Matt Richman

Bill Clinton and the Financial Crisis of 2008

Tue, 22 May 2012 21:12:00 -0400

The financial crisis of 2008 cost millions of people their jobs, their savings, and their homes. Conventional wisdom has it that the collapse was the result of President George W. Bush’s economic policies. But there’s one problem with that idea: it’s not true. Bush was a sitting duck. Two of President Bill Clinton’s decisions were the primary causes of the global economic crisis of 2008.

The Bank Holding Company Act

The Bank Holding Company Act was passed in 1956 under President Dwight Eisenhower. It prohibited a bank holding company — a company that owns a bank, either directly or indirectly — headquartered in one state from owning a bank in another state. Effectively, this prevented too big to fail banks from forming.

The parts of the Bank Holding Company Act that prevented too big to fail banks from spawning were repealed with the signing of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The act wasn’t passed over Clinton’s veto. To the contrary, Clinton himself expressed strong support for the bill, saying he was “honored” to sign it.

Clinton’s repeal of the Bank Holding Company Act created “banks of mammoth size”, according to Albert E. DePrince Jr., a professor of economics and finance at Middle Tennessee State University. And Simon Johnson, a professor of global economics and entrepreneurship at the Massachusetts Institute of Technology’s Sloan School of Management, told Congress that “perceptions that certain financial institutions were ‘too big to fail’ played a role in encouraging reckless risk-taking in the run-up to the financial crisis” because there was an implicit guarantee by the federal government that they wouldn’t be allowed to fail since they were so important to the stability of the global financial system.

In other words, some of the banks were so big that, if just one of them were to have failed, it would have taken the rest of the financial system down with it. The too big to fail banks understood they operated with implicit government backing, so they took risks they otherwise wouldn’t have.

In Inside Job, Frank Partnoy, a professor of Law and Finance at the University of California, San Diego, explained the thought process that helped cause the crisis: “You’re gonna make an extra $2 million a year — or $10 million a year — for putting your financial institution at risk. Someone else pays the bill [if things go downhill]; you don’t pay the bill. Would you make that bet? Most people who worked on Wall Street said, sure, I’d make that bet.”

This type of thinking existed solely because of Clinton’s repeal of the Bank Holding Company Act. If he hadn’t repealed it, banks would not have gotten to be too big to fail in the first place. And they wouldn’t have operated with implicit federal backing, so they wouldn’t have taken on anywhere near as much risk. Banks knowing that they were too big to fail played a huge role in causing the crisis, and Clinton was directly responsible for the formation of too big to fail banks.

Derivatives

But it was Clinton’s decision to not regulate derivatives that played the largest role of any policy in causing the financial crisis. Derivatives are contracts two companies enter into wherein, if something happens, company A owes company B money. You can think of them as possible debt.

By the end of June of 2000, outstanding derivative contracts — again, possible debts — were worth a total of $94 trillion, while the GDP of the world was $31.6 trillion. And for some reason, even though derivatives were worth nearly three times the size of the world’s economy in 2000, Bill Clinton decided to not regulate them in any way, shape, or form.

In fact, in 1998, when Brooksley Born, then the Chairwoman of the Commodity Futures Trading Commission, issued a proposal to regulate derivatives, she soon got a phone call from Larry Summers, then the Deputy Secretary of the Treasury, telling her, in a “bullying” tone of voice, to stop pushing for the regulation of derivatives. And soon after that, Alan Greenspan, then the Chairman of the Federal Reserve, Robert Rubin, then the Secretary of the Treasury, and Arthur Levitt, then the Chairman of the SEC, put out a joint press release that condemned Born and recommended legislation to prevent derivatives from ever being regulated. So not only did Bill Clinton decide to not regulate them, but the people at the highest levels of his administration actively fought against their regulation.

Needless to say, the Commodity Futures Modernization Act of 2000, which ensured that nobody, unless a new law be enacted, could regulate derivatives, was not passed over Clinton’s veto. From the very beginning, the bill had the support of some of the highest and most influential members of the Clinton administration.

Eight years later, AIG, then the world’s largest insurance company, collapsed because of this Clinton decision. During the run-up to the crisis, the company entered into more than $500 billion of derivative contracts, more than four times as much as AIG itself was worth. Following the bankruptcy of Lehman Brothers, the company was on the hook for $13 billion. And because derivatives were not regulated, AIG had not been forced to set aside any money in the run-up to the crisis — none whatsoever — in case something horrible was to happen. Thus AIG failed.

Again, this was a direct result of Bill Clinton’s decision to not regulate derivatives. Sensible policy — regulating derivatives, possible debts worth almost three times the size of the world’s economy when the decision to not regulate them was made — would have prevented the crisis. But Clinton decided not to, causing a crisis that destroyed millions of peoples’ jobs, savings, and homes. Despite that, almost 70 percent of Americans think highly of him.

And that makes no sense.

The War Between Data and Storytelling

Thu, 10 May 2012 16:57:37 -0400

The War Between Data and Storytelling:

Kevin Drum makes a great point at Mother Jones:

But for some reason, what really struck me today was the way that both Brooks and Krugman play to type. Krugman the liberal is all about the data: he hauls out charts, models, “signatures,” and international comparisons. Brooks, by contrast, barely admits that data even bears on this question. He’s all about telling a plausible story: the chickens of globalization, failing education, high federal debt, and political sclerosis have finally come home to roost, so what do you expect? Of course the economy is in tatters.

You see this play out on TV too. Conservatives tell a story, and Krugman then explains impatiently that the data simply doesn’t back up what they’re saying. Every week it plays out the same way. It’s like a kabuki show.

How to End This Depression

Fri, 04 May 2012 09:55:56 -0400

How to End This Depression:

Paul Krugman:

For the fact is that we have both the knowledge and the tools to get out of this depression. Indeed, by applying time-honored economic principles whose validity has only been reinforced by recent events, we could be back to more or less full employment very fast, probably in less than two years. All that is blocking recovery is a lack of intellectual clarity and political will.

Read this, too.

iPhone and iPad ASP Both Down

Tue, 24 Apr 2012 17:17:00 -0400

Apple just reported earnings for its first calendar quarter of 2012. With revenue and profit up 58 percent and 94 percent, respectively, it was one of Apple’s best quarters ever.

Despite an incredible quarter, the average selling price of both an iPhone and an iPad were down. For an iPhone, it was $647.10; for an iPad it was $558.57. This information is shown in the graph below:

The $399 iPad 2 must be selling very well for it to make iPad ASP drop more than 8 percent in one quarter.

Why Anyone Should Care that Bill O’Reilly Calls Me A Communist

Tue, 24 Apr 2012 11:03:24 -0400

Why Anyone Should Care that Bill O’Reilly Calls Me A Communist:

Robert Reich, Bill Clinton’s Secretary of Labor, was called a communist on Fox News a few days ago. This is his response. It couldn’t be better.

Obama Targets Speculators in Latest Gambit of Oil-Price Politics

Tue, 17 Apr 2012 17:10:49 -0400

Obama Targets Speculators in Latest Gambit of Oil-Price Politics:

Oh, CNN. This has nothing to do with politics.

Because oil is traded on a world market, more U.S. drilling doesn’t reduce the price of oil in the U.S. On the contrary, 80 percent of the U.S. oil futures market is speculation. And Rex Tillerson, the CEO of ExxonMobil, told Congress that speculation jacks up the price of oil by up to 40 percent.

As I said, targeting oil speculators has nothing to do with politics. It’s solely about lowering gas prices.

Enron, Anyone?

Fri, 13 Apr 2012 16:43:56 -0400

Enron, Anyone?:

Matt Taibbi on the JOBS Act:

For instance, if this bill is supposedly about increasing access to capital for small businesses, why do we also need to repeal the conflict-of-interest ban on bank analysts talking up startup firms in an attempt to gain their investment banking business? Wasn’t it just ten minutes ago that Eliot Spitzer had to drag the entire financial services industry into court for pumping up worthless stocks in order to get their business?

People have apparently forgotten just how crooked the IPO market was during the tech boom. Banks and underwriters were openly, nakedly, offering to sell their research in exchange for investment banking business. Piper Jaffray, for instance, made a pitch to be the investment banker for a medical startup called TheraSense Inc. by including in its pitch materials mock copies of mock research reports – reports that included a “strong buy” recommendation. The “mock” report contained drooling descriptions of the hypothetical sales of TheraSense, calling the company’s fictional sales “nothing short of breathtaking.”

Wells Fargo’s Prison Cash Cow

Thu, 12 Apr 2012 18:10:22 -0400

Wells Fargo’s Prison Cash Cow:

Charles Davis:

As Wells Fargo has grown over the years, using its bailout funds to gobble up rival Wachovia and expand to the East Coast, so has the U.S. prison population. By 2008, one in 100 American adults were either in jail or in prison – and one in nine black men between the ages of 20 and 34, many simply for non-violent offenses, justice not so much blind as bigoted. Overall, more than 2.3 million people are currently behind bars, up 50 percent in the last 15 years, the land of the free now accounting for a full quarter of the world’s prisoners.

These developments are not unrelated.

ARM Holdings to Drop 40 Percent in 2012, Shares Overvalued to Growth Prospects

Wed, 11 Apr 2012 15:54:03 -0400

ARM Holdings to Drop 40 Percent in 2012, Shares Overvalued to Growth Prospects:

Tim Plaehn at Seeking Alpha:

When viewing the three-year stock chart of ARM Holdings, the share price looks like the top of a mesa for the last year-and-a-half. The price will fall off the table in 2012, dropping to below $20 for the ADRs [American Depository Receipts]. Based on long-term potential, ARM Holdings would be an attractive buy somewhere below $15. Currently this is a dangerous stock for investors and an attractive opportunity for short sellers.

I don’t buy it. ARM has a huge period of growth ahead of it. ARM-based chips — on which the company collects royalties — power the computing devices of the future, and no other company has the ability to break ARM’s stronghold on the market. This isn’t even a competition. The game is already over.

One-Third of U.S. High School Students Now Own an iPhone

Tue, 03 Apr 2012 20:13:50 -0400

One-Third of U.S. High School Students Now Own an iPhone:

Not true at all.

Blackberry ASP Takes a Nosedive

Thu, 29 Mar 2012 17:15:00 -0400

RIM just reported earnings for its first calendar quarter of 2012. 68 percent of its $4.2 billion in revenue came from the sale of hardware, which includes both Blackberrys and Playbooks. That means RIM brought in $2.85 billion from hardware sales.

Assuming that each Playbook sells for, on average, $250, then RIM took in $2.73 billion from Blackberry sales. Divide that number by the 11.1 million Blackberrys RIM sold and you get an average selling price of $246.04. That compares to $285.45 in the previous quarter, and $278.79 in the quarter before that one.

Though the average selling price of a Blackberry has been very volatile over the last year, an almost $40 drop in ASP in one quarter is unprecedented. My data goes back to 2007, and I couldn’t find anything like it. ASP dropped by more than 13 percent in 90 days.

The chart below illustrates just how bad it’s gotten:

How much longer will RIM survive?

RIM Begins Laying off High-Level Staff

Thu, 29 Mar 2012 16:33:00 -0400

RIM Begins Laying off High-Level Staff:

Iain Marlow at The Globe and Mail:

Ahead of RIM reporting fourth-quarter and year-end financial results on Thursday after markets close, a source with knowledge of Mr. Heins’ actions said RIM executives at the senior vice-president and vice-president levels had been told they no longer had jobs on Thursday.

Wow.

IDC Predicts Apple Will Sell 318 Million iOS Devices in 2016

Thu, 29 Mar 2012 15:06:45 -0400

IDC Predicts Apple Will Sell 318 Million iOS Devices in 2016:

Apple will easily hit that number in 2013.

Harvard Schmarvard

Mon, 26 Mar 2012 16:25:00 -0400

Harvard Schmarvard:

The main question for me is whether or not Apple will succeed in building a walled garden for everything new that breaks out of the old 1080p mold.

The main question for me is why this blog post is titled “Why the new iPad screen is the future of display [sic]” when the content of the post has nothing to do with its title.

Why You Should Buy Stock in ARM

Wed, 21 Mar 2012 15:43:46 -0400

Why You Should Buy Stock in ARM:

Tony Daltorio at The Motley Fool:

Telecom equipment company Ericsson ADRrecently forecast that there would be roughly 50 billion connected devices by 2020, up from just 5 billion in 2010. And ARM chips are likely to be in most of them.

Apple Could be Top Mobile Processor Maker by End of 2012

Tue, 20 Mar 2012 21:17:00 -0400

Apple Could be Top Mobile Processor Maker by End of 2012:

Apple started making mobile processors a little more than two years ago.

Apple Announces Plans to Initiate Dividend and Share Repurchase Program

Mon, 19 Mar 2012 17:06:00 -0400

Apple Announces Plans to Initiate Dividend and Share Repurchase Program:

Apple:

“Combining dividends, share repurchases, and cash used to net-share-settle vesting RSUs, we anticipate utilizing approximately $45 billion of domestic cash in the first three years of our programs,” said Peter Oppenheimer, Apple’s CFO. “We are extremely confident in our future and see tremendous opportunities ahead.”

That may seem like a lot, but it’s not. Apple made $13 billion last quarter, and will probably make at least $10 billion this quarter. For a company that currently pulls in more than $10 billion per quarter and whose profits double annually, $45 billion over three years is nothing. Apple may well be making that much every quarter three years from now.

Apple Stock Seen Hitting $718 on Sales of 60M iPads, 134M iPhones in 2012

Fri, 16 Mar 2012 10:03:00 -0400

Apple Stock Seen Hitting $718 on Sales of 60M iPads, 134M iPhones in 2012:

From the department of too-high-to-do-basic-math:

As for the iPhone, [Gene] Munster’s models call for Apple to sell 134 million units this year, up from the 93.1 million the company sold in 2011.

Apple has sold more iPhones every year than in every previous year combined, yet Munster thinks Apple won’t sell even 50 percent more iPhones in 2012 than it did in 2011.

Did he even look at the numbers before making this prediction?

Is Now the Time to Take Profits in Apple?

Wed, 14 Mar 2012 20:08:54 -0400

Is Now the Time to Take Profits in Apple?:

No.

Five Tablets That Go Where the New iPad Doesn’t

Tue, 13 Mar 2012 20:53:00 -0400

Five Tablets That Go Where the New iPad Doesn’t:

First of all, the fifth tablet mentioned is the iPad 2. And if you exclude the iPad 2, I’d be willing to bet a lot of money — a lot of freakin’ money —that the other four tablets combined won’t sell even half as well all year as the new iPad does the quarter after it’s launched.

Please pass me some of what this guy is smoking.