either way

those moments pass
like bullets through chest
legs detach
vains spread
eyes swoon dangerous
an ocean of drugs
a swelling ego
cut down a dumb world
there is no choice
just the pull
the cut of that voice
kindred souls
every hour after
just leaky containers
every single part
ephemeral remainders
every single time
every moment
to ever be timeless
to ever hold my heart
murderered either way

The President's Financial Regulatory Proposal

About two days a week throughout the fall last year there would be a black suburban parked on the street I walk from the red line to work. On these days I’d walk a little slower to see Treasury Secretary Paulson walk from a giant office building into the waiting car. I saw him the day after Lehman failed, the only thing fresh looking about him was his suit- and the day after the inauguration, with 8 foot high metal cage-like fences spilled down Penn Avenue as far as the eye could see, tons of trash blowing surreally in the freezing wind- this time looking more relaxed in his basketball shorts and unbuttoned shirt. It was pretty surreal to wake up and read the Journal or Times chronicling the latest historical market failure and then cross paths with its leading financial firefighter. A year later I’m afraid the sense of urgency of those fall months is fast diminishing. A tragedy of the last year is a terrible thing to waste. From the ashes of a failed regulatory system, that cost 3 million people their jobs and nearly as many their homes, and $7 trillion in wealth, is the promise to build a sleeker, more common-sense, more responsive regulatory system. And here many people will stop me simply with the semantics, “regulation” is a terrible word- so call it what you will. The basic concept though holds true in essentially every aspect of life. We don’t get on a jet plane and just hope the proper safety checks have been done and the pilot isn’t drunk, we “regulate” it, we don’t trust a stranger to deliver our new baby at a whim, we “regulate” it. So those who would notionally dismiss regulation as a bad thing should maybe stop flying or stop having kids.

The legal zeitgeist of these times is the President’s Financial Regulatory Reform proposal (http://www.financialstability.gov/docs/regs/FinalReport_web.pdf). In a little over two short months this entire white paper has been translated to authorizing language and sent to the Hill, where as usual it was met with a startling sense of complacency and criticism without much constructive feedback. If this can pass in some form by 2010 my hypothesis of complacency is proved wrong. If not, a similar asset bubble and burst cycle and all of the capital contraction, income decline and job loss and capital loss (repeat) is not just possible but probable. The impetus to correct a clearly insufficient financial regulatory regime – one that forced the government to choose between catastrophic failure and chaos or injecting huge of amounts of taxpayer dollars- is otherwise lost. Critics can say what they like about the choices made last year, but with Bear, Lehman, AIG, WaMu- those were the options. Here are some core tenets of the President’s regulatory agenda.

1) Capital ratios. A working group is currently drafting the details due out in a couple months. When the banks’ experienced severe asset valuation shocks they were forced to liquidate and perpetuate the cycle. With better loan loss provisioning this cycle could have been prevented. In practical terms, probably means going from tangible common equity ratios of 4% to 8%.

2) Resolution authority. The FDIC can repossess and either break up or auction off bankrupt depository institutions. There is no similar authority for non-depositories or holding companies that own depositories. The Fed can loan money to anyone or anything so long as it is last resort and there is sufficient collateral. If there isn’t, then there is no way to protect innocent bystanders from the consequences of large bank failure. The President’s proposal would permit the Fed with Treasury consent, to seize and efficiently break up large failing firms.

3) Preventing regulatory arbitrage. Under current law, thrift holding companies (banks with a higher share of mortgages created to facilitate liquidity in the housing market), industrial loan companies (like GMAC or GE Capital), credit card banks, trust companies and grandfathered non-bank banks are exempt from most supervisory requirements, simply because they were left out of the BHC Act. Firms (like Bear, Lehman, AIG, WaMu) simply owned one of these entities and could simultaneously avoid regulation while having access to the Fed’s lending if they got into trouble. This gave the public no risk management function but sole responsibility should they encounter significant risk. Heads I win, tails you lose. Financial companies should not be able to escape consolidated supervision by technicality.

4) Systemic risk regulation. The proposal creates a new category of Tier 1 financial companies which will be overseen by the Federal Reserve. These would be firms whose failure threatened the entire market, and would be subject to coordinated and robust prudential regulation. Bank holding companies consist of so many separate entities that they can have a dozen separate regulators each and allows firms to arbitrage the differences to their advantage.

5) Consumer financial protection. A central catalyst of the ’08 recession was the set of uninformed and stupid decisions consumers made- like buying houses they couldn’t ever afford or signing up for credit cards with early payback penalties. The proposal observes correctly that finance and economics have a distinct world view, one that does not manage the cultural, psychological and communications challenges inherent in good consumer advocacy. There are bright lines that could be established, but it takes clear authority and communication otherwise it will likely die in the interagency process as it has for decades. Without clear responsibility for common-sense consumer protection there can be no accountability. There are consumer protections for seatbelts, kids toys and lawnmowers, it's time for some for households' budgets too.

6) Office of National Insurance Regulator. The U.S. regulates the insurance industry essentially entirely at the State level and is the only G-20 country without a national framework for insurance oversight. There is clear executive will to do so, now we need legislative consensus.

7) Office of National Bank Supervisor. This would consolidate the Office of the Comptroller of the Currency (which regulates interstate banks) and the Office of Thrift Supervision to oversee all national banks. One office in Treasury would have sole authority for national banks and be able to provide consolidated prudential oversight rather than the current fragmented system.

8) Financial Services Oversight Council. This would force regulators to actually talk to each other and coordinate policy while closing gaps in regulation. In ’08 we saw a fundamentally ad hoc response among the Fed, FDIC, OCC, Treasury and others with predictable turf wars and inefficiencies. Before any major action, like designating a firm a Tier 1 Financial Holding Company or intervening in an institution’s distress, this council would meet to have an integrated approach. It would be a consensus building forum while avoiding the tenuous nature of decision by committee by giving the Treasury Secretary executive authority as the Chairman.

9) Central clearinghouse of derivatives. This would establish a central resolution, clearing and payment exchange for derivates. Most derivatives today are cleared by JP Morgan and Mellon Bank of New York, so creating a consolidated exchange would be eminently doable. By providing transparency in this market, it would not prevent dealmaking, hedging or economically valuable speculation, it would just provide basic information to inform the price discovery mechanism. It was a surprise to most of the world that AIG had a hedge fund grafted on top of it that had drunkenly bet the house on the U.S. housing binge. If people could have seen this, the asset valuation collapse could have been incorporate in prices in near real time and prevented a huge dis-equilibrium and subsequent quick collapse. Contrary to popular misconception, this proposal would not prohibit custom derivatives.

People on the Hill who have better ideas should put them forward, but a system that allowed the consequences of the last year is definitionaly in need of repair. Just ask a harried former Republican Treasury Secretary.

5 Pretty Convenient Truths about Healthcare

5) The government will not take over healthcare in the rather unlikely political event that a public option is passed. Four of the five bills out of committee have an individual mandate requirement that precludes individuals who are already insured, or offered insurance by their employer, from leaving for a public option. Additionally, there are strong tax incentives in place for employers to continue to offer competitive insurance. Adding one more public plan to the 2500 private ones in existence, and putting them on one central exchange for consumers to search, will definitionaly result in more competition and choice.

4) The cost curve must be bent. Medicare and Medicaid could be cash flow negative in 8 years. For true fiscal conservatives the most expensive thing government could do is continue on the present trajectory of healthcare spending growth (~1.5% above inflation) with no meaningful attempt at reform. Denying or obfuscating on the need for reform is the surest way to continue to grow the public debt. By not insisting on a public option, President Obama has wisely left negotiating room for moderate conservatives not ideologically opposed to reform.

3) There is reason to believe the government could run a pretty good health benefits plan. When private insurers make money they pass a significant portion onto their shareholders and (often a larger amount) to their executives. However because the government has no profit margin, any net income the government made would go right back into Treasury’s coffers to either provide more or cheaper insurance, or pay down the debt. Government already runs three of the largest insurance systems in the world in Medicare, Medicaid and Social Security – and you haven’t heard a single opponent of healthcare reform suggest repealing any of these (a classic inter-temporal allocation problem – people love the money already committed to them, but loathe the idea of spending future money for the same improvement). Additionally, the Federal government has unique comparative advantage in negotiating lower drug and procedure costs by virtue of its size. This is one reason why Senator Baucus’ attempt at political compromise with non-profit coops (in lieu of a public plan) is well intentioned but off the mark- these would be run at the State level and miss the huge economies of scale of a Federal plan.

2) For something as important and scientific as medicine and healthcare, there should be basic best practices established. The fact that there is such a disparity in healthcare utilization across both hospitals and regions, procedures for identical conditions (like $10,000 radiation versus $200,000 proton radiation with the same success rate for prostate cancer), and a wide divergence in collection rates is definitionaly inefficient. There can be only one best way. Creating comparative effectiveness research centers and expert panels to guide technical decision-making can improve both outcomes and reduce costs.

1) The majority of opposition to reform doesn’t come from people who actually disagree with true reform. Health is one of the most universal and personal concepts imaginable, and it is understandable that people who have good existing coverage would be intensely resistant to change. But herein lies a tremendous opportunity to explain that reducing cost growth by opening up competition is not the same as denying coverage, in fact it’s the opposite. Should be a good reason to tune in tonight.

Music Video

Come on down

When most people hear the word ‘mentoring’ they probably think of something like troubled teens breaking windows, or take your daughter to work day, or some medieval apprenticeship in axe smelting. Or maybe a couple junior partners ensconced in wing-backed chairs sipping vintage chardonnay while talking about penetrating market share. But they don’t usually conjure up images of themselves, at least not concrete ones. Mentoring has become a chore, a vehicle to log community service or pad a resume or atone guilt.

But for many young professionals, the familiar path for attempting to develop a meaningful career goes something like school, internship, cold calls, email solicitations, happenstance job postings, and submitting applications like buying lottery tickets. Getting a job you actually really want, or honing useful experiences in a field, is about as deliberate as falling through a trap door. It kind of either happens or it doesn’t. Harvard either sends you a big manila folder or a wafer-thin legal envelope. That principal either calls you for a second interview or fades into utter oblivion. You show up the first few weeks of work and either realize you found something that genuinely makes you happy and productive, or you realize you didn’t need the last 8 years of school to answer the phone when it rings or discuss 1970s cultural trivia with co-workers you can’t stand. It kind of just happens. And in the 21st century, innovations and widgets and databases designed to mute this uncertainty and randomness seem to just accelerate it. Now instead of a few job postings we’re not sure we’re interested in, we can see a thousand, or instead of five bosses we don’t know we want, we can network with fifty. But going in for that first face to face in some downtown office or stately board room while being offered free drinks and being peppered with questions still seems just as ice-cold evolutionary as antelope crossing the Serengeti. Degrees and core competencies and letters of recommendation may get you in the door, but you still either sink or swim. It’s all decided usually in matter of minutes or hours, or if you’re lucky days. There is rarely that trial opportunity, an environment that isn’t so clearly and awkwardly motivated by self interest. I want this job, you want to finish the paperwork and successfully close a headhunt, so just try to resist my effusive charm and unrestrained intelligence. The fact is most people think they’re more insightful and unique than they could ever hope to be, and so this shock and awe approach to dream career acquisition usually goes about as well as its military equivalent.

The reality is we can more easily follow a feed of Britney Spears’ daily caloric intake than vaguely describe what it is we want to do every day with job title ‘fill in the blank.’ We develop a better rapport with our cleaning ladies than we do with people we may potentially spend a majority of our waking hours with. Years of school and imagined lives and aspirations and resumes are crushed together in one giant professional particle accelerator, and it either spits out a job you like, or maybe consumes your life as fuel to swallow the universe whole in one giant eternal black hole. We test drive cars but not careers, we rate 30 second youtube clips but not vocations, we try on a pair of slacks at the mall but not a job offer, we scorn Wall Street bonuses but know we just wish it was us on the receiving end. And in these little gaps is where I think there is a role for mentoring. Mentoring can be more than trying to save people from entering the penal-justice system or reduce an uptick in attrition. Mentoring is where droves of teenage aspiring financiers can have a fail-safe environment to test their assumptions, and would be engineers can stress-test career pathways before they commit hundreds of thousands and years of their life. It's where people can actually pick up and hold that big shiny prize they've coveted forever. It's where people can discover what they want and what they like.

There’s a billion gray-haired professionals populating skyrise cubicle farms, slogging through subways in yellow sweat-stained polos, negotiating morning rush hour at the Starbucks drive-thru, sifting through folders of porn on the weekend, who deep down know they want more. And there are at least as many religiously, compulsively anally driven twenty-somethings whose main mental construct is centered around getting a usually painfully generic big break that will deliver them from their current stalled ascent up the career escalator. Seems like supply and demand groping for a market. And rather than unite them in a high-stakes, hire or fire, promote or shelf, judge or patronize, win or lose, zombie dance, how about actually try it, whatever it happens to be. This is why I created Plategro.com. And while I think it has a likelihood of success about the same as an AIG subprime mortgage getting paid back, I think it’s good to dream.

Ok, after seeing what Chase and Goldman and co have been able to do in the fixed income and commodities sectors this quarter, I officially rescind my last blog post. I want cap and trade to pass, I want it to be a volatile market, I want some index to short, I want as much consolidation as possible, and I want a bunch of government agencies with overlapping responsibilities and a slew of new regulations with no established case law whose fissures can be easily navigated. In the process there will be so much liquidity generated that banks will be able to underwrite lots of new clean energy investments. And with the intent of the cap being to actually incent new capital purchases, maybe it will be a sustainable boom not bubble. And as some have pointed out, the climate doesn't have a constituency, so how could we expect any different sort of political economy? Probably accurate. What was I thinking?

The Audacity of the Grand Bargain

Seventeen years after George H. W. Bush signed the United Nations Framework Convention on Climate Change, committing the U.S. to seek greenhouse gas emissions limits, one chamber of Congress finally passed the first U.S. climate change bill in history. Coincidentally this fell on my birthday- I always thought I was the climate messiah. Too bad the 1300 page American Clean Energy and Security Act of 2009 is full of so many complicated, unnecessary and potentially dangerous provisions. The proposal commits the U.S. to reduce emissions 17% below 2005 levels by 2020 and 83% below by 2050, sets up a 20% renewable energy portfolio standard by 2020, and establishes a menagerie of committees, criterias, offsets, definitions and standards on how to measure and verify everything, all to be figured out later when these regulations are drafted.

This bill hands out all rights to emit carbon dioxide and five other gases to industries for free, in direct contrast to Obama’s campaign pledge. The results are windfall profits and the potential for an energy driven asset bubble. It provides no assurances that the price placed on carbon will actually be one that makes clean energy profitable, which was exactly the experience in Europe when they established the same system in 2005. Credits were handed out for free, and in order to get votes everyone got a big piece of the pie (resulting in more credits being handed out than there were emissions), and the price has hovered at near $0 per ton ever since, while Europe has lived with a huge regulatory bureaucracy and burden while actually increasing its greenhouse gas emissions. And if the price of carbon gets “too high”, well then more permits are handed out for free to lower the price. And if the price is still too high, well then the cap no longer applies, so everyone paid a lot of money for a big complicated system that didn’t reduce emissions. Not to mention that we are in the midst of the worst recession in three generations, largely precipitated by an asset bubble and excessive speculation in the housing market, a market that has been studied and regulated for hundreds of years. This bill sets up a multi-trillion dollar market for the next 50 years, one in which the U.S. has no experience. The same people who pushed this through so voraciously will be the same ones decrying the excesses of carbon credit default swaps and derivatives in 10 years after we have seen another huge unsustainable bubble pop.

Then there is the issue of offsets, new emissions credits that can be generated when firms offset their emissions with something that captures carbon. Except, what exactly that means and who measures it will be figured out later by the Department of Agriculture. This will take years and many lawsuits to resolve, and even then the standards may be overly broad and subject to some very clever abuse by Wall Street, who frankly I put my money on over USDA any day of the week when it comes to cleverness. Not to mention the agriculture community is in large part the regulated party, a slight conflict of interest. Then there are the trade sanction provisions. This will allow the U.S. to bring action in the WTO and UN against countries who “artificially subsidize” their products by not attaching the same carbon price as the U.S. India and China have already drawn a line in the sand and said they will reciprocate any climate change tariff or quota and challenge our actions via arbitration, which typically takes about a decade to resolve. Of course by the time this is resolved we’re already supposed to have reduced emissions nearly 20%, so we’ll either have to march on with significantly high energy costs while India and China walk, or wait until a nasty trade dispute is resolved. And of course the bill raises $650 billion in new tax revenues, not to be recycled back to the American people.

Much superior to this convoluted grand bargain, we should place a price on carbon so it is the cheapest alternative, rebate it back to the American people, and cut out 1000 pages of special interests pay-offs in the process. If we want a clean energy economy, we don’t need the government telling every business and consumer exactly how much carbon they can emit every year for the next 50 years. And we don’t need dozens of new programs and thousands of new bureaucrats trying to figure out how much we’re emitting in the first place. All we need is for clean, renewable energy to be cheaper than dirty finite energy. If clean energy is cheaper, consumers will buy it, there will be demand pull. If clean energy is cheaper, it will represent a larger profit margin and greater return on investment for producers, there will be supply push. The price is the market maker, not the government. This bill could very well result in the grotesque situation of firms producing unprofitable products for consumers who are forced to pay more for them. Many people on the Hill act as though once you acknowledge the reality of climate change, there can only be one way to address it. There is no discussion of the multiple potential approaches and associated tradeoffs. Just one bill, and a lot of gray-haired men ramming it down everyone’s throat. The consequences of such little context for debate could be some very unintended consequences.

The Obama Administration is pushing hard on so many mega issues- health care, financial regulatory reform, energy and climate change, the largest budget in the history of the world, and now it looks like immigration too. The implicit tradeoff with this ‘boil the ocean’ approach, in contrast for instance to a more incrementalist one, is it requires engagement with the entire universe of very powerful special interests. You either have to commit to hard slow negotiations with the lobbies, and take very public and potentially damaging defeats in the process, or give them broad sway in order to get votes and flattering headlines, but live with policies you may come to regret. Obama and chief whip Emmanuel have consciously chosen to attempt to complete their entire agenda in what would be a truly historical first term (and guarantee for a second) in exchange for being very willing to play ball with the interests they want to regulate. The stimulus was a prime example. The White House sent a list of broad goals and top line numbers up to the Hill, and like throwing meat to a pack of ravenous dogs said, “fill in the details.” Lobbyists get a bloated bill full of new government contracts, Congress gets the support of their local haymakers, and the White House gets a resounding legislative victory. We also get a lot debt, a still increasing unemployment rate, and a bill the American people are increasingly souring on. If all that bill produces is a few hundred thousand jobs, and nearly a trillion dollars in new debt, that could be just the opening the GOP needs. (*POSTSCRIPT: Excerpt from Fall 2010 Paper: "Mr. Obama is already faced with the reality that voters have, fairly or not, decided that his first big effort to revive the economy, the $800 billion package enacted right after he took office, was a qualified failure, and that anything tagged as further 'stimulus' will be cast by Republicans as throwing good money after bad.")

And if all this climate bill produces is mountains of new regulations, costs, and system gaming, with few emissions reductions (like Europe), then the White House just gave the GOP a gaping hole to meander through. Obama said at the time he was pushing the stimulus, "my job depends on this bill"- he knew the risk he was taking. If politics is the art of the possible, then this is some very fine art. Perhaps it’s impossible to achieve much better, but we won’t know unless we try. The bill that was passed Friday shows more about how many people want to be Rahm Emmanuel’s friend, and who don’t want to cross Henry Waxman, than about who wants to actually usher in a clean economy in the most efficient way.

the royal treatment

The other day I tripped over a branch in Rock Creek Freeway (some would call it a park, but whoever thought putting a busy road absolutely parallel to a beautiful creek packed with birds, strollers and generally other important things should revisit urban planning school), except I didn’t realize I had tripped over this enormous Amazonian vine crossing the roadway until I had gotten off the ground to look back and indeed realize there was this freakish vine running across the road. In the time it took me to get up this erudite 60ish master of the universe gentleman type biking my way shouted at me “YOU should have picked that up!” To which I apologized profusely for tripping and agreed yes, I should have had some kind of pre-cognition that I was about to eat shit. Clearly being a selfish gen-y wasteoid meth addict, I had lazily chosen to trip over the vine rather than remove it. I really would have picked it up, just as soon as I realized it, and my face, was fucking there! I then asked him if he had any good stock tips, whether he was Yale ’67 or ’68 and inquired as to whether he wanted some grey poupon slathered on his ass.

This is my Mr. Rogers moment for why sometimes we need to look in the mirror, and see if the guy above is staring back. Because it’s too easy in high places like DC, with powerbrokers and lobbyists and lawmakers and Honorifics and executives sashaying through their populated schedules on the reg, to watch someone eat shit over a branch and blame them for not not de-littering the park. Sometimes this town can pass a $900 billion law before it can show kindergarten level humanity.