STARR V BOARD OF GOVERNORS

...or the AIG case if you prefer.

As I mentioned, I somehow thought that Starr, the investment group headed by Hank Greenberg might win this thing because what actions were taken were, in no place that I could find, authorized by the Federal reserve Act and the testimony presented in the trial was damning to the case of the respondent.  I was therefore hardly surprised as apparently the rest of the world when Hank won.

It is a fascinating situation: the core holding that the Federal Reserve engaged in a clearly unconstitutional act but concluded that there would be no damages for if they hadn't broken the law things would have been worse for the shareholders who wound up with 20% of the corporation with the government getting a 80% "fee" for doing what they shouldn't have done.  Or to put it in language that I have used before, the "Vig" was 80% which in the end amounted to $22 billion dollars that went somewhere (anybody ever ask where?) and a goodly number of bonuses and legal fees were paid out. There have to be guys Up The River and in a dozen of Federal run "vacation facilities" all over the country shaking their heads and asking themselves, "Why the hell couldn't I have thought of that ," rather than dropping a few large on some schlep who couldn't pay his bookie.  But no matter.

Before we get into what this all means we might review what occurred to put it all in a bit of perspective.

Hank Greenberg, the long-time head of AIG, Is Starr, which has the largest holding of AIG stock.  Mr. Greenberg is about 150 years old and has absolutely no need of any recovery that he might have received if damages had been granted, but after a long and distinguished career he does have a great need for a very important recovery...his reputation.  For you see, Mr. Greenberg was AIG; the identification was interchangeable and rightly so as he ruled it like a fiefdom.  For reasons best left explained by a hand far more refined and longer-lasting than mine, he ran afoul of the office of the Insurance Commissioner and the office of Attorney General of the State of New York--mind you, I didn't say the Attorney General; I said the office of the same as that office has continued the charge right up to this point.  Beginning the proceedings was no other than Client ("love potion) #9, as odious a creature who ever disgraced the halls of Albany and that covers a lot of ground.  The State of New York terrified the Board of AIG with threats of criminal prosecutions forcing them to remove Mr. Greenberg fro the Chairmanship.  The successor, was, shall we say, not always crisp when the gun sounded and proved a disaster.  Thank you State of New York.  It was under this watch that the fun started.

I think this background is somewhat important because it establishes somewhat of an understanding as to why events proceeded as they did.  There were no clean hands anywhere along this parade.  And there was a lot of risk out there involving such names as DeutscheBank, Societe General and of course, the omni-present Goldman Sachs, who despite protestations to the contrary that exist until today, were damn near toes up in 2008/2009 but somehow managed to get out of this thing better than anyone else.  I always wonder how they continue to pull that off..........a $billion plus in less-than-fully-disclosed bridge loans to Russia in '97 and they sell a bond issue...multiple billions...ah, why bother.  In any case, the decision was made and as much as anything else, I'm sure Mr. Greenberg brought this case to get the entire story out there.  I'm not sure the great unwashed knows it all but at this stage those who should know do and in that respect he has won and won big.  I hope he doesn't appeal the lack of a monetary award.  Let the dead be buried.

Anyway, in the immediate aftermath starts the speculation of what does this all mean should we face another financial crisis and what will be the role of out institutions?  The name Dodd/Frank has been brought in to the discussion.  Will this paralyze institutions from acting?  Well, yes and no.  The easy one is that Dodd/Frank is indecipherable to any sane person so let's just put it aside and leave the worry of "living wills" and "orderly bankruptcies and receiverships" to the likes of Crazy Lizzy and her mob.  Then let's ask ourselves, "Selves, do we really think that those guys back when the decision was made to bail-out  AIG in the manner which they did were not aware that they were at least on very thin legal ice if not smack in the middle of the pond?"  Hell, read the testimony if you're not sure.  Sometimes they made dumb decisions but dumb they were not.  And sometimes the best advice comes from Rocky Balboa; "Ya gotta do whatcha gotta do."  Been there, done that...

What happens next time around?  In the NY Times today, Andrew Sorkin suggested that the the ruling in Starr might well result in inaction due to fear.  He may be right but for the wrong reasons.  If we had a Federal Reserve--especially in New York which has historically been the center for all things international and capital markets related, staffed by the exceptional and selfless men and women professionals with whom I grew up, there would be no concern.  Alas, we do not.  Nor is there the independent and professional membership in Washington.  Nor is there the independent voice of the regional Feds to be heard.  The system is a sad representation of what it once was, politicized and self-aggrandizing.  These are careerists, not public servants.  "How will this affect me," is always the first question these days.  And yet, I still believe that when the specter reappears--as it most certainly will--there will be enough will in that room where the decision is made  to do what's gotta be done.  But I'm not that positive.

As a final thought, here's a conundrum in all of this.  If what occurred was in fact a clear and gross unconstitutional act--which it was--where is the shock and concern?  Remarkably, the shock seems to be at the decision itself although in an even a cursory reading of the applicable statutes the decision should have been clear-cut.  Not a sound.  It is almost as though everyone is thinking the same thing: God, let this go away, but not for the right reason which is to allow the leeway for our institutions and their leaders to do their jobs under the most difficult of circumstances for the greater good but because there are those who would look for any excuse not to make any decision at all and would simply prefer that there be no discussion such as this we are having.  Sometimes there is no law, no playbook, no history and very little glory in deciding that which has to be decided and done.  Fewer and fewer understand that.  Mores the pity.

A WASTE OF TIME

I was well into today's piece when the news broke.  Hank Greenberg won, AIG won and the Government lost.  No money was awarded but this I think is a big, big decision that changes the ground rules altogether for things like Dodd/Frank and Federal intervention and oversight...I think.  I've been on the horn for a while now trying to figure this out for it will be the subject of tomorrow's effort with perhaps a few snippets not generally known in this entire proceeding.  Anyway, congratulations to old Hank and his lawyer David Boise who has won another big won (he's lost a few as well).  Boise and I shared the same barber.  Liked his hair quite long at the sides.  David has very big ears.  He didn't like to see them.

DUSTOFF 26

During the early days of Vietnam there was a certain HUEY pilot whose call sign was DUSTOFF 26. He flew Med Evac and as there weren't a lot of troops committed at the time, his call sign was often heard whenever an evacuation was needed. Over the course of the war, the call sign stuck; every med evac flight became know as a DUSTOFF. They saved a lot of guys at considerable cost to themselves so I thought from here on out, our Fed Chairman will no longer be known as Helicopter Ben but in honor of those brave guys we shall call him DUSTOFF.

DUSTOFF showed up on the Hill today in front of Barney and the boys. Yak Yak, Blah Blah. Things better but not great no change coming. Really a non-event. Hardly any talk about the governing legislation for the financial industry that is swirling about both the Senate and the House. I thought for sure one of those geniuses was going to ask him about derivatives in light of Arthur,Arthur's article of the other day (thank you Paul, for pointing out that Arthur, Arthur is conflicted seven ways to Sunday) but it never happened. Thank heavens for small favors

Anyway, to continue from our conclusion on Monday, there remains still a good deal of confusion as to the role derivatives played in the crisis primarily, I think, because the term is being used in connection with what happened with AIG with the focus being almost entirely on AIG. I suppose one could say that the instruments created by AIG which are the focus of all the conversation are technically derivatives but in fact they are really somewhat esoteric insurance policies not unlike, in their purpose, forms of guarantees that have been used by financiers since some Medici back in 14-something wrote a guarantee or a special purpose letter of credit in favor of Da Vinci completing some work for a buddy in Firenze. They have been around for years. Of course the quants on the street had to get fancy and support the creation of the same with all sorts of formulae to explain the risk profile allowing other quants to price the damn things so that a market could be made in them forgetting, of course, that none of this brain power was worth a crap if nobody wanted to buy them which, in the terms of the market is stated there being no bid. But, before these things got sliced and diced it was a series of fairly straightforward transactions between risk-takers and hedgers of risk with a finite number involved. No method of transparency would have improved upon the situation. Please keep in mind that underneath all of the underwriting done by AIG there should have been an asset: in other words if one were to call on the guarantee that which was the object of the guarantee would have to be delivered--sort of a "no tickee, no washee," as we used to say in the good old days before PC. But AIG, MBIA and the other geniuses who wrote this stuff were so sure of their math that they allowed their contracts to include the ability of the purchasers to require additional collateral if either the perceived credit of the underlying risk or its guarantor deteriorated. In short, they screwed themselves. And now, Houston, we had a problem. Irrespective of ownership of the underlying assets the guarantors were now required to pay up to the counterparties without an off-setting return of the guaranteed assets. With all respect to Arthur, Arthur, the problem was not transparency but plain ol' stupidity on the part of the underwriters. Hubris kills you every time in the end. That's not to say exchanges aren't a good idea; it's not to say more transparency is bad but it is to say that if you are arrogant and stupid and get into a business you know little about while suffering from all of the above you will probably get killed despite being as transparent as you can be. I'm all for improvement but let's first understand what happened and why before we go racing out to solve the unsolvable. Bold statement: This was a failure of market understanding and of management. We will never know but if the board of AIG had not been cowed by the dreadful Spitzer and fired Hank Greenberg this would not have happened. Government intrusion into business for the purpose of personal political gain. This is the result.

SCOOPED THEM AGAIN

You might take a look at the leading article in the Wall Street Journal today. What it does is to explore in greater detail the point I made yesterday that the real shocker in yesterday's testimony was the revelation that it was the threat of the downgrade of AIG by the rating agencies was the catalyst for the final decision on the payout on the banks.

Loyal reader Mark C. has called me a jerk for my comments of yesterday but I would simply reply that the views of the insurance commissioner of the State of New York, Eric Dinallo seems to be in direct opposition to those of Messrs Paulson/Geithner as to the state of affairs at AIG during the time in question. Mark also claims I'm part of the Geithner/Paulson cabal and are being fed what amounts to lies.

Sorry Marc, but I haven't spoken to Mr. Geithner in a hell of a long time and I have never met Mr. Paulson. As for whose correct as to the state of affairs, my bet would be with the Treasury and the New York Fed a opposed to the political hacks in the insurance commissioner's office. Remember, it was that office that oversaw the firing of Mr. Greenberg on trumped up charges brought by Eliot Spitzer and the hiring of the jerk that replaced him. Mark should also keep in mind that fear is all-controlling. The nicities of corporate attachments don't mean a thing in an environment then-faced. I don't like what happened any more than Marc does but I don't think these guys had any good options. Nice to know I'm loved, wanted and read. Thanks Marc.

...AND ON THE SEVENTH DAY

God rested. But he got bored and he said to himself, "Ah, let me fool around with this creation stuff and make a few things that re a bit different. And so he made aardvarks, and marsupials and all sorts of weird, one-of-a-kind animals. He also fooled around with humans, making a sub-species that looked like regular humans but were considerably less intelligent--stupid really--just for amusement. Today, we call this sub-species Congressmen.

They were on full display today as the Townes committee interviewed The Suit. By the by, have you noticed that Mr. Townes looks exactly like Howdy Doody? Honest to God I was looking for Buffalo Bob Smith to pop up behind this guy. SURPRISE! Look, I pull this string and his mouth moves! Intellectually, Mr. Townes is one of the stars so it is no surprise that The Suit put on a terrific show. When he's on, he's on and give him a bunch of straight men like this and brother, he was ON!

The subject was the AIG situation and it became immediately apparent that having received 250,000 subpoenaed not one congressperson had read more than a page. My son, who works within the Beltway hit it right on the head:

"Dad, all these people do is raise money for reelection. They have 20+ staffers and do what the staffers tell them to do." He should know; he was a staffer.

As you know I think the NY Fed could have done better with the AIG situation. I think that the inability of the Fed to guarantee the AIG obligations as it would have been illegal for them to do so should have led them to a market based effort involving making a market in the CDOs central to the issue. I do not know whether this was considered but having failed to adopt that approach the Fed really had little leverage against the banks. What did come out today that was not generally well known was that the rating agencies informed the Fed right in the middle of the mess that they were about to downgrade AIG which, had it occurred, would have created an event of default not only as to the CDOs but as to the insurance business as well. AIG was not the only insurance company involved in this business. The reaction of the market would have been catastrophic. I don't like Mr. Geithner; I don't think he should have been appointed to his present position but then he got it right. Had any of these so-called law makers had been asked to make a decision such as that the people in New York were asked to make I suspect they would have soiled themselves. They are disgraceful and they are liars as well. Practically every one of them accused the Fed of hiding the fact that the banks were being paid 100 cents on the dollar. Crap. I cursory reading of the Times and the Journal would show that the full payout had been reported for days. EVERYONE knew except these clowns.

The Suit also said something that should have sent chills down the spine of every one of these fools but of course they missed it. Speaking to the point as to who was watching the store Geithner said that the insurance commissioners in probably 30 states had no idea in what businesses the companies they oversaw were involved. No reaction. None. Zip. Nada. And this is the financial oversight committee of the Congress of the United States. We're doomed.

MOMMA SAID...

Woke up this morning to discover that something happened to last night's posting: 1/5 got posted. No luck retrieving the rest (which of course was brilliant). The dog was sick as, well, a dog and the wife went to panic stations. Nurse Charlie was trying to get her to move and eat and pee and drink (the dog not the wife) while the latter was on the phone to the vet. Appointment in the afternoon by which time the dog was fine but the marital relationship had suffered. Cost: $120. Being able to tell the wife I told you so: priceless. Of course I'm now sharing the dog's house and missed the blog. See you tomorrow.

Be sure to watch the Hill testimony on AIG tomorrow. Rep Issa is on a which hunt, the jerk.

... there'd be days like this my Momma said...

GOOD CHRISTIAN DISCOURSE...

...which we will all see tomorrow in the annual leading article in the WSJ repeating another journal written in 1620 just before the sailing of the Mayflower. It is a wonderful piece that I used to read to my sons every year. Imagine, sailing across the ocean to God knows where on a leaky bucket not much larger than the one owned by Bernie Madoff for a dream to be free. Every year, I love the Journal for printing that article.

Last week, however, I hated it. My Friday's posting was to be a follow-up on TheSuit's testimony or to be precise, one little nugget of the same. Of course, the buggers at Dow Jones had to get to it before me but I came to the conclusion that I should cover it BECAUSE IT WAS MY IDEA IN THE FIRST PLACE (they print earlier than I do) and it is important.

What everyone overlooked except for the Journal and me was The Suit rather blandly stating that Credit Default Swaps (CDSs) in the case of AIG really didn't matter. As the Journal said, "Hello?" Well if credit default swaps didn't matter in the great scheme of things, what the hell is all the excitement about these awful things called derivatives? With all of this regulatory nonsense going on might we be looking at the wrong tree in the forest.

As I have said repeatedly, a CDS is nothing more than an insurance product written on an existing risk generally or most often expressed (the risk) as a bond, a loan or some form of documented liability of a borrower. Now once the original CDS is written the purchaser can market it for oodles of purposes but cut through all the nonsense and there is still the original writer of the risk; in our case AIG. Again, as I have said a half-dozen times, if all of a sudden there was a bid out there from the biggest pile of money in the world (the Fed) on the CDS-covered asset, the credit worthiness of the AIG structured finance unit is no longer an issue. There would still be hell to pay among secondary holders but hey, nothing that can't be settled among gentlemen. But that did't happen. Originally we all thought that it couldn't happen but The Suit has indicated that that portion of AIG's business was manageable. So, one might ask one's self, "Self, where was the problem?"

Before we start rearranging the entire regulatory landscape it seems to me that it might be a good idea to use AIG as a test case in an attempt to discover where it is that the problems truly lie. If we were to do this I have a suspicion that the trail might lead not to those areas already investigated in nauseating detail--with little to show for it I might add--but back to the undiscovered country such as the core businesses of AIG--the straight-up insurance business-- overseen one might point out not by the Federal reserve but by the Insurance Commissioner of the State of New York and the role played from the git-go in this mess by the State's AG, the odious Mr. Cuomo. Nothing may come of it but would we not have a fuller understanding of what really happened? Ponder this over the Turkey and football this weekend. Let us all give thanks for what we have and also for those brave souls it set forth 400 years ago and made all of this happen.

See you next week.

20-20 HINDSIGHT

By now, some of you might have the impression that I don't always agree with The Suit. I can see how that might have happened but every once in a while even I can commiserate with the guy. He was up on the Hill yesterday and got his bum handed to him over the AIG bailout of last year. Seems as though, following the report of some inspector general there are so many of those) some of the Hill types seem to have gotten the impression that maybe the latest anti-Christ, Goldman Sachs and friends, got too good a deal when the got paid 100 cents on the dollar by the Fed for their AIG exposure. Ok, they did, s*** happens and The Suit was running the New York Fed while auditioning for his present job so that means he has to carry the can for this one. Unfortunately, this could be a real problem for Our Hero because both sides of the aisle hate the AIG situation, the GOP believes that his little income tax "misunderstanding" should have disqualified him for the job and most everybody is coming to the belief that there is more than a bit of arrogant little snot around this guy's personality. He got big-time testy yesterday during the questioning knowing full well he's not the flavor of the week.

Now I am on record in stating that this was perhaps not the NY Fed's best moment. Before bailing everybody and his brother out of that mess I thought they might have tried a bit of market action like putting a bid behind the paper on which AIG had issued CDSs and then getting inside quickly to avoid the shorts who were falling off buildings but they didn't. And I suspect that this is the reason.

I'm sure you also remember me having stated that a lot of the history of past crises was rewritten last year. Many had seen this before going back to the first real systemic risk of our business lifetimes in 1982 with the Latin American debt crisis. At that point in time most of the major banks in the U.S. were technically broke but the crisis was resolved with a lot of hard work over time. It was a bank crisis, and while terrible in its effect, not everything ground to a halt. Last year, there were two major differences. The first I would call the financial equivalent of Moore's Law and the second the complete grinding to a halt of all mechanisms of credit extension world wide. There was no credit available to anyone as all depositors and liability holders ran to save havens and because of the technological advances that had occurred since 1982 it happened in the blink of an eye. Unlike 1982 when months were spent to resolve the situation a good friend who was involved in the events of last year told me that, "the time we had was measured by a clock's second hand." In this scenario, I am prepared to give The Suit a pass: it perhaps wasn't pretty but what had to be done was done. Frankly, if he were to be forced out, I would shed no tears (except that I shudder to think of the replacement) but if it occurred over this, it would be a bum rap.

While all of this is going on it's going to be difficult for the Treasury to get up to speed on the two bills relating to governance pushed by Messrs. Dodd and Frank. They had best do so as these two monstrosities have in them the capacity to do more damage to our financial system that 10 AIGs. On top of that, The Leader's trip has proven to be a train wreck and there is some serious backing and filling that needs to get done as every single approach on the international front was kaboshed. Enough there to keep a boy out of trouble for some time.

...AND TO CONTINUE

We talked last week about how it was that everything went so badly wrong and promised to discuss what might be done to prevent such a mess from occurring again. In regard to CDSs, the solution (if there is one) might be fairly simple and one without a good deal of disagreement. What set the dire events in motion was the total lack of knowledge on the part of the participants as to the volume of the market and the exposure of the individual participants, not only in aggregate but to one another. There were intelligent and in some cases accurate guesses to be sure, but real time information was woefully lacking due to the fact that there was no central body through which transactions were cleared; the business was conducted as they say in the trade in an over-the-counter market...companies delt directly with other companies directly on their own books with no one keeping score.

CDSs were considered by some (many?) to be just another derivative--a creation whose value is based on something else. Derivatives have been around for some time starting with simple interest rate swaps--you pay me a steam of money on a fixed rate basis and I pay you a stream...based on the same principal amount...on a floating rate basis and VOILA, we have created a fixed rate obligation out of a floating rate one thereby transforming the underlying debt into one or the other. Cleaver and useful, no? Now there is a chance that on side may get it wrong and pay a floating rate during a period of rapidly rising interest rate but the loss suffered will never be the principal amount; it will only be the difference in the cost of money during the period that the transaction is outstanding which in most cases will be only a small percentage of the nominal amount. Not so with Credit Default Swaps. That, my friends, can be a zero sum game for if the underlying obligor defaults, the loss can be 100% for the poor slob who wrote the contract.

AIG and others wrote A LOT of contracts about which no bod ee knew nuttin'. Think of the different result if all of there transactions would have been through a central clearing house. Three things would have been accomplished:

1. Counterparties would have been revealed
2. Outstanding exposures would have been revealed
3. There would have been a hell of a lot fewer contracts written due to the now-revealed exposure which would have tempered the zeal for dealing with companies that were perceived as becoming overexposed

I suspect there will shortly be a clearinghouse for transactions of this type, as there should be, for there is very little disagreement among regulators as to its need.

As to other forms of derivative transactions, there seems to be apparent agreement among regulators around the world that some additional forms of control are required. However, there is yet to be agreement as to who the regulators are to be and how the regulation is to be accomplished. If the institutions involved are banks, the control is fairly simple: bank regulators have long controlled the businesses in which banks participate through reserve requirements; take this risk and you have a reserve requirement of x; do that, x + y; do THAT, (x + y)2. But if they are not banks like AIG? Ah ha, a subject for another day as well as a discussion on rating agencies.

EASY ISN'T IT?

Thinking like Mike, that is. The answer to yesterday's question is of course greed. You had a number of firms doing a nice, easy business, making a bit here and a bit there when some really smart guy said, "Hey, why can't we apply this business model to other area, guaranteeing debt for banks, corporates, ANYBODY!" Of course the anybodies of the world didn't have any real taxing power and no one gave much of a thought to the fact that if their credits were not rated triple A there must be a reason. And it was off to the races.

Now guaranteeing the primary obligations of a corporate's direct obligations is one thing; there is historical evidence of performance, usually sound projections, products to be analyzed and assets to be valued. Remember, it is not the issuer that is rated but the paper that is issued meaning that multiple bonds of a single issuer may be rated at different grades depending upon structure, security, maturity and a host of other different criteria. The funds obtained are used in the growth of the business. That of course is the case if there is a "real" business involved. But what happens if the issuer has been created just to issue debt, relying on the income stream from debt instruments purchased by the same debt of the newly created issuer? Whoa, you say, this gets dicy. Yep, sure does. Nobody can figure out these so-called special purpose corporations ("SPCs") so the easiest thing to do is to get a company, such as AIG, which has a Triple-A rating to guarantee the debt issued by the SPC and we all go home happy. This is a highly complex exercise made particularly so by the nature of the debt purchased to support the issuance that I've made to sound easy; trust me it's not. What has to be determined is the odds against non-performance of these myriad slices of debt and for that you need a whole bunch of really smart math guys, known in the trade as "quants" to tell you what the odds are. They create models for each circumstance and based upon these models a risk profile is created and the price at which one is prepared to guarantee is agreed. The mathematics is, by definition, always correct; the assumptions, however, may be very, very wrong. But it was easy money; what good is a Triple-A rating if you can't use it? The problem of course was that much of the SPC issuance that was credit enhanced was related to real estate debt, and when folks began to realize that the massive creation of such debt had led to ridiculous liquidity which led to mother of all bubbles is when the excrement hit the revolving device.

Spreads on all credit enhanced products widened, even those on "normal" debt and especially those relating to emerging market debt. You see, any holder of a debt instrument could ask for it to be enhanced; indeed you didn't have to be a holder at all, you could purely speculate in the instruments themselves. No one knew who had guaranteed whom and for that matter the exposure of an institution on one risk could not be determined with any certainty. It was the wild west with the market creating and pricing credit risk that may or may not have existed with the result predictable to many and forecast by some. In a nutshell what happened was that holders of these guarantees began to suspect that certain guarantors were overexposed and, as was their right, demanded collateral--read CASH-- to be put up in support of the guarantee. To use AIG again as an example, they ran out of cash or near cash and the game ended. By this time no one knew what the ultimate exposure was as the problem was not simple AIG but the solvency of many of their clients in relation to AIG exposure and other risk in the case of an AIG bankruptcy. The risk became systemic. There is a first law in the credit business: You never make as much in interest or fees as you lose in principal. Could this have been prevented? Perhaps. Next week, we will try to explore how and what might be done to protect the future. You see, we are off to The Large Apple for the wedding of an old friend's daughter tomorrow. For those of you in the business I know I've made this so plain vanilla as to be ridiculous but there are folks out there who really don't know what happened. My apologies if some have been bored to tears. We'll liven in up next week. Back on Monday.

CAN I MARRY YOU?

It was quite a show from the get-go. Our Hero appeared before The Congressional Oversight Panel ("COP") up on the Hill today armed with pages of testimony on various bail-outs and fix-it projects. He was rolling right along in bureaucratic other-speak when the Chairperson of the gathering, Elizabeth Warren of the Harvard Law School told him to shut up. Well, she wasn't that blunt but she did tell him to finish up because she was a lot more interested in his answers to the questions that were about to be posed Twice. If available, Ms. Warren I will marry you. There's a couple of problems but we can work them out. If only more things in D.C. were run like this. Of course, Our Hero proceeded to give few satisfactory answers to anything and in fact did admit that he had no idea how to extract the government from its position in AIG much to the feigned surprise of all on the panel. One could actually say that Mr. Geithner had a very shaky grasp of all he discussed leading to the assumption that he may not really be Da Man after all. Methinks we might have an order-taker on our hands and not the executive chef of the repast. Unfortunately, the head cook, whomsoever that may be, appears to be unable to boil water at this stage. Tough cooking the meal when you haven't a clue as to the menu. Anyway, let us continue with our Fed-spec.

Since suggested in this space some weeks ago, there seems to be a full consensus emerging that Mr Bernanke has indeed gone over to the dark side and taken the entire staff (at least the D.C. staff) into the collaboratory mode with this administration as opposed to the normal role of independence in a manner not heretofore seen in recent memory. "Why the concern," one might ask and a valid question it is. To begin, there are now no checks on what is clearly the most radically expansionist fiscal plan in the history of the world. Secondly, while one can argue that there may be an intellectual communion between the Fed and the Administration, one has to be concerned that in the duality of the Fed's mandate--monetary stability and economic stability--the latter has completely overwhelmed the former with adoption of the view that we can fix any inflationary problems that emerge at a later date with the tools available. Thirdly, one must also question how great is the concern on Mr. Bernake's part that the reported oft-mentioned promises to Mr Summers that he would become the next Fed Chair and his desire to prevent that from happening has influenced his actions.

So, what one may argue, if this is the right approach. Perhaps, but in the process if any of the foregoing is correct--or if all are correct--the confidence and trust in the institution as an independent contributor and, indeed arbiter, of economic policy in this country may be irretrievably lost; which, IMHO is an enormous and frightening event.

Another consideration. The Leader is constantly speaking of how this country must constantly seek international cooperation in all matters. Fair enough, but there will be many instances in the near and distant future, as in the past, where it will become necessary for the major central banks in the world to cooperate with one another. It is quite one thing for a central bank to cooperate with another of its ilk; it is quite another thing to cooperate with the arm of a political regime whose interests may not be the same or which may be in conflict with one's home country, or in the case of the EU, a group of countries. The history of the Bank of England up until very recent times is a prime example of such a relationship. This is a difficult thing for those who stand as casual observers to this interplay to understand, but it is very real and very important. Already, one can notice the friction that has been on clear display over the past few months (not just with the present administration) between the Federal Reserve and it's European counterparts even with Mr. Bernake at the helm. I shutter to think of Mr. Summers, whose personality is, shall we say, off-putting at times, being viewed in any light other than as
a politician.

Finally, Monetary policy is not, in my experience as an observer, something that often turns on a dime especially if the people involved in setting such policy may be forced to admit that hey were wrong at a previous moment. As I said at least a month ago, we have seen this movie before. It was called The Seventies. It was ugly. The remake is shaping up to be a real horror. Keep the kiddies at home if this doesn't get stopped.


In this posting on Central Banks there must unfortunately be A Last Post. Eddie George, former Governor of the Bank of England died the other day. I didn't know Mr. George well at all but the times we met I liked him. It was under his watch that the Old Lady became independent of the Treasury but also lost a good deal of its regulatory oversight to the newly created FSA. Mr. George opposed that. He was correct to do so. Flights of Angels Mr. George.