John McCain, May His Memory be a Blessing

I first met John McCain at a primary campaign rally in New Jersey in 2000. A photograph of him and my wife memorializing that event looks down at me as I write this blog.  I later met him two more times in more private surroundings. We talked about the Iraq and Afghanistan wars and the growing problem of Iran. He candidly admitted that he had no real solution for the Iran of a decade ago. I spoke on his behalf at a Baruch College forum during his 2008 presidential campaign.

In those conversations he was authentic. Unlike other politicians I have known, what you saw on television is what I witnessed in person. Even in a very serious conversation his sense of humor came through and above all else I knew I was in the presence of an American patriot. At a time when America is being threatened from within and without his counsel and leadership will be sorely missed.

There are far more eloquent things being written about John McCain today. I only knew him causally and for that I will be eternally grateful. His family has our prayers.

My Amazon Review of Laurence M. Ball's "The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster"

Killing the Chicken to Scare the Monkey

Johns Hopkins economics professor Laurence Ball has written an extraordinarily well-researched book on the demise of Lehman Brothers. At the very least he seriously questions the official response to the Lehman bankruptcy which states that Lehman was insolvent and lacked adequate collateral on September 15, 2008 and at maximum he completely debunks the Fed and the Treasury. Although I am not in the complete debunking camp, Ball has certainly changed my views on the subject.

Specifically Ball calculates that Lehman was borderline solvent at the time of the bankruptcy filing. In my own view based on Ball’s numbers I would have them more in the insolvent category because of the way Ball values Lehman’s Level 2 assets. Be that as it may, Ball is convincing when he argues that Lehman had sufficient collateral for a loan under the Primary Dealer Credit Facility (PDCF) at the time of the filing and it certainly had the collateral when the requirements were eased two days later. Ball cogently argues that Maiden Lane rescue of Bear Stearns and the subsequent AIG rescue were far more risky for the Fed than a short-term loan to Lehman would have been.

Then why didn’t the Fed at least temporarily bail out Lehman. To Ball it was pure politics with Treasury Secretary Hank Paulson leading the charge against any hint of a bailout.  Put simply a Lehman bailout was viewed as politically toxic. And in fact, the consequences of letting Lehman go allowed the Congress to go forward with TARP and for the Fed to open the floodgate of cash under Section 13(3) of the Federal Reserve Act. A year later New York Times columnist wrote “Lehman Had to Die, So Global Finance Could Live” (September 11, 2009). Put bluntly the chicken had to die.

Ball argues that if the Fed intervened and kept Lehman alive, at least temporarily, the deluge that followed would have been averted. Here I respectfully disagree. AIG was already a goner and the markets would have immediately turned their attention to the severe problems at Morgan Stanley and Citigroup. Clearly stated, there were too many toxic assets awash in the system. All bailing out Lehman would have done would have been to delay the inevitable, which in my mind would have been far worse.

Ball’s encyclopedic sources include all of Lehman’s SEC filings, the Valukas report, testimony before the Financial Crisis Inquiry Commission, the books by Bernanke, Paulson and Geithner and Andrew Ross Sorkin’s “Too Big To Fail.” One failing is that he should have talked to Lehman’s CEO Dick Fuld. In my view Fuld was so full of himself that he refused to see the writing on the wall and held out for too high of a price in his failed attempt secure financing for Lehman in 2008. Further exacerbating the situation is that Fuld was hardly the most agreeable person around and likely rubbed his regulators and the other major firms the wrong way. In the interest of full disclosure I was a managing director at Lehman from 2000 – 2005.

Ball’s book is very detailed and the writing leaves out the high drama of the situation making it very text bookie and slow going. Nevertheless the facts speak for themselves.

The full Amazon URL appears at: https://www.amazon.com/review/R61722ZNJ3XFH/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Adam Tooze's "Crashed: How a Decade of Financial Crises Changes the World"

The World in Crisis

Columbia history professor Adam Tooze, an authority on the inter-war years, has offered up an authoritative history of the financial crises and their aftermath that have beset the world since 2008. He integrates economics, the plumbing of the interbank financial system and the politics of the major players in how and why the financial crisis of 2008 developed and the course of the very uneven recovery that followed. I must note that Tooze has some very clear biases in that he views the history through a social democratic prism and is very critical of the congressional Republican caucus and the go slow policies of the European Central Bank under Trichet. To him the banks got bailed out while millions of people suffered as collateral damage from a crisis that was largely made by the financial system. His view may very well be correct, but many readers might differ. Simply put, to save the economy policy makers had to stop the bleeding.

He starts off with the hot topic of 2005; the need for fiscal consolidation in the United States. Aside from a few dissidents, most economists saw the need for the U.S. to close its fiscal deficit and did not see the structural crisis that was developing underneath them. Although he does mention Hyman Minsky a few times in the book, he leaves out Minsky’s most important insight that “stability leads to instability” as market participants are lulled into a false sense of security. It therefore was against the backdrop of the “great moderation” that the crisis began.  And it was the seemingly calm environment that lulled all too many regulators to sleep.

The underbelly of the financial system was and still is in many respects is the wholesale funding system where too many banks are largely funded in repo and commercial paper markets. This mismatch was exacerbated by the use of asset-backed commercial paper to fund long term mortgage securities. It was problems in that market that triggered the crisis in August 2007.

The crisis explodes when Lehman Brothers files for bankruptcy in September 2008. In Tooze’s view the decision to let Lehman fail was political, not economic. After that the gates of hell are opened causing the Bush Administration and the Federal Reserve to ask for $750 billion dollar TARP bailout of the major banks. It was in the Congressional fight over this appropriation where Tooze believes the split in the Republican Party between the business conservative and social populist wing hardens. We are living with that through this day. The TARP program passes with Democratic votes. Tooze also notes that there was great continuity between the Bush and early Obama policies with respect to the banks and auto bailout. Recall that in late 2008 and early 2009 nationalization of the banks was on the table. Tooze also correctly notes that the major beneficiary of the TARP program was Citicorp, the most exposed U.S. bank to the wholesale funding system.

Concurrent with TARP the Bernanke Fed embarks on its first quantitative easing program where it buys up not only treasuries, but mortgage backed securities as well. It was with the latter Europe’s banks were bailed out. Half of the first QE went to bail out Europe’s troubled banks. When combined the dollar swap lines with QE, Europe’s central banks essentially became branches of the Fed. Now here is a problem. Where in the Federal Reserve Act does it say that the Fed is the central bank to the world? To some it maybe a stretch.

Tooze applauds Obama’s stimulus policy but rightly says it was too small. There should have been more infrastructure in it. To my view there could have been more infrastructure if only Obama was willing to deal with the Republicans by offering to waive environmental reviews and prevailing wage rules. He never tried for fear of offending his labor and environmental constituencies. Tooze also gives great credit to China with it all out monetary and fiscal policies. That triggered a revival in the energy and natural resource economies of Australia and Brazil thereby helping global recovery.

He then turns to the slow responses in Europe and the political wrangling over the tragedy that was to befall Greece. It came down to the power of Angela Merkel and her unwillingness to have the frugal German taxpayer subsidize the profligate Greeks. As they say “all politics is local”. The logjam in Europe doesn’t really break until Mario Draghi makes an off-the-cuff remark at a London speech in July 2012 by saying the ECB will do “whatever it takes” to engender European recovery.

As a byproduct of  bailing out the banks and failing to directly help the average citizen a rash of populism, mostly of the rightwing variety, breaks out all over  leading to Brexit, Orban in Hungary, a stronger rightwing in Germany and, of course, Donald Trump. But to me it wasn’t only banking policy that created this. The huge surge in immigration into Europe has a lot more to do with it. Tooze under-rates this factor. He also under-rates the risk of having a monetary policy that is too easy and too long. The same type of Minsky risk discussed earlier is now present in the global economy: witness Turkey, for example. Thus it is too early to tell whether or not the all-out monetary policy of the past decade will be judged a success from the vantage point of 2030.

Adam Tooze has written an important book and I view it as must read for a serious lay reader to get a better understanding of the economic and political policies of the past decade.

The full Amazon URL appears at: https://www.amazon.com/review/R3N14CMQU8F3OF/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Ronen Bergman's "Rise and Kill First: The Secret History of Israel's Targeted Assassinations"

Clausewitzian Realism in Service of the State

Israeli journalist Ronen Bergman has written a well-researched and readable book on Israel’s secret war of targeted assassinations against its most feared enemies ranging from Iran to Hamas to Hezbollah. In fact as I write this review there is a front page New York Times story (8/7/18) on the assassination of a Syrian rocket scientist on the streets of Damascus that was attributed to the Mossad which remains pound for pound the best foreign security agency in the world. He starts in the pre-state era and goes through 2015 and covers the three main organs of state security: Mossad (external), Shin Bet (internal) and AMAN (military). He covers their great successes and their failures. Unfortunately he is way too much of a critic for my taste.

Bergman begins his book by quoting from Talmud: “If someone comes to kill you, rise up and kill him first.” That in a nutshell is the major lesson of his book because a small state surrounded by enemies has to act preemptively if it is to survive. The state has to be a Clausewitzian realist who understands to paraphrase Clausewitz “assassination is the continuation of politics by other means.”

Perhaps the clearest example of realism is when the Mossad hires former Waffen-SS Lieutenant Colonel and Hitler favorite Otto Skorzeny to disrupt an Egyptian missile program in the early 1960s. At that time Nasser recruited World War II German rocket scientists to develop missiles to attack Israel. The operation was a success. Just think about this, Israel hiring a Nazi leader to defeat its current Egyptian enemy.

There are many stories like this with hits taking place in Europe, Iran, Iraq, Syria and Lebanon. Each and every one had to be personally approved by the prime minister. Of course thing often went awry, most notably during the 1982 Lebanon War. It is a high risk business where the lives of the agents are at great risk and the mission can fail if civilians are killed. However, unlike their opponents, the Israeli’s agonized over the potential for collateral damage and actually called off operations because of undue risk to non-targets.

Bergman’s main source for more recent events appears to be former Mossad head Meir Dagan who ran the operation from 2003-2012. Dagan died in 2015 and was a harsh critic of Netanyahu, especially with respect to his Iran policy. Bergman too dislikes Netanyahu but he more kind to Sharon and Begin. I did not like Bergman using his pejorative term “right wing” to describe the Likud faction. I would have used center-right. After all he never called the Labor Party “left wing.”

Despite my criticisms Bergman has written a terrific book. There is much to learn about Israeli tradecraft and how their decision making process worked. And when one reads about operational failures, the critic has to sit in the shoes of the decision makers at the time the decision was made. In the spy business it is easy to be a Monday morning quarterback. Bergman ends his book by noting that we can’t confuse tactical success with strategic success. Israel’s strategic dilemma hasn’t much changed since the aftermath of the 1967 war. It has yet to reach a long term settlement with the Palestinians and still faces a very hostile Iran.

For the full Amazon URL see: https://www.amazon.com/review/R1PFY89UKBK8SG/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv