for an undisclosed price, resulting in an undisclosed profit or loss.

Chris Kaufman at Reuters noted the same.

Now, to be fair, there is some information in the release if you have some context.  In January 2009 Citigroup separated “into Citicorp, housing its key banking business, and Citi Holdings, which included its brokerage, consumer finance, and troubled assets.”  In other words, Citi Holdings is the bucket holding “assets that Citigroup is trying to sell or wind down.”  The press release is a signal to the market that Citi has been able to offload some of those assets – it’s an attempt to speak of improved market conditions.  But the refusal to release any details suggests that they sold the portfolios at a deep discount to face value, which implies either that Citi was desperate for the cash (a negative signal) or that they think the portfolios were worth even less than they got for them, which doesn’t bode well for the rest of their credit card holdings (also a negative signal).  It’s unsurprising, then, that Citi were down 4.1% in afternoon trading after the release.

Some more information did emerge later on.  American Banker, citing “industry members with knowledge of the transaction,” reported:

The buyer was U.S. Bancorp, according to industry members with knowledge of the transaction, who identified the assets as the card portfolios for KeyCorp and Associated Banc-Corp, which Citi issues as an agent bank, and the affinity card for the American Dental Association.

But a spokeswoman for Citi, which only identified the portfolios as “North American partner credit card portfolios” in a press release, would not comment, identify the buyer, or elaborate on the release. U.S. Bancorp, Associated Bank and the American Dental Association did not return calls by press time; a spokesman for KeyCorp would not discuss the matter.

It’s tremendously frustrating that even this titbit of information needed to be extracted via a leak.  Did Maria Aspan — the author of the piece at American Banker — take somebody out for a beer?  Did the information come from somebody at Citigroup, Bancorp or one of the law firms that represent them?

In what seems perfectly designed to turn that furstration into anger, we then have other media outlets reporting this extra information unattributedHere‘s the Wall Street Journal:

Citigroup Inc. sold its interest in three North American credit-card portfolios to U.S. Bancorp of Minneapolis, continuing the New York bank’s effort to unload assets that aren’t considered to be a core part of its business, according to people familiar with the situation.


Citigroup announced the sale, but it didn’t identify the buyer or type of portfolio that was being sold. Representatives of U.S. Bancorp couldn’t be reached for comment.

That’s it.  There’s no mention of where they got Bancorp from at all.

It’s all whispers and rumours, friendships and acquaintences.  It’s no way for the market to get their information.

Here’s my it’ll-never-happen suggestion for improving banking regulation:

Any purchase or sale of assets representing more than 1% of a bank’s previous holdings in that asset class [in this case the sale represented 1.9% of Citi’s credit card holdings] must be accompanied by the immediate public release of information uniquely identifing the assets bought or sold and the agreed terms of the deal, including the price.  Identities of all parties involved must be publicly disclosed within 6 months of the transaction.

An information-based approach to understanding why America let Lehman Brothers collapse but saved everyone afterwards

In addition to his previous comments on the bailouts [25 Aug27 Aug28 Aug], which I highlighted here, Tyler Cowen has added a fourth post [2 Sep]:

I side with Bernanke because an economy can withstand only so much major bank insolvency at once. Lots of major banks were levered up 30-1 or so. Their assets fell in value more than a modest amount and then they were insolvent, sometimes grossly so. (A three percent decline in asset values already puts you into insolvency range.) If AIG had gone into bankruptcy court, some major banks would have been even more insolvent. Or if Frannie securities had been allowed to find their non-bailout values. My guess is that at least 15 out of the top 20 U.S. banks would have been flat-out insolvent if, starting at the time of Bear Stearns, all we had done was loose monetary policy and no other bailouts. Subsequent contagion effects, and the shut down of short-term repo markets, and a run on money market funds, would have made even more financial institutions insolvent. The world as we know it then becomes very dire, both for credit reasons and deflation reasons (yes you can print up currency to keep measured M up and running but the economy still collapses). So we needed not just emergency lending but also resource transfers to banks, basically to put them back into the range of possible solvency.

I really like to see Tyler’s evolving attitudes here.  It lets me know that mere grad students are allowed to not be sure of themselves. 🙂  In any event, let me present my latest thoughts on the bailouts:

Imagine being Bernanke/Paulson two days before Lehman Brothers went down:  you know they’re going to go down if you don’t bail them out and you know that to bail them out creates moral hazard problems (i.e. increases the likelihood of a repeat of the entire mess in another 10 years).  You don’t know how close to the edge everyone else is, nor how large an effect a Lehman collapse will have on everyone else in the short-run (thanks, in no small part, to the fact that all those derivatives were sold over-the-counter), but you’re nevertheless almost certain that Lehman Brothers are not important enough to take down the whole planet.

In that situation, I think of the decision to let Lehman Brothers go down as an experiment to allow estimation of the system’s interconnectedness.  Suppose you’ve got a structural model of the U.S. financial system as a whole, but no empirical basis for calibrating it.  Normally you might estimate the deep parameters from micro models, but when derivatives were exempted from regulation in the 2000 Commodities Futures Modernization Act, in addition to letting firms do what they wanted with derivatives you also gave up having information about what they were doing.  So instead, what you need is a macro shock that you can fully identify so that at least you can pull out the reduced-form parameters.  Letting Lehman go was the perfect opportunity for that shock.

I’m not saying that Bernanke had an actual model that he wanted to calibrate (although if he didn’t, I really hope he has one now), but he will certainly have had a mental model.  I don’t even mean to suggest that this was the reasoning behind letting Lehman go.  That would be one hell of a (semi) natural experiment and a pretty reckless way to gather the information.  Nevertheless, the information gained is tremendously valuable, both in itself and to society as a whole because it is now, at least in part, public information.

To some extent, I feel like the ideal overall response to the crisis from the Fed and Treasury would have been to let everyone fail a little bit, but that isn’t possible — you can’t let an institution become a little bit bankrupt in the same way that you can’t be just a little bit pregnant.  To me, the best real-world alternative was to let one or two institutions die to put the frighteners on everyone and discover the degree of interconnectedness of the system and then save the rest, with the nature and scale of the subsequent bailouts being determined by the reaction to the first couple going down.  I would only really throw criticism at the manner of the saving of the rest (especially the secrecy) and even then I would be hesitant because:

(a) it was all terribly political and at that point the last thing Bernanke needed was a financially-illiterate representative pushing his or her reelection-centred agenda every step of the way (we don’t let people into a hospital emergency room when the doctor isn’t yet sure of what’s wrong with the patient);

(b) perhaps the calibration afforded by the collapse of Lehman Brothers convinced Bernanke-the-physician that short-term secrecy was necessay to “stop the bleeding” (although that doesn’t necessarily imply that long-term secrecy is warranted); and

(c) there was still inherent (i.e. Knightian) uncertainty in what was coming next on a day-to-day basis.

Are you by any chance Canadian?

This is fantastic:


It’s by Donald Reilly.