Treasury and the Blogs

On Monday the Treasury Department (various officials, including Geithner, in shifts) had an informal meeting with eight prominent finance or economics bloggers. I’ve only read the accounts by Tyler Cowen, Steve Waldman, and Yves Smith; Waldman names all of them and links to other accounts. This is Smith’s sum-up:

“[T]hese guys are very smooth, very smart, and seemed quite sincere, which made it difficult to discern how much they really did believe and how much of what they said they had to say because they need to defend official policy and maintain confidence. Let’s face it, they get prodded and roughed up by big dogs with some frequency. There was nothing we asked that would be new. They’ve covered this ground with other people of more consequence and therefore have answers ready. We are a pretty unimportant audience (yes, they did bother making time for us, but let us not kid ourselves on how far down the food chain bloggers are) and we cannot argue from a position of advantaged information, so it was inevitable that we would not get beyond standard responses.”

I give Treasury big points for acknowledging us bloggers and inviting some pretty severe critics, such as Smith. I separately give them points for being good at their jobs. They understand that public opinion matters; they understand that bloggers have some influence on public opinion, if not that much; they understand that it’s a little harder to criticize someone after you’ve met him and he’s given you free cookies (“The free cookies were good and fresh, with a warm, fluid chocolate interior.” – Cowen; note also that when the bank CEOs went to Washington in March all they got was water, no cookies.); and even if they couldn’t possibly have expected to change anybody’s mind, they understand that it’s better to talk to your critics than to avoid them. Waldman talks about some of the techniques used to make the attendees feel like they were being treated as special guests.

On a substantive point, Waldman said this:

“A Treasury official pointed out that eliminating ‘too big to fail’ doesn’t solve the problem, since institutions can be systemically important because of their interconnections and roles along a wide variety of dimensions. I responded that ‘too-big-to-fail is too stupid a criterion,’ but pointed out that it would be possible to progressively tax several of the various markers of criticality so that it becomes uneconomic for an institution to remain indispensable.”

I think this whole “interconnectedness” theme is a clever rhetorical trick — a way of defusing the “too big to fail” argument by making a correct but ultimately minor point. I agree that if you simply cap balance sheet assets, that will not be enough. Technically speaking, a derivatives dealer can have ZERO balance sheet assets yet have an unlimited amount of open derivatives positions. If my memory of When Genius Failed is correct, LTCM just before its collapse had about $130 billion in assets and $1.4 trillion in open derivatives positions (that’s market value, not notional [wrong, see below]) on top of $4 billion in capital.

But who said that “big” in “too big to fail” had to mean balance sheet assets? When I say “big,” the concept I am referring to is the overall shadow the institution casts over the financial system and the amount of collateral damage it would cause were it to fail. That damage can take various forms: debt that becomes worthless, derivatives positions that can’t be closed, hedge fund collateral that can’t be pulled back, etc. So call it “too interconnected to fail” or “too systemically important to fail” if you want, but you haven’t made the problem go away. The only thing you’ve done is pointed out that it can be tricky to measure overall importance, but none of us ever denied that to begin with.

Update: Sorry, I checked, and that $1.4 trillion was notional value, not market value.

By James Kwak

48 thoughts on “Treasury and the Blogs

  1. Free cookies. Wow. And you say the bank CEOs only got water? Water and how many billions of dollars?

  2. Oh yeah the Fed wouldn’t want worthless debt. It’s too interconnected because the Fed has too much hedged on these large financial institutions, and it most certainly a way fro them to buffer high taxes, and keep profits out of the hands of those who it deems not allowed to have it. I agree it is too tied into the American government, and the Fed has made the mistake of deregulating these companies to the point that they have become the U.S. only viable asset in the world economy. Oh wait, I forgot there’s the precious iPod too.

  3. JK:

    “The only thing you’ve done is pointed out that it can be tricky to measure overall importance, but none of us ever denied that to begin with.”

    That has become the core issue – measurement. As Fox-Penner summarized, you can’t regulate what you can’t measure. Someone has got to derive a measure that cannot be gamed. Some have cogently made the argument that a better option might be real stress tests by sophisticated (even quasi-private) regulators. That may be. But I do wonder whether we can create a better metric of Capital At Risk…

    Among other things, we could create a set of Capital At Risk measures of varying conservativeness (like measures of the money supply). The current Capital At Risk would be the most generous. The next level could mandate fatter tail distributions (perhaps even use Chebychev). And more stringent from there (imposing correlation adjustments across all assets, for example)… The key is making the metrics easy to update (so they can be updated in real time), and creating a wide enough set of metrics that capture different things so that no financial institution can game ALL of them simultaneously. This would help give regulators a better toolset.

    But something like this needs to be done…

  4. I very much like your idea of measuring “too big to fail” by the size of “the shadow cast on the financial system.” What you are getting at is the counterparty footprint. Now shadows and footprints are far too poetic to translate into regulatory jargon, but a good step in the right direction might be to require reporting gross (not net) counterparty exposures as a way of gaining a rough handle on that shadow. And, by the by, focusing on absolute, rather than hedged, exposures is absolutely critical.

  5. Let’s give the Treasury 1/2 credit on this one. I’d even give them 3/4 credit if they had invited James Kwak and Mike Konczal. But Waldman and Yves Smith have somewhat similar views so…… 1/2 credit. Let’s put it this way, it shows better communication skills than asking female professors at Harvard why they aren’t as good at math as men are.

  6. StatsGuy’s point is the key issue. The continue use of the term “TBTF” is grossly misleading and a distraction to fixing the root problem in the financial system.

    Worse, the term TBTF gives ammo to those that doesn’t want to fix the financial system.

    The problem is systemic risk. To solve it, start with measuring it. Stop inventing new terms that side track the focus. Lehman isn’t really that big. AIG isn’t a bank.

  7. But by the LTCM standard, the really “too big to fail” institution was the subprime market itself. Who was going to pull the plug on subprime mortgages or rein in Fannie and Freddie in 2002-03? And of course, isn’t Social Security the ultimate TBTF insolvent institution?

  8. Focusing on quantification of risk seems, well, risky. Should the government be regulating the exponents of power laws used?
    My question is: did we see flawed ratings of CDOs, CMBS etc. because of moral corruption and complacency at the ratings agencies, or because risk is by its very nature hard to model?

  9. Careful! The most dangerous thing to be in a world of idiots is a man with a sound idea. Don’t expect the Treasury to be sending cookies.

  10. The meeting strikes me as a clever way to mute and deflect the stronger critics of Treasury’s Goldman-oriented policies. Just curious, how many of the STO’s were Goldman alumni?

  11. The Fed didn’t deregulate the banks… congress did. And don’t leave Paulson & Geitner out, nor Larry Summers, as long as we are casting spears about.

  12. Agree. Obtusely insisting on using the term “TBTF” to describe the issue is counter-productive and dumb.

  13. Many bloggers (for example Andrew Sullivan) criticize MSM. But I doubt if a journalist from the New York Times or PBS Newshour would have accepted the terms/constraints of not being able to quote treasury officials directly. SOME of the bloggers seem to accept that invitation to speak to Treasury officials like they were sprinkled with fairy dust from the heavens. I’m not criticizing them for accepting the invitation, but they might have shown a little more backbone based on bloggers easy criticism of mainstream media.

  14. Ted – this has been a common reaction, but i still don’t understand it. The Treasury set the terms – could i have told them to suck it and not gone? of course i could have. would that have shown backbone? i guess so. but what would it have accomplished?

  15. Yeah that’s what even I was thinking. You could go ahead and do it, and it might have been great for publicity too, but what good would come out of it?

  16. The Administration gives official, anonymous press briefings all the time. If you’d like to know who these guys talked to, file a FOIA request. (I did exactly that earlier this year to find out who “Senior Administration Official” was at one of these events — the reporters all knew who they were talking to. (It turned out to have been Steve Rattner.) Note, however, that according to the reponse I received, the Treasury has no written policy of any kind governing its personnel at these events.

  17. Dear Mr. Kwak,

    Just a fan here, a musician, not an economist, asking how any of us “civilians” can determine, reasonably, the “overall shadow” a given institution would cast? Isn’t public awareness the ultimate check upon irresponsible market behavior? If we have a vast array of small but overleveraged and interconnected institutions, how are we to monitor them?

    This is meant as a genuine question, not a rhetorical attack. I ask on the behalf of the well-meaning simpletons of the world.

  18. If you allow “to big to fail” institutions to actually fail, then they take that likelihood into account. You don’t see anymore LTCMs anymore do you?

  19. Very true… a comprehensive review seems to imply that the dreaded and mysterious Fed may have made some missteps, but the true dereliction of duty is in those old mainstays, the Legislative and Executive branches…

  20. Well, I could put this in vulgar terms. Let’s just say you’d still have some self-respect in the morning. It would have been much more impressive YES if you had refused and shown you’re not so easily jerked around by your puppy chain. If you had simply stated you had been invited but refused BECAUSE of restraints on identifying WHO made quotes readers would have come away much more impressed and feeling very positive about the potential of blogs.

  21. James Call,
    The old fashioned way—look at the balance sheets. Some people would say a lot of that risk is carried off balance sheets. I think balance sheets are still a pretty good way. If you see the guy with very well-combed hair and the guy with very messy hair (like me) which do you think has the clean apartment??

    As far as being safe as a “simpleton” depositor?—get yourself a Credit Union account. Make sure they belong to National Credit Union Administration (NCUA) and have FDIC insurance.

    Switching accounts is a SMALL hassle, but you be SO GLAD you did it after you see the difference. Also don’t forget you can often get Credit Union membership through relatives.

  22. The “shadow” is so massive and the risk so severe that NO bank is even remotely safe.

    Look, you have a $600,000,000,000,000.00 (600 trillion) shadow banking system globally stuffed with WMD (Derivatives.)

    $200,000,000,000,000.00 (200 trillion) of that is here at home in a handful of large banks in the US.

    As for any claims that the banks are solvent – that is a farce. The FASB changed the rules, we now have mark to fantasy accounting. Besides, when, no if, the derivatives blow up no bank will be safe. refer to table 3. JPMC 87 trillion, BOA 39 trillion, Citi 33 trillion. Those are the 3 biggest the rest (another 22 add up to 200 trillion.

    Remember, these are global banks now. This earthquake will be felt globally.

    The bottom line is some really smart people have absolutely NO common sense.

  23. that’s laughable, Ted. But if you want, you can pretend that I didn’t go – since i’m guessing you clearly didn’t read my two lengthy, insightful recaps, which certainly showed that neither I, nor any of the other bloggers were “jerked around by our puppy chains.”

  24. The above comment is still awaiting moderation. Apparently, one is not permitted to use the i word, even when not identifying a particular i. The censor is hereby authorized to substitute his own word for the i word in the above comment, which none of you will get to read unless the censor allows it.

  25. It keeps things civil. If you go over to zerohedge you’ll know why James Kwak is a stickler on this. It gets really filthy in the comments over there. Sure, it’s a little annoying, but this is better. James lets things fly, you just have to wait until he clears it.

  26. Kid Dynamite,
    It seems you’re very satisfied with the job you did. I’m sure next time Treasury officials want to have their side expressed without tying their individual names to it, they won’t hesitate to give you a holler.

  27. ted – I think given the constraints, I did a pretty good job of expressing what was said in the meeting.

    I’d love to hear how you think I could have done better. honestly.

    but remember, 1) “say exactly who said what” isn’t an option – that would have resulted in ZERO access, instead of the access I got. and 2) “refuse to go next time” isn’t an option – it doesn’t prove that i have bigger balls than the Treasury – it only prevents me from being able to get any access at all.

    rhetorical question – if you were a journalist, and The President offered you an off the record or partially off the record interview – would you avoid it on principal, and tell him so, to prove how much of a man you were and how much journalistic integrity you have?

  28. Kid Dynamite,
    In answer to your question, NO I would never agree to do an off the record interview, unless I was promised (beforehand) some important piece of information/news which would OTHERWISE be unavailable to the public. I am afraid that Treasury officials’ opinions/views doesn’t qualify.

    My question to you sir is….. what new information/news did you give your blog readers from this terrific “access”???

  29. ok Ted, fair points. the information i was able to give my readers was the Treasury’s attempt to validate their actions, and their reactions to the questions they were asked.

    many people have found that to be very valuable, and it was not available to the public – the public never gets the chance to sit down and question senior treasury officials. we did. did they give us the secret to world finance? of course not – that doesn’t mean there weren’t valuable insights to be gained.

  30. Sounds like the “senior fed guys” wanted the bloggers to digest a bit of spin with those cookies…

    TARP worked – if you were GS, or JPMChase, or even BoA, which probably should be out of business right now.

    But if you look at the consumer side of things – in the regular economy and the consumer side of the bank books, it’s a blood bath. So we can rejoice that GS and the others on Wall Street are having one of their best years yet – billions in bonuses heading out of the economy and into the bank accounts of the bankers – but TARP did not shore up “the economy” at all.

    (And isn’t all that toxic debt still out there, clogging up the pipes?)

    In reading Waldman’s blog post on this, sounds like Obama’s peeps have taken a page out of the Bushies’ playbook – tell ’em what you want them to believe, truth be damned.

  31. “(And isn’t all that toxic debt still out there, clogging up the pipes?)”

    200 trillion of the 600 trillion in derivatives are in the US most at the banks you mention.

    +1 to your post!

  32. James, with all due respect, I would disagree with the idea that they were trying to make us feel special.

    I have a busy schedule, and it cost me five hours, gas, $17 for parking to attend the event. A few cups of tea and one cookie does not do it for me. Getting to talk with them was good — they’ve thought through a number of things, but are optimists. Where they are pessimists, they can’t talk about it — they can’t shake confidence.

    What they get out of it? A number of critical blog posts from me. If this is worth it for them, I doubt it.

  33. Isn’t Larry Summers supposed to be a guy who likes to throw ideas around?? Could it be a type of brainstorming they’re doing?? I think this has some hints of Summers’ M.O. in it.

    In my opinion you’re being slightly naive Mr. Merkel. When you look at the total list of bloggers who were originally asked to attend you might notice the majority by far were lefties politically.

    You say you got nothing out of it. Then why go when you must promise anonymity of comments to attend??

  34. I can’t say who was there. I can say that Mr. Summers was not there. I am no fan of Mr. Summers.

    The total list of bloggers was not lefties. Let them characterize themselves, but the bloggers who were there were mainly libertarians or their fellow travelers.

    We did not know in advance that it would only be bloggers. We expected a broader press-type gathering. The Treasury announcement to us was vague.

    Why did I promise anonymity? I thought it was the rules of the game for press on “deep background.” I keep my word. I also thought that maybe I would learn some things not in the press. The only thing I learned that I did not know was that they worry about the same things I do but can’t talk about them, because it would lead to a crisis.

    Does that help? I had my own questions about going, but I went because I felt I could reveal more, despite their restrictions. See my lengthy commentary at my blog.

  35. Bloggers met with various Treasury officials… the very officials that need to be removed

    And now this ridiculous discussion of what TBTF means…

    So much progress, things are getting so much better every day…

  36. With the Treasury, they’re not made up, but rather altered (rather severely) 100% of the time!!

  37. The problem at Treasury is how do we find out who there is willing to pull the “flush lever” before the toilet bowl of lies floods the world. It really doesn’t matter what term we use to describe the great lie(s) we are all being fed by those we elected to represent us. But, like the new “reregulatory” efforts, if we can wrap the garbage in a very complex bag, we can go on claiming it’s gold bullion. What we are getting from everywhere in the government these days has all the tansparency of lead shielding. I just want to let the economy run on real terms — the Paulson, Geithner, Bernanke, Summers quartet has so warped the foundations of the economy, the slightest earthquake is likely to cause their entire mythical structure sink into the quicksand of their obfuscations.

  38. I didn’t mean Summers had attended. I mean the fruition of the idea might have been with Summers.

    The question is not who attended, the question is who was offered/allowed access. If you look at that blog list and see mostly Libertarians, you and I were educated quite differently about politics.

    Finally I am not going to reward bloggers who promise anonymity to government officials with no promise of new information/news in return by making hits on their websites. I saw Waldman’s review, that’s enough.

    IF the 8 of you bloggers had gotten ONE piece of fresh information/news that had not been revealed before it might be worth it. From my view the bloggers who attended seem to be saying “Come to my site, I have 4 posts on what a farce this was where we learned nothing new”—-NO THANK YOU

  39. James Kwak made an excellent point about “interconnectedness”. Sounds like a word that would have been used many times in George Orwell’s 1984 doesn’t it??? Maybe next time the bloggers agree to go without quoting Treasury officials individually, they’ll hold a small shiny pendant on a chain in front and swing it back and forth repeating rhythmically “interconnectedness….. interconnectedness….. interconnectedness….. interconnectedness….. interconnectedness….. “

  40. wow, this is certainly more deja vu than i warrant for this life.

    the problem is not that we need to see where they are coming from. obviously they need to see and experience our reality.

    to that end i would gladly invite both summers and blankfein both to dinner. they can eat what the rest of us do.

  41. Oh, by the way, that $600,000,000,000,000.00 (600trillion) figure was conservative. Please see ZeroHedges 1,600 trillion dollar upside down (Madoff) Pyramid.

    I haven’t dug into how the Treasury formed it’s table of 600trillion but I know the BEA and BLS cook GDP, CPI, and Unemployment like Enron baked it’s book. Example, you own a home – they add what you would but don’t pay in rent to GDP. They back out Gas and food from Inflation – no consumer can do that.

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