Confusion

David Leonhardt says if you're confused by the current financial market problems you're not alone:

I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup.

Evidently, the very obscurity of the nature of the problem is part of the problem; there's little understanding of exactly how much bad debt is out there or who's on the hook for it.

Comments

You'd think that the least Robert Rubin could have done in return for his 8-figure sinecure at Citigroup would have been to stay abreast of the latest developments in finance and provide some adult supervision there -- especially because he seems to have had no formal duties or direct reports beyond two assistants. Are there any institutional shareholders wondering what they've been paying Rubin for all these years?

Posted by Fred | March 19, 2008 11:26 AM

Fred, they're paying him for connections and customer relations; they're paying other people to keep track of financial innovations (that said, hell, even i had heard of liquidity puts, so you would really think that he would know).

Posted by howard | March 19, 2008 11:31 AM

Likudity Putz? Isn't that Jonah Goldberg's Hebrew name?

Posted by James Gary | March 19, 2008 11:38 AM

I'm not confused. Taxpayers bail out the most idiotic of the companies, the executives don't give back their obscene salaries, Joe Employee and Joe Taxpayer get screwed, we're all going to die.

Posted by How Insane Is John McCain? | March 19, 2008 11:42 AM

This is marginally off-topic, but important nonetheless...

As far as I can see, nearly all the looming global financial disaster is due to American domestic securities and "innovations" (with a slight exception in the "Americanized" U.K. market). For example, the big overseas bank that's gotten into a lot of trouble, UBS, has gotten into that trouble because it owns a lot of (maybe) worthless U.S. paper.

Over the few decades, one of the biggest growing American exports has been the export of "management expertise" such as in business, corporate management, finance, and advertising. Lots of successful Americans who aren't remotely connected with the current financial-sector meltdown earn their living by providing this sort of "expertise".

Exactly how many people overseas will be willing to pay for such "expertise" in the future? How many foreigners will continue applying to American B-Schools, or even law schools?

How many people in the world were eager to copy the "Soviet Model of Development" in 1988 as opposed to 1968...

Posted by RKU | March 19, 2008 11:46 AM

Howard,

Rubin's also a Citigroup director. A director needs to understand a company's business if he's going to fulfill his responsibility to represent the interests of shareholders effectively. Rubin is a former Goldman Sachs chief and former Treasury Secretary. There's no excuse for him being as out to lunch as he has been over the last few years.

Posted by Fred | March 19, 2008 11:46 AM

for Howard above:
You've hit upon our secret for destroying Japan as an effective global economic competitor. As Japan's economic power was rising in the 1980s, the USA was able to lure Japanese companies into sending many of their most promising young-middle employees to the US to attend business school. These employees rreturn to Japan, moved up in the corporate ranks, and Bingo! 15 years of economic stagnation.

More generally, given that nobody seems to know anything about the level/amount of debt that is actually bad, or to have much data about mortgage failures beyond the most superficial and aggregate, wouldn't it be reasonable to
1. stop asserting that this is a solvency crisis / liquidty crisis, since no one knows
2. stop proposing solutions until there's actually some fairly complete information and data on the nature of the problem

Posted by Gene | March 19, 2008 12:06 PM

Sorry, my response was for RKU, not Howard.

Posted by gene | March 19, 2008 12:13 PM

Fred, don't get me wrong: i'd love to see directors really held accountable for management failures on their watch, but now you're not talking about rubin, you're talking about boards of directors in general.

there's also a fair question as to how much, specifically, a board should know: their job is oversight, strategy, and picking the right chair and ceo, not to know the details. where strategy ends and details begin is a discussion for another time.

but you asked what citigroup was paying rubin for: they weren't paying him to know liquidity puts, even if he should have. they were paying him to be a rainmaker....

Posted by howard | March 19, 2008 12:37 PM

Liquidity puts were an astonishingly stupid idea.

a) If you can't sell something without agreeing to buy it back, you probably shouldn't be selling it in the first place.

b) If you agree to buy something back when market for it dries up (most likely because the assets themselves are deteriorating), then you haven't transferred any risk.

The vast majority of Citi's write-downs were on assets they thought they had sold, not on direct subprime holdings. Stupid, stupid, stupid.

Posted by Ginger Yellow | March 19, 2008 2:29 PM

The chutzpah/b.s. award has to got to David Brooks and other conservative financial commentators who've been saying regulators were "asleep at the wheel" when one of the main tenets of conservative ideology is that regulations are bad and inefficient and they defund "burdensome" regulations every chance they get. Let the free market work its magic!!!

Posted by Peter K. | March 19, 2008 3:06 PM

The problem for the Fed is that it only has $800 billion to put to work trying to fix this - and it's already dumped well over $200 billion of it.

Folks, that ain't gonna be enough by all accounts. We're looking at probably $3 trillion worth of write-offs here when all the collateral credit damage is counted.

And the "last resort" is just to print more money - which means a "stagflation" - a recession with inflation.

The extent of the problem isn't clear yet because the problem is systemic. And that means big trouble. Numerous analysts are saying the entire banking system could come down in this one.

This is going to have a global impact, not just in the US.

And in the middle of this, next year, if McCain wins, we're gonna have a war in Iran that will spike oil prices to $200/barrel or more, and China will in retaliation dump the US dollar - which is already on the verge of crashing.

Folks, the US economy is on the verge of EVAPORATING.

Posted by Richard Steven Hack | March 19, 2008 9:24 PM