The Classic American Word Salad

If you felt confused after watching Sarah Palin’s resignation speech on Friday, it’s probably because you were supposed to. The type of meandering, disjointed, excited speech patterns that she used are typical of a person who is trying to obscure her true motivations, not reveal them. These are the elements of an anti-speech, a miscommunication, red herrings tossed out to throw the audience off track.

In the parlance of the on-line support groups that I moderated for several years, her speech was classic American Word Salad, just in time for our picnics.

We’d borrowed the term ‘word salad’ from psychology, where it’s used to refer to the nonsensical syllabic sounds that schizophrenics sometimes substitute for real words. In the support groups we used the term a little differently. One of the important tasks in the group was to learn to recognize when a person was trying to control our opinion by confusing us, and for short hand we called it ‘word salad.’

It isn’t necessarily intentional; people often use word salad when they themselves are confused about their own true motives.

And word salad can be revealing once you know how to parse it. The details vary from person to person, but in general, just flip everything over and turn it inside out. Reasons given are for the benefit of the audience. These are the things that the speaker feels you’ll accept as valid or even desirable, the things she thinks you want to hear. Keep in mind the broad appeal of concepts such as ’sacrificing for the family’ or hailing the troops, or sports analogies. These are American cultural values that are guaranteed to provoke emotional responses, at least in the members of the audience who matter most to the speaker.

Watch out too for the the things the speaker condemns. Sometimes condemnation reveals clues to what the speaker is actually doing or considering doing. You’ve experienced this, right? It’s confusing when you find out that a person you know has done the exact thing that he’d previously criticized others for doing.

Only time will tell what Sarah Palin’s real motivations and intentions are but try not to put too much credence into the reasons she gave.

A speech like that one isn’t meant to enlighten you.

Why why WHY does our federal government keep bailing out AIG? Simple.

Ok, I’ve racked my brain over this one. And I’ve finally figured it out. It’s very simple. It’s so simple I was missing it even though it is right there out in the open. Big duh on me.

It’s because the US Government is a counterparty to AIG’s credit default swaps. You know, CDS, the insurance policies that were written against the mortgage and other credit securities that you remember from the beginning of this little debacle. A counterparty is the one who is on the hook if the buyer of the insurance comes to collect. They’re on the hook because they have the right to receive the income from the insurance payments that the buyer made. Like any insurer, they receive payments with the understanding that if something bad happens, they pay money back out.

The US Government may possibly be the biggest counterparty of all. And something bad has happened.

You ask, how is that possible? That can’t be right. You’re crazy. We didn’t give those crappy politicians permission to speculate with our money. We haven’t seen any insurance payment income. How can our government be one of the ones on the hook for this? We didn’t agree to this.

They (we) didn’t have to speculate or agree to this. It works like this.

Remember the FDIC?

The FDIC insures depositors. When a bank goes under, the FDIC pays the depositors. This prevents bank runs. The FDIC is now warning that its funds could go negative this year because of all the banks that have gone under already. It tried to raise fees recently to cover for that and all the little banks across the country screamed because the proposed fees would eat up all of their 2008 income. Gone. But if the FDIC goes under, the bank runs begin. It wouldn’t take much of a spark at this point.

These are your neighborhood banks, and savings & loans, and credit unions. They aren’t Wall Street. They are small town banks with small town names. Drive down Main Street of any small town and you’ll know the name of the town because it’s right there on the LED sign of the most prominently placed bank in town. These are the banks where the local farmers do business, and the town gas stations, and the little grocery stores and cafes.

The FDIC could not possibly cover all of the deposits in all of those banks at the same time. Not even close. It was never meant to. Such a situation, where all of the banks went under at the same time, would be a total disaster. It would be like hurricane Katrina taking out the entire country. The FDIC is just insurance, not God.

Mr. Ben Bernanke, our Princeton economist-Great Depression expert-Chairman of the U.S. Federal Reserve is well aware that the loss of the localized small town banks was the last straw that put this country into the Capital-D Depression and kept it there for so long. It sucked the blood right out of the heartland if you’ll forgive the expression. Once those banks were gone, it became extremely difficult for the federal government to pump money back into those areas. There was no infrastructure left to pump money through and no local banker who knew everyone by name to know who deserved a loan. There was no clear way to distribute funds. The economy shriveled and dried up everywhere.

If so much as one single bank is a counterparty to AIG credit default swaps, then the FDIC is also a counterparty, and if the FDIC is a counterparty, then the U.S. government is a counterparty.

The media talks about credit default swaps (CDS) as if they are these big pieces of paper sitting in a vault and about counterparties as if there is this one person or hedge fund or some shadowy entity holding a single piece of paper as if it’s a betting stub, just waiting for it to pay off big [cue evil laughter]. Who cares about evil financial masterminds? Let’s just not pay that bet, right?

But that’s not exactly the situation. Wall Street securitized the CDSs too. That’s how they sold so many and so much, estimated to be more than the GDP of the entire world. They chopped them up into little bits and sold them to investors all over the planet. Is your 401K or your pension invested in a bond fund? Then you might be invested in part of a CDS. Correction: you ARE invested in a CDS.

How many localized small town banks own some of these AAA rated-supposedly-safe securities (bonds) and are therefore counterparties? 1? 20? ALL OF THEM? Do you want to take bets on it? This stuff was sold to school boards and pensions. Where do you think the school boards and pensions got them? They bought them through their trusted local financial advisor / banker.

I don’t think I’m exaggerating to think that if AIG fails then every single small bank in the country is at dire risk. And by extension the FDIC. And therefore the United States government. It’s right there in front of us. That’s what we’re facing. That’s why the government is feeding the bottomless pit of AIG.

Because it’s holding us hostage.

Best iPhone / Twitter photo so far!

“There’s a plane in the Hudson. I’m on the ferry going to pick up the people. Crazy.” – Janis Krums, Sarasota, FL

Hey, just how big is this problem anyway?

“We basically had a $10 trillion shadow banking system shrivel up and die. Having the Fed add $700 billion to its balance sheet, or whatever it is by now, is not enough to make up for that.” – Paul Krugman, Nobel prizewinning economist

THE MONEY CULTURE : ‘Depression Economics’ – Nobel Prize-winner Paul Krugman on America’s financial crisis
By Daniel Gross | Newsweek Web Exclusive
Dec 3, 2008 | Updated: 12:22 p.m. ET Dec 3, 2008

If we spent $3 million dollars on a planetarium in Iraq, would McCain notice?

My favorite class in high school was astronomy. That’s because my high school housed an actual planetarium, an unusual feature that attracted field tripping students from across the city. I still remember taking constellation and star quizzes in darkness so enveloping that I couldn’t see my hand in front of my face, let alone my pen crawling cautiously across my notebook. My biggest fear was that I’d write one answer over the top of the previous answer and that when the lights came up I’d find a big scrambled scrawled illegible mess. Fortunately that never happened and the memory of stars circling in the darkness still brings a smile.

I guess Senator McCain never felt that way about astronomy because the incredulous comment he made last night about Senator Obama requesting a federal earmark for the famed Adler Planetarium in Chicago is only the most recent of many attempts to single the Adler out as an example of wasteful spending.

I’ve been to the Adler and I’ve taken my children there. They were as excited as I was to visit it. I don’t know how many millions of people, young and old, students, would-be or someday astronomers have visited the Adler Planetarium since it was opened in 1930 but it doesn’t seem that Senator McCain is one of them.

Visit the Adler Planetarium website here.

The Adler Planetarium released this statement to the press about Senator McCain’s remarks in the debate last night.

On credit, CDOs, SPVs, credit swaps, and mark-to-market: A Bedtime Story

Once upon a time there was a merchant in Hong Kong who sold sardines along with many other things. Ever filled with schemes and ideas and plans to make more money, one day he packaged mud into a sardine can. He sold the can to another merchant, who added on his own brokerage fees and profits and sold the can to another merchant. The sardine can was passed along in this fashion from merchant to merchant, its cost growing as each made money while passing the can along to the next.

The fifth merchant opened the can and discovered to his dismay that the can was filled with mud instead of sardines. Indignant, he confronted the original merchant with his discovery.

The first merchant replied, “Why did you open the can?”

(cross-posted from subterrain)

Was Friday the ‘tipping point’ for the economy?

On Sunday the Fed jumped in to prop up Fannie and Freddie. The problem is that they are holding a lot of souring assets that are worth a lot less than they’re booked for. That value is going to collapse from a lack of substance. If it’s not there, then it’s just not there! It’s just a matter of time.

Signs of the Times : Fed opens up a fire-hose of cash

Here’s a great graph found on the website of the 2008 Federal Reserve Bank of St. Louis. It reflects a part of the response to the ongoing financial crisis. Think the threat to the economy has been overstated? Take a look at the size of the response, reflected in this graph of the Total Borrowings of Depository Institutions from the Federal Reserve. The rules for borrowings have been changed, allowing the dollars borrowed to soar far above anything ever seen in the past.

All is Vanity: How to Topple an Economy in 10 Easy Steps

It’s been a long time since I read “The Bonfire of the Vanities” by Tom Wolfe but I still remember how the main character, Sherman McCoy, described his lucrative profession of investment banking as making money off crumbs from pieces of cake being passed around.

Last summer I was taking a class in management taught by a moonlighting mortgage broker. The so-called sub-prime crisis was beginning to bubble into the nightly news with tales of rising foreclosures and something my dad referred to as “liar loans”. There was one outspoken woman in my class who came right out with what she thought of the situation and of mortgage brokers in general.

“You all,” she said to the professor, “made a whole lot of loans that you shouldn’t have!”

“Do not believe everything that you hear in the news,” he replied.

More to the story? I wondered. Like what? I started reading commentary on the story. It wasn’t long before I came across a story in the Financial Times that made everything a whole lot clearer. It was accompanied by a diagram that showed how the mortgages were consolidated into packages and resold. I could see a couple of things from this illustration: that there had been a vital disconnect between the assessment of the risks and the eventual owners of the risks, and that this was such a lucrative market that the risk assessors had no real incentive to be cautious. Following that line, it wasn’t much of an extrapolation to see the fuel behind rising home prices, the attraction to speculators, that whoever was supposed to be regulating this market was asleep at the wheel, that therefore the protections put in place to prevent another Great Depression were being subverted and rendered ineffective, that the rest of the financial world could not have been ignoring these kinds of profits or the practices used to attain them, and that therefore this problem could not be limited to the sub-prime market.

I feared then that the problem went much deeper than sub-prime but I prayed that I was wrong.

I’ve described that illuminating diagram to people since then and sometimes they ask to see it but I didn’t bookmark it and can’t find it again. But if you are still interested and haven’t fallen asleep yet, I found this story in the NY Times, “Triple A Failure,” that sums up a key component of the problem: the SEC allowing credit rating agencies to evaluate bond backed investment vehicles even through there was an obvious conflict of interest since their biggest paying customers were the creators of the investment vehicles that were to be rated instead of the investors who would be buying them. From the article: “In effect, the government outsourced its regulatory function to three for-profit companies.”

Read the article and you’ll get a sense of the multipliers involved and it basically boils down to an enormous Ponzi scheme, profitable to the bankers and Wall Street gamers but leaving the actual investors holding the deflated party balloons.

So using the article as a guideline, here’s the recipe for disaster.

How to topple an economy in 10 easy steps.

1. Wall Street takes a pile of mortgages, all lumped together, obtained from the investment banks that provided the loans.
2. Sells the pile to a ghost corporation called a SPV (Special Purpose Vehicle).
3. The SPV pays for the pile of mortgages by issuing bonds.
4. The SPV issued bonds are rated by a credit rating agency (Moodys et al). The better the credit rating, the more they can be sold for.
5. The SPV pays the credit rating agency for the ratings.
6. The bonds are sold on the market to investors and the SPV (held by Wall Street) gets the cash. The value of the mortgages has magically been inflated in the process. So has the risk but the risk isn’t reflected in the magic ratings from the credit agency so the risk is disguised and therefore in reality the bonds are overpriced.

The investment banks that provided the loans pocket lots of cash from the SPV and have completely offloaded their own risk. They’re happy! They go to write more loans! The more the merrier! They have no reason to care if the loans will be repaid, ever!

But it doesn’t stop there. There is too much money to be made by repackaging paper, disguising the risk, and reselling it all for much more than it’s really worth. So for steps 7 – 10:

7. They do it again. They take those bonds issued by the SPVs and they repackage the risky overpriced bonds into another pile and now the pile of bonds that were mortgages are called a CDO.

8. The CDO pays for the mortgage backed bonds by issuing more bonds. The new bonds are again rated by a credit agency. The better the rating, the more they can be sold for.

9. The CDO pays the credit rating agency for the ratings.

10. The bonds are sold on the market to investors and Wall Street pockets the cash. The risk now has exponentially multiplied again but that’s not reflected in the rating or the price.

Investment banks pump as much money as they get into writing more loans. They make it clear to the mortgage brokers that their job is to give that money away to anyone who wants it. The mortgage brokers get nice commissions on every loan they write for the banks so they’re highly motivated to write loans. Blaming the mortgage brokers for loan defaults is like blaming the car salesperson for the repossession of the car they sold. It wasn’t their job to evaluate the risk. It was their job to sell and write loans and submit them for evaluation to the investment bank that was supplying the money.

The more credit is available, the more people buy. That’s been documented by social psychology research. The more houses people buy, the more the housing prices rise. Up, up, up the prices go. Now people see that they can make money by buying houses and reselling them at a profit so speculation blooms. It isn’t about homes anymore; it’s about money but the credit rating agencies are still rating the risk as if it’s all about home owners who are highly motivated to keep their homes.

Big money! Buy, buy, buy! Sell, sell, sell! Buy, Buy BUY! Woohoo!

People who already own homes watch their values rise. Yay! Home equity loans mean you can turn that value into cash! You can then spend the cash! Yay! Vacations and bling for everybody! Hey look pa, the economy is doing great! 70% of the economy is consumer-driven so all this spending of home equity can really inflate what the economy looks like. The actual amount of home equity proved to be an illusion.

Picture the sub-prime mortgages (and all other credit related paper that was securitized into bonds like consumer and home equity loans – also mentioned in the article) as the tiptop of a pyramid and the pyramid is inverted, balancing on that tip and that tip is crumbling. It didn’t have enough substance. That’s the reality of the current stock and bond markets.

That was the spiral up. Now for the spiral down. The dominos fall. Guess I should write about that next, unless I’ve put everyone to sleep by now.

Notes & Quotes:

“Scary does not begin to describe the feeling of learning that there are only three or four hard working people at a major rating agency judging the creditworthiness of all the investment banks and they don’t even have their own model.” – David Einhorn, “Private Profits and Socialized Risk” Grant’s Sprint Investment Conference, April 8, 2008

Waste Not, Want Not

Today is Easter Sunday. I’ll be having dinner with family at my parent’s home. My mom will be serving her traditional ham.

Mmm hot, sweet, and smoky ham. It’s one of the best things she makes, a favorite from childhood on. Leftovers at their house this week will include another favorite, scalloped potatoes, and a not-so-favorite, split pea soup. But she may have extra leftovers because I’m not sure I want to eat the ham this year. Not because I’m committed to some fad diet that doesn’t include ham, or because I’m watching my salt, or because I’ve finally decided to take the plunge into a vegetarian lifestyle. No, it’s something else, something that has been on my mind for about a month, mingling with things that I’ve learned prior to that about how we in this country produce our food. Call it an emerging fear, maybe even paranoia, but my misgivings about our food supply have been growing and something I read last month in the New York Times has really gotten my attention and hasn’t let go yet. So be forewarned: what I’m about to talk about might dampen your enthusiasm for ham and pork and bacon too. Or maybe you can write this off as mere speculation and happily go back to attacking that still-steaming slice of ham.

The Story

According to this article on nytimes.com: “A Medical Mystery Unfolds in Minnisota,” a mysterious neurological illness has broken out among workers at a pig slaughterhouse in Minnesota. Not just random workers either; all of the afflicted workers are on or near a specific processing line, a workstation referred to as the “head table,” where the severed heads of the hogs are processed.

One of the procedures at the head table is to literally blow the brains out of the skull using highly pressurized air, a process that splatters the workers with flying bits of vaporized brain tissue that get on their exposed skin, into their eyes, nose, and mouth, and inhaled into their lungs. Hour after hour, day after day. The packing plant processes 19,000 hogs along with their heads every day. This procedure has been used in Minnesota since 1998, and only two other of the 25 packing plants that were checked use the same procedure. Only one of those two, in Indiana, has a few workers that are showing similar symptoms. Strange that this illness has suddenly shown up now when this procedure has been in use for about ten years.

(By the way, if you’re interested in the job, starting pay is $11 to $12 bucks an hour.)

The crippling illness involves serious nerve damage. It isn’t contagious and infection has apparently been ruled out. The spinal cord is inflamed from what appears to be an auto-immune reaction. The immune system is attacking the patient’s own nerves as if they are foreign. That doesn’t sound like much fun.

Twelve patients had arrived with these symptoms by November of last year, all of them having worked near the “head table.” Fortunately for these workers, the packing plant is located near the famed Mayo Clinic. Some of the best doctors in the country are working on figuring this out. So much cutting edge research is performed at the Mayo that it is published in over 2800 bio-medical publications a year. That must involve a lot of research subjects. I’ve never been there but the place must be huge.

A quick peek at their web site confirmed something I was looking for: one research area looks at Valvular Heart Disease, its treatments and surgical procedures. I’m vaguely familiar with one surgical procedure because my brother has had a heart valve replaced – with a valve from a pig’s heart. It’s a life-saving procedure and my family is grateful that treatment was available for my brother. How convenient for the heart researchers at the Mayo Clinic that a pig slaughterhouse is nearby. It probably means ready access to hogs. I can’t imagine taking just the pig’s heart and throwing the rest of the animal away. It seems reasonable to guess that the ham on my family’s plates could have come from the same animal that provided a valve to someone’s heart. Waste not, want not.

But medical researchers aren’t stopping at pig valves. They are working hard to genetically alter pigs in order to make their organs more compatible to humans. Scientists would like to transplant pig hearts into human patients and they’ve made a lot of progress. At the Mayo Clinic, they’ve already managed to keep a baboon alive with the heart from a pig that has had a human gene inserted. Recent publications out of the Mayo Clinic’s Xenotransplantation program (transplanting organs from an animal into a human) include such titles as “Cardiac xenotransplantation: Recent preclinical progress with 3-month median survival.” (2005) and “T cell responses during pig-to-primate xenotransplantation” (2006,) and also “Increased immunosuppression not anticoagulation extends cardiac xenograft survival” (2006). Thousands of lives could be saved annually if this research is successful and scientists are just about there.

What does a genetically altered pig look like? Probably a lot like any other pig, even if it does have a human gene or two inserted. It probably eats like a pig and grunts like a pig, mucks in the mud like any other pig. A pig farm that breeds genetically altered pigs probably has a lot in common with any other pig farm. The workers on the pig farm might be a lot like any ordinary farmer, doing chores, feeding hogs. Ideally such a farm would be located near the market for its products, in this case a large experimental medical facility. Or a packing plant. Waste not, want not.

What has changed recently at the hog packing plant? Maybe it’s the hogs.

From the New York Times article:

“Clearly, all the answers aren’t in yet,” Dr. Osterholm said. “But it makes biologic sense that what you have here is an inhalation of brain material from these pigs that is eliciting an immunologic reaction.” What may be happening, he said, is “immune mimicry,” meaning that the immune system makes antibodies to fight a foreign substance — something in the hog brains — but the antibodies also attack the person’s nerve tissue because it is so similar to some molecule in hog brains.

“That’s the beauty and the beast of the immune system,” Dr. Osterholm said. “It’s so efficient at keeping foreign objects away, but anytime there’s a close match it turns against us, too.”

So I have to ask: Did genetically altered pigs from the Mayo Clinic end up at the nearby packing plant? Have genetically altered pigs entered our food supply? Hogs carrying human genes? If so, how much have these hogs been altered? Why haven’t we been told? Should we care? They’re being tested like a medical device, shouldn’t they be tested to determine if they’re safe for human consumption before we start eating them?

How do you feel about ham now?