If you want to understand what’s at stake with the current economic crisis, and why it could very easily go from bad to 45-trillion-dollar bad, you could do worse than to read the two articles from the New York Times Sunday Business page on credit default swaps. Nelson D. Schwartz and Julie Creswell lay out the basic story in “What Created This Monster?” and Gretchen Morgenson explains the implications of the Fed/JPMorgan bailout of Bear Stearns in her Fair Game column.

Here’s the key grafs from each article (at least as they appear from the very distant sidelines where I’m sitting). From Morgenson, who’s discussing the possibility that JPMorgan had effectively sold insurance on Bear Stearns’s bonds via credit default swaps, and therefore had a very direct interest in making sure that Bear didn’t end up in bankruptcy:

An interesting side note: It’s likely that JPMorgan, the biggest bank in the credit default swap market, had a good deal of this kind of exposure to Bear Stearns on its books. Absorbing Bear Stearns for a mere $250 million allows JPMorgan to eliminate that risk at a bargain-basement price. JPMorgan declined to comment on the size of its portfolio of credit default swaps.

And from Schwartz and Creswell, who are discussing the reason the Fed had to get involved:

Bear Stearns held credit default swap contracts carrying an outstanding value of $2.5 trillion, analysts say. “The rescue was absolutely all about counterparty risk. If Bear went under, everyone’s solvency was going to be thrown into question. There could have been a systematic run on counterparties in general,” said Meredith Whitney, a bank analyst at Oppenheimer. “It was 100 percent related to credit default swaps.”

And finally, check this article for a look at the fight that’s already brewing: how to implement regulations that will help keep all this from happening again.

Poor Brandy Coons.

In a front-page article by Kevin Sack in today’s New York Times Coons, a 23-year-old waitress in Atlanta, managed to get herself pinned up as the poster child for health-insurance free riding. Sack writes,

She may not fully appreciate it, but her decision to go without health insurance, like millions of similarly situated Americans, has become central to the pre-eminent policy dispute of the Democratic presidential campaign.

That policy dispute is over the question of a health-insurance mandate. Hillary Clinton believes one is necessary; Barack Obama thinks it isn’t. The candidates’ argument over the mandate is the real subject of Sack’s story, which does a good job of explaining the ins and outs of the two policies. Coons is merely there to give the piece a human face.

But there’s an interesting sidestory here that’s worth bringing out, since it too will have a part to play in either candidate’s health-care policies. (more…)

It would seem a fairly mischievously buried lede. The story you expect from the headline “Old Friends Say Drugs Played Bit Part in Obama’s Young Life” is the story of, well, drugs playing a bit part in Barack Obama’s young life. Turns out, as we don’t learn until the sixth paragraph of the article, the real news is this:

Mr. Obama’s account of his younger self and drugs [in his memoir Dreams From My Father] significantly differs from the recollections of others who do not recall his drug use.

Or, as the New York Times reporter who filed the story, Serge V. Kovaleski, puts it a little further on:

In more than three dozen interviews, friends, classmates and mentors from his high school and Occidental [College] recalled Mr. Obama as being grounded, motivated and poised, someone who did not appear to be grappling with any drug problems and seemed to dabble only with marijuana.

In other words, the story is more about the bit than it is about the drugs.

(more…)

Anything David Cay Johnston writes for the New York Times is worth reading, and his article today on the Congressional testimony of Nina E. Olson, the national taxpayer advocate, is no exception. In the space of a single two-column article, he gives us more hard information than we can get in a week’s worth of primary-season punditry. In today’s article we learn that:

1/ Olson has proposed “apology payments” ranging from $100 to $1000 that would be used to compensate taxpayers who endure “excessive expense or undue burden” on their time as a result of I.R.S. mistakes.

2/ The government could collect $100 billion or more in taxes on the cash economy by tracking credit card payments, state sales tax reports, and other records.

3/ The use of private tax collectors may cost more money than it brings in: (more…)

Filed under Economics + Politics on January 10, 2008
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Brian Weatherson at Crooked Timber has a nice post today on arbitraging the Republican primary-election prediction markets. Weatherson’s main point is that arbitrage opportunities shouldn’t exist in a truly efficient market, and so the prediction markets might not be quite so effective as people think. But in the course of making this argument, he notes that the significant spreads among the different markets mean that there’s free money for the taking.

Here’s how to make an easy* $1000:

1/ First off, buy $500 worth of Giuliani contracts at the Iowa Electronic Markets. (Five hundred dollars is the maximum you can bet at IEM.) Giuliani was was trading at $0.233 this morning—the contracts pay $1.00 if he wins—which means you’d get 2145 shares for your $500.

2/ Next, short sell Giuliani contracts at Intrade to balance your long buy at IEM. Giuliani contracts that pay $100 for a win were on offer for $27.30 this morning, which means you’d need to short sell 21 Intrade contracts to offset your IEM bet. (Since Intrade doesn’t offer margins, you’ll have to fund your account there with enough money—$2100—to cover a loss.)

3/ Sit back and wait for September. If Giuliani wins the Republican nomination, you’ll bring home $2145 at IEM, which means you’ll make $1072 above and beyond the cost of your contracts. Counting the money you need to leave in your Intrade account to cover a loss, that’s a 41% profit. If Giuliani loses, you’ll collect $2100 at Intrade, which means a profit of $1027, or 39%.

(Optional step #4: Donate your ill-gotten gains to whatever Democrat makes it through the primary meat grinder.)

++++++++

*Okay, maybe not easy, especially if you’re American. Under federal law, the legality of betting in the election futures markets is questionable, and some states specifically ban betting on elections. Check out this guide at Slate before you do something you’ll regret. Also, the calculations above don’t take account of transaction costs.

In an article on the dollar’s depreciation in today’s NYT, Katie Hammer and Julia Wedigier write:

The dollar’s fall has been so drastic, it has seeped into the popular consciousness. In his last video, rapper Jay-Z cruised the streets of New York flashing not a stack of Benjamins, but a fistful of euros.

The implication seems pretty clear*; as James Cramer put it last month: “When things have gotten to the point that even people like Gisele [Bundchen] and Jay-Z realize the dollar is too weak, things have gotten out of control” (my emphasis).

Yes, we get it: the point of the anecdote is to add color (no comment) to the story, to break up more mundane sentences like the one that follows. (”The dollar had been at relatively low levels against the pound and euro for most of this year, but in April it broke the $2 for £1 barrier…”)

But stop for a moment and ask yourself: by what standards does Jay-Z count as a representative of the popular consciousness? Consider what it means to be a person “like” Jay-Z:

+ According to Rolling Stone, Jay-Z earned $17.5 million in income during 2005 (more…)

Filed under Economics + Journalism + Music on December 15, 2007
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