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Wednesday, December 31, 2008


(Der 20. Juli - a video authored by howe92)

Walkyrie, (the movie made in 2008 by Bryan Singer, with Tom Cruise as Claus Schenk Graf von Stauffenberg) is, I think, very well made. It respects in the most accurate way the facts, it keeps away from any attempt to romanticize whatever, and it has the perfect pace, like real time.

What would have followed were the plot to succeed? Would have been the end of the war then, in July 1944? I'm not sure. The engagement had been total, the only logic of the war had been succeed or disappear, so the Allies were committed to punish Germany, with or without Hitler. Unconditional surrender was the only option.


Tuesday, December 30, 2008

Christmas Party at Lexington

Kids, parents, and grandparents together. Let's see, can you recognize my two granddaughters?

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Sunset in Lexington

Sunset in Lexington, Massachusetts. There is a golf club on the Hill Street, and winter comes there with snow and sleds.

Sunday, December 28, 2008

Hou Hsiao-Hsien: Millennium Mambo

A girl is advancing graciously along a walkaway, giving sometimes the impression of floating; she's talking presumably about herself, but at the third person. Or is it about another girl? She's saying that the story has happened ten years ago, in 2001. It's about an abusive boyfriend and about her dependence on him, but her tone is detached, and she's smiling. Are we really in 2011 in this scene? Or the girl from 2001 is imagining her future (Millennium Mambo was made actually in 2001)? As she is advancing, the walkaway becomes a tunnel going down: is it a metaphor for the road that life follows toward the end? The whole scene seems surreal, sending subtle signals: maybe the story in the movie is just symbolic, like in a medieval morality.

(Opening Sequence - video by shanghanigan)

Actually the walkaway exists in reality. It is in Keelung, a city on the border of the ocean. The girl exists also in reality, and she is from that city, too. One evening, in a bar in Taipei, she told Hou Hsiao-Hsien her story, talking about herself at the third person, and with the same detachment as the personage from the movie.

Why did she tell her story to the filmmaker? I think because Hou Hsiao-Hsien is a good listener, and people feel confidence and sympathy in good listeners. The movies of Hou Hsiao-Hsien show a particular respect and empathy for people like Vicky, and Hao-Hao, and Jack: young people floating freely over the borders of promiscuity, guys good of nothing, bar girls, small thieves, petty gangsters.

(The whole movie - video by Tom Eveney)

The plot could be told in just a couple of sentences: a teenage girl (Vicky) is trying to break with her abusive boyfriend (Hao-Hao), only she always comes back to him; it's like a spell; she needs a job as he doesn't work; she becomes a stripper in a bar where a small gangster (Jack) offers her protection; will the new relation evolve beyond camaraderie? will she rather come back once more to Hao-Hao?

There are three great masters here: Hou Hsiao-Hsien, the filmmaker, Chu Tien-Wen, the author of the screenplay, and Lee Ping-Bing, the cinematographer. Each scene of Millennium Mambo carries some kind of magic and seems unreal: it comes in a halo of blue tones; people and objects are taking shape, to repeat the same basic action; he is abusive, she is submissive, again and again. Taipei: a city of young people, populating the night bars, living the rhythms of techno music, sleeping during the day.

As the movie is developing slowly on the screen, you are looking for a sense in all that. The action is not linear and some scenes are even repeated. As it happens with all movies of Hou Hsiao-Hsien, the effect is not immediate. It is like depot medication: the feeling about the movie is penetrating you slowly, long after it has ended. Sometimes it can take years. The art of Hou is of a special kind: words like wizardry or slow poison are not out of context.

(Trailer - video by ShuQiFanBase)

To get the sense of the movie, you should watch carefully the ending scene, taking place in Japan during winter. The fact that a story from Taiwan moves suddenly to Japan is not important: the reason there is the snow! It snowed in Tokyo that winter, remembers Vicky (the sentence sounds so great! the author of the screenplay, Chu Tien-Wen, is one of the most important names in Taiwanese literature).

The movie is about our dreams: they are pure, our dreams, we build them in immaculate snow, we live our lives in the country of snowmen. We dream about eternity: they will live, our dreams, only as long as snowmen live.

(Ending Scene - video by shanghanigan)

(Hou Hsiao-Hsien)


Thursday, December 25, 2008

Poveste de Craciun

Un coleg de-al meu din anii studentiei, Ioan Pescaru, mi-a adus in atentie o poveste de Craciun care este foarte frumoasa. Autoarea este doamna Adriana Ioana Serban. Iata si povestea:

Candva, de mult, la marginea unui oras, traia un mester batran care facea jucarii. Tot anul mesterea la ele cu dragoste si rabdare. Erau minunate si nu semanau una cu alta.

In Ajunul Craciunului, batranul mester pleca din oras sa-si vanda jucariile. Oameni din acel oras nu erau prea bogati. Mesterul le vindea jucariile pe mai nimic.

Dar asta nu-i scadea cu nimic bucuria de a face jucarii de care copiii sa se bucure, dupa datina, in dimineata de Craciun. Pana intr-un an in care…

Mesterul vanduse toate jucarile si se intorcea spre casa. La marginea orasului s-a oprit sa priveasca o fereastra. Stia ca acolo locuieste o familie saraca si se intreba ce jucarii or fi primit copiii din acasta casa.

Trei copii visau cu voce tare:

-Daca am avea un soldatel de plumb, numai unul, ne-ar fi de ajuns…

-Ne-am juca impreuna si nu ne-am certa nici o data pentru el. Batranul stia ca nu mai avea nici o jucarie si tare ar fi vrut sa le daruiasca macar una. Dar ce minune! Tocmai un soldatel de plumb rasarise, nu se stie de unde, in fundului sacului. Si astfel dorinta celor trei frati sarmani s-a indeplinit.

In drum spre casa, batranul gandea: As vrea sa fac atat de multe jucarii, incat sa daruiesc cate una fiecaruri copil din lume dar mai ales celor sarmani, carora n-are cine sa le cumpere. Si acum mergand asa, pe ganduri, vazu in zapada un pui de caprioara care-l privea cu ochi tristi.

-Sarmana faptura, ce te doare?

Se pare ca puiul de caprioara se ranise la un picior. Cum a stiut si cu ce a avut la indemana, batranul i-a legat rana si la ajutat sa se ridice .

Atunci faptura aceea gingasa i-a a vorbit cu glas limpede ca si de copil:

-Acum vad ca ai 0 inima buna. Dorinta ti se va indeplini.

Ca din pamant a aparut o sanie fermecata purtata in zbor de niste reni minunati.

Si batranul s-a inaltat cu ei si slava cerului instelat, spre o lume de basme. Chiar si hainele lui saracacioase se preschimbasera in niste haine neobisnuite de culoare rosie.

N-ar fi putut spune cat si pe unde l-a purtat sania fermecata. Intr-un tarziu a simtit cum coboara lin intr-un tinut inzapezit, unde il astepta o casuta cu ferestre luminate. O multime de pitici ca si cei din povesti l-au intampinat bucurosi.

Piticii erau harnici si indemanatici, gata sa se apuce de treaba. Materialele se gaseau din belsug, caci, nu se stie cum, se imulteau mereu si nu se terminau niciodata. Iar batranul mester priceput ii indruma pe pitici si impreuna faceau jucarii, mereu mai multe si mai frumoase. Pentru fiecare copil din lume, jucaria pe care si-o doreste.

In seara de Ajun sosesc colindatorii, La fiecare casa, ei aduc vestea minunata a Nasterii Domnului si ureaza un an bun si imbelsugat.

Tarziu, cand noaptea se lasa , copii se culcusesc in patucurile lor. In urechi le mai suna inca zvonul de colinde : O ce veste minunata… Apoi dorm si viseaza…..

Dar oare vis sa fie???

Este noaptea in care visele copiilor se implinesc. A doua zi, in dimineata de Craciun in jurul bradului impodobit, bucuria nu mai are margini. Nici unul dintre ei n-a fost uitat. Iar dupa numele sarbatorii, copiii i-au pus numele Mos Craciun si asa a ramas pana astazi.

De aceea, in zilele acestei sfinte sarbatori, cand stam cu toti in jurul mesei incarcate cu bunatati, nu trebuie sa-i uitam pe cei sarmani. Mosul are grija de ei o data pe an. Noi trebuie sa ne gandim la ei mereu!


Harold Pinter Passed Away

Harold Pinter
10 October 1930 - 24 December 2008

(A Life in Books)

Christmas Party at Circle Towers

Christmas Party at Circle Towers in Fairfax, Northern Virginia

Vecinii mei, unde locuiesc: nord-americani si sud-americani, indieni, chinezi, rusi, si multe alte natii; am petrecut impreuna si ne-am bucurat de Craciun.

(Around Fairfax Circle)


Monday, December 22, 2008

Parajanov Museum in Yerevan

I had never the chance to visit Yerevan; I met with the Armenian civilization on many occasions. There is the Armenian community in Romania, with its history that is strong on its own values. It is in the same time a mirror toward their country of origin: I understood the Armenian ethos from them.

Parajanov belongs to the Armenian ethos, but his genius embraced much more than that. His movies tell us about the whole Eastern Christian culture, from the Carpathians woods to the Caspian borders. Well, better said, not the whole: his movies followed just the borders of the Imperium; the center was the space of Tarkovsky. Only, you know, Armenian and Georgian Christianism is much older than the Imperium.

I am now following Hasmik and Jim (the authors of the video) in their visit to the museum of Parajanov in Yerevan. It is overwhelming: too many great objects gathered together; the space is too tiny and Parajanov has so much to say...



Friday, December 19, 2008

Sarah Chayes Reporting from Kandahar

Sarah Chayes in W. Post: Clean Up the Afghan Government and the Taliban Will Fade Away

Nurallah strode into our workshop shaking with rage. His mood shattered ours. This is no government, he stormed. The police are like animals.

The story gushed out of him: There'd been a fender-bender in the Kandahar bazaar, a taxi and a bicycle among wooden-wheeled vegetable carts. Wrenching around to avoid the knot, another cart touched one of the green open-backed trucks the police drive. In seconds, the officers were dragging the man to the chalky dust, beating him -- blow after blow to the head, neck, hips, kidneys. Shopkeepers in the nearby stalls began shouting, What do you want to do, kill him? The police slung the man into the back of their truck and roared away.

So he made a mistake, concluded Nurallah, one of the 13 Afghan men and women who make up my cooperative. We don't have a traffic court? They had to beat him?

In the seven years I've lived in this stronghold of the Afghan south -- the erstwhile capital of the Taliban and the focus of their renewed assault on the country -- most of my conversations with locals about what's going wrong have centered on corruption and abuse of power. More than roads, more than schools or wells or electricity, we need good governance, said Nurallah during yet another discussion a couple of weeks ago.

He had put his finger on the heart of the problem. We and our friends in Kandahar are thunderstruck at recent suggestions that the solution to the hair-raising situation in this country must include a political settlement with relevant parties -- read, the Taliban. Negotiating with them wouldn't solve Afghanistan's problems; it would only exacerbate them. Ask any Afghan what's really needed, what would render the Taliban irrelevant, and they'll tell you: improving the behavior of the officials whom the United States and its allies ushered into power after the Sept. 11, 2001, terrorist attacks.

I write this by flickering light, a fat candle at my right elbow and a kerosene lamp on my left. We get only three or four hours of electricity every couple of days, often from 1 to 5 a.m. Still, the bill has to be paid. To do that, you must wait in a total of eight lines in two different buildings. You almost never get through the whole process without hearing an uncouth bark as your turn comes up: This desk is closing; come back tomorrow. Due to the electricity shortage, the power department won't open new accounts. Officially. But for $600 -- 15 times the normal fee and a fortune to Afghans -- you can get a meter installed anyway.

A friend recently visited the jail in Urozgan Province, north of Kandahar, where he found 54 prisoners. All but six were untried and uncharged and had been languishing there for months or years. A Kandahar public prosecutor told him how a defendant had once offered him the key to a Lexus if he would just refrain from interfering in a case the man had fixed.

Across the street from my cooperative there used to be a medical clinic. When it moved to a new facility, gunmen in police uniforms set up a checkpoint outside the empty building. Our inquiries revealed that they were the private guards of a senior government official. Their purpose? To serve as a graphic warning to the building's owners not to interfere in what would follow. A few days later, some friends of the official's moved in. The owners had no say in the matter, no recourse. This government official is one of the men the United States helped put in power in 2001 and whom the international community has maintained and supported, no questions asked, ever since.

This is why the Taliban are making headway in Afghanistan -- not because anyone loves them, even here in their former heartland, or longs for a return to their punishing rule. I arrived in Kandahar in December 2001, just days after Taliban leader Mullah Muhammad Omar was chased out. After a moment of holding its breath, the city erupted in joy. Kites danced on the air for the first time in six years. Buyers flocked to stalls selling music cassettes. I listened to opium dealers discuss which of them would donate the roof of his house for use as a neighborhood school. I, a barefaced American woman, encountered no hostility at all. Curiosity, plenty. But no hostility. Enthusiasm for the nascent government of Hamid Karzai and its international backers was absolutely universal.

Since then, the hopes expressed by every Afghan I have encountered -- to be ruled by a responsive and respectful government run by educated people -- have been dashed. Now, Afghans are suffering so acutely that they hardly feel the difference between Taliban depredations and those of their own government. "We're like a man trying to stand on two watermelons," one of the women in my cooperative complains. The Taliban shake us down at night, and the government shakes us down in the daytime.

I hear from Westerners that corruption is intrinsic to Afghan culture, that we should not hold Afghans up to our standards. I hear that Afghanistan is a tribal place, that it has never been, and can't be, governed.

But that's not what I hear from Afghans.

Afghans remember the reign in the 1960s and '70s of King Zahir Shah and his cousin Daoud Khan, when Afghan cities were among the most developed and cosmopolitan in the Muslim world, when Peace Corps volunteers conducted vaccination campaigns on foot through a welcoming countryside, and when, my friends here tell me, a lone, unarmed policeman could detain a criminal suspect in a far-flung village without obstruction. Kandaharis -- even those who lost a brother or father in the 1980s war against Soviet occupation -- praise the communist-backed government of former president Najibullah. His officials weren't building marble-clad mansions with the money they extorted, says Fayzullah, another member of my cooperative.

One day I asked three of my colleagues -- villagers with almost no formal education -- what jobs they would choose if we were the municipal government of Kandahar. They spoke right up. I would want to be in charge of public hygiene, said Karim. The garbage piling up on our streets is a disgusting health hazard." Abd al-Ahad wanted to be the registrar of public deeds, "so the big people can't just take land and pass it out to their cronies. Nurallah wanted to be the equivalent of the FDA: the man responsible for weights and measures and the quality of merchandise in the bazaar.

After the Soviet invasion, which cost a million Afghan lives over the course of the 1980s, followed by five years of gut-wrenching civil war and another six of rule by the Taliban, who twisted religious injunctions into instruments of social control, Afghans looked to the United States -- a nation famous for its rule of law -- to help them build a responsive, accountable government.

Instead, we gave power back to corrupt gunslingers who had been repudiated years before. If they helped us chase al-Qaeda, we didn't look too hard at their governing style. Often we helped them monopolize the new opportunities for gain. A friend of mine, one of the beneficiaries, was astounded at the blank check. What are we warlords doing still in power? police precinct captain Mahmad Anwar asked me in 2002. I vowed on the Holy Koran that I would fight the Taliban in order to bring an educated, competent government to Afghanistan. And now people like me are running the place? I had to laugh at his candor.

Into the context of the white-hot frustration that has been building since then, insert the Taliban. Since 2001, they have been armed, financed, trained and coordinated in Pakistan, whose military intelligence agency -- the ISI -- first helped create them in 1994.

What I've witnessed in Kandahar since late 2002 has amounted to an invasion by proxy, with the Pakistani military once again using the Taliban to gain a foothold in Afghanistan. The only reason this invasion has made progress is the appalling behavior of Afghan officials. Why would anyone defend officials who pillage them? If the Taliban gouge out the eyes of people they accuse of colluding with the Afghan government, as they did recently in Kandahar, while the government treats those same citizens like rubbish, why should anyone take the risk that allegiance to Kabul entails?

More and more Kandaharis are not. More and more are severing contact with the Karzai regime and all it stands for, rejecting even development assistance. When Taliban thugs come to their mosques demanding money or food, they pay up. Many actively collaborate, as a means of protest.

The solution to this problem is not to bring the perpetrators of the daily horrors we suffer in Kandahar to the table to carve up the Afghan pie. (For no matter how we package the idea of negotiating with the Taliban, that's what Afghans are sure it will amount to: cutting a power-sharing deal.)

The solution is to call to account the officials we installed here beginning in 2001 -- to reach beyond the power brokers to ordinary Afghan citizens and give their grievances a fair hearing. If the complaints prove to be well founded, Western officials should press for redress, using some of their enormous leverage. The successful mentoring program under which military personnel work side-by-side with Afghan National Army officers should be expanded to the civilian administration. Western governments should send experienced former mayors, district commissioners and water and health department officials to mentor Afghans in those roles.

If the United States and its allies had fulfilled their initial promise and pushed the Afghan government to become an institution its people could be proud of, the reconcilable Taliban would come into the fold of their own accord. The Afghans would take care of the rest.

Zoon Politikon)

Synecdoche, New York

Gus Van Sant on Synecdoche, New York: a pastiche of existence; there's no way to describe it; it's pretty intense.

Once, long, long time ago, the artist (played by Philip Seymour Hoffman) had started to work on a gigantic project. A theater was rented in Manhattan, shape and sizes of a huge hangar. And soon the hangar had been filled by scaffolding.

They were building a whole city inside: the real image of the outside, with streets and avenues, cars, skyscrapers, sordid apartments; and the zeppelin was flying just below the roof.

Actually the roof hadn't ever been terminated, so you were able to see the outside from inside: and here and there the two cities were looking like one and the same.

The actors were non-professionals, just bums, failures and mentally insane, as Manhattan could anytime provide enough supply. The artist had given them a total freedom how to interpret their roles. It would have been impossible otherwise: there were too many.

It should have been a performance about his life: he was trying to understand himself.

It had been the typical life of an artist destroyed by Manhattan, spiritually and physically (as any other artist living there), navigating endlessly among grandiose projects and impossible women.

He had failed with all women in his life. The first wife had left him long time ago; she had taken their four years daughter with her and had moved to Germany. Years had passed; the girl had been meanwhile initiated by a lesbian artist, who had painted her nude at different ages.

That was the story with the first wife. The second had divorced as she could bear no more the intensity of the performance. As for the third woman, he had given up that time. She would come back late in his life when both of them were far too old.

The project would never be finished, because his life was going on, with new erotic failures and endless failed projects.

And the performance arrived at the point in his life where the project had started: a new hangar appeared inside the first hangar, and a new inside city. As for the non-professional performers, with their total freedom to decide, they hired in turn other non-professionals to play them.

Which was the real city? What women were the real ones? Those who had been in his life? Those who were playing them? Those who were playing the roles of those who were playing the roles?

As for him: which of them was the real one? He, the artist? Or the bald toothless old guy with a cynical smile who was walking with a cane and was playing him? Or the other old insane, who was hired by the first one?

Was he the real one? Everybody was getting older there, it was not clear anymore whether in life or on the scene. And they were hiring bums and failures who were older and older. All his performers were decaying biologically, more and more. And they were dying eventually, and they were buried there, on the scene.

He was keeping in having accidents, each one leaving him with one more small visible infirmity. Otherwise he did not seem to look older.

Actually he was getting older and older, of course, besides cane, besides glasses. He would realize it, in the long run. Only in the long run.

Who was the real one? Was it the old bald toothless performer with cynical smile? Or Philip Seymour Hofman?

Because it's his movie. He, Philip Seymour Hoffman, he is playing with a tragic pathos that you cannot see often.

And you leave the theater in the end with many details that remained obscure, but who cares? You are overwhelmed, and you realize that it is your own life there, grandiose and useless; you are there in the movie, you are trying to understand yourself, but you cannot. Because you are too hypochondriac, too paranoid, too scared of your own degradation and death.


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Nikita Mikhalkov in a Timeless Movie

The video of Pustinnik shows a scene from Жестокий романс, the 1984 movie of Eldar Ryazanov. Look at Nikita Mikhalkov there: he was doing it in style!

(Russian and Soviet Cinema)


Thursday, December 18, 2008

Conceptual Art: Lawrence Weiner, Robert Barry, Hamish Fulton

Lawrence Weiner - Reduced, 1970
paint on wall

It starts with this impressive REDUCED, that calls in mind the Constructivists of the Twenties. Fifty years separates them, the Constructivists and the Conceptualists. There are striking resemblances, but actually each one is quite a different animal. Constructivism and Conceptualism, each with its own history, motivations, aims, interests.

Hirshhorn is hosting these days an exhibition mainly devoted to the Conceptual Art (not only; there are also some Minimalism, some Installation Art). The works are from the Panza Collection.

The first exhibit is REDUCED: it's the first time for me to see so much Conceptual Art, and now everything begins to make sense.

Conceptualism: a form of art where the project (the idea, the concept) is emphasized, rather than the aesthetic aspects; a formula that is cryptic enough, isn't it?

What is on view at Hirshhorn reflect mainly two ways to emphasize the project.

One way: the art work is a statement about the project (the idea, the concept) that the artist wants to accomplish (to convey). The second way: the art work makes a statement about the accomplishment of a project.

Lawrence Weiner, Robert Barry belong, I think, to the first category, while Hamish Fulton belongs rather to the second.

Lawrence Weiner paints huge red letters on the wall: you should say Minimalism, only the words Weiner paints constitute his message, his obsession, his ego. This originated from Minimalism, but it's no more there. Once you say a statement that expresses your ideas, your ego, you are no more a Minimalist: it's no more a line (expressing just itself, the line), it's a manifesto (expressing yourself, the artist). Conceptualism is Post-Minimalism. Lawrence Weiner had learned the Minimalist lesson and went further.

And here comes another strinking resemblance: Minimalism shifting to Conceptualism repeats somehow the history of Suprematism shifting to Constructivism - Minimalists, like Suprematists, were aiming to arrive at the basics, to discover the beyond - Conceptualists, like Constructivists, start from the basics to build upon the new project.

Works by Robert Barry, Lawrence Weiner, Hamish Fulton

Robert Barry goes the same way as Lawrence Weiner. He, too, paints statements on the wall (IT CAN ONLY BE KNOWN AS SOMETHING ELSE); in It... he uses slides and a projector to communicate the thing.

Robert Barry - It..., 1969-1971
35 mm slides (59 text, 1 blank) and projector

But I think Barry goes a bit further beyond the Conceptual border in this vinyl lettering: the statements are here arranged in an elegant way, suggesting a huge wall clock.

Robert Barry - Untitled, 1983
paint, oil stick, and vinyl lettering on wall

Hamish Fulton is a Conceptualist who goes the second way. His statements are about accomplishments; they are expressed through photographs. Look at this Iceland: it's beautiful, however it conveys primarily a statement: here is the project that I accomplished - I walked through Iceland from coast to coast.

Hamish Fulton - Iceland, 1975
gelatin silver prints and ink on paperboard

(Hirshhorn Museum)

(Contemporary Art)


Wednesday, December 17, 2008

U.S. and China: Two Countries, One System

Thomas L. FriedmanChina has a big-state-owned banking sector, next to a private one, and America now has a big state-owned banking sector next to a private one. China has big state-owned industries, alongside private ones, and once Washington bails out Detroit, America will have a big state-owned industry next to private ones. And while the two countries are looking more alike, they appear to be on very different historical trajectories: China goes toward capitalism.

Tom Friedman in today's NY Times:

The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I’ve never been asked before: So, just how corrupt is America?

His question was occasioned by the arrest of the Wall Street money manager Bernard Madoff on charges of running a Ponzi scheme that bilked investors out of billions of dollars, but it wasn’t only that. It’s the whole bloody mess coming out of Wall Street — the financial center that Hong Kong moneymen had always looked up to. How could it be, they wonder, that such brand names as Bear Stearns, Lehman Brothers and A.I.G. could turn out to have such feet of clay? Where, they wonder, was our Securities and Exchange Commission and the high standards that we had preached to them all these years?

One of Hong Kong’s most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of know thy customers and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

Previously, there was America, he said. American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick.

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the legal scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Far from being built on best practices, this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: I’ll be gone when the payments come due or the mortgage has to be renegotiated.

It is both eye-opening and depressing to look at our banking crisis from China. It is eye-opening because it is hard to avoid the conclusion that the U.S. and China are becoming two countries, one system.

How so? Easy, in the wake of our massive bank bailout, one can now look at China and America and say: Well, China has a big-state-owned banking sector, next to a private one, and America now has a big state-owned banking sector next to a private one. China has big state-owned industries, alongside private ones, and once Washington bails out Detroit, America will have a big state-owned industry next to private ones.

Yes, an exaggeration to be sure, but the truth is the differences are starting to blur. For two decades, a parade of U.S. officials came to China and lectured Beijing on the necessity of privatizing its banks, said Qu Hongbin, the chief economist for China at HSBC. So, slowly we did that, and now, all of a sudden, we see everybody else nationalizing their banks.

It’s depressing because China in many ways feels more stable than America today, with a clearer strategy for working through this crisis. And while the two countries are looking more alike, they appear to be on very different historical trajectories. China went crazy in the 1970s, with its Cultural Revolution, and only after the death of Mao and the rise of Deng Xiaoping has it managed to right itself, gradually moving to a market economy.

But while capitalism has saved China, the end of communism seems to have slightly unhinged America. We lost our two biggest ideological competitors — Beijing and Moscow. Everyone needs a competitor. It keeps you disciplined. But once American capitalism no longer had to worry about communism, it seems to have gone crazy. Investment banks and hedge funds were leveraging themselves at crazy levels, paying themselves crazy salaries and, most of all, inventing financial instruments that completely disconnected the ultimate lenders from the original borrowers, and left no one accountable. The collapse of communism pushed China to the center and [America] to the extreme, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland.

The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense. Which is why we don’t just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics and regulations. I don’t want to kill the animal spirits that necessarily drive capitalism — but I don’t want to be eaten by them either.

Zoon Politikon)


Tuesday, December 16, 2008

A Story with Santa Claus

(click here for the Romanian version)

It was Saturday. I had come to see the Christmas Tree near the White House. As always, it was surrounded by lots of railroads, and it was fun, and the kids were noisy and happy.

I tried to record a video, and it was difficult, as the sun was playing games with my camera. I succeeded somehow, not a particularly great video, but nobody's perfect.

There was a small wooden shack a bit further, with a very young lady in front. As she was dressed somehow peculiarly, I asked her what the matter was.

She said to me that she was the niece of Santa and the gatekeeper there: the small shack was Santa Klaus Workshop.

Well, this made me curios, I wanted to see Santa, I had been missing him for a whole year. So I stayed in line there, along with kids and parents and grand parents, thinking at my two granddaughters, who were in a vacation in some distant place where winter is not very different from summer.

I went inside and here he was, Santa Claus, with a gorgeous white beard, with a respectable belly, and with a nice smile. He looked very much like my friend from Toronto, Adrian.

Actually I haven't met Adrian yet, we are only pen pals, but I saw him in a photo. He is very old, with a respectable belly and a huge beard, so the comparison with Santa has strong evidence behind.

Well, the beard of Santa was not only white, it was real! I was amazed: it was the first time in my life that Santa was wearing a real beard. Each time I had seen him before, the beard was from cotton.

All this happened last Saturday. Next day I was in Georgetown and I entered the Starbucks on the M Street. There was a line, and in front of me was Santa himself! Of course, now he was dressed in civilian clothes, like everybody, but the same very real, very white beard (huge and gorgeous, too) and the same respectable belly. Or was it Adrian?

No, Adrian was in Toronto. Had he come suddenly here, just to enjoy a cup of coffee at Starbucks? Impossible. Or, who knows?

I asked him, are you Santa?

Yes, he said, and you should give me money: I need to buy toys for the kids.

Okay, based on this answer he could have been very well Adrian, too.

I didn't know what to say. I mumbled something and I smiled. He returned my smile.

After one hour or so I met him again, on the street.

Here you are again, he said.

I said, yesterday I was at the White House and Santa was nearby in a wooden shack. Are you that guy or not?

You could say so, was the answer.

Then he asked me, where are you from? You have a special accent.

You should guess, I said.


You think I would have moved here from Germany?

He tried again, Switzerland?



No, Romania.

He looked at me amazed, man, I am old and I witnessed strange events in my long life. But it's the first time I am in front of a Romanian!

Nobody's perfect, I said.

Suddenly he started to laugh, and you were believing I was Santa, is it?

I realized now who he was! Adrian, you are incorrigible!

(Washington, District of Columbia)

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The Crash - What Went Wrong

When the housing market began to tank in 2005, Wall Street ran through the yellow light of caution and created even riskier investments -- and Washington had no mechanism for finding out what was going on.

That's what Jill Drew writes in today's Washington Post. And she continues:

It was Wall Street's version of an inside joke: Take a motley collection of largely unwanted assets, repackage them into a new set of bonds, and name it after the pristine white-sand beaches of an exclusive New Jersey town where Katharine Hepburn once summered.

No one is laughing now.

The Merrill Lynch bond deal known as Mantoloking has ended up with a different punch line: proof of the frenzied, foolhardy drive for upfront fees that helped bring down the world's financial markets and trigger the largest federal bailout in history.

Wall Street firms thought they had a surefire way to profit from the booming real estate market without much risk to their companies. They engaged in a kind of financial alchemy, creating a trillion-dollar chain of securities on the back of subprime mortgages and other loans, which were sold to investors in private offerings that no government regulator scrutinized.

With these deals, known as collateralized debt obligations, the world glimpsed the raw power of unchecked financial markets operating full-throttle to the point of self-destruction. The cascading losses on CDO bonds have undermined the solvency of several large banks and obliterated the trust that is the bedrock of all functioning markets. The debacle also has called into question the competence of Wall Street, the independence of bond-rating firms, the prudence of insurers and the foresight of regulators.

Deals like Mantoloking were the height of lunacy, says Joshua Rosner, a bond market expert who issued multiple warnings about lax lending standards during the past seven years, earning him status as an early prophet of the credit crisis.

So many of these bonds have become untouchable that they stand in the way of restoring the flow of credit that the global financial system needs to operate and that the economy needs to climb out of recession. Experts say that firm prices must be established for the bonds -- no matter how low they may go -- so the system can clear itself of these toxic assets.

Not only did no government agency or official try to stop the bond deals as they were selling, but Washington cheered this new market because it expanded homeownership -- at least until defaults started piling up.

Wall Street and Washington acted in concert to provide an artificial sense of a safety net, said Julian Mann, a Los Angeles-based investment portfolio manager for First Pacific Advisors who looked over many CDO offerings.

Like many others, Mann faults Washington for failing to rein in the subprime market, with its many no-documentation, teaser-rate loans that extended credit to those who couldn't afford it and invited fraud. He also blames Wall Street for relying on elaborate models that predicted that default rates would be low when common sense screamed otherwise.

The incoming Obama administration has pledged to overhaul the regulatory structure, which could lead to an examination of the legal thinking that has embraced CDOs as private placements. Sold from trusts often organized in the Cayman Islands, the bonds were listed only on the Irish Stock Exchange, of all places. An official there readily acknowledged that the exchange handled no trades in the bonds. No prices were made public, and documents on file at the exchange were available only to those who purchased the bonds.

The only public reporting of the deals were the gains or losses on the securities recorded by their owners. Under this system, regulators had no official window into the bigger picture -- that these private securities had grown so numerous and involved so many companies that they posed a collective risk to the entire financial system.

The Wall Street machine cranked out CDOs full tilt from 2005 to 2007. It was a race against time as accelerating delinquencies ate away at the value of mortgage-backed securities that served as collateral for many of the deals. No one was trying to contain the erosion; rather, the players had every incentive to get the securities that backed the deals out of their inventories, so they created as many CDOs as possible.

In February and March 2007 alone, one of the world's biggest CDO dealers, Merrill Lynch, sold nearly $29 billion of the securities, 60 percent more than in any previous two-month period, according to data from Thomson Reuters. Goldman Sachs sold $10 billion that March, more than double any previous month. Citigroup sold $9 billion, one-third more than in February, itself a record month.

Deals were flying out so fast that the Wall Street firms sometimes could not tell investors what specific collateral was going into which CDO, making a mockery of anyone who tried to do a fundamental analysis of the assets backing the bonds before agreeing to buy.

There was enough of a feeding frenzy that you didn't want to lose your place in line, Mann said, speaking as an investor who passed up many such deals. A lot of people knew this was bogus, but the money was too good.

Creation: Manufacturing Money

Thursdays in 2006 were party nights for the structured-finance team that packaged CDOs at a top Wall Street investment bank. The evenings usually started with dinner at a trendy restaurant, perhaps Morimoto, run by one of Japan's original Iron Chefs, or Babbo, Mario Batali's Italian gem in Greenwich Village. Then the brokers and bankers would take their clients to nightclubs such as Marquee and Pink Elephant, where they would run up $1,000 tabs and dance until 4 a.m. At 7 a.m., team members would arrive at their desks, haggard if not hung over.

Hangover or not, some traders couldn't explain how a CDO worked. The CDO alchemy involved extensive computer modeling, and those who wanted to wade into the details quickly found that they needed a PhD in mathematics.

But the team understood the goal, said one trader who spoke on condition of anonymity to protect her job: Sell as many as possible and get paid the most for every bond sold. She said her firm's salespeople littered their pitches to clients with technical terms. They didn't know whether their pitches made sense or whether the clients understood.

CDOs were first sold in the 1980s, part of a revolution in corporate finance called securitization that fueled the unprecedented boom in available credit. Lenders could package their mortgages, credit card loans, equipment leases, even corporate debt, and sell securities backed by the interest payments. This maneuver transferred the risk of not getting paid to the investors who bought the securities. The deals returned cash to lenders, which they could plow into new loans. This efficient machine pushed borrowing rates lower, creating a win-win-win for consumers, lenders and investors.

Wall Street saw any income stream as a candidate for securitizing. Mortgages went into pools that became the basis for mortgage-backed securities. Ditto credit cards and other forms of debt. The list was long. All those securities were scooped up and used as collateral for CDOs. Indeed, this diversity of loans was thought to be a plus for the CDOs' safety.

The entire chain depended on the concept of layered risk. Once the ratings firms evaluated the quality of the securities, a ladder would form: The securities on the top rung, or tranche, were considered low risk and won a AAA rating. In return for their safety, these bonds paid the lowest interest rate. The reverse was true at the other end: The lower tranches absorbed the first losses from loan defaults, buffering the securities in the higher tranches. This extra risk earned them lower ratings, often AA, BBB or lower, but paid the highest interest rate.

The computer modelers gushed about the tranches. The layers spread out the risk. Only a catastrophic failure would bring the structure crashing down, and the models said that wouldn't happen.

CDO sales sputtered on and off until the surge in mortgage loans from the housing boom earlier this decade. Because mortgage-backed securities paid higher yields than other securities with the same ratings, they became wildly popular for use as CDO collateral. The CDO market took off. From $157 billion issued in 2004, it ballooned to $557 billion in 2006.

Unfortunately, a toxic chain was also forming. Consumers jumped into houses they couldn't afford. Mortgage brokers closed deals swiftly, sometimes by inventing phony income data for borrowers. The loans were quickly sold into pools that issued securities, so the brokers were rarely on the hook for defaults. Wall Street traders swirled like piranhas, snapping up the securities for repackaging as CDOs. Everyone feeding on this chain earned money upfront, in the form of fees.

Volume and speed dominated the process. Michael Anderson, a former mortgage trader for a Wall Street firm, said he would receive an e-mail from a mortgage originator like Washington Mutual that offered, say, a $1 billion package that included thousands of loans. Anderson had as little as an hour to bid. Some Wall Street firms, including Merrill Lynch and Bear Stearns, bought mortgage origination companies so they could cut out the bidding process and pump collateral more quickly into their CDO machines.

So frenzied was the market that firms short on actual collateral kept their machines humming by creating synthetic CDOs. These bonds had no actual loans to secure their payments; rather, investors were promised payments from another kind of private contract designed to mimic the inflows and outflows from other CDOs.

Investors who asked questions were derided for not getting it and crossed off the preferred customer lists of Wall Street sales forces, thus losing an opportunity to buy this hot product. Skittish buyers could purchase an insurance contract that was supposed to protect the investors in the top tiers of the CDO in the event of a default.

Getting the bonds sold was the key objective. That's when the firms would collect their underwriting fee, estimated by Thomson Reuters at 1.1 percent, or $11 million for every $1 billion deal.

There was only one possible catch in the seamless CDO machine: the bond-rating firm. Without high marks from at least one independent rating company, it would be impossible to sell large swaths of bonds to the intended market of big institutional investors -- pension funds, insurance companies and many overseas buyers -- because their rules required them to purchase only highly-rated, lower-risk securities.

Ratings were the linchpin of the CDO sales frenzy. The Wall Street engine had considerable influence here, too: It paid fees to the ratings firms for every approved deal.

Scrutiny: Overwhelmed and Overrated

Richard Gugliada, who was managing director in charge of structured finance at Standard & Poor's ratings services before leaving in October 2005, huffs when asked how the firm maintained its independence when it was paid by securities underwriters.

Never, he said. We never changed a rating because we would be paid more.

Gugliada acknowledged that S&P was under pressure to increase its revenue and was seeking to take market share from its two main competitors, Moody's Investors Service and Fitch Ratings. To do that, he said, the firm needed to do three things: provide better service, cut its fees and loosen its criteria a smidge for what would earn a triple-A rating. It's fair to say we did a little of all three, said Gugliada, who was criticized at a recent congressional hearing for sending an e-mail pressing one of his managers to make a credit estimate on a CDO deal without examining details of the underlying mortgage pools. Gugliada said the individual loans in those pools had been examined when they went into mortgage-backed securities, and it was S&P's policy to rely on those ratings in making a credit estimate.

A former S&P analyst in Gugliada's group, who spoke on condition of anonymity because he is out of work and fears being shunned by possible employers, recalls working flat-out by the end of 2005 to handle the huge flow of CDO deals pouring in from Wall Street. I missed most of every holiday family gathering and worked on every vacation, the analyst said. He often left S&P's office in lower Manhattan near midnight and occasionally would get calls at 4 a.m. on European deals.

The Securities and Exchange Commission, charged with overseeing the private ratings companies, did little to scrutinize their procedures during this time. In the summer of 2007, after S&P, Moody's and Fitch began slashing their grades on CDO bonds they had once blessed, the SEC stepped in to investigate what had gone wrong. This summer, without naming names, an SEC staff report faulted the ratings firms for not doing enough to police their conflict-of-interest policies.

The firms all say they did not bend their rules. We have rigorous policies and procedures in place to maintain our analytic independence and shield our analysts from encroachment of commercial interests, S&P said in a written statement. The company also said its criteria are consistently applied.

In the trenches, the overworked former analyst said he never worked with investment bankers to structure any of these complex deals. Instead, as S&P's policy dictated, he engaged in back-and-forth discussions. The most contentious conversations, he said, involved bankers trying to copy some new twist in a competitor's CDO. Because CDO documents were private, the analyst could not tell the copycats how a competitor had won a top rating. He watched as bankers tried to reverse-engineer the new structure from scant public information, often leaving out important risk-mitigating elements.

The CDOs piled up at a staggering rate, and so did the complexity, along with the pressure to get them rated. There was such a compressed time frame, the analyst said. As soon as some new development emerged, everyone took advantage of it. There was such an explosion, so many deals with the same features, that when something went wrong, it wasn't just limited to a few hundred million, but to several billions.

The S&P statement said analysts were not compensated on the number of deals rated or on the percentage of high ratings granted. Although the firm acknowledges that its assumptions about defaults did not serve us well on certain structured finance ratings, it also maintains that those assumptions seemed reasonable given the projected market environment at the time they were made.

Gugliada, who praises structured finance for lowering borrowing costs and making credit more widely available, says the ratings firms misjudged the impact that a relatively few mortgage foreclosures would have on all the other mortgages in a pool. In hindsight, we now know all mortgage-backed securities perform fine or they all default at the same time, he said.

The S&P statement called that view overly simplistic and inaccurate, saying securities have different levels of credit enhancement, different mortgage types and different borrowers that can cause each to perform differently.

Gugliada used to believe that. But he now says that CDOs made up of BBB-rated pools of mortgage-backed securities should never have been rated any higher than BBB themselves. If the ratings agencies had understood that, there wouldn't have been any CDOs of mortgage-backed securities, he said.

But Wall Street didn't just create CDOs based on mortgages. As the frenzy went on, it cooked up CDOs based on CDOs.

Deluge: Morphing the CDO

The Mantoloking CDO, offered to investors in late 2006, owed its existence to an innovation that became typical of late-stage CDOs.

In Wall Street parlance, it was a CDO squared -- a CDO concocted from the unwanted parts of 126 other CDOs. In plain English, Mantoloking was a dumping ground.

BBB and BB bonds that had drawn few buyers in earlier incarnations were repackaged into a new set of tranches. At the top, $580 million of the bonds took on AAA designations. The remaining $185 million went into the lower, riskier tranches.

The CDO-squared carried an extra level of danger, however: If something went wrong, investors in Mantoloking's AAA tier had to stand behind the investors in the top layers of the original CDOs. The securities in the bottom tranches were a distant last in the lengthening queue.

Risky bet.

Nearly 60 percent of the underlying bonds were based on pools of corporate loans with below-investment-grade credit ratings, or junk. An additional 35 percent or so were based on asset-backed securities, including low-credit-quality subprime loans, according to the 178-page confidential offering prepared by its underwriter, Merrill Lynch. (The Washington Post obtained a copy from a firm representing one buyer.)

The offering document acknowledged several potential conflicts of interest. The most significant: The CDO pieces were plucked from an inventory held by Merrill's partner in the deal, Dillon Read Capital Management, a hedge fund owned by Swiss banking giant UBS that acted as the deal's servicing agent. Neither Dillon Read nor Merrill, which was the underwriter for several CDO pieces used as collateral, solicited independent bids to set the price for the bonds before hoisting them into Mantoloking.

The Dillon Read fund also purchased $45 million of preferred stock in the Mantoloking trust. The hedge fund's dual role as servicer and investor gave it the incentive to load the CDO with risky investments to enhance its potential return, according to the offering document.

The Mantoloking deal earned big fees for Merrill and others affiliated with the offering. Total fees aren't disclosed, but using the Thomson Reuters industry average, a rough estimate would be about $8.4 million.

Officials at Merrill and UBS declined public comment on the deal, which is now the subject of at least two legal actions by unhappy investors. The Dillon Read fund, despite the fancy footwork on this and other CDO deals, was later disbanded after big losses and its obligations were assumed by UBS. Merrill, too, swooned under losses from CDOs and other deals and sold itself to Bank of America in September.

Disintegration: Caught in the Cataclysm

The beginning of the end, many CDO traders say, is easy to mark. It came in July 2007 when two Bear Stearns hedge funds loaded with CDOs collapsed. That sent CDO prices tumbling and created instability that fed on itself.

Merrill felt the tremors almost immediately. An early casualty was one $160 million tranche of the Mantoloking bonds, which was especially vulnerable to market conditions because it had an added twist of complexity: Its interest rate was reset monthly via auctions, which Merrill conducted for another tidy fee.

By re-auctioning the bonds every month, Merrill essentially was selling bonds with 40-year maturities as four-week notes. That made them attractive to corporate treasurers seeking short-term investments to park their working capital. The auctions injected another level of uncertainty into the bonds, but Merrill wasn't worried. The tranche had a AAA rating and a much higher interest rate than comparable short-term debt, so Merrill was confident that there would always be buyers.

At least, that was the theory.

Then in August, at the first auction after the Bear Stearns funds collapsed, the theory blew up. Almost no one showed up to place bids. Merrill did not step in as a buyer of last resort. The auction failed.

Investors who owned the securities were stuck. Mind CTI, a small Israeli telecom services company, was caught with $20.3 million of these AAA bonds, tying up two-thirds of its cash. The bonds have been downgraded to junk, and there are no buyers. The company has filed an arbitration case against its financial adviser, alleging that the bonds were bought without Mind's authorization.

MetroPCS Communications, a Dallas-based provider of Internet phone services, had another $20 million of Mantoloking bonds. Claiming that it never saw the offering document, the company has sued Merrill, which also served as its financial adviser. The lawsuit alleges that Merrill deliberately failed to disclose the high-risk nature of the CDOs and its conflicts of interest to MetroPCS.

Merrill denies the allegation. Metro PCS knew what it had purchased and authorized the purchases because they provided a higher yield than other investments, Merrill said in a statement, noting that MetroPCS officials approved each CDO purchase.

The failed Bear Stearns funds also owned Mantoloking bonds. Unfortunately, the damage didn't stop at Mantoloking's shores.

The catastrophe that the computer models had discounted now coursed through the global financial system. Banks around the world soon fessed up to the billions of dollars in CDOs held in off-balance-sheet vehicles. Their books were also packed with billions in contracts linked to synthetic CDOs bleeding red ink. Some banks and investment firms couldn't cover their losses. Their exposure caused the credit markets to seize up and led banks here and abroad to essentially refuse to transact business without a government guarantee.

Larry A. Goldstone, president and chief executive of Thornburg Mortgage in Santa Fe, N.M., a boutique provider of prime loans to wealthy homeowners, remembers his reaction when UBS announced on Feb. 14 this year that it had nearly $70 billion in risky mortgage assets to unload.

I realized the market in general was far worse than I had imagined, he said. If UBS had that much, what about Goldman? What about Citi? What about everyone else?

Desperation: The Grab for Cash

To limit the carnage, banks scrambled to offload their money-losing positions and find new sources of cash.

In April 2007, Bear Stearns came up with a plan to sell stock in a new company that would essentially take over many of the imploding CDOs that its two hedge funds had invested in. The plan was called off before any public shares were sold, and the hedge funds collapsed.

Wachovia, the North Carolina-based financial powerhouse, had a different idea for how to protect itself. It came up with people like Donald S. Uderitz.

Uderitz had spent years on Wall Street, but in January 2007 he struck out on his own. He raised $50 million from investors and started a firm near his home in Delray Beach, Fla. He wanted to get in on the CDO business.

Uderitz had once worked for Wachovia. In spring 2007, a Wachovia affiliate approached Uderitz with an attractive offer. The affiliate wanted to buy a kind of insurance from Uderitz's fledging company that would protect the bank against losses on $10 million worth of bonds from a deal called Forge CDO, which Merrill had sold in April 2007. Wachovia would pay Uderitz $275,000 a year for the protection, under a contract that would last until 2053, a healthy stream of income for what was presented as a low-risk transaction. The Forge bonds were rated AA, one step below the highest grade, but still considered unlikely to default.

Wachovia requested that Uderitz post $750,000 to secure his pledge to pay if the bonds defaulted. Wachovia promised to hold it in a separate account and return it once the contract expired. On May 30, Uderitz wired the cash and thought he could sit back and collect more than 40 years of monthly payments.

He thought wrong. On June 18, less than three weeks after signing the documents, Wachovia sent the first of repeated requests for millions in additional collateral, several just a few days apart. One arrived by e-mail on Thanksgiving eve.

Uderitz had already posted nearly $9 million. Now the bank wanted another $550,000. On Thanksgiving morning, Uderitz got up early, put a turkey in the oven and headed to his office to deal with the nightmare. Nearly one-fifth of his investors' money was now frozen in this supposedly low-risk deal.

When Uderitz refused to pony up more cash, Wachovia declared him in default and seized the collateral. Uderitz has since sued Wachovia, alleging that the contract was a sham to squeeze us out of the trade and steal our money. Wachovia has countersued, seeking the rest of the money that it says is due.

Wachovia, saddled with other losses, is in the midst of merging with Wells Fargo. It has denied Uderitz's allegations, saying in court filings that the freefall in prices of mortgage-related securities had triggered provisions in the contract that authorized the bank to collect the additional collateral.

Uderitz has a less legalistic view. They were obviously having some major, major problems, he said. I think there had to be a conscious shift in their thinking: Go get collateral from whomever we can. We have to save our ass.

Wreckage: Scavengers in the Ashes

CDOs have become a knot of toxic debt choking off the flow of credit to consumers and businesses around the world. The Treasury Department's evolving bailout plan essentially acknowledged the need to set some sort of price for these bonds when it recently agreed to cover most of Citigroup's $306 billion in portfolio losses.

Brendan O'Connor knows that is easier said than done. He's a vice president of SecondMarket, a New York company that specializes in bringing together buyers and sellers for hard-to-value assets.

The CDO mess has given SecondMarket a new line of business. It has expanded to 60 employees and moved from its nondescript office near the Staten Island Ferry terminal in Manhattan to the former Standard Oil building on Broadway. Wall Street's big bronze bull sculpture sits on the median outside.

One new hire: L. William Seidman, the former chairman of the Federal Deposit Insurance Corp. who once ran the Resolution Trust Corp., the federal agency that disposed of tattered real estate assets during the savings and loan crisis. Seidman is serving as a senior adviser.

We're creating a transparent marketplace to try to provide liquidity for these investments, said Barry E. Silbert, its chief executive. Original buyers, he said, didn't do a deep dive into the details of the blizzard of securities that underlie CDO bonds. Silbert's staff is developing analytical tools to take apart CDOs, research that he says will be available to the public. Only qualified buyers and sellers will have access to bond prices, however.

Price has turned out to be the sticking point in selling the distressed CDO bonds. O'Connor has been trying to find buyers for one portfolio of CDOs, purchased for $40 million by a company he declined to name. The company fired the executive who had authorized the CDO purchases, and his replacement told O'Connor he wanted to get them off the company's books by year's end. He was willing to take just about any price.

O'Connor canvassed possible buyers and came back with a bid of 2 to 3 cents on the dollar. Not that low, the executive said. A second bid of 8 cents was also rejected.

O'Connor found a new buying group willing to up the ante: 10 to 15 cents on the dollar. O'Connor thought he had a winner.

I told the company that we had what I considered a very realistic buyer for the entire $40 million of assets, he said. But after a couple of days, the corporation still rejected it. It's a very tricky thing. They want to sell, but they are clinging to a sense of hope. It's no longer a mathematical discussion, it's a psychological discussion. It's not a badge of honor to walk around the office being the one who decided to sell assets at a distressed level.

Epilogue: Regulation Rising

Joshua Rosner recalls standing before a group of bankers, economists, regulators, Capitol Hill staffers and housing advocacy groups assembled at the District-based Hudson Institute on Feb. 15, 2007, looking out at blank stares. He had just presented a scholarly paper, which he had co-authored, predicting the crisis that would result from the CDO frenzy.

No one wanted to hear what Rosner was saying: The massive CDO market was about to collapse. The rise in subprime mortgage delinquencies, the reality of which had been masked for months by the CDOs' opaque structures and lack of public pricing, was choking off cash needed to pay investors.

There was a lot of skepticism, said Rosner, managing director of Graham Fisher & Co., a New York-based independent consultant that advises institutions on mortgage investments. Wall Street, he said, still had everyone mesmerized by its creation. He remembers strains of the popular song by the 1960s pop band the Monkees, running through his head: Then I saw her face. Now I'm a believer . . .

Plummeting CDO prices, he told the group, would cause a crisis on at least the same scale as the 1980s thrift crisis, when hundreds of financial institutions failed under the weight of bad real estate investments. The federal government shelled out hundreds of billions of dollars to rescue the economy.

Rosner's analysis was dead-on, although the mess may end up being even larger than he envisioned. Desmond Lachman, a resident fellow at the American Enterprise Institute and a former top Wall Street economist, says the U.S. economy has entered its deepest recession since World War II, one that could result in losses to the U.S. financial system of about $1.6 trillion, or 12 percent of gross domestic product. The thrift crisis, by contrast, cost the U.S. financial system about 2.5 percent of GDP.

Rosner says he could become a believer in CDOs if they were reworked and traded in a public market. He has urged regulators to build a new framework that stresses transparency and oversight of the structuring, sales, ratings and valuations of CDOs. Without that, the bonds are too reliant on ratings as a measure of the safety, ratings now known to be flawed.

Former SEC commissioner Paul S. Atkins, a strong advocate of deregulation during his six-year tenure that ended earlier this year, agreed that the trading of CDOs and other private investments must be done more openly to prevent systemic risk. But he cautioned that there needs to be smarter regulation, not just more rules.

Remember this crisis began in regulated entities, Atkins said, referring to investment and commercial banks overseen by the SEC and other federal agencies. This happened right under our noses.

Zoon Politikon)