Can we put down the pitchforks now?

The New York Times today published an open resignation letter by Jake DeSantis, Executive VP at AIG. Since it's publication, many computer fonts have been spilled about it's portent. Too many of these comments are simply ill-informed. A typical example from the left is digby's from Hullabaloo. I am a fan of digby, and enjoy his blog. But too often I see liberals rant about business practices that they don't seem to understand, and this is a classic example.

First digby rolls his eyes at at an op-ed piece by Martin Feldstein, who claims that President Obama's proposal to limit the tax deductibility of charitable contributions will hurt charities. Without discussing the merits of Feldstein's argument, digby dismisses him because he is a member of AIG's board, and a member of their Finance Committee. Exactly how those facts makes Feldstein's argument moot, digby does not say. But consider this...would a bazillionaire donates $50 Million to a charity if there were no tax deduction? I think not. And I think Feldstein is correct that Obama's plan will disastrous for charities. But don't take my word for it, call the head of fundraising for your favorite national charity and ask for yourself.

Next digby moves on to DeSantis, describing his letter as a "petulant whine." He then goes on to say, "It's very hard to believe that this person knew nothing of the CDO business since it was the focus of the division in which he worked." He quotes MSNBC commentator Carlos who basically said the same thing: "I know and you know that when you're an executive in a large company you sit in those senior management meetings you hear what's going on in other parts of the business." Carlos and digby are simply wrong about this, and their comments lead me to believe they never worked for a large corporation. Busy managers focus on their own departments, and they don't have time to get detailed breakdowns of what others are doing.

MSNBC and digby show a lack of understanding of financial products and large financial organizations. DeSantis worked in commodities, and had nothing to do with CDOs. But digby assumes that every executive working for AIG is guilty by association. It doesn't take every employee to bring down a company. Remember Barings Bank? Barings was the oldest merchant bank in London until its collapse in 1995 after a single employee lost $1.4 billion speculating on futures contracts. One guy killed a 200 year old company.

Just because you worked for AIG does not make you evil or stupid. And we can debate whether anybody deserves to make a $750,000 bonus, but if other executives at other companies were getting similar bonuses (which they were) then AIG executives were not overpaid relatively speaking.

The AIG rhetoric is becoming shrill and is leaving logic behind. digby effectively says that we should not listen to anything that an AIG board member says. The board members deserve their share of blame for this mess. They were wrong about that, but that doesn't make them wrong about everything. DeSantis opened himself up to a lot of scorn by publishing his letter, but I saw it as frustration, not whining. He was angry that the CEO promised to fight for them, then did not. And he was angry that he and the vast majority of AIG employees did nothing wrong, but are being treated like lepers.

I'm not a pro-corporation apologist - far from it. But I think it is important to focus on real issues and not get tied up in witch hunts. Too much has been written about the AIG bonuses. Americans are frustrate at the mess we are in, and want to punish the guilty. I do as well. But a lynch mob is not the answer. Let's put down the pitchforks.

Robert Gates makes a bold move

The Boston Globe reports that Defense Secretary Robert Gates is going to do the unthinkable. He is going to end costly, high-tech military programs in an effort to cut Defense Department waste, and to shift focus from gadgets to boots on the ground. This is an extraordinary move, and may be the most potent assault on Eisenhower's "military industrial complex" since Ike left office.

The country is broke. We can't keeps spending like we did. But the Military loves their toys, and nobody wants to appear soft on defense. However, now it's pretty obvious that our current enemy is decidedly low tech. So there is no real use in spending money for new jets and destroyers. But I never expected to see a Secretary of Defense reach that conclusion, and I am very pleased that ours did.

Our Navy has not fought a sea battle since World War II. Our cruisers and destroyers have not fired a shot in anger for decades. Aircraft carriers can at least deliver fighters to a theater, but only if that war zone is near enough to an ocean. But if Iraq is any indication, "air cover" is less of an issue because there is nothing to bomb. Insurgents don't present a united front. They don't charge your fort like Indians in a John Wayne movie. The only aircraft that makes sense are helicopters that can swoop in and get your guys the hell out of there. Everybody in the military knows this. But for the Defense Secretary to actually shut down military projects is extraordinary.

Robert Gates took the world's worst job, at a time when it was guaranteed to get worse. He never grandstanded or engaged in subterfuge. When a new administration from the other party asked him to stay on, he did. He has done the best he could with the awful hand that was dealt him, and he has done it with class. But this latest decision is, I think, his bravest. Defense contractors have armies of lobbyists. The Spam has not yet hit the fan. But I think the time is right for this. And I think that the savings will help soften the blow of this, the worst financial year in many generation.

Thank you, Robert Gates, for doing the hard thing.

9000 earmarks

9000 earmarks. The spending bill that Congress is sending to President Obama has 9000 earmarks. At a time when our economy is staggering Legislators still can't stop loading up spending bills with pet projects. When our deficit and our national debt are the highest in history, our elected officials still show no restraint. During his campaign, Obama promised to curtail earmarks. But the White House says that they are going to sign the omnibus bill, which is a holdover from the Bush administration. But they hinted that Obama would veto future spending bills that were loaded with earmarks. Why wait? Why not veto this one? Why not send a message that Congress simply cannot wallow up to the hog trough...especially not now, while Rome is burning.

9000 earmarks...I am totally disgusted.

Geithner needs to step up or step aside

I have grown restless lately, waiting for Treasury to step up to the plate and act like a leader. This morning I read a NY Times article that points out a main reason why - Treasury Secretary Tim Geithner still has not staffed up the Department. The Times points out that Geithner has only filled about half of the top spots.

I think we can all agree that the economy is the most pressing issue we face right now, and the Obama administration is dropping the ball big time. As the Times article pointed out, "Of the four major federal departments — State, Justice, Defense and the Treasury — the Treasury has had the fewest nominees even though it is dealing with probably the most significant problems facing the government." That shortfall is on Geithner.

So far Geithner has been a dud. When we need bold action and reassurances, we get a Treasury Secretary that hardly ever appears in public, and when he does his pronouncements are so vague, so uninspiring, that he actually makes the problems worse. Those open Treasury posts are an example of how unqualified Geithner is. To be effective at that job, you need to be not just savvy about economics and the market, but you need to also be a leader, a recruiter, a manager, a coach and a delegater. It appears that the reason Treasury is moving so slow is because Geithner is doing everything himself.

These are extraordinary times, and we need extraordinary effort. We are not getting it. Obama needs to take Geithner to the wood shed. Step up or step aside. We need to know that the best and brightest are working on the economy and our foundering banking system. If Geithner can't do the job, President Obama should cut his losses and replace him.

Foreclosure prevention, or foreclosure delay?

The New York Times reports details of the Obama administration foreclosure prevention initiative today, and it looks like it is only delaying the inevitable. The plan pays lenders a flat fee to reduce loan interest rates to no more than 38 percent of a family’s gross monthly income. Then the government pays the actual cost of reducing the interest rate further to 31 percent of the gross monthly income. This rate would remain for five years, then will rise one percent a year until it is back to its original amount. Let's crunch some numbers, shall we?

According to the National Associate of Realtors (NAR), the average home price in the US as of February 4th is $213,100. According to the census bureau, the average family income in 2007 was $50,233. While figures are not yet available for the current average, we would have to assume it is lower, given layoffs and wage reductions that are so common right now. Let's be conservative and call the average $45,000. Let us further assume that the family has one of those "bad" mortgages that started with low payments but quickly increased them to, 8%. That would be a monthly mortgage payment of $1,562.92 or $18,755.04 per year. This mortgage payment represents 41% of the family's gross income.

Under the Obama plan, the family's mortgage payment would be reduced to $1,162.5, roughly 5.15% interest. That rate will remain in effect for five years, then rise 1% until it is back to 8%, just under eight years total. By then the family will be back in the same boat.

Obviously, the plan hopes that inflation will cause salaries to rise so that the restored mortgage payment will by then be only 31% of gross family income. In order for that to happen, the family income has to be $60,500 by 2017. That is a 34.4% increase in family income over eight years. But according to inflationdata.com, the inflation rate in January was 0.03%. For the family to reach the magic 31% mark, inflation would have to increase substantially. If it does, inflation will not only raise wages, but also the cost of gas, food, clothing, etc. So the family's extra income will be at least partially eaten up by those increases, leaving less for the mortgage.

My question is...are we really solving the problem or just delaying it? Many of the families this plan is designed to help bought at the top of the real estate market. Now that home prices have fallen so drastically (17% in the last year alone, according to NAR), most homeowners who bought in the last several years owe much more than the home is worth. Home prices have fallen so drastically, and the economy is so sluggish, it appears likely that in eight years these rescued homeowners will still owe more than the home is worth. And unless they increase their income past inflation levels, they will again be paying too high a percentage of gross income for their mortgage.

One advantage of this plan is that it stops the bleeding now. Given our current situation, that is not a bad thing. But the plan will not "fix" the problem, as we will see after five years when those mortgage interest rates start to rise again. And those properties will continue to be a sword of Damocles hanging over the real estate market.