The Crash

News of Wall Street’s tumult has dominated my reading list for the last week or so. It’s a crazy time.

My understanding of the crisis might not be complete, but I find it easiest to explain with a grocery story analogy. I wrote the following to an e-mail to Mikey back in March: Our “biggest problem is that there isn't any money in the tills— people are hesitant to buy, because there isn't enough change (liquidity and capital) to go around. A secondary problem could be devastating. None of the products on the shelves have price stickers. So, customers (financial institutions) don't really know what the products (assets) are worth, so they are hesitant to make any decisions. Finally, it's unclear what anybody's money is worth. (The dollar is in the tank).”

That was March.

I didn’t understand then the now-obvious implications of questionable asset values — dubious balance sheets mean lowered credit ratings which require higher capitalization ratios. And if you, as an investment bank, hold assets that cannot be capitalized, you are worthless. You are Lehman Brothers. You are done.

It is largely irrelevant if your day-to-day operations are successful. It means nothing that Lehman Brothers have posted something like 100 straight years of profit. Lehman was leveraged out the ass. Between 2004 and 2007, Lehman added $300B worth of assets to its balance sheet, but only $6B in cash. When Lehman discovered that $300B was worth significantly less, it was screwed.

Lehman was not alone.

Now, officials are wrestling with how best to fix the crisis.

The thrust of the Bush administration’s $700B plan is this: The government will buy all your crazy, questionable mortgage-related assets. The government will buy your bad debt. You, bank folk, please go about your business. The plan is simple. It is clean. It is only 840 words long. Literally.

Of course, the administration cannot implement its plan without congressional approval, so the politics have begun. The Democrats will try and make sure the banks aren’t the only winners.

Paul Krugman argues that instead of helping Wall Street sell (capitalize) its assets, the government should simply provide the companies with capital. Give Wall Street money, take an ownership share in the banks, but insist that Wall Street keep its own debts.

He writes:

"'Clean,' in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review 'by any court of law or any administrative agency,' and this adds up to an unacceptable proposal."

Not everybody agrees.

Over at the Wall Street Journal, for instance, Evan Newmark says this is the sort of crisis that requires bold leadership and not committee solutions.

Newmark says Americans are lucky Hank Paulson is the best man for a difficult job. Newmark calls Paulson “an honest broker between the banks and the taxpayers – between Wall Street and Washington.”

Newmark also writes, interestingly, that since the $700B will be spent in purchase negotiations, Paulson needs all the authority and latitude he can amass:

"And that is all this $700 billion bailout is–a negotiation between the Treasury and the banks over who picks up the tab for $2 trillion of bad mortgages.

"There is a lot of money at stake, so it will be almost impossible to produce a plan that makes everyone happy. But the plan has to produce winners on both sides. Push the banks too far–and the Treasury may get more bankruptcies than the system can handle. Don’t push the banks hard enough–and they will get rich at the expense of the taxpayer. It is a balancing act, but who better to find that balance than an honest broker like Paulson?"

I love the debate. It will be interesting to see, many months down the line, to see how it plays out. Here’s hoping things stay “interesting,” and do not turn "devastating."

...More in the same vein

Today's NYTimes' piggybacks on last week's Politico:

For the first time in nearly two years, people are moving with freedom around much of this city. In more than 50 interviews across Baghdad, it became clear that while there were still no-go zones, more Iraqis now drive between Sunni and Shiite areas for work, shopping or school, a few even after dark. In the most stable neighborhoods of Baghdad, some secular women are also dressing as they wish. Wedding bands are playing in public again, and at a handful of once shuttered liquor stores customers now line up outside in a collective rebuke to religious vigilantes from the Shiite Mahdi Army.

In a way, with a family member just six months from beginning military service, and likely only 18 months from Iraq, this news is scary. In another way, it's a relief.

Nine months later, more words on Iraq:

Because I have so much pessimism regarding our Iraqi debacle, I feel compelled to report things that make me seriously reconsider my viewpoint. It seems instructive that I've only felt compelled twice within the last nine months, but I digress. My viewpoint is (and was) that we never should have entered. I also believe staying means Americans die. I don't believe there is any promise of positive change, even years down the line.

But, we're not here to recap me or my opinions. We're here to read about what's making me reconsider. Observe:

Politico is a new online newspaper. It stole many of the Washington Post's political reporters, including James VandeHei and John F. Harris, who I believe was the White House bureau chief, or some shit. Point is, VandeHei and Harris are good. They might be among the best. This is what they wrote today as part of a critique of the ineffective Democratic war opposition:

"It turns out that Washington matters less than many Democrats and even many journalists supposed in determining political momentum in the Iraq debate.
"Events on the ground — including regular, if still fragmentary, evidence that security is improving somewhat in the wake of the military’s “surge” policy — matter more."

Of course, VandeHei and Harris are political reporters. They aren't suggesting that the war is going well. Their point is only that it is going well enough. It is going too well, that is, to galvanize political opposition.

As part of their article, VandeHei and Harris justify the belief that things are going well by linking to this opinion article written by long-time war opponent Rep. Brian Baird (D-Washington) after an August trip to Iraq. Baird voted against the war in 2003, so he's got cred with me. I didn't see his article when it came out, which saddens me. But whatever. It's dynamite.

While I don't necessarily agree with all of Baird's logic -- he seems to suggest that since we've already lost thousands of soldiers, we need to continue until we win -- he makes allegations of fact which seem truer when coming from a long-time war opponent than they otherwise would:

"Our soldiers are reclaiming ground and capturing or killing high-priority targets on a daily basis. Sheiks and tribal groups are uniting to fight against the extremists and have virtually eliminated al-Qaida from certain areas. The Iraqi military and police are making progress in their training, taking more responsibility for bringing the fight to the insurgents and realizing important victories. Businesses and factories that were once closed are being reopened and people are working again. The infrastructure is gradually being repaired and markets are returning to life."

Baird doesn't necessarily convince me. But, he lends credence to statements which I otherwise almost dismiss. By toeing a party line that isn't his, he makes me listen. You should listen, too.

Also, you should bookmark Politico. You'll thank me later.

Iraq, the Surge, the Problem

I'm not sure many people understand the Iraq conflict. We understand there are two sides, but we don't understand what those sides are. Let me, very briefly, explain the two major powers, and then let me explain the possible importance of yesterday's news:

- Iran: Shia (aka Shiites)
- Saudi Arabia: Sunni
---> Use the 'N' as a memory tool: Iran has an 'N' and so does Sunni. Is Iran Sunni? No. ('N'!) Anyway.

Around the world, the vast majority of religious Muslims are Sunni. That dominance has sat well with massive Sunni countries like Saudi Arabia, but has obviously not sat well with Iran — the world's only powerful Shia country. Lately, Iran has been flexing its muscle. Iraq and Hezzbolah are its two primary outlets.

Why?

Well, Iraq is mixed religiously. Although the majority of Iraq's population is Shiite (and therefore encouraged by Iran), Saddam was a Sunni. Saddam, as we remember, repressed Shiites and went to war with Iran. Initially, the United States supported Saddam for this reason: He was a bulwark against Iran at a time when we needed one. (I'll ignore the geopolitical implications and morality of "need").

Now, though, the new Iraqi government is Shiite. Iran is celebrating. Repressed for years by Saddam and his Sunni elite, the Iraqi Shiites are wicked pissed about the way things have been going, and Iran is happy to help them create unrest. Thus, the civil war. If you pay a little attention to the news, you'll hear the media use the following terms for the Iraqis fighting:

1. "Insurgents": These are the Sunnis. The former elite.
2. "Militias": These are the Shiites. They are supported actively by Iran.

The elected government in Iraq is, of course, Shiite. The government was elected in part because it got support from the large Shiite gangs — including, most prominently, Moktada al- Sadr who is in turn supported by Iran. The United States has never been comfortable, therefore, with the Iraqi government. America's concerns about leaving Iraq without a clear victory are naturally complex, we are afraid of possible genocide for one thing, but we are also clearly frightened by one certain result: If we leave Iraq, Iran's interests will inevitably dominate Iraqi's political scene.

So, now, the news:

In the last few weeks, apparently, the Iraqi government (which was elected with the support of Iranian-backed Shiite militas) has begun arresting the leadership of a very prominent Shiite militia. So, in other words, we've convinced the Iraqi government to bite the hand that has been feeding it.

That's big news. That's huge news. That, if it is true and not contrived, could potentially pave the pathway for American withdrawl. Well. If Bush's surge can support efforts like this, and these efforts are effective, I mean, that could lead to American "success." We will have installed a friendly government in an exceedingly inhospitable environment. And once that's done, we can draw down.

Before anybody celebrates, however, the article has some words of caution:

In an interesting twist, the militia’s leadership has not visibly fought back against the crackdown. American commanders say that the arrests do not draw the howling objections they used to in 2004, because Mr. Sadr’s militia has splintered so deeply since then that the members they are arresting are more criminal than political and considered by Mr. Sadr to be disloyal renegades.

In that assessment, Mr. Sadr could even be using the government and the American military to purge his own ranks of undesirables.

Ugh. Would that be bad news, or what? And, let's be honest here, doesn't that smell like the truth? Doesn't it make more sense than anything else?

Ugh. Well. Here's for optimism.

The Democratic Party

The NYTime's Matt Bai is a hero. He's very good. He's writing a book now on the future of the Democratic party, and so while the article I'm about to link to is very wonky, rest assured Bai is capable of less intimidating reading. Excellent stuff.

Bai's article in this week's NYTimes magazine is about the struggle between Howard Dean and the elected Democratic leaders like Chuck Schumer, who chairs the Democratic Senate committee. Dean is chair of the Democratic National Committee, of course.

In the past, the DNC has shuttled most of its funds over to the House and Senate committees. The funds have been spent in targeted ways on specific, swing races. Also, the DNC has been raising more money than the RNC.

Dean has changed all of that. Not only is he not raising as much money, he isn't giving it to the Senate or House committees. Instead, he's spending the money on state Democratic committees, and not necessarily in swing states. For instance, Mississippi got four new full-time positions, which doesn't sound like a ton of money (and I don't think it is), but which sounds to Schumer et al like wasted money nonetheless. Mississippi has no close races.

I'll let Bai do most of the talking, but let me copy these final paragraphs to pique your interest:

If Democrats fall short of retaking the House of Representatives in November, the party’s elected leaders will almost certainly blame Dean for the near miss. They will say that he squandered their best chance in more than a decade to control the country. They will say it proves that Dean’s risky strategy has badly hurt the party.

And yet, you could make a compelling argument that anything short of total victory in November would prove precisely the opposite. With polls consistently showing voters to be deeply nervous about a protracted war, high gas prices and stunted wages, this is that rare election that should turn less on tactics than on fundamental choices about the direction of the country; in other words, this election season is about the fear and fury of the electorate, not the addition of a few more door-knockers in New Haven or some negative 30-second spot broadcast in Columbus. As the Democratic strategist James Carville told Al Hunt, the Bloomberg News columnist, in August, “If we can’t win in this environment, we have to question the whole premise of the party.”

Most analysts in both parties now believe that Democrats have better-than-even odds of winning at least the House. But if they don’t, rather than dissect the mechanical failures that cost them a few thousand votes here or there, Democrats might be forced to admit, at long last, that there is a structural flaw in their theory of party-building. Even a near miss, at a time of such overwhelming opportunity, would suggest that a national party may not, in fact, be able to win over the long term by fixating on a select group of industrial states while condemning entire regions of the country to what amounts to one-party rule.

Anyway, here's the article.

Mikey!, Income Distribution, Living in Cities

After a few friends and I struggled last night in a conversation regarding American poverty-levels and income distribution across our socioeconomic classes, I resolved today to research the issue, and write about it. -- And then e-mail the link to you, Mike. You cared the most. Consider this a shout-out. We had no facts last night. Now, we’re armed with a few.

Before I get started, I must make a quick note about economic data: most of the data released in 2006 refers to 2004 or earlier. There is a serious and persistent lag with financial and population data. Nothing to be done. Also, and quickly, you'll need to understand the difference between "household incomes" (a single individual is a household, and a family of four is also a household) and more specific data points, like four-person families. "Households" are baseline units of measurement. It also seems relevant that "per capita income", which we bandied about last night as something around $30k, isn't a data point that I encountered.

Straight away, I’ll tackle some of the hard data, all of which comes from 2003 Census Bureau reports unless otherwise noted:

1. The median household income in the United States was $43,318. (Report One)
   
2. The median household income in the Western states was $46,820. (Report One)
   
3. The median income of a four-person family in the USA was $65,093. (Report Two)
4. The median income of a four-person Washington state family was $69,130. (Report Two)
5. The median income of males was $40,668. (Report One)
6. The median income of females was $30,724. (Report One)
7. Poverty is defined by the Office of Management and Budget. The poverty thresholds in 2003 were:
   
• Family of four, $18,810.
• Family of three, $14,680.
• Family of two, $12,015.
• Individuals, $9,393.
8. 12.5% of people live below the poverty line. (Census Fact-sheet)

Here is another string of interesting data points from the Census Bureau. All of this data came from the aforementioned Census Bureau fact-sheet. It seems to have been updated in June 2006 despite the data seeming much older.

1. Per capita money income..............1999.............$21,587
2. Persons per household...................2000...........2.59
3. Retail sales per capita....................2002............$10,615

It is interesting to note that "retail sales" do not include service establishments (like restaurants) or other merchants whose primary business isn't consumer retail sales. This quite obviously confirms the notion of eating out as an absolute luxury. The poverty level for an individual is below the retail sales per capita ($9,393), and if you divide two of the above statistics -- the median household income by the people per household -- one can get a bastardized 'median individual income' of roughly $16,000, itself just above the retail sale figure.

I was a little surprised to learn how subjective notions like "Upper Middle Class" are. I spent a few hours trying to nail down a hard definition from a government agency, but I couldn't find anything. A few voices -- like Wikipedia and a blog titled Steve Jackson Games -- created definitions for Upper Middle class that seemed reasonable -- between $75-85k, or above $100k -- but were absolutely arbitrary.

Upper Middle Class, and Middle Class, and other designations don't exist. There is no such thing.

But, if one spends a long while sifting through reports like the Census's "Selected Characteristics of Households, by Total Money Income in 2004" he can build a basic percentile breakdown of the American population. I sifted. Percentiles look something like this:



If 15% of US households earn less than $15,000 a year, and 15% of US households earn more than $100,000/year, then perhaps the middle class is between those two extremes. You could draw up your own definitions of "upper middle" and "lower middle". The data above $100k, I should mention, was grouped together in the intial Census report. It wasn't my idea to conglomerate everything greater than $100k.

There is, however, more specific and sporadic information if you dig deep into, say, the New York Times archive. Here are some figures and links to articles that provided specific and occassionally conflicting data points regarding income distribution among the upper classes.

• Top .1% - "$1,672,726"/yr (Krugman - Feb 27, 2006)
• Top 1% - "$402,306"/yr (Krugman - Feb 27, 2006)
• Top 1% - "$341,773"/yr (Krugman - April 14, 2006)
• Top 1% - "$315,000"/yr (Non-Krugman editorial - July 19, 2006)
• Top 3% - "roughly $150,000"/yr (NYT news article - Dec 11, 2005)

Krugman in particular is unhappy about the consolidation of wealth in Bush's America. Perhaps Mr. Krugman's most scathing commentary reads like this:

"There's a persistent myth, perpetuated by economists who should know better -- like Edward Lazear, the chairman of the president's Council of Economic Advisers -- that rising inequality in the United States is mainly a matter of a rising gap between those with a lot of education and those without. But census data show that the real earnings of the typical college graduate actually fell in 2004," Krugman wrote July 14, 2006.

"In short, it's a great economy if you're a high-level corporate executive or someone who owns a lot of stock. For most other Americans, economic growth is a spectator sport," he finished.

A report published by the Brookings Institute last month titled "Where Did They Go? The Decline of Middle-Income Neighborhoods in Metropolitan America" seems to decry a trend that predates today's economy, but definitely validates concerns about the ever-increasing prices in urban America. I suppose the highlight of the study is its initial finding that "Middle-income neighborhoods as a proportion of all metropolitan neighborhoods declined from 58 percent in 1970 to 41 percent in 2000. This dramatic decline far outpaced the corresponding drop in the proportion of metropolitan families earning middle incomes, from 28 percent in 1970 to 22 percent in 2000."

The report found that upper income neighborhoods were growing rapidly, but that lower-income neighborhoods were also increasing. Interesting combination.

The data concerning Seattle suggests that the Puget Sound region has protected its middle-income neighborhoods remarkably well. You'll need to click the graphic to view its larger form, but notice that both Tacoma and Seattle/Bellevue/Everett crack the Top 10 list for middle-income neighborhoods.



I wonder if a collapse of Seattle's strong median household income would precipiate a push for ubanization, or if our medium-income housing is tied more closely to cultural issues pushed by the Lesser Seattle movement and its hero, Emmett Watson.

I don't know. Maybe you can tackle that one.

Seattle, Oklahoma City, and the NBA

Professional sports in the United States, it is popular to say, are out of control. The salaries, the ticket prices, the unbelievable television revenues -- everybody seems to agree that the Business Of Sports is no longer grounded in any sort of reality.

Taken from a particular angle, however, today's news that the Seattle Supersonics were purchased by a group from Oklahoma City is a return to sanity. The leader of the new group, Clay Bennett, wants to bring a professional sport to Oklahoma City. That's it. He's an Oklahoma City guy, and he wants an Oklahoma City professional sport. Period.

"We are acutely interested and very focused on bringing a team to Oklahoma City. It's a tricky spot to be in because you don't want to overstep your boundaries ... but the Sonics, yes, are a possibility," Bennett told the Seattle Times in a February 2006 profile. At the time of the article, Bennett had not even contacted the Sonics, he said.

Bennett does have experience in the NBA in San Antonio. He once sat on their board, Oklahoma City's Oklahoman newspaper reported today. But, "Bennett is a die-hard Oklahoman. He spoke passionately that day last fall when the Hornets announced they were relocating to the city. He loved the idea that his state, his city, his home was getting a major-league franchise that he long thought it deserved," wrote columnist Jenni Carlson.

Of course, the Hornets were only temporaily displaced, and once Katrina's effects have receeded, the NBA plans to move them back to New Orleans. The NBA has said they expect New Orleans to reclaim the team full-time by 2007-2008. So Bennett went looking elsewhere. There's no harm there, no inordinate greed. During the press conference annoucing the sale, members of Bennett's group indicated that they had even looked at bringing the Washington Nationals baseball club to the city. Mr. Bennett was trying everything. He wanted a professional sports franchise. End of story.

Sort of.

The people from whom Mr. Bennett purchased the Sonics, though, seem dirty. Seattle's ownership group, a hodge-podge of 58 local millionaires and billionaires, purchased the franchise five years ago for $200 million. Since then, the Sonics claim to have lost $60 million, because of what has been called the worst-stadium lease in the NBA. Nevertheless, despite the public protestations of losses and the futility of going-forward, today's sale was for $350 million. Something doesn't jive.

The Sonics have been in Seattle for 40 years, and throughout the 1990's was Seattle's only respectable sports franchise. In many ways, Seattle was a Sonics town. Gary Payton. Shawn Kemp. Detlef Schrempf. To this day, the fans still support the team. The capacity attendance figures from the past four years surprise even me. (Record in parentheses)

2005-2006 - 95.3%, 9th in the NBA, (35-47)
2004-2005 - 96.9%, 8th in the NBA, (52-30), playoff berth
2003-2004 - 92.0%, 11th in the NBA, (37-45)
2002-2003 - 91.0%, 14th in the NBA, (40-42)

The team has been bad. The fans have come anyway.

ESPN.com is asking whether or not Oklahoma City deserves an NBA franchise. With 72,293 votes in, the split is 50/50. I don't think there should be any split. Oklahoma City has supported the Hornets in a way that many cities do not support their franchises. I voted Yes. But, OKC does not deserve one more than the Seattle. Seattle supports the Sonics. Seattle is a bigger city, whether counting within city limits or metropolitan district. If The Business of Sports takes this team away from this city, then Sonics fans have been done wrong by.

Most every news article discusses how unhelpful the city government has been in satisfying ownership complaints about losses. The team has demanded that their stadium lease be reworked, but the city has refused. Sort of. As news of the sale leaked, the mayor's office released three proposals it offered the Sonics. I don't understand the in's and out's, but the Seattle Times tackles the proposals briefly in bullet form.

"They never did respond to us on those three offers," said Seattle Deputy Mayor Tim Ceis said in the Times article. "It was pretty clear at that point they were looking at different options."

Some of those options have been well-publicized in the Seattle press. Most promising were proposals by the local cities of Renton and Bellevue. Very interesting summary by the Seattle P-I.

I should note before closing the storyline that the old ownership group and the new one pitched in their joint press conference this afternoon. There aren't any articles on the web, so I cannot link to anything, but both groups said the sale did not necessarily mean that the Sonics would move to Oklahoma City. The new owners have pledged, or perhaps written into the sale agreement, to spend 12 months pursuing a suitable arena agreement in the Seattle area. The old owners suggested that they took less money from Mr. Bennett's group in order to secure this promise. We'll see.

Lastly, the Sonics switched away from their long-time radio partner, KJR. Excellent review about that move, and what it might mean, and an excellent blog generally by local radio DJ Lisa Wood.