A pugnacious pundit Wall Street can’t ignore
By John Gapper
Charlie Gasparino, chronicler of Wall Street and champion television reporter of its downfall, is in his element. He is sitting at a prime window-side table at San Pietro, his favourite lunch-time restaurant in Manhattan, ruminating on the financial crisis, when a familiar face appears.
It is David Komansky, the former chief executive of Merrill Lynch, who has been lunching with another veteran Wall Street executive. He and Gasparino exchange warm words, and before Komansky leaves, he traces a circle on his left palm with his right forefinger. “Call me,” he mouths.
“He’s such a nice guy, and I wrote so many nasty stories about him,” says Gasparino. “I did this story about how Stan O’Neal [Komansky’s successor] took him out. O’Neal went to the board and arranged for everyone to report to him instead. Dave went ballistic about my story. He was very pissed and he told a lot of people I was an ass.”
That memory seems to gratify Gasparino, a 46-year-old veteran of the newspaper trade who has found an unlikely niche on CNBC, the financial cable channel, whose best-known stars have been glossy female anchors such as Maria Bartiromo. Gasparino, with his close-cropped hair and broken nose, hardly looks the part. Yet the financial crisis brought out a different CNBC, one its bosses began to fashion after the network sagged in the wake of the 1990s internet boom. Instead of waiting for newspapers or wire services to break stories and then getting a chief executive or an analyst to comment, CNBC strove to produce scoops of its own – and hired seasoned reporters to find them.
The network also encouraged staff to express their opinions onscreen and even to contradict one another. Where tussles over markets and investments used to be left to guests, with anchors as referees, now CNBC journalists are in the ring themselves. “We think the viewer welcomes the intellectual tussle and the engagement of our team with each other,” says Tyler Mathisen, CNBC’s managing editor. “That is part of the magic sauce.” That sauce has also brought in viewers and profits and, with ratings further boosted by the financial crisis, helped it to crush Fox Business News, launched by Rupert Murdoch in October 2007. Fox had its eye on CNBC’s viewers, who have among the highest incomes of any US cable channel – a fact not lost on advertisers.
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Gasparino embodies this change of tone. Not only has he broken many stories about Wall Street’s troubles live on air during the financial crisis, but he picks fights with other CNBC figures with enthusiasm, sometimes venom. During one heated on-air confrontation about Citigroup with Dennis Kneale, a CNBC anchor, Gasparino said: “I’m doing what maybe you should do, Dennis, which is be a reporter and talk to people.” Kneale responded indignantly: “You know, it’s really bad for the CNBC brand to impugn the reporting skills of your colleagues.” On another occasion, Gasparino seemed openly contemptuous of a group of CNBC anchors, who asked him, television-style: “What have you got?” Instead of answering, he mused: “What have you got? Now that is almost Zen-like … I have many things in my arsenal, but what I have is not what I got.” After some tense sparring, they cut away in confusion.
Gasparino thrives on being awkward, even on being disliked, within CNBC. It burnishes his image as a tough outsider willing to go to battle with anyone – colleague or contact – in pursuit of the story. “People at CNBC will tell you that I’m a pain in the ass, hard to manage, that kind of thing, but they benefit from me being that way,” he says.
If anything, the onscreen Gasparino is a toned-down version of the off-air one. One morning, he upset Lance Armstrong, the cyclist, by asking him pointedly on CNBC about drug use in sports (Armstrong faced rumours of taking drugs, although he was cleared by inquiries). That evening, Gasparino bumped into Armstrong by chance at Campagnola, another favourite Manhattan haunt.
“He looked at me and he goes: ‘You’re an asshole,’” recalls Gasparino. So I was like: ‘Mr Armstrong, I want you to know that you answered all the questions perfectly.’ He says: ‘No, no, no, fuck you!’ I said: ‘Listen, we had to ask you one tough question.’ He said: ‘I am never doing your show again. Stick it in your ear.’ Then he got me pissed because he just kept on going. I said: ‘Listen, I am going to give you a little insight into something. If you don’t sit in that chair, we’ll get some other asshole to do it.’ He said: ‘Really?’ I said: ‘Really.’ He said: ‘You can leave now.’ I said: ‘No, this is my restaurant.’”
That line – “This is my restaurant” – is quintessential Gasparino. It contains all of his swagger and self-possession, his defiance when challenged by others, his sharp-elbowed marking out of territory. He still has the air of a tough, old-fashioned newspaper man, digging up stories in the big city, preferably over a martini.
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| With Tom Constance of the Kramer Levin Naftalis & Frankel law firm at San Pietro; ‘This is my restaurant’ |
The slack trade reflects the state of Wall Street since the crisis broke out in earnest last autumn. It has taken down several of Gasparino’s old contacts, among them Jimmy Cayne, former chairman and chief executive of Bear Stearns, and Dick Fuld, former head of Lehman Brothers. Their ghosts linger as he discusses the restaurant’s seating plan. “Guys like me who he [Gerardo Bruno, one of the brothers who own the restaurant] likes, get to sit up front. This here is chairmen’s row. This is reserved for Sandy Weill [the former head of Citigroup] and Larry Fink [of BlackRock]. This is the most sought-after table,” he says proudly, of our corner spot.
It should be a sweet moment, but he is wistful as he compares this crash to covering Wall Street after the dotcom bubble. “It was great to catch them, and make them look greedy and stupid – they were not going out of business. This time, you are doing it to wounded animals. I tell you, I am not having much fun.”
Gasparino’s rise mimics that of Robert Peston, the BBC business editor, whose run of scoops on the financial crisis in the UK, including his revelation in September 2007 that the Bank of England was considering intervening to support Northern Rock, have been both praised and criticised. Peston has been accused of going beyond simply reporting facts, getting emotional and causing a run on Northern Rock’s deposits.
Like Gasparino, Peston is a former newspaper reporter (on the Financial Times and elsewhere) who brought to television a scoop-hungry attitude that, when mixed with the power of the medium, produced unpredictable results. But Gasparino is given a freer rein by CNBC, not only to report stories but to deliver opinions, and to take on anyone who challenges him. This includes people on Wall Street whom Gasparino thinks have misled him. One example was Lucas van Praag, the Goldman Sachs partner in charge of the bank’s public relations. After van Praag denounced one of Gasparino’s stories about Goldman as “completely wrong”, Gasparino hit back with further on-air revelations. Yet van Praag admits to a grudging respect for Gasparino. “Most trading floors have CNBC on with the sound turned down, but when Charlie comes on, they listen. People tend to discount what he says because he is such a blowhard, but he does move stock prices.”
In the week after the collapse of Lehman Brothers and the bail-out of AIG, the stock market was very volatile and would move sharply as Gasparino gave details of the financial health of banks, or changes in government policy. The Dow Jones Industrial Average twice jumped hundreds of points as he was predicting fresh bail-outs. This impresses many of his fellow professionals. John Carney, a blogger at Clusterstock, a financial news website, says: “I think Charlie is one of the best reporters CNBC has. He actually goes out and shakes down sources for real information, which is why he breaks stories.”
Similarly, Larry Kudlow, a CNBC host, credits Gasparino with giving CNBC an edge in the crisis: “He broke some great stories. I give Charlie a lot of credit for having great sources and, to tell you the truth, most of his steers have been good. He has got us ahead of the game.”
. . .
However, CNBC’s more aggressive editorial strategy has also drawn controversy and criticism. The most stinging attack came from Jon Stewart, host of The Daily Show on the Comedy Central cable television network, who pilloried CNBC for failing to warn its viewers of the housing bubble and accused it of irresponsibly mixing up news and entertainment.
Meanwhile, some Wall Street executives claim that CNBC, and Gasparino in particular, added to the problems of banks such as Bear Stearns and Lehman last autumn by speculating about their condition. Stephen Schwarzman, the chief executive of Blackstone, rang Jeff Zucker, the chief executive of NBC Universal, CNBC’s parent, during the turmoil and accused Zucker of allowing his cable network to foment fear among investors. Similarly, an article in Vanity Fair about Bear’s collapse quoted one of the bank’s executives complaining: “At CNBC, there is simply no adult supervision.”
“The point of editors is to take a force of nature like Gasparino and turn it into something reliable,” says Felix Salmon, a blogger for Reuters. “But CNBC has no incentive to do it because it is not really about news, it is about creating conflict and cacophony.”
Gasparino insists that his stories were both correct and responsible. “Just so you know, I am really protective of my reputation. That was not a threat. I am not threatening you – I have never sued anyone. But if someone writes that I caused a run on Bear, I will not let them get away with it.”
However, he comes closer to admitting to another accusation against him – that he plays favourites to get stories. “Gasparino is very good at stitching up the people he doesn’t like, which is why people try to stay on his good side,” says Salmon. “It’s not a pleasant way of doing business.” Gasparino concedes that he certainly felt less inhibited about chasing negative stories on Bear Stearns when, following his disclosure that Jimmy Cayne was likely to lose his job, Cayne refused to deal with him. “Jimmy made himself easy to write about because he stopped talking to me – so why do I care any more?” he says.
Yet it is hard to accuse Gasparino of going soft on Wall Street executives in return for information, given his track record of upsetting them. For all his pride at his closeness to figures such as Komansky and Cayne, he did not hold back when the chips were down. “How close do you get? You do not really get that close,” he says. “You want to get close to them because you want them to trust you so they tell you stuff, but there is a line. When it comes down to it, if you don’t report the bad stuff when it does happen, that is a problem.”
Mark Hoffman, CNBC’s president, points out that the channel is accused by some Wall Street figures of being overly negative and by Jon Stewart and others of financial boosterism. He says that it has received an equal number of complaints from either side, which indicates that it has done its job fairly. “Could business journalists have done more to predict the financial crisis?” asks Hoffman rhetorically. “Possibly so. But are they at the top of the list of those who ought to be held accountable for the unravelling of the international financial system? In my view, absolutely not. There is a long list of folks who ought to go before journalists.”
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| Gasparino at work in the CNBC studio; even his critics concede that, ‘When Charlie comes on, people listen’ |
Being out of the studio adds to the sense that he is an outsider. To make his appearances, known as “hits”, he must thread his way through the warren-like NBC offices to a small studio. He does not sit companionably around a desk with the anchors in New Jersey, and he sometimes butts into discussions awkwardly as a result.
Indeed, Gasparino did not take easily to the demands of television. He recalls one early appearance when he had been out drinking the night before and arrived at the New York studio on a summer morning with a hangover, to find that the air conditioning was not yet on. “I went on air and I did my hit and I thought I did it really well, but I noticed a pool of sweat here on my lip. I guess I was half detoxing and half reacting to the fact that there was no AC. Then my phone rings and it was Claudine, [CNBC president] Mark Hoffman’s secretary. She says: ‘Can you please hold for Mark?’ And I was, ‘Oh God, what did I do?’
“He says: ‘Hey Charlie, how are you doing? You’re doing a great job, but I need to ask you a question.’ I said: ‘What’s that?’ He said: ‘Have you ever seen the Nixon-Kennedy debates?’ I said: ‘Yeah.’ He says: ‘Well, you’re not Kennedy. Get some make-up! What are they doing over there? Don’t they have any powder?’”
Gasparino’s father, a construction worker, was not happy at him becoming a journalist. “My dad hated journalists because he liked Richard Nixon,” he says. “He was a patriotic guy and when he saw what was going on in the country in the 1960s, like a lot of blue-collar Democrats, he voted for Nixon and blamed the liberal media for chasing Nixon out.” Gasparino, whose great-grandparents emigrated from Italy to New York in the early 1900s, was brought up first in the Bronx and later in the more salubrious surroundings of Westchester County, a swathe of suburbs north of the city. But even there, he kept a streak of the streetwise Bronx kid, training in his teens as a boxer.
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It still pains him that he did not enter the Golden Gloves, an amateur boxing contest. “The biggest regret of my life was not going through with it. One day I was sitting in a bar, and I was watching this guy that I used to spar with in the semi-finals of the Golden Gloves. I was sitting there with a beer and I said to myself: ‘What did I do?’” Instead, he had studied at Pace University on Long Island, before taking a postgraduate degree in journalism at the University of Missouri. After college, he honed his skills at papers including Newsday, the Long Island paper famous for its investigations into the Mafia and government corruption during the 1970s and 1980s, before turning to financial journalism, ending up as a banking correspondent on The Wall Street Journal in 1995.
His sharp elbows came in handy at the Journal. During his nine years there, he broke a series of stories on Henry Blodget, a former Merrill Lynch analyst who was investigated and fined $4m by the Securities and Exchange Commission in 2003 for issuing misleading reports on internet companies to obtain business. (Blodget now runs a group of news websites, including Clusterstock.) After a brief spell at Newsweek, Gasparino arrived as an on-air editor at CNBC in 2005.
In his own way, Gasparino has come to embody what is known in the media as “convergence” – the way in which the old boundaries between television, print and online journalism have been falling. Despite his pride in being a blue-collar traditionalist, he is also a new media pioneer.
His brand extends from television to online, in the form of articles for The Daily Beast, Tina Brown’s news site; print, in commentaries for the New York Post; and books. Gasparino’s account of the Wall Street crisis, The Sellout, is to be published by Harper Collins later this year. “This job has worked out better than my parents thought, and I guess I was more opportunistic than a lot of my colleagues in trying to understand how the business was changing. It is becoming more television-oriented, more online, less print,” he says.
He attributes that opportunism to the memory of how it felt to throw away his chance to be a teenage boxing contender. “Going into television relates to it. I never wanted to say ‘What if?’ again. Here’s the thing about journalism, and most stuff. If you make a bad move, shit happens, you move on. The worst you can do is screw it up.”
What's Up, Docs?
The AMA signs its members up to be civil servants.
Everyone supports "health reform" as an abstract goal, but that mile-wide consensus is an inch deep when it comes to substance. Increasingly, however, most of the major health industry lobbies seem prepared to concede the mile -- as long they get their inch.
The latest example is the American Medical Association's unqualified endorsement Thursday of the health bill patched together by House Democrats. In a letter to Ways and Means Chairman Charlie Rangel, the doctors group lays on its "appreciation and support" pretty thick, and pledges to "work with the House committees and leadership to build support." The so-called tri-committee plan is also the most left-leaning out there, funding its new coverage for the uninsured in part by cutting payments to doctors and hospitals in Medicare and Medicaid.
But lobbyists don't lobby for less revenue for their members, and Democrats seem to have procured the AMA's bouquet with what the AMA letter says is the promise of "fundamental Medicare reforms, including repeal of the sustainable growth rate," or SGR. The SGR is a formula that Congress created in 1997 as a form of fiscal triage, mandating automatic cuts in physician payments if entitlement spending rises too steeply. Next year, they're scheduled to drop by 21.5%.
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Associated Press President Barack Obama speaks about health care on Friday in the Diplomatic Room of the White House.
Doctors despise the SGR, and understandably so. Medicare's administered prices are already 20% to 30% lower than those of private insurers, and then Congress threatens to arbitrarily pay even less for the medical goods and services it wants to buy. However, Washington always swoops in with an 11th-hour reprieve that defers the pain to another year, given that even deeper cuts would cause many doctors to stop treating Medicare patients. But this only makes the distortions worse, creating an uncertain business climate and forcing some doctors to compensate by shifting costs onto their private patients or making up in volume what they lose on margin in Medicare.
Yes, ending this incoherent farce is a great idea. But the AMA is essentially saying that if doctors get paid more, all else is negotiable. Other industry lobbies such as the insurers and drug makers have made the same calculation, putting their short-term self-interest -- usually ensuring that government programs remain generous (enough) -- ahead of the long-run threats. It can't last.
The SGR is a perfect illustration of the only approach the political class has ever tried to control health spending -- and a preview of what is certain to happen under ObamaCare. As costs explode, Congress will try to wring out ever more "savings" by underpaying doctors and hospitals, and this central planning will be far easier because it will control the bulk of U.S. health dollars. Physicians -- especially the specialists who provide expensive treatments that the White House has decided qualify as "waste" -- will gradually be converted into civil servants a la the U.K. or Canada. All medicine will function, or not function, like Medicare does today, but much worse.
Some doctors realize as much. A coalition of 17 state medical associations and three specialty organizations is poised to break with the AMA over its Washington work. Another group of state hospital associations is at odds with their Beltway representatives over the deal cut with the White House to help defray universal coverage with $155 billion in across-the-board Medicare cuts. The plan "will do nothing to encourage changes in the delivery of health-care services," their protest reads, while hurting the nearly half of U.S. hospitals operating on a deficit or close to it.
Oh, and the Mayo Clinic -- upheld by President Obama and other Democrats as a model for reform -- also weighed in on the House bill Thursday, though without the AMA's fanfare. While noting "some positive provisions," it "misses the opportunity to help create higher-quality, more affordable health care for patients. In fact, it will do the opposite," the clinic's policy shop wrote in a statement. "In general, the proposals under discussion are not patient focused or results oriented. . . . The real losers will be the citizens of the United States."
Including, ultimately, the doctors who belong to the AMA.
The U.S. Steers Left on Honduras
Why would Hugo Chavez expect Obama to help him?
When Hugo Chávez makes a personal appeal to Washington for help, as he did 11 days ago, it raises serious questions about the signals that President Barack Obama is sending to the hemisphere's most dangerous dictator.
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Associated Press Ousted Honduran President Manuel Zelaya (left) with Costa Rican President Oscar Arias.
At issue is Mr. Chávez's determination to restore deposed Honduran president Manuel Zelaya to power through multilateral pressure. His phone call to a State Department official showed that his campaign was not going well and that he thought he could get U.S. help.
This is not good news for the region. The Venezuelan may feel that his aims have enough support from the U.S. and the Organization of American States (OAS) that he would be justified in forcing Mr. Zelaya on Honduras by supporting a violent overthrow of the current government. That he has reason to harbor such a view is yet another sign that the Obama administration is on the wrong side of history.
In the three weeks since the Honduran Congress moved to defend the country's constitution by relieving Mr. Zelaya of his presidential duties, it has become clear that his arrest was both lawful and a necessary precaution against violence.
The Americas in the News
Get the latest information in Spanish from The Wall Street Journal's Americas page.
Mr. Zelaya was trying to use mob rule to undermine Honduras's institutions in much the same way that Mr. Chávez has done in Venezuela. But as Washington lawyer Miguel Estrada pointed out in the Los Angeles Times on July 10, Mr. Zelaya's actions were expressly forbidden by the Honduran constitution.
"Article 239," Mr. Estrada noted, "specifically states that any president who so much as proposes the permissibility of reelection 'shall cease forthwith' in his duties, and Article 4 provides that any 'infraction' of the succession rules constitutes treason." Congress had little choice but to take its next step. It convened "immediately after Zelaya's arrest," Mr. Estrada wrote, "condemning his illegal conduct, and overwhelmingly voting (122-6) to remove him from office."
Mr. Zelaya was shipped out of the country because Honduras believed that jailing him would make him a lightning rod for violence. Interim President Roberto Micheletti promised that presidential elections scheduled for November would go forward.
That might have been the end of it if the U.S. had supported the Honduran rule of law, or simply refrained from meddling. Instead President Obama and the State Department joined Mr. Chávez and his allies in demanding that Mr. Zelaya be restored to power. This has emboldened Venezuela.
On July 5, Mr. Zelaya boarded a plane manned by a Venezuelan crew bound for Tegucigalpa, knowing full well that he would not be allowed to land. It didn't matter. His intention was to incite a mob on the ground and force a confrontation between his supporters and the military. It worked. One person was killed in clashes near the airport.
Yet the tragedy did not produce the desired condemnation of the Micheletti government. Rather, it empowered Honduran patriots. Perhaps this is because the airport violence reinforced the claim that Mr. Zelaya is a threat to the peace.
He was not the only one to lose credibility that day. OAS Secretary General José Miguel Insulza had encouraged the fly-over stunt despite its obvious risks. He even traveled in a separate plane behind Mr. Zelaya to show support. The incident destroyed any possibility that Mr. Insulza could be considered an honest broker. It also proved the charge that by insisting on Mr. Zelaya's return the U.S. was playing with fire.
The next day Costa Rican President Oscar Arias offered to act as a mediator between Mr. Zelaya and the new government. Mr. Arias would seem to be far from an impartial referee given that he is a supporter of Mr. Zelaya. Yet it is also true that Central America has the most to lose if Honduras descends into civil war. It follows that the San José venue offers better odds for the Honduran democracy than, say, the auspices of the OAS.
Other influential Central Americans have expressed support for Honduras. Last week the Honduran daily El Heraldo reported that Salvador's OAS ambassador said he hopes to see the resolution that suspended Honduras from the group revoked under the new permanent-council president. Catholic Cardinal Oscar Rodriguez Maradiaga has condemned Mr. Zelaya's violent tactics and says that Honduras does not want to emulate Venezuela.
Mr. Chávez understands that Mr. Zelaya's star is fading, which is why he called Tom Shannon, the State Department's assistant secretary for the Western Hemisphere at home at 11:15 p.m on July 9. Mr. Shannon told me that Mr. Chávez "again made the case for the unconditional return of Mr. Zelaya, though he did so in a less bombastic manner than he has in the past."
Mr. Shannon says that in response he "suggested to him that Venezuela and its [allies] address the fear factor by calling for free and fair elections and a peaceful transition to a new government." That, Mr. Shannon, says, "hasn't happened."
Nor is it likely to. Yet the U.S. continues exerting enormous pressure for the return of Mr. Zelaya. If it prevails, it is unlikely that Mr. Zelaya's mobs or Mr. Chávez will suddenly be tamed.
Why Toxic Assets Are So Hard to Clean Up
Securitization was maddeningly complex. Mandated transparency is the only solution.
KENNETH E. SCOTT JOHN B. TAYLOR
Despite trillions of dollars of new government programs, one of the original causes of the financial crisis -- the toxic assets on bank balance sheets -- still persists and remains a serious impediment to economic recovery. Why are these toxic assets so difficult to deal with? We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.
The bulk of toxic assets are based on residential mortgage-backed securities (RMBS), in which thousands of mortgages were gathered into mortgage pools. The returns on these pools were then sliced into a hierarchy of "tranches" that were sold to investors as separate classes of securities. The most senior tranches, rated AAA, received the lowest returns, and then they went down the line to lower ratings and finally to the unrated "equity" tranches at the bottom.
But the process didn't stop there. Some of the tranches from one mortgage pool were combined with tranches from other mortgage pools, resulting in Collateralized Mortgage Obligations (CMO). Other tranches were combined with tranches from completely different types of pools, based on commercial mortgages, auto loans, student loans, credit card receivables, small business loans, and even corporate loans that had been combined into Collateralized Loan Obligations (CLO). The result was a highly heterogeneous mixture of debt securities called Collateralized Debt Obligations (CDO). The tranches of the CDOs could then be combined with other CDOs, resulting in CDO2.
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Getty Images Each time these tranches were mixed together with other tranches in a new pool, the securities became more complex. Assume a hypothetical CDO2 held 100 CLOs, each holding 250 corporate loans -- then we would need information on 25,000 underlying loans to determine the value of the security. But assume the CDO2 held 100 CDOs each holding 100 RMBS comprising a mere 2,000 mortgages -- the number now rises to 20 million!
Complexity is not the only problem. Many of the underlying mortgages were highly risky, involving little or no down payments and initial rates so low they could never amortize the loan. About 80% of the $2.5 trillion subprime mortgages made since 2000 went into securitization pools. When the housing bubble burst and house prices started declining, borrowers began to default, the lower tranches were hit with losses, and higher tranches became more risky and declined in value.
To better understand the magnitude of the problem and to find solutions, we examined the details of several CDOs using data obtained from SecondMarket, a firm specializing in illiquid assets. One example is a $1 billion CDO2 created by a large bank in 2005. It had 173 investments in tranches issued by other pools: 130 CDOs, and also 43 CLOs each composed of hundreds of corporate loans. It issued $975 million of four AAA tranches, and three subordinate tranches of $55 million. The AAA tranches were bought by banks and the subordinate tranches mostly by hedge funds.
Two of the 173 investments held by this CDO2 were in tranches from another billion-dollar CDO -- created by another bank earlier in 2005 -- which was composed mainly of 155 MBS tranches and 40 CDOs. Two of these 155 MBS tranches were from a $1 billion RMBS pool created in 2004 by a large investment bank, composed of almost 7,000 mortgage loans (90% subprime). That RMBS issued $865 million of AAA notes, about half of which were purchased by Fannie Mae and Freddie Mac and the rest by a variety of banks, insurance companies, pension funds and money managers. About 1,800 of the 7,000 mortgages still remain in the pool, with a current delinquency rate of about 20%.
With so much complexity, and uncertainty about future performance, it is not surprising that the securities are difficult to price and that trading dried up. Without market prices, valuation on the books of banks is suspect and counterparties are reluctant to deal with each other.
The policy response to this problem has been circuitous. The Federal Reserve originally saw the problem as a lack of liquidity in the banking system, and beginning in late 2007 flooded the market with liquidity through new lending facilities. It had very limited success, as banks were still disinclined to buy or trade such securities or take them as collateral. Credit spreads remained higher than normal. In September 2008 credit spreads skyrocketed and credit markets froze. By then it was clear that the problem was not liquidity, but rather the insolvency risks of counterparties with large holdings of toxic assets on their books.
The federal government then decided to buy the toxic assets. The Troubled Asset Relief Program (TARP) was enacted in October 2008 with $700 billion in funding. But that was not how the TARP funds were used. The Treasury concluded that the valuation problem seemed insurmountable, so it attacked the risk issue by bolstering bank capital, buying preferred stock.
But those toxic assets are still there. The latest disposal scheme is the Public-Private Investment Program (PPIP). The concept is that private asset managers would create investment funds of half private and half Treasury (TARP) capital, which would bid on packages of toxic assets that banks offered for sale. The responsibility for valuation is thus shifted to the private sector. But the pricing difficulty remains and this program too may amount to little.
The fundamental problem has remained untouched: insufficient information to permit estimated prices that both buyers and sellers find credible. Why is the information so hard to obtain? While the original MBS pools were often Securities and Exchange Commission (SEC) registered public offerings with considerable detail, CDOs were sold in private placements with confidentiality agreements. Moreover, the nature of the securitization process has made it extremely difficult to determine and follow losses and increasing risk from one tranche and pool to another, and to reach the information about the original borrowers that is needed to estimate future cash flows and price.
This account makes it clear why transparency is so important. To deal with the problem, issuers of asset-backed securities should provide extensive detail in a uniform format about the composition of the original pools and their subsequent structure and performance, whether they were sold as SEC-registered offerings or private placements. By creating a centralized database with this information, the pricing process for the toxic assets becomes possible. Making such a database a reality will restart private securitization markets and will do more for the recovery of the economy than yet another redesign of administrative agency structures. If issuers are not forthcoming, then they should be required to file the information publicly with the SEC.
Mr. Scott is a professor of securities and corporate law at Stanford University and a research fellow at the Hoover Institution. Mr. Taylor, an economics professor at Stanford and senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis" (Hoover Press, 2009).
Will Small Be Beautiful for GM?
Michigan's Orion plant has become a symbol of government run amok in the auto industry.
HENRY PAYNE
Orion Township, Mich.
On July 5, 1984, President Ronald Reagan joined General Motors Chairman Roger Smith at a dedication ceremony opening Orion Assembly, a sprawling plant off of Interstate 75 north of GM's Detroit headquarters.
America's largest auto maker was then emerging from the most severe downturn since the Great Depression and a decade of punishing federal fuel-economy regulations that gave Japanese auto makers an edge.
The Orion plant was a symbol of the U.S. auto industry's rebirth as GM invested $50 billion in state-of-the-art facilities world-wide.
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Associated Press "Let our competitors take note today: The American automobile industry is back," Reagan thundered to a building full of auto workers. "You've demonstrated when the chips are down, what people can do working together freely, rather than at the dictates of some central planner or bureaucratic mandate of government. I happen to believe the last thing your industry needs is the federal government bringing in outsiders to tell you how to run your business. . . . We immediately moved to reduce the regulatory burden . . . and I'm proud to say, we made a special effort on behalf of the auto industry, saving you hundreds of millions of dollars."
Twenty-five years later, GM is again at a crossroads. And again Orion is the focus of its future plans.
This time, however, a very different White House led by President Barack Obama and his Auto Task Force is calling the shots. This time, Washington is telling GM how to run its business. This time, the Orion plant is a symbol of government regulation run amok as Washington keeps GM on life support so that it will produce the cars Washington wants to build.
On June 1, GM Vice President for Global Manufacturing Gary Cowger announced as part of the company's bankruptcy filing that it would close the Orion facility in its drive to become a "leaner, stronger and more flexible" company. Though still a relatively modern facility making midsize Chevy Malibu and Pontiac G6 sedans, Orion's once 5,000-strong labor force had shriveled to 1,200 as the recession ravaged sales and the company planned to eliminate its Pontiac brand and consolidate Malibu production at a Kansas City facility.
But a few weeks later, the company reversed course. GM now says it will retool Orion to make compact, gas-sipping cars. The change of heart says a lot about how GM's new owners -- the federal government owns 60% of the company and the United Auto Workers (UAW) owns 17% -- are making considerations other than profitability a top priority for the auto maker.
The Obama administration is increasing Corporate Average Fuel Economy (CAFE) mandates to 35.5 mpg for all vehicles in a company's fleet by 2016, up from 27.5 mpg for cars and 23 mpg for light trucks now. Not a single GM vehicle meets the new CAFE standard, so the company is scrambling to make new high-mileage cars.
It was planning to build a new compact car in China (it already works with Daewoo to make the tiny Chevy Aveo in South Korea). Most auto makers have similar arrangements -- profit margins are so low for compacts made in America that not a single auto company makes a compact inside the U.S. Not the Japanese. Not the Koreans. And not even Ford, which plans to make its new Fiesta in Mexico.
But the UAW insisted that GM build its compact stateside and along with the Obama administration forced the company to agree to build a new green car somewhere in the U.S. as a condition for exiting bankruptcy.
This is a mistake that will only make it harder for GM to make good on the president's pledge that it will repay every penny of the $50 billion in federal loans it recently received. Why? Because auto makers make a slim $1,500 per vehicle profit, on average, on small cars. The profit margin on SUVs can be $5,000 or even $7,000.
One reason for the small margin on small cars is that compacts occupy a tiny niche of the market. Gasoline is relatively cheap in America, so those interested in buying fuel-sipping autos often base their buying preferences on environmental or political considerations, or they are particularly sensitive to the variable price of gasoline. There aren't enough of these people, Center for Auto Research analyst Kristin Dziezek told me, to allow auto makers to develop models with varying pricey features that drive up profit margins.
In Europe, things are different. There gasoline costs 100% to 200% more than it does here, so there are a lot of buyers who make fuel efficiency their No. 1 priority.
GM says that once its Orion plant is turning out compact cars, it can increase its small car sales to 100,000 units a year. But that claim seems dubious because its current compact, the Aveo, sold just 55,000 units in 2008. The critically acclaimed Honda Fit sold 80,000 units last year. Only the class-leading Toyota Yaris has sold 100,000 vehicles.
However, there is one way to make building small cars in America pay off -- through government subsidies.
There is a provision in the 2007 Energy Bill that allows the Energy Department to dole out up to $25 billion to domestic auto makers to pay for, as the bill spells out, "the cost of re-equipping, expanding, or establishing manufacturing facilities in the United States to produce" low-mileage vehicles. Ford has already been awarded $6 billion in such loans. With its new plans for Orion, GM will likely get its own slice of that pie.
Also, once it was clear that GM planned to build compacts somewhere in the U.S. a bidding war broke out between Michigan, Tennessee and Wisconsin -- all of which had GM plants slated to be closed. Michigan won by giving away the store. The Orion plant will get $1 billion in tax incentives and job training grants from the state, which will pay for the $800 million GM will spend on retooling.
GM insists that business factors alone drove its decision. But in the era of Government Motors, there's reason to be skeptical. Speaking to reporters recently, GM North America President Troy Clarke made an environmental, not an economic, argument for building small cars at Orion. He said that the new plans for the plant would help GM's "efforts to become the greenest car company in the world."
While acquiescing to the demands of its two major shareholders -- Washington and Big Labor -- GM did get concessions of its own. The UAW will allow the company to pay a majority of workers at Orion lower, "second-tier" wages of $14-$16 an hour with no pension benefits. That will make Orion's wages competitive with the non-union Kia plant in Georgia (which makes SUVs).
Outgoing car czar Steve Rattner insisted recently that "We are not going to micromanage or get involved in day to day decisions" at GM. Americans can take him at his word. That is, assuming they overlook Washington's tight grip on a bankruptcy process in which the UAW demanded that the company make a green car in the U.S. that is designed to meet Washington-mandated mileage standards in a plant that makes Washington-favored cars so that GM can get billions in Washington-issued funds.
Mr. Payne is a writer and cartoonist for The Detroit News.
Nebraska Liberal, New York Reactionary
Former Senator Bob Kerrey worries that Democrats could overplay their hand on taxes and spending.
BARI WEISS
You can't help but notice the combination of photographs on Bob Kerrey's windowsill: a signed picture of Al Franken laughing at a campaign rally, a shot of Daniel Patrick Moynihan smiling in the Senate Office Building, and a black-and-white photo of Hannah Arendt presiding over a seminar. This intersection -- between politics and the perhaps even more rarified world of academia -- is where Mr. Kerrey has found himself over the past eight years since he left the Senate to become president of the New School.
Straddling disparate worlds, never quite fitting in, is something Bob Kerrey seems to revel in. ("I've gone from Nebraska, where people thought I was a liberal, to New York, where people think I'm a right-wing nutcase," he said in 2003 when the war in Iraq began.) And so in theory, the university in Greenwich Village seemed like a perfect fit for a man who's at turns described as contrarian, free-thinking, and, yes, a maverick.
![[THE WEEKEND INTERVIEW]](http://s.wsj.net/public/resources/images/ED-AJ866_winter_DV_20090717131717.jpg)
Ismael Roldan Bob Kerrey
The New School's animating spirit is contrarian: It was founded in 1919 in part by several Columbia professors who were fired when they refused to take loyalty oaths. When Hitler came to power in the 1930s, the school became a haven for European Jewish refugees like Arendt and Leo Strauss, who created its graduate program, originally called the University in Exile.
The past eight years with Mr. Kerrey at the helm have certainly had their successes. As he puts it: "We've really changed the nature of the university from a holding company with eight divisions into a real university." The endowment has grown to $180 million from $90 million in 2001 (after reaching a peak of $232 million last September), the number of full-time faculty has doubled to 351, and the students "are more talented, and more capable than they were eight years ago," he says.
But from the beginning Mr. Kerrey faced a highly disorganized institution with an entrenched faculty suspicious of his commitment to the job. His views on foreign policy only added insult to injury. When he came out in support of the Iraq War, his office became the site of regular student protests. Inviting John McCain to speak at graduation in 2006 didn't win him many fans among the student body. After a tumultuous year of a no-confidence vote from the faculty and a slew of student occupations aimed at overthrowing Western hegemony and his presidency, Mr. Kerrey recently announced that in 2011 he'll step down.
So when I sit down with him in his West Village office on a morning following graduation, the natural place to begin is to ask if he's going back into politics. "I never really left," he says. "I've been engaged in issues." I press him a bit more: How about mayor of New York, an idea he flirted with in 2005? He laughs, "No." And then: "But if you'd have asked me two years before I ran for governor in '82, I'd have told you no. Two years before I ran for Senate, I would have said no. So it's not impossible."
As a senator, Mr. Kerrey was famous for his willingness to be frank. He's maintained his candor. Unlike many other university presidents, he hasn't hesitated to weigh in on contentious public debates.
Five days before Barack Obama was elected president, for example, Mr. Kerrey, a Clinton-turned-Obama supporter, warned of the following in the Daily News: "By my lights the primary threat to the success of a President Obama will come from some Democrats who, emboldened by the size of their congressional majority, may try to kill trade agreements, raise taxes in ways that will destroy jobs, repeal the Patriot Act and spend and regulate to high heaven." Has this come true, I ask? "Well, we'll find out in November 2010," he quips.
He points to Bill Clinton's first term as an example of liberal overreach on the part of a Democratic president. "Democrats found out in November 1994 that it's not what the country wanted," he says. "The warning signs were there, the warning signs were delivered to the White House. The Deficit Reduction Act of 1993 was loaded up with taxes -- the largest tax increase in the history of the country. I voted for it and survived it. But the majority of the House and the majority of the Senate didn't. The House and Senate both switched over [to the GOP] and Bill Clinton famously went to Texas not long after and said he didn't want to raise taxes and he was against it, but he went along with it."
Mr. Kerrey doesn't necessarily think this president will find himself similarly backtracking in two years. Public attitude, he believes, has changed dramatically. "There is a big difference between today and 1993 in that people are very, very angry at the laissez-faire market presumptions of the Federal Reserve and the banking regulations. And they're demanding government intervention on a scale that I haven't seen in my lifetime," he says.
Arguably the most expansive intervention currently up for debate is health-care reform. Mr. Kerrey believes that today's model is unsustainable -- and feels passionately about delinking coverage with employment. But he's so far unimpressed with the proposals on offer. Mr. Kerrey says he's "personally worried" that Sens. Ted Kennedy and Max Baucus's health-care proposals will cost trillions of dollars over the next decades and "still leave tens of millions of uninsured Americans lying in the breach."
Despite such policy initiatives, he doesn't think his party has "shifted significantly to the left." There are important developments, he points out, like the "rising power of the black caucus," a phenomenon he views as a "very very big story and a big change." But, at least for the time being, "I don't look at Obama and think he's a dramatic shift to the left at all. I think he's still trying to keep . . . as close as possible to the center."
Mr. Kerrey has much praise for the president -- at least for his personal qualities and his image. When he was campaigning for candidate Obama, he made the argument to foreign-policy hawks that "If you really believe in the Iraq war and want it to have a good outcome, you gotta vote for Obama." It's not just about the fact that his middle name is Hussein, though Mr. Kerrey believes it's a "huge asset" that "gives room to moderates" in the Muslim world. It's also "because of his capacity to process complicated things and his willingness to do the right thing once he's figured it out. And he's demonstrated that on the job as far as I'm concerned."
He thinks that Mr. Obama has "put together a phenomenal team," and that his transition to power was the "most efficient since Eisenhower's first in '52." He praises choices like keeping on Defense Secretary Bob Gates and bringing in National Security Adviser Jim Jones, which he views "not as token gestures," but as real reflections of Mr. Obama's commitment to surrounding himself with the most competent people. Putting Gen. Stanley McChrystal in charge of Afghanistan was the right move, as was allowing him to put together his own team, which Mr. Kerrey says was "like the authority Marshall was given in the second world war."
But when it comes to Mr. Obama's fundamental ideas about foreign policy, Mr. Kerrey is far more critical. Take Mr. Obama's stance on the idea of wars of necessity and wars of choice. By his lights, Afghanistan is a war of necessity while Iraq is a war of choice. "I would disagree with the president when he says Afghanistan's not a war of choice," Mr. Kerrey says. "It certainly is a war of choice and I think it's a sound decision."
"I think he's got this problem with Iraq," he adds. "Because he says certainly we're better off without Saddam Hussein. Well, that's acknowledging that there was something good about the cause."
Despite this difference, Mr. Kerrey doesn't think the president has gone soft on foreign policy. "I think he's maintained a lot of Bush's policies." Moreover, the "fundamental presumption -- that al Qaeda and terrorism is an existential threat -- remains."
Mr. Kerrey's views on foreign policy are informed not just by his years in Washington but by his service as a Navy SEAL in Vietnam, where he earned the medal of honor. Knowing it firsthand, Mr. Kerrey says that he "hates war" and is a "true peacenik." His philosophy effectively illustrates, though, the difference between peacenik and pacifist.
"One of the assertions that's oftentimes made by the left is that the U.S. is an imperial power and we've got to pull back from the rest of the world," Mr Kerrey says.
"Well, ok. How did you feel about Bosnia? Oh, we had to do that. How about Somalia? Oh, we had to do that. How about Rwanda? Well, we shoulda done that. The problem is that there are times when the only thing that keeps people from killing each other is the presence of a U.S. military force. It's the only thing that gets the job done. And so, that's where I become hawkish."
Aside from a few heirs to Scoop Jackson (most notably Sen. Joe Lieberman), Democratic politicians don't often make such blunt observations these days. Maybe they silently agree with Mr. Kerrey about the value of the careful but strong use of American power. And maybe they'll even be made to show it soon in Sudan, North Korea, or elsewhere.
But if President Obama's recent meekness toward Russia and Iran is indicative of what we can expect for years to come, then centrists like Mr. Kerrey may stop being so open-minded toward their party's standard-bearer.
Whether this happens -- and whether it's before or after November 2010 -- is up to the president.
Ms. Weiss is an assistant editorial features editor at the Journal.
Commerce Secretary: Americans ‘Need to Pay’ for Chinese Emissions
Keith Johnson
NOTE: This post was updated Saturday morning.
With the U.S. secretaries of energy and commerce in China this week, much of the attention focused on the standoff over emissions reductions or small breakthroughs in clean-tech cooperation.
But yesterday, Commerce Secretary Gary Locke said something amazing—U.S. consumers should pay for part of Chinese greenhouse-gas emissions. From Reuters:
“It’s important that those who consume the products being made all around the world to the benefit of America — and it’s our own consumption activity that’s causing the emission of greenhouse gases, then quite frankly Americans need to pay for that,” Commerce Secretary Gary Locke told the American Chamber of Commerce in Shanghai.
The idea that rich-country consumers should pick up the tab for some of China’s industrial emissions has been gaining currency lately—but not from within the Obama administration. The argument is that many of China’s factories churn out cheap stuff for the West, not for domestic consumption, so those consumers are actually responsible for the emissions. China, of course, loves the idea.
This could just be another area for trade tensions with China over the environment. The House climate bill includes a provision for mandatory “carbon tariffs” on dirty imports from countries such as China, which might be illegal under international trade law and which have riled up Beijing. President Obama and Senate leaders have frowned on hardline trade measures.
But Secretary Locke’s statement could open up a new can of worms—right when China’s actions on energy and the environment are proving so crucial to mustering support among wavering senators for the administration’s big cap-and-trade bill.
UPDATE: The Commerce Department sent this clarification late Friday:
“Secretary Locke has been very clear on emphasizing the importance of fair trade as a part of the United States’ relationship with China. He believes U.S. companies should not be disadvantaged by Chinese imports not bound by responsible policies to reduce carbon emissions. China and the US must work together to ensure a level playing field and reduce our carbon footprints. The Secretary’s trip to China demonstrated his commitment to fair trade and his belief that both the United States and China can benefit from shared investments and cooperation in clean energy that will lead to commercial and environmental benefits for both countries.”
Economists’ Pro-Fed Petition Discredits Its Signers
By Robert Higgs
A passel of bigwig economists has signed a petition urging Congress and the executive branch “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” In support of this defense of the Fed against those now challenging the secrecy of its undertakings and, in some cases, its very existence, these economists offer three arguments.
First, “central bank independence has been shown to be essential for controlling inflation.” A little difficulty for this claim, however, resides in the undeniable fact that for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power. If this post-1913 experience is what these economists consider “controlling inflation,” I would not want to see what happens to a currency’s purchasing power when inflation is not controlled! It seems that the petitioning economists have placed the performance bar absurdly low in their judgment of the Fed’s containment of inflation. Evidently, barring a Weimar-Germany-style hyperinflation, they suppose that everything is hunky-dory on the monetary front.
Second, say our esteemed economists, “lender of last resort decisions should not be politicized.” This statement only goes to prove that, as everybody knew already, economists make terrible comedians: the statement is obviously a joke, but it’s just not funny. “Not be politicized,” they say? What is one to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges, and so forth to the big boys on Wall Street? Are we supposed to believe that all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, were selected and accommodated on purely disinterested grounds? Or may we be permitted to imagine that institutions such as Goldman Sachs and Morgan Stanley just might—might, I said—enjoy a tad more political coziness with the government in general and the Fed in particular than, say, you and I and another three hundred million Americans do?
Finally, the leading economists declare: “The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.” But legitimacy, it would seem, properly lies in the eyes of the legitimizer, not in the tables, charts, and econometric exercises of top-tier academic economists. The Fed’s appointment process, as I see it, suggests more the co-conspiratorial character of the ruling elites than anything we might grace with the adjective “democratic.” And if frequent congressional testimony by Fed officials, notorious for its mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” then we are left to wonder what led Senator Byron Dorgan to complain on the floor of the Senate on February 3: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?” Indeed, the lack of Fed transparency and accountability has been so outrageous during the past year that it has prompted nearly three hundred members of the House of Representatives to support Congressman Ron Paul’s bill to audit the Fed.
All in all, the economists’ petition reflects the astonishing political naïvité and historical myopia that now characterize the top echelon of the mainstream economics profession. (I prefer this interpretation to the more conspiratorial one that they are fronting for the Fed in order to reap some form of personal gain. Academic economists are more often obtuse than evil.) Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—can produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.
It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.
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