Friday, July 31, 2009

Willem Buiter Meltdown

Wow. Willem Buiter, in another impressive display of his own self-consciousness, absolutely unloads on Ben Bernanke and Larry Summers. Being provocative has been part of Buiter's shtick for years, but I'm beginning to think he simply has a Matt Taibbi-like inferiority complex. Now he's claiming that Bernanke answering questions from the public is a threat to Fed independence, and that Larry Summers isn't a serious scholar. You can say lots of things about Summers, but you can't say that he's not a serious scholar. This is getting embarrassing to watch.

Thursday, July 30, 2009

Yikes

Bradford & Bingley CDS auction results:

Senior debt: 94.6
Subordinated debt: 5.0

Hmmm...

Brad DeLong asks (h/t Mark Thoma):

I do have one big question. The US government especially, but other governments as well, have gotten themselves deeply involved in industrial and financial policy during this crisis. They have done this without constructing technocratic institutions like the 1930’s Reconstruction Finance Corporation and the 1990’s RTC, which played major roles in allowing earlier episodes of extraordinary government intervention into the industrial and financial guts of the economy to turn out relatively well, without an overwhelming degree of corruption and rent seeking. ... So I wonder: why didn’t the US Congress follow the RFC/RTC model when authorising George W. Bush’s and Barack Obama’s industrial and financial policies?
DeLong had posted a substantially similar version of this column on his blog last week, and I was planning to respond to his question then, but I obviously didn't get around to it. I think it's an interesting question though, so I'll take this chance to offer my response. With regard to TARP, I think Congress didn't set up an RTC-like institution because the feeling was that there simply wasn't enough time. Neither the RTC nor the RFC were set up during market panics. By the time the RTC was set up in 1989, the S&L crisis had been raging for several years, and the 1987 stock market crash had come and gone. Similarly, the RFC was created in January 1932—over 2 years after the stock market crash of '29. Time was of the essence back in September, and in order to respond with the necessary speed and force, more discretion had to be given to the executive branch. The RTC, for example, was run by a board of directors and a separate oversight board. In a crisis, policy-by-committee doesn't work. The market had to be confident that help was coming soon, and wouldn't be held up by internal government bickering (think Sheila Bair). Why wasn't an RTC-like institution created once the financial markets more or less stabilized, and time was no longer of the essence? That's easy: because Congress already gave the executive branch the money. In the administration's view (which I largely share), there's no real benefit from creating a separate "technocratic" institution to administer TARP. Treasury is a highly "technocratic" institution itself, as DeLong no doubt knows, having worked in the Clinton Treasury. I have great confidence in Tim Geithner's competence—in fact, I don't think there's anyone I'd rather have in charge of TARP.

Sunday, July 26, 2009

Mandatory Bankruptcy?

I highlighted this provision in the administration's financial reform proposal the other day, but I still can't get over the mandatory bankruptcy petition for Tier 1 financial holding companies within 90 days of being designated "critically undercapitalized." No exceptions. That has to be a mistake, right? I mean, I understand that they were trying to model the rules for Tier 1 FHCs after the "prompt corrective action" requirements that currently govern FDIC-insured banks, but not even the prompt corrective action requirements are that harsh. Why would we want to require a relatively sudden bankruptcy for a financial company whose failure we've already decided would threaten the stability of the financial markets? It doesn't make any sense. This has to be a mistake. Someone get Geithner on the phone.

Saturday, July 25, 2009

Advance Book Copies

Speaking of David Wessel's book, In Fed We Trust, how does everyone have advance copies? The release date is August 4th, but several bloggers have apparently read it, or at least have it, already. Tyler Cowen has already read it and recommended it; Ezra Klein says he has it "on the nightstand at home"; and Arnold Kling has already skimmed it (and dismissed it for containing too many pesky facts about what actually happened). I understand that publishers send advance copies to journalists to try to get them to write a review, but neither Cowen nor Kling is a journalist. I practically keep the publishers in business with how many books I buy—plus, I always buy the hardcover version, and often the ebook version as well (I like to be able to search books that I've read). But in my entire life, I've never once been offered an advance copy of a book. What gives?

Friday, July 24, 2009

Earth to Bloomberg

This Bloomberg story really amused me: "Wall Street Banks Reached Deal to Save Lehman, Wessel Book Says":

Leaders of Wall Street’s biggest commercial and investment banks crafted a plan to bail out Lehman Brothers Holdings Inc. the weekend before it went bankrupt, only to see the deal die when U.K. regulators blocked a sale to Barclays Plc, according to a book on the Federal Reserve’s role in the financial crisis.
Umm, this isn't new information. It's common knowledge that the FSA blocked a deal to save Lehman. (When I arrived in NYC on that Monday, the first thing one senior partner in the firm said to me was, "So, do you think the FSA is the stupidest financial regulator in history, or just the stupidest financial regulator in the world right now?") I know I wrote a post about the FSA's bonecrushingly stupid decision when an ECB official tried to engage in a little revisionist history. In the comments to that post, Don linked to a November 10 story talking about the FSA decision from Bloomberg. Some quick searching reveals that not only has the FSA-blocked Wall Street rescue of Lehman been widely reported, but it's been reported by Bloomberg several times! The question is, did this Bloomberg reporter, Michael McKee, not know that the FSA blocked a private-sector rescue? And if so, is he really the right person to be reviewing Wessel's book?

Treasury just released the legislative language for its financial reform proposals, so I haven't had time to study them in any depth.

But one thing that jumped out at me as an obvious flaw is that Tier 1 financial holding companies are not automatically subject to the proposed resolution authority for systematically important financial institutions. This is very bizarre.

Tier 1 FHCs are financial companies whose "material financial distress ... could pose a threat to global or United States financial stability or the global or United States economy during times of economic stress." The failure and resolution of a Tier 1 FHC would, by definition, threaten the stability of financial markets. You can't even be a Tier 1 FHC if your failure wouldn't pose systemic risks. So why wouldn't the proposed resolution authority for systematically important institutions automatically apply to Tier 1 FHCs?

For some reason, however, the administration's formal proposal requires an official "systemic risk" determination—which is separate from the determination that a financial company qualifies as a Tier 1 FHC—before the new resolution authority can be used, even for Tier 1 FHCs. An official "systemic risk" determination requires a written recommendation from the Fed and, depending on the nature of the failing financial company, either the FDIC or the SEC. After receiving the written recommendation, the Treasury Secretary, in consultation with the President, can then make an official systemic risk determination.

Why require an official "systemic risk" determination before invoking the new resolution authority for Tier 1 FHCs? It would have already been decided that the failure of a Tier 1 FHC would pose systemic risks, because the definition of a Tier 1 FHC is a financial institution whose failure would pose systemic risks.

Requiring an official "systemic risk" determination will unnecessarily create uncertainty about which resolution regime Tier 1 FHCs will be subject to. Creditors have different rights under the proposed resolution regime than they have in bankruptcy, and the uncertainty about which resolution regime will be applied could easily scare off potential creditors. For something as important as the resolution of a Tier 1 FHC, markets need to know the rules of the game. If the proposed resolution authority automatically applied to Tier 1 FHCs, then as soon as a financial institution is designated a Tier 1 FHC, markets would know which resolution regime to expect if the institution failed, and would be able to adjust accordingly.

Why create the possibility that a financial institution whose failure would pose systemic risks might not be resolved under the resolution authority specifically created for systematically important financial institutions?

This is just setting the markets up for another Lehman-like surprise decision at the worst possible time. Investors were absolutely convinced that the U.S. government would bail out Lehman, because Lehman was much bigger than Bear Stearns, which the government had bailed out, and because surprisingly few investors understood the politics of the situation. Lehman's failure was therefore a risk that most funds had not priced in, and when the government decided to let Lehman fail, the sudden, systemic repricing, coupled with the market's general shock at the government's decision, played a big role in setting off the financial panic that ensued.

Similarly, markets will assume that all Tier 1 FHCs will be resolved under the new resolution authority, rather than bankruptcy. The way the administration's proposal is drafted now, it's possible that a Tier 1 FHC could fail without a "systemic risk" determination being made (forcing the Tier 1 FHC to file for bankruptcy), which would shock the markets, and might cause a mini run on the other Tier 1 FHCs. I've seen that movie before, and it doesn't have a happy ending.

Treasury has released the proposed legislative language for, among other things, the new regulatory regime for "Tier 1 financial holding companies." I've only had time to skim it, and I hope to take the time to read it in depth at some point today. Here are the highlights (based on my quick read). Definition of "Tier 1 financial holding company," and criteria to be considered in designating a Tier 1 FHC:

[The Fed] may designate ... any United States financial company as a United States Tier 1 financial holding company, if it determines that material financial distress at the company could pose a threat to global or United States financial stability or the global or United States economy during times of economic stress based on a consideration of the following criteria:
(i) the amount and nature of the company’s financial assets; (ii) the amount and types of the company’s liabilities, including the degree of reliance on short-term funding; (iii) the extent of the company’s off-balance sheet exposures; (iv) the extent of the company’s transactions and relationships with other major financial companies; (v) the company’s importance as a source of credit for households, businesses and State and local governments and as a source of liquidity for the financial system; (vi) the recommendation, if any, of the Financial Services Oversight Council; and (vii) any other factors that the Board deems appropriate.
What looks like an informal threshold for being considered a Tier 1 FHC:
(A) UNITED STATES FINANCIAL COMPANY.—The Board may require any United States financial company that, based on the most recent audited or unaudited financial statements available, has—
(i) $10 billion or more in assets; (ii) $100 billion or more in assets under management; or (iii) $2 billion or more in gross annual revenue, to submit such information that the Board may reasonably require for the sole purpose of determining whether to designate the company as a United States Tier 1 financial holding company.
Prudential standards for Tier 1 FHCs have to be more stringent than prudential standards for bank holding companies:
The prudential standards shall be more stringent than the standards applicable to bank holding companies to reflect the potential risk posed to financial stability by United States Tier 1 financial holding companies and shall include, but not be limited to—
(A) risk-based capital requirements; (B) leverage limits; (C) liquidity requirements; and (D) overall risk management requirements.
Tier 1 FHCs, like FDIC-insured banks, will be subject to "prompt corrective action" requirements (see Section 6A). Mandatory leverage limit range for Tier 1 FHCs:
The level specified under subparagraph (A)(i) shall require tangible equity in an amount—
i) not less than 2 percent of total assets; and (ii) except as provided in clause (i), not more than 65 percent of the required minimum level of capital under the leverage limit.
Mandatory Chapter 11 bankruptcy petition for Tier 1 FHCs within 90 days of becoming "critically undercapitalized" under the new prompt corrective action rules for Tier 1 FHCs:
The Board shall, not later than 90 days after a Tier 1 financial holding company becomes critically undercapitalized—
(1) require the Tier 1 financial holding company to file a petition for bankruptcy under section 301 of title 11, United States Code; or (2) file a petition for bankruptcy against the Tier 1 financial holding company under section 303 of title 11, United States Code.
Credit exposure to an unaffiliated entity can't exceed 25 percent:
(b) LIMITATION ON CREDIT EXPOSURE.—The regulations prescribed by the Board shall prohibit each Tier 1 financial holding company from having credit exposure to any unaffiliated company that exceeds 25% of the Tier 1 financial holding company’s capital stock and surplus or such lower amount as the Board may determine by regulation to be necessary to mitigate risks to financial stability. (c) CREDIT EXPOSURE.—For purposes of subsection (b), a Tier 1 financial holding company’s “credit exposure” to a company means—
(1) All extensions of credit to the company, including loans, deposits, and lines of credit; (2) All repurchase agreements and reverse repurchase agreement with the company; (3) All securities borrowing and lending transactions with the company to the extent that such transactions create credit exposure of the Tier 1 financial holding company to the company; (4) All guarantees, acceptances, or letters of credit (including endorsement or standby letters of credit) issued on behalf of the company; (5) All purchases of or investment in securities issued by the company; (6) Counterparty credit exposure to the company in connection with a derivative transaction between the Tier 1 financial holding company and the company; and (7) Any other similar transactions that the Board by regulation determines to be a credit exposure for purposes of this section.

I just saw this video, which shows Rep. Alan Grayson questioning Ben Bernanke during his Humphrey-Hawkins testimony, and was being promoted by Zero Hedge and others a couple days ago. It's embarrassing....for Grayson.

He asks Bernanke about the currency swap lines that the Fed established with other central banks during the financial crisis, which he clearly doesn't understand (although he obviously thinks he does). He harps on the fact that Bernanke doesn't know which foreign financial institutions "got the money." Of course Bernanke doesn't know that. The Fed entered into currency swaps with foreign central banks, like the ECB and the BoE. Who those central banks then lent the dollars to is irrelevant—the Fed doesn't bear the credit risk of loans made by other central banks. The Fed only bears the credit risk of the central banks it established swap lines with, which, obviously, is vanishingly small. Grayson then focuses on the Fed's swap line with New Zealand's central bank, which is where the wheels really come off the wagon. He apparently thinks a swap is the same thing as a loan, and that the Fed extended $9bn of credit to New Zealanders, which he considers an outrage (the Fed is lending to "foreigners" instead of Americans!). Of course, he doesn't even get his facts right (which is what happens when you hire people with no experience on Capitol Hill as Senior Policy Advisors). The Fed's swap facility with New Zealand central bank is $15bn, not $9bn, and more importantly, NZ's central bank never even drew on its swap line, which has $0 outstanding (pdf):
Grayson arrogantly laughs when Bernanke denies that the expansion of the swap lines on September 18th caused the dollar to rise 20%, which is amusing because the swap lines relieved the extraordinarily high demand for dollars from foreign financial institutions. The best part of the video is when Barney Frank (easily my favorite Congressman) cuts Grayson off, which draws another of his arrogant laughs. Maybe Grayson should go back to losing millions in Ponzi schemes.

Tuesday, July 21, 2009

Housekeeping

I'm going to try to change the blog's layout/theme today. I haven't liked this theme since about the second month after I started blogging. But I'm not even remotely web-savvy in this regard (my nephew set up the blog for me, and it's taken me forever to add all the extras), so there's roughly a 90% chance that I'll screw it up at least once. Be forewarned.

Justin Fox makes a pretty remarkable statement:
[A]ll major financial crises have been associated with some financial innovation or another.
Really? How about, for example, the Asian financial crisis? That principally involved old-fashioned foreign exchange markets. Or how about the S&L crisis? Nope, the main culprits there were residential and commercial mortgages. The Japanese financial crisis of the 1990s? That involved nonperforming mortgages and commercial loans that soured after the massive real estate and equity bubble burst—and there was definitely nothing "innovative" about Japan's financial sector, that's for sure. The LDC debt crisis? No again—that involved syndicated sovereign debt, which is a centuries-old practice. The only recent financial crises (other than the current one) that were seriously associated with financial innovation were the 1987 stock market crash ("Black Monday") and the Long-Term Capital Management crisis. Black Monday was in no small part caused by portfolio insurance, while LTCM used pretty much every new derivative it could get its hands on in its doomed "arbitrage" strategy. However, it's worth noting that Black Monday and the LTCM crisis were also two of the least damaging financial crises in the post-Depression era. In the grand scheme of things, financial innovation has largely been a sideshow in modern financial crises. The real lesson of modern financial crises is that the most severe crises are those that are caused by the bursting of a housing bubble. See e.g., Reinhart and Rogoff (2008):

In the WSJ, David Wessel has a long adapted excerpt from his forthcoming book. Which reminds me: there are a lot of books on the financial crisis coming out this fall, some of which will be required reading, most of which will not. Wessel's book will definitely be required reading—Wessel was able to interview Bernanke for the book, so it'll be the closest thing we have yet to Bernanke's side of the story. Here are the books that, as it stands right now, I'm planning on reading:
Hank Paulson, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (Nov. 2, 2009). Also required reading, for obvious reasons. David Wessel, In Fed We Trust: Ben Bernanke's War on the Great Panic (August 4, 2009). Michael Lewis, The Big Short: Inside the Doomsday Machine (Nov. 2, 2009). Andrew Ross Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—And Lost (Sept. 22, 2009). I've never been very impressed with Sorkin—his grasp of finance leaves a lot to be desired—but I'll give him another shot. Lawrence McDonald, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (July 21, 2009). The first Lehman tell-all.
As you can see, lots of "inside" stories. I'll probably skip Charlie Gasparino and Charles Geisst's books. I'm sure I know what both of them say already. Roger Lowenstein was supposed to write a book called The Six Days that Shook the World, about (obviously) Lehman Week, but apparently that's been changed and now he's writing a book on the broader crisis called, The End of Wall Street, and it won't be published until 2010. That's unfortunate. I would have liked a detailed, blow-by-blow account of that epic (and horrific) week. Bethany McLean and Joe Nocera are also writing a book about the financial crisis, but I don't know when that's supposed to be published. A closely related book on my reading list for this fall: Ken Rogoff & Carmen Reinhart, This Time is Different: Eight Centuries of Financial Folly (Oct. 21, 2009).

Paul Krugman digs up a 2007 interview with University of Chicago economist Eugene Fama, which says pretty much all you need to know about Chicago school macroeconomics:
Well, economists are arrogant people. And because they can’t explain something, it becomes irrational. The way I look at it, there were two crashes in the last century. One turned out to be too small. The ’29 crash was too small; the market went down subsequently. The ’87 crash turned out to be too big; the market went up afterwards. So you have two cases: One was an underreaction; the other was an overreaction. That’s exactly what you’d expect if the market’s efficient. The word "bubble" drives me nuts. For example, people say "the Internet bubble." Well, if you go back to that time, most people were saying the Internet was going to revolutionize business, so companies that had a leg up on the Internet were going to become very successful. I did a calculation. Microsoft was an example of a corporation that came from the previous revolution, the computer revolution. It was hugely profitable and successful. How many Microsofts would it have taken to justify the whole set of Internet valuations? I think I estimated it to be something like 1.4. ... Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.
Much as I disagree with Krugman's views on current financial markets (which are at best underinformed, and well outside his area(s) of expertise), I completely, 100% agree with his assessment of Chicago school macroeconomics. This is literally the kind of analysis -- '29 crash was too small, '87 crash was too big, therefore markets are efficient! -- that informs much of modern Chicago school macro. People tend to assume that famous economists like Fama must have complex, rigorous arguments to back up their views. But in reality, most of them have simply forgotten basic lessons of macro. Milton Friedman had the intellectual honesty (and capacity) to debate New Keynesians on the merits, and while I usually didn't agree with him, he was a force to be reckoned with. Most modern Chicago schoolers (there are exceptions of course, but not many) simply assume that markets are good and government is bad, even though they can't articulate why. I'm glad Krugman and Brad DeLong are finally telling it like it is.

It's good to see The Economist's Free Exchange blog get after Simon Johnson for making absolutely no sense. The guy just keeps lobbing up softballs, like this, on CIT:
[I]t would be straightforward to refinance this part of CIT’s business without bailing out CIT’s creditors, and definitely without keeping top CIT executives in place; this is the essence of “negotiated conservatorship,” which is a proven model in the US.
The "negotiated conservatorship" model refers to the resolution of Continental Illinois in 1984. Johnson claims that not bailing out a bank's creditors and firing its top executives is the "essence" of the negotiated conservatorship model. Except, of course, the essence of the Continental Illinois resolution is that the FDIC bailed out Continental's creditors. The fact that the FDIC eschewed the $100,000 cap on deposit insurance and promised to protect all of Continental's depositors and other general creditors is what made it so controversial. So yet again, Johnson has no clue what he's talking about.

On Monday, U.S. District Judge Laura Swain ruled on Wachovia's motion for judgment on the pleadings in CDO Plus Master Fund Ltd. v. Wachovia Bank, N.A., 07-CV-11078. Judge Swain dismissed 7 of the 8 claims brought against Wachovia by CDO Plus Master Fund, but refused to dismiss CDO Plus's claim that Wachovia breached the implied covenant of good faith and fair dealing. (Of course, she didn't rule on the merits of CDO Plus's claim either.) CDO Plus has now changed its name to VCG Special Opportunities Master Fund, but since Judge Swain still refers to them by their former name, so will I. I think this was a bad opinion, and that Judge Swain's decision not to dismiss CDO Plus's "good faith and fair dealing" claim was based on a flawed understanding of the transaction documents. But first, some quick background: CDO Plus sold $10mm of credit default swap protection on a CDO to Wachovia. The swap was executed under a standard ISDA Master Agreement, and included an ISDA Credit Support Annex (CSA) that provided for the posting of collateral. CDO Plus was required to post $750,000 in collateral upfront, known as the "Independent Amount." The swap also required the parties to post collateral based on the mark-to-market value of the swap, or as Judge Swain explained it:
The [contract] allowed either party to demand “Credit Support” collateral whenever the party’s “Exposure,” defined as the cost to that party to replace the Trade in the market, exceeded by more than $250,000 the value of the collateral held by the party. (Credit Support Annex ¶¶ 3, 12.)
For all practical purposes, Wachovia, in its role as "Valuation Agent," was in charge of calculating each party's Exposure.¹ The long and short of it is that as the CDO market imploded, Wachovia demanded more and more collateral from CDO Plus, until eventually CDO Plus refused to post any additional collateral, and commenced litigation. Significantly, the total amount of collateral demanded by Wachovia was $10,410,000. CDO Plus claimed that Wachovia breached the implied covenant of good faith and fair dealing because it acted “arbitrarily and irrationally” in its capacity as Valuation Agent. Judge Swain, in refusing to dismiss CDO Plus's claim, reasoned:
[CDO Plus's] allegation that Wachovia acted “arbitrarily and irrationally” is not merely a “naked assertion devoid of further factual enhancement.” ... Rather, it is amplified by the allegation that the Final Demand would have required [CDO Plus] to post collateral in excess of the notional amount.
It's true that Wachovia's final demand would have required CDO Plus to post collateral in excess of the notional amount of the swap, but the transaction documents specifically allow this. Paragraph 3 of the ISDA Credit Support Annex permitted Wachovia to make a demand for collateral equal to: "(i) [Wachovia's] Exposure for that Valuation Date plus (ii) the aggregate of all Independent Amounts applicable to [CDO Plus], if any, minus ... [CDO Plus's] Threshold."² (emphasis added) CDO Plus was required to post a $750,000 Independent Amount upfront, but also had a $250,000 Threshold, so Wachovia was entitled to demand collateral equal to its Exposure + $500,000. That means if Wachovia's Exposure went above $9,500,000, then CDO Plus would, in fact, have to post collateral in excess of the notional amount of the swap ($10mm). Moreover, because the swap in this case was written on a mezzanine CDO tranche, which can easily lose 100% of its value, it's likely that Wachovia's Exposure went all the way to $10mm. In that case, CDO Plus would be required to post $10.5mm in collateral on a $10mm swap. Judge Swain concluded that Wachovia's demand for $10.41mm in collateral on a $10mm swap provided "further factual enhancement" to CDO Plus's claim that Wachovia had acted "arbitrarily and irrationally" in its capacity as Valuation Agent. But it's hard to see how demanding less collateral than it was entitled to under the transaction documents could be construed as evidence that Wachovia had acted "arbitrarily and irrationally." It was perfectly rational for Wachovia to demand $10.41mm in collateral, since it had the right to demand as much as $10.5mm in collateral. Absent some other evidence that Wachovia acted "arbitrarily and irrationally," the mere fact that Wachovia exercised a right clearly given to it in the transaction documents shouldn't be remotely sufficient to survive a motion to dismiss a breach of contract claim. There, if you're a lowly associate at a big firm who's been tasked with writing a Client Alert on this case (which a partner will inevitably take credit for), then I've done most of your work for you! I don't know why. Maybe I miss writing Client Alerts. ¹ If you thought, "Hey, why would CDO Plus allow Wachovia to calculate the amount of collateral it had to post?" then congratulations! You're smarter than AIG Financial Products, as well as 95% of CDO managers. Dealers usually insisted on being the Valuation Agent, and for reasons I never, ever understood, counterparties were usually fine with that. ² Technically, any Independent Amount applicable to Wachovia would also be subtracted, but since Wachovia didn't have to post an Independent Amount, this is irrelevant for our purposes.

Friday, July 17, 2009

DoJ's CDS Investigation: A Guess

There has been a lot of speculation about what the Department of Justice is focusing on in its investigation of credit derivatives after it was disclosed that Markit, and the dealers that have an ownership stake in Markit, have all been contacted by the DoJ's Antitrust Division. I obviously don't know (at this point, only the DoJ lawyers know), but I'll throw a guess out there. I'm guessing the DoJ is investigating the possibility that traders were colluding on quotes they gave each other for purposes of calculating their "Exposure" under their Credit Support Annexes (CSAs), which would have allowed them to demand more collateral than they should have from counterparties (such as AIG). If that's the case, then the DoJ is probably looking to compare the dealers' "Exposure" calculations, and the quotes they were based on, with the quotes they were submitting to Markit. I'll explain why these calculations are important in the next post, in case you have no idea what I'm talking about.

Thursday, July 16, 2009

Eerily Prescient

In the 2003 book Too Big to Fail: Policies and Practices in Government Bailouts (edited by Benton E. Gup), GW Law Professor Arthur Wilmarth has a chapter on financial liberalization and systemic banking crises (SSRN) that's so eerily prescient I just have to post part of the introduction. Remember, this was written in 2003:
[B]anking crises associated with deregulation occur in seven general stages. First, financial liberalization broadens the lending powers and permissible investments of banks, and deregulation also places greater competitive pressures on banks. As a result, banks have incentives to increase their profits by expanding their lending commitments and equity investments in the real estate and securities markets. Second, the expanded availability of debt and equity financing produces an economic boom. Boom conditions are fueled by positive feedback between rising asset values and the willingness of creditors and investors to provide additional financing based on their belief that asset values will continue to rise. Third, asset markets ultimately overshoot and reach levels that cannot be justified by economic fundamentals (e.g., the cash flow produced by real estate projects and business ventures). Fourth, the asset boom becomes a bust when investors and creditors (1) realize that market prices for real estate and securities have diverged from economic fundamentals, and (2) engage in a panicked rush to liquidate their investments and collect their loans. Fifth, the asset bust creates adverse macroeconomic effects, because it (a) impairs the liquidity and market value of assets held as investments or pledged as collateral for loans, and (b) discourages investors and creditors from making new investments or extending additional loans, thereby depressing economic activity and reducing the ability of borrowers to pay their debts. Sixth, the continuing fall in asset values and rise in nonperforming loans inflict large losses on many banks. Those losses impair the confidence of depositors and threaten a systemic crisis in the banking sector. Seventh, to prevent such a crisis, governmental authorities spend massive sums to protect depositors and recapitalize banks. In sum, deregulated financial markets generally promote faster growth rates by providing more extensive financing to consumers and business firms during economic expansions. However, by encouraging a greater reliance on external funding, deregulation creates a higher risk that consumers and firms will become overextended and insolvent if external funding sources shut down during economic contractions.
Sound familiar? Look at Wilmarth's other papers on SSRN too. They're all like this. Professor Wilmarth: you, sir, were right.

Wednesday, July 15, 2009

A Partial Defense of Goldman

Goldman Sachs has apparently become Public Enemy #1.

Regarding Matt Taibbi's article on Goldman, I don't have much to add to Megan McArdle's pitch-perfect critique, which concludes that "Matt Taibbi is becoming the Sarah Palin of journalism." I read Taibbi's piece, and it was exactly as stupid as I expected. It's not even remotely serious, and can barely even claim to be based in reality. It was difficult to finish reading it, because it was one of those articles that's so bad it actually makes you embarrassed for the author.

I'm honestly surprised by how much "Goldman hatred" has spread to the general public (even before Taibbi's creative writing piece). I think it's completely unfounded. Of course, in the financial industry, "Goldman envy" (which often turns into "Goldman resentment") is a long-standing tradition—a sort of favorite pastime, if you will. But a lot of the conspiracy theories about Goldman that circulate through the Wall Street rumor mill are tongue-in-cheek. The current Goldman hatred is, I think, mostly sincere.

I've worked with Goldman frequently over the course of my career. I'm sure some people will take as proof that I'm some sort of Goldman shill, or that I've been "captured," but they're wrong, and there's probably nothing I can do about those people anyway. So take this for what it is.

I know this isn't a popular thing to say, but the truth of the matter is that Goldman is simply better than everyone else right now—more talented, more diligent, and much more thoughtful in its approach. (Matt Taibbi is so far out of his league it's not even funny.) I'm reminded of Rick Bookstaber's description of Salomon Brothers in A Demon of Our Own Design:

Going to Salomon [from Morgan Stanley] was like moving from a lumbering cargo plane to a fighter jet. Salomon Brothers was not like other firms on Wall Street. ... The atmosphere was reasoned and intellectual. Where discussions at Morgan Stanley seemed to be a concatenation of sound bites, at Salomon things were thought out. While at Morgan Stanley there was a hierarchy that demanded wending down the right path to bring out ideas, at Salomon a vice president who disagreed with the head of a trading desk would just walk up and discuss things. If what he said made sense, that was how it was done. Turf and status were trumped by the primacy of ideas.

Perhaps that sounds Pollyanna-ish, but I saw it happen regularly. (pp. 52-53)
This is a nice description of Goldman in the past decade. (Citigroup quickly gutted Salomon after their 1998 merger, famously disbanding Salomon's powerhouse fixed-income arb unit. Sandy Weill: worst CEO ever.) Goldman has a fundamentally different culture than other major banks—much like the culture Bookstaber described at Salomon—and it's immediately obvious when you work with them. There's a reason why Warren Buffett's Berkshire Hathaway is the largest investor in Goldman, and why Buffett injected $5bn into Goldman at the height of the crisis. They're very good at what they do. They make mistakes, of course, but not many, and they're generally not unforced errors.

I simply don't buy the argument that the bailout, or the financial crisis in general, proves that Goldman is guilty of wrongdoing. What happened last September was a bank run, pure and simple, and we've always known that what makes a bank run so dangerous is that it creates a classic coordination problem, which is indiscriminate in its destruction. If the market believes there will be a panic, then each individual firm has an incentive to liquidate assets and horde cash (because of anticipated margin calls and higher liquidity risk). But the more that firms dump assets into illiquid markets, the further asset prices fall, and the more cash they need to meet margin calls. Asset prices in a bank run are based on investors' idiosyncratic liquidity needs rather than fundamental value, so whether a bank fails or survives depends on the random liquidity needs of other, possibly unrelated investors, rather than the underlying strength of the bank's assets.

The point is that bank runs are irrationally destructive. The fact that Goldman was swept up by last September's financial crisis isn't proof of wrongdoing.

Yes, Goldman was bailed out by the taxpayers, but taxpayers also made money on the deal. Goldman paid back its TARP money. The argument that the $13bn it received from AIG should be regarded as bailout money is naïve. Goldman has repeatedly explained that it had collateralized and hedged its counterparty exposure to AIG—and if you want proof that they had hedged themselves, just look at AIG's own internal memos. Goldman was either going to collect that $13bn from AIG or its hedge counterparties. If AIG had been allowed to fail, Goldman would have collected the money from its hedge counterparties. That's what it means to be "hedged." Also, what if Goldman took $5bn of the $13bn it received from AIG and used it to pay someone like Fidelity? Would the AIG bailout then be a backdoor bailout of Fidelity? The argument has no logical end.

AIG paid out 100 cents on the dollar on its CDO CDS because Goldman wasn't in a position where an AIG failure would have been worse than accepting a haircut. If AIG failed, Goldman would have seized the posted collateral and collected the rest of the money from its hedge counterparties—so if AIG had offered 80 cents, Goldman would essentially have been choosing between 80 cents and 100 cents. Do you see why AIG paid out 100 cents on the dollar? As for the FDIC-backed debt that Goldman issued, they were just taking advantage of a program that was made available to them. That's what profit-maximizing firms do. There are no call provisions in the debt instruments, so there's nothing Goldman can do about it now. If you want to blame someone for not including a call provision, blame Sheila Bair.

Finally, the "Government Sachs" arguments are based on nothing more than rumor and innuendo, and are frankly insulting to the former Goldmanites working in the government. Why is it that anyone who has ever worked for Goldman is assumed to remain loyal to the firm long after they've left, and even after they've held jobs at other firms?

So there, that's my defense of Goldman. Take it for what it's worth.

There seem to be a lot of stories lately that assert, without any support, that "Wall Street" is mounting a huge lobbying campaign against the administration's proposed derivatives reform. This WSJ article about JP Morgan "playing hardball" with the administration is in that same vein. It talks about JP Morgan "stepping up its opposition to" the administration's proposed derivatives reform, and claims:

J.P. Morgan is taking issue with portions of the White House's financial plan that deals with the regulation of derivatives. ... The unregulated derivatives market has taken the heat for much of the financial crisis, leading the White House to propose measures aimed at regulating the instruments by funneling trades through exchanges where regulators can monitor them. Such a move could crimp the derivatives industry, eating into the billions of dollars that J.P.Morgan earns each year in helping clients navigate the contracts and assuming counterparty risk in such transactions.
But the administration's plan doesn't propose forcing OTC derivatives onto exchanges. It only proposes moving standardized derivatives onto central clearinghouses, which, the article notes elsewhere, is something JP Morgan supports. The administration's plan has a vague statement about "encouraging" the market to move standardized derivatives onto exchanges OR an electronic execution system for OTC derivatives (not the same thing), but that's a long way from forcing, or even "funneling," derivatives onto exchanges. (The administration has actually taken considerable heat from financial illiterates Congress for only proposing that standardized derivatives, not bespoke derivatives, be centrally cleared.) I think most of this is just journalists wanting to write about "Wall Street" opposing any regulation of derivatives. The reality is that most of Wall Street supports the administration's derivatives proposal.

From an FT story on the DoJ investigation of CDS pricing:

In recent weeks, for example, rumours have circulated that last year some large dealers manipulated the price of derivatives linked to mortgages and corporate bonds – by “leaning on” prices, to use trading jargon – to hurt rival banks or hedge fund groups. “Some of the stuff that has been happening on the trading desks has been pretty dirty,” says one banker who used to hold a senior position at a large dealer. There is little evidence that those tales are grounded in truth, or directly linked to the current probe by the DoJ.
If the rumors aren't true, then why print one? Especially one about "stuff" happening on unspecified "trading desks"? Rumors on Wall Street are rarely true. I'm less and less impressed with Gillian Tett.

Monday, July 13, 2009

Fitch Data on RMBS Losses

For all you fellow data geeks (you know who you are): Fitch has now published its full RMBS Loss Metrics report (.xls), which is basically a large RMBS dataset that provides pool-level loss and performance data on 3,000+ outstanding RMBS deals. Most interestingly, for each RMBS deal, Fitch provides data on the percentage of performing non-delinquent loans, current loss levels, expected default levels, and loss severity. I can spend hours playing with ABS performance datasets. I haven't had time to look at Fitch's data in much depth yet, but hopefully I will this week. Let me know if you find anything interesting in the data. (I wonder how many pundits in the mainstream press have spent more than 5 minutes looking at even a basic dataset like Fitch's. I bet it's around 1%. Too generous?)

Saturday, July 11, 2009

Second Stimulus

Do we need a second stimulus package? Paul Krugman says yes, and has launched one of his unofficial campaigns for a second stimulus. There are really two distinct issues at play here, which the media usually conflate: one is whether we need a second stimulus package, and the other is how successful the first stimulus package has been. On pure economic grounds, Krugman is almost certainly right: the Obama administration's $787 billion stimulus package is too small to close the output gap. The unemployment rate now sits at 9.5%, which is well above the administration's projected unemployment rate without the original stimulus package (graph via Calculated Risk):

The high unemployment rate doesn't prove that the stimulus package has already "failed" in any sense. Stimulus spending takes time, and hardly any of the stimulus money has been spent yet. According to Recovery.gov, only $56.3 billion of the $787 billion stimulus package has been paid out to date:
Moreover, we don't know how much of the $56.3 billion that has been "paid out" has actually been spent yet. To be effective, fiscal stimulus needs to spend money—that is, get money circulating through the economy—as quickly as possible. The majority of that $56.3 billion went to states in the form of grants—for example, HHS has paid out $22 billion in grants to states for Medicaid, and the Department of Education has paid out $6.2 billion in grants under the State Fiscal Stabilization Fund. We don't know how much of that money the states have actually spent yet, although given the dire condition of state budgets, it's reasonable to assume that the states have spent most of the grant money they've received so far. We knew it would take a while for the stimulus package to have an effect when it was passed though, so legislators can hardly claim to have been tricked. Government spending takes time—project rules have to be designed, requests for proposals (RFPs) have to be issued etc., etc. If any legislator claims that he wouldn't have voted for the stimulus bill had he known it would take as long as it has to spend the stimulus money, then he's probably not qualified to work in government in the first place. Now to the issue of a second stimulus. It's not necessarily true that since the first stimulus package hasn't "failed," we should wait and see how effective it is before we start talking about a second stimulus. The truth is, the first stimulus package was always too small. Even if the administration's economic projections back in January had turned out to be accurate, the first stimulus would still have been too small given the scale of the recession, and monetary policy would still have been ineffective because interest rates have reached the zero bound. So there was always going to be a solid economic case for a second stimulus. This is where Krugman and I part ways. Krugman thinks the administration made a political mistake in not asking for a bigger stimulus package the first time around, making it needlessly more difficult for the administration to come back to Congress for a second stimulus. Krugman is a first-rate economist, but he's not especially savvy politically, and this is one of those times when his political/legislative inexperience shows. The reality is that the administration isn't going to come back to Congress for a second stimulus package, and for good reason: A second stimulus is politically impossible. Absent another massive shock to the economy (e.g., Citi or BofA failing), there's a zero percent chance that a second stimulus will make it through the Senate. It's simply not going to happen. Even with another shock to the economy, the chances of a second stimulus passing are incredibly low. I'll be shocked if a second stimulus bill ever even comes to a vote in the Senate. This is just the way Capitol Hill works. The two years I spent working on the Hill were miserable, but they were also invaluable, because they tempered my expectations about what politics and public policy are capable of accomplishing. It's not as simple as "Dem House majority + 60 Senate Dems + Dem president = liberal free-for-all!" All politics is local, as the late Tip O'Neill famously put it. Voting to increase an already-enormous budget deficit (by a substantial amount, as any stimulus package would have to be in the hundreds of billions) is an incredibly tough vote for any potentially-vulnerable member of Congress to take. After the first stimulus bill, omnibus appropriations, and the health care bill—not to mention the deeply unpopular "Wall Street bailout" (TARP) in September—the administration knows that it can't ask vulnerable Democrats to take another incredibly tough vote. Democrats probably have the numbers in the House to push a second stimulus bill through, but it would get blown out of the water in the Senate. To be fair, Krugman did say that he's "well aware of how difficult it will be to get such a plan enacted." But there's an enormous difference between "difficult but politically feasible" and "politically impossible." A second stimulus is firmly in the "politically impossible" category. A stimulus bill is a tough vote for any vulnerable politician—just look at how difficult it was to get the first stimulus bill passed—and there are only so many politically harmful votes that vulerable politicians can realistically give you. The modern U.S. political and legislative system just can't accommodate two large stimulus bills in one year. This isn't a new revelation. A second stimulus was always going to be politically impossible, and the administration knew it. (Rahm Emanuel has a little bit of experience with tough pieces of legislation, remember.) The fact that the administration asked for a stimulus package in January that was too small according to its own economic forecasts demonstrates that the administration was well aware of political constraints. They knew the first stimulus bill was their only shot, and they asked for as much as they thought was politically feasible. Frankly, I'm surprised they were able to get $787 billion. When they initially floated an $800 billion stimulus to the press, my first thought was: "Huge mistake." I thought anything over $775 billion would be rounded up to $1 trillion by their opponents and the media, and that the idea of a $1 trillion stimulus bill would kill any chance it had of getting through the Senate. To its credit, however, the media (ex-Fox News) didn't settle on the "almost $1 trillion stimulus" description, and the administration somehow got a $787 billion stimulus bill passed. If the administration was ever naïve enough to push for a second stimulus, the media would focus almost exclusively on the budget deficit and the federal debt level—when they're not debating whether the first stimulus was a colossal failure, that is. So while there's a strong economic case for a second stimulus, it's beyond pipe dream.

Thursday, July 9, 2009

Should CDS be regulated as insurance?

Locrian asks in the comments to my previous post on CDS and insurance:

I guess it just seems to me that you didn't answer (and didn't intend to answer) a much more interesting question: Should CDS be made to fit the definition of insurance, and then be regulated as such?
Locrian is right that I didn't intend to address the normative question in my previous post, but I suppose I should. No, I don't think CDS should be made to fit the definition of insurance, and then be regulated as such. There are several key differences between CDS and insurance that make insurance regulations inappropriate for CDS. The most important difference is daily collateral posting—standard single-name CDS require daily collateral posting, which insurance contracts do not. To borrow an example from A Credit Trader: if you buy fire insurance on your home, and then one day your neighbor's teenage son takes up smoking (increasing the risk that your house will catch on fire), you can't demand that the insurance company post collateral to a specified collateral account to offset the increased risk of fire. In contrast, standard single-name CDS contracts require daily collateral posting to offset changes in the mark-to-market value of the CDS (that is, the CDS are collateralized). In other words, as the CDS spread rises—indicating that the reference entity is getting progressively closer to default—the protection seller has to post more and more collateral to offset the increased risk of default by the reference entity. (By the time a credit event occurs, protection sellers have usually posted most of the total payout in collateral.) Collateralization (which usually includes initial margin as well) is a common way to mitigate counterparty credit risk (i.e., the risk that your counterparty can't pay). Similarly, the strict capital requirements that insurance companies are subject to are just another method of mitigating counterparty credit risk—the purpose of strict capital requirements is to ensure that when it comes time to collect on your insurance policy, the insurer has enough money to pay you. Strict capital requirements are an appropriate method of mitigating counterparty credit risk in uncollateralized contracts like insurance, where the insurer doesn't have to post collateral on a daily basis to reflect changes in risk exposure. But as we've seen, standard single-name CDS are collateralized, which dramatically changes both the frequency and nature of payments. If standard single-name CDS didn't require daily collateral posting, and instead only obligated the protection seller to make a single lump-sum payment upon the occurrence of a credit event, similar to insurance contracts, then there would be a plausible case for regulating CDS as insurance. But collateralization, which is a feature of certain CDS trades (e.g., stand-alone synthetic bond trades), makes CDS fundamentally different from insurance contracts. Instead, standard(ized) CDS should be moved onto regulated central clearinghouses, which already require initial margin and daily collateral posting (known in clearinghouse jargon as "variation margin") as a matter of course. Clearinghouses also have the risk management and technological capacity necessary to calculate the proper amount of variation margin required from each clearing member on a daily basis, which insurance commissioners most certainly do not. I'll have to leave CDS on ABS/CDOs and the "insurable interest" argument for a later post, because, well, I just don't have time to get into those arguments right now. UPDATE: Commenter M expands on my point, and provides an excellent explanation of why daily collateral posting based on mark-to-market changes makes CDS a fundamentally difference product than insurance:
I think you leave an important feature of the difference between insurance and CDS out. Which is that insurance is only paying out in case of an event, and will not pay out in case nothing happens. You can have a view of the overall chance of certain events happening, but you can not buy and sell insurance depending on the change in circumstances. With CDS you can take a view on not just the actual event happening, which would result in a pay out, but also on a general deterioration of the credit environment or the improvement of the credit environment, allowing you to take a profit or avoid a greater loss without an actual default happening. For instance, if you buy and hold a bond of a company, in case the credit of that company goes down, the price of the bond will go down and you will lose out if you would want to sell the bond before maturity, even if the company does not actually default. However, if you would have seen it coming,and you bought a cds on the same company, for a fee you are protected to this change, not just the actual default. The change in creditspread is a source of income, a protection, much as an interest rate swap as a protection against changes in interest rates. That is what makes a CDS fundamentally different, and much more dynamic, than a insurance that is purely build around an event happening or not.
Exactly. This is the distinction I had in mind when I discussed insurance law's use of strict capital requirements to mitigate counterparty credit risk. Strict capital requirements are appropriate for insurance because insurance contracts are essentially binary—either the insured event happens or it doesn't. Because there's so little interaction between the insurance company and the policyholder prior to the occurrence of the insured event, policyholders are much less likely to monitor the insurance company's ability to pay (i.e., its capital adequacy) on a day-to-day basis. That's why we need the government to impose strict capital adequacy requirements on insurance companies. But CDS are generally not binary, due to the daily collateral posting based on mark-to-market changes. So a difference regulatory regime is warranted.

Monday, July 6, 2009

CDS Are Not Insurance Contracts

Felix Salmon is right: CDS should not be regulated by insurance commissioners, primarily because CDS are not insurance contracts. Felix does a good job of explaining why CDS shouldn't be regulated by insurance commissioners, so I won't repeat him. I can, however, provide the legal reasoning. Virtually all US-based CDS are governed by New York state law. Section 1101(a)(1) of the New York Insurance Law defines an "insurance contract" as follows:

"Insurance contract" means any agreement or other transaction whereby one party, the "insurer," is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary," dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
First, protection sellers in CDS contracts are obligated to confer a benefit of pecuniary value on protection buyers dependent upon the happening of a defined credit event (e.g., bankruptcy, failure to pay). Second, a credit event in a CDS contract probably qualifies as a "fortuitous event." However, a CDS contract does not require that the protection buyer have a "material interest which will be adversely affected" by a credit event—as everyone knows by now, CDS contracts don't require the protection buyer to own the reference obligation, or to have any interest whatsoever in the reference entity. Moreover, payment by the protection seller in a CDS contract is not dependent on the protection buyer suffering an actual loss, whereas actual loss is a fundamental element of an insurance contract. In 2000, the NY Insurance Department's Office of General Counsel issued an opinion concluding that CDS do not constitute insurance contracts. The opinion doesn't appear to be available on the internet, so I've embedded it below. Here's the key language in the 2000 OGC Opinion:
[A] credit default swap . . . does not meet the definition of Insurance contract in N.Y. Ins. Law Section 1101(a)(1)(McKinney 1985)1 because, under the terms of the transaction, the seller will make payment to the buyer upon the happening of a negative credit event and such payment is not dependent on the buyer having suffered a loss.
In other words, as long as CDS contracts don't require protection buyers to suffer an actual loss in order to collect payment, they don't constitute insurance contracts under New York law. (I'm ignoring the NY Insurance Department's ridiculous attempt last September to reinterpret the definition of "insurance contract" to include covered CDS, because the Department subsequently dropped the ill-considered plan, and its legal reasoning was, to be perfectly honest, a joke. It was a purely political stunt.) 2000 OGC Opinion

Sunday, July 5, 2009

Twitter

I'm on Twitter finally. My Twitter name is EconOfContempt. I'm not sure how I feel about Twitter yet. I'm definitely still learning. For a long time, I thought Twitter was a new kind of portable Instant Messenger that you had to have some sort of special cell phone service to use. I don't know why I thought that. An intern set me straight last month. What's really embarrassing is that even the New York Fed—one of the stuffiest, least "hip" institutions ever—beat me onto Twitter. Ouch.

Friday, July 3, 2009

Well, at least Palin isn't boring

Like everyone else, I'm completely baffled by Sarah Palin's decision to step down as governor of Alaska. Not only did it come as a total shock to everyone, but she still hasn't offered any sort of realistic explanation. (I even signed up for a Twitter account just so I can follow her, because Twitter is where she said she's going to provide "info on decision to not seek re-election.") But let's be serious: there are really only two options here. Either (1) a scandal is about to break, and she's resigning preemptively; or (2) she was originally going to announce just that she wasn't running for re-election in Alaska (thus opening the way for a 2012 presidential run), but convinced herself in the past couple of days—probably with the help of her inner circle of advisers—that the best move was to resign now and get a head start on the preparation for her presidential campaign. My sense is that option (2) is the more likely explanation. I think Palin genuinely believes that resigning as governor now and becoming a full-time party leader/pundit is a savvy political move. If that's what she thinks, then she's very, very wrong. But that doesn't mean that's not what she thinks. I'm still holding out hope for option (1) as the explanation though. Just for pure entertainment value.

Michael Lewis has a new article in the latest Vanity Fair on AIG Financial Products. It's titled, The Man Who Crashed the World, and it's nominally about former AIGFP chief Joe Cassano, but it's really about AIGFP in general. (Cassano plays a big role in AIGFP's story, of course.) The full article isn't available on Vanity Fair's website—they only offer a limited summary—but I have a pdf version of the full article that I'm embedding below (if I can figure out how to do it). The article is excellent—it's really Lewis at his best. The media narrative of AIG's downfall was established many months ago. And yet, incredibly, Lewis is apparently the first journalist who actually went to AIGFP's offices and interviewed their traders about what really happened. As Lewis notes:

Here is an amazing fact: nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.'s losses and the trades that led to them still haven't been properly explained.
The real story is much less sensational, and much more nuanced, than the accepted media narrative. Shocking, I know. Also, for what it's worth, Lewis's account is consistent with everything I've heard about the AIGFP trades too. We also learn the story of Jake DeSantis's infamous resignation letter that was published on the New York Times op-ed page. Lewis, who was involved, calls DeSantis "incredibly brave. He stepped out alone in front of a mob and compelled it to disband, at least for the moment." Anyway, read the whole thing. vf article