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Assorted links
1. Doug Elmendorf (another good pick) to head the CBO
2. What really happened to AIG?
3. Top ten food trends of 2008, via Craig Newmark with the meta-list here.
4. Does it matter if judges know some economics?
5. Overall, was 2008 a year of *good* news?
Posted by Tyler Cowen on December 31, 2008 at 10:14 AM in Web/Tech | Permalink
Comments
we retort, you deride.
Posted by: babar at Dec 31, 2008 11:05:41 AM
If a bunch of computer scientists or MBAs were empaneled to decide some subtle issue of constitutional law, it would be absurd. Yet having judges rule on software patents or business method patents is considered perfectly normal. There are any number of technological and economic issues where judges are completely out of their depth, to say nothing of juries deliberately selected through peremptory challenges to be as uninformed as possible, turning the judicial system into a casino. Some day the world will treat the US legal system as damage and route around it.
Posted by: at Dec 31, 2008 12:11:43 PM
Right, because judges know so much more about economics and technology everywhere else. *snicker*
Posted by: Joshua Holmes at Dec 31, 2008 12:27:56 PM
Re 2/AIG
Is this statement by Kling essentially saying that Mark to Market was part of the problem?
"If that is the story, then it is possible that the actual losses on the AIG credit default swap portfolio could turn out to be zero. Instead, what did them in was the collateral posting that was required because their credit rating was downgraded. The collateral demands multiplied as their credit default swaps went from being deep out of the money to being slightly out of the money.
If that is the story, then the stern-sheriff metaphor, that I first introduced here and later included in my Congressional testimony, looks really apt. Instead of putting money into AIG, the Treasury and the Fed should have told Goldman Sachs to stop grabbing for collateral. Make Goldman wait for actual losses to occur before they make claims against AIG."
Posted by: Andrew at Dec 31, 2008 12:47:35 PM
It's not mark to market but collateral required on contracts regardless of their value. AIG had to post collateral because their own credit rating declined (and the deposits are exponential) even if the risks they underwrote were still quite good (or conversely quite bad). This part of the collateral calculation is independant of the value of the contract. Their models didn't include that risk so when their credit rating declined they suddenly needed to post a huge amount of collateral (triggering more credit rating declines and additional collateral requirements...).
Posted by: nelsonal at Dec 31, 2008 12:56:56 PM
Ah, thanks.
It sounds very analogous to m2m to me. Anyway, another funny example of the regs that were supposed to keep companies alive may actually have killed them.
Not that the companies were going great, but the regs didn't steer them out of trouble, it just made sure everyone got thumped once we realized everyone was in trouble.
Posted by: Andrew at Dec 31, 2008 1:39:35 PM
> Their models didn't include that risk so when their credit rating declined they suddenly needed to post a huge amount of collateral (triggering more credit rating declines and additional collateral requirements...).
1) There's no real way to "model" this in any case. 2) That's the mechanism in the AIG case, but:
it stands to reason that any highly leveraged entity is going to have huge trouble when its credit suffers, whether there are triggers mandated by contract or whether the market gangs up on you and shorts your stock or shorts/denies you credit. Leveraged entities are ultimately dependent on their ability to convince their creditors (or credit markets by proxy) of their ability to pay back what they owe. Once that is in doubt, and everyone knows it is in doubt, creditors will want get out quickly so as not to be the last one in line to get paid.
Posted by: babar at Dec 31, 2008 5:39:22 PM
Joshua Holmes,
Actually, in many places in the world, judges don't get to make those decisions, technocrats and government officials do. The notion of a single judge getting to decide the major policy issue of whether to break up the old AT&T monopoly, for instance, would be quite amazing and inconceivable in most countries of the world, including most Western countries. Should the US let a judge (or a jury of ordinary citizens) decide whether to raise or lower the Fed funds target rate too?
Letting technocrats decide is not always a better system, but in practice it is often no worse, and far quicker and cheaper. In China in particular, the authorities avoid the problems that plague the US system (armies of smart unproductive people making a living discovering and exploiting loopholes and technicalities, the law of unintended consequences, the enormous financial burden of litigation, decision-making by people who have absolutely no domain expertise or stake in the consequences of their decisions, flights of constitutional fancy) by turning a blind eye to rulebreaking, either ratifying and extending it after the fact if it has been a success, or charging those involved with corruption and shooting them if it has not.
Posted by: at Dec 31, 2008 6:12:16 PM
I have an extensive post on AIG's credit derivatives. http://capitalvandalism.blogspot.com/2008/12/aig-issues-press-release-no-headlines.html
The bottom line is that they had already marked down about 1/2 of them with modest cash losses. They then bought the CDO's they insured at full price, and sold them to a SIV with mostly government money for 1/2 face value.
There will be no price discovery on this stuff, since it can't be sold. But it will amortize and will either pay off at the 50% level or not.
It isn't a mystery what happened, but it takes a fair amount of digging through the published financials.
A lot of people dont' agree, or don't like anything about the situation to the point that facts are irrelevant. They believe that when AIG/Treasury is talking they are lying and when they are quiet they are stealing.
The only thing about the SIV is that it provides finality on this for AIG. They are out the $30 billion but not the entire nominal value of the CDO's.
They also have a much more simple problem which was with mortgage backed securities in their insurance entities. Once again, they did a SIV, took a big haircut, and were able to move on.
Posted by: Capital Vandalism at Dec 31, 2008 9:04:20 PM
In European countries technocrats make the ruking but judges have full review power and they do use it without restraint
Posted by: k at Jan 3, 2009 10:36:55 PM
