Someone has to be wrong

Paul Krugman thinks Brad DeLong is wrong.  Brad DeLong thinks that Paul Krugman is wrong.  Robert Waldmann thinks that Brad DeLong is wrong.  The topic of course is the Geithner plan.

I'm not so far from Kevin Drum's view, as stated here and here.  It has some chance of succeeding and the relevant alternatives are also bad for the taxpayer.

But can the government itself be trusted?  Here is some of the recent fallout:

…some executives at private equity firms and hedge funds, who
were briefed on the plan Sunday afternoon, are anxious about the recent
uproar over millions of dollars in bonus payments made to executives of
the American International Group.

of these executives have told administration officials that they would
participate only if the government guaranteed that it would not set
compensation limits on the firms, according to people briefed on the

The executives also expressed worries about
whether disclosure and governance rules could be added retroactively to
the program by Congress, these people said.

The bottom line?: Here are what Thugz say about the various bailouts.  Excerpt:

…they laughed when I said the government should prioritize the punishment of senior management. In the words of Shine,
the elder statesman of the group, “You have to be real careful when you
mess with folks at the top, because when the war is over, you’ll need
these guys real quick. Ninety-nine percent of people just doing what
they’re told – you couldn’t find half a brain among all of them. But the ones with the brains – don’t let them go.”

In fact you would expect a successful businessman to understand that.


I assume Tyler's final line of this post is a triply ironic joke hinging on the word "successful".

I can't take anything the guy writes seriously after he said "I spent the last month on grand jury duty, putting Manhattan’s poor minorities behind bars." It's just wrong on so many levels.

1. Grand juries do not render verdicts which put people behind bars.
2. This guy spent a month of his life on a grand jury and is still comfortable characterizing its activity as "putting Manhattan's poor minorities behind bars"? So is he complicit in the injustice perpetrated by his grand jury? Or is he mischaracterizing the putative criminals he voted to indict by calling them "Manhattan's poor minorities"?

Maybe this seems like nitpicking but it sure seems like a big mistake to have this credibility-destroying throwaway line as the lede to your essay.

I work a a Tarped bank, and yes, there have been massive, dramatic layoffs, including unprecedented numbers of senior people and revenue producing groups, and others left without bonuses. I am not surprised that the media haven't noticed that bonuses are only going to our most difficult to replace Killers.(ps allthis has been publicly announced and is my personal not official view)

Yeah I have to agree with Curt. Normally I am no prude on these things, but that Freakonomics column seemed a lot like, "I'll get popular among the rich white folks by perpetuating their stereotypes about black criminals." He opens with (what seemed to be) a sarcastic joke about racial injustice, and then proceeds to contrast white corporate lifestyle with how black guys run their businesses, with Killers and ammo. (Not in so many words of course.)

That elder statesman's quote only shows how divorced from reality many executives are these days, they think there aren't droves of competent people willing and able to replace them in a heartbeat. FYI, there are.

Read Seth Godin's great piece on compensation in the financial world from this morning ( There is way more supply of willing financial world workers, and salaries are kept high through artificial means to create the allure of quality.

And to all, remember that the bonuses in question aren't performance payouts, they are guarantees. That's not money for performance, that's money to show up every day.

The non-recourse financing arrangement of the Geithner plan gives the toxic assets additional option value on top of their DCF intrinsic value. This will allow the private capitalists to make bids on the assets that are above the bank's reservation prices. The success of the program, along with other programs recently put in place, will set in motion a positive feedback loop that will result in recovery rates on the toxic assets being close to the high end of the current distribution. The economy recovers late this year. There will be a fifth edition of Jeremy Siegel's Stocks for the Long Run.

I wouldn't bet on it though.

Curt, Bob: To be fair, the writer for the Freakonomics post was involved in the same research that was divulged in the book "Freakonomics" (and related papers, of course)... much of the research was based on this student's insight into the economics of gangs -- thus, why we are getting the explanation using "Killers" and "Thugz".

On the other hand, he should have at least referenced this past research to put it into perspective, that is for sure.

I posted this on Waldmann's site but I don't know if it will show up:

Is Waldmann right that the hedge fund makes money even if it overpays for the assets? In particular, does the 3%/17% formulation mean that a risk-neutral hedge fund [if one existed] would theoretically break even if they paid 17/3rds of the value of the security?

So there is some risk discount multiplier which we apply to the number 17, and then (17*RiskDiscount)/3 is the ratio of overpayment which is the break-even point for hedge funds?

How do we know precisely how risk-averse hedge funds are? Do we have a low-variance estimate on this parameter?

Dan said:

Curt, Bob: To be fair, the writer for the Freakonomics post was involved in the same research that was divulged in the book "Freakonomics"...

That's fine, and like I said, I normally am not the guy to get squeamish about stereotypes. But something just really rubbed me the wrong way about the whole tenor of that column, like, "You white folks are screwing up the government, but in their own area of expertise--drug gangs and the NBA--black people know what's up. You white folks could learn a lot from us blacks. And we dance better too."

(Note I am not offended as a white guy, I am feeling patronized for any black readers who might have desired a career in the corporate world, or who are pursuing a PhD in a hard science, and are being represented by "Thugz.")

All that is needed is eliminate mark-to-market for regulatory purposes. Spending trillions of dollars is insane.

I believe this gentleman was responsible for the best theory on CEO pay I have heard - the top guy has to make a lot of money, even in bad times, so he doesn't seem "weak and sh*t". I call this the "W&S" theory.

From the outside, I have no idea if the high pay for certain key employees is needed or not. However I am sure that the government is no more informed than I am.

This I know, if government didn't give money to AIG, either they'd drop their pay, or go bankrupt, and we wouldn't have to bother to have this conversation.

Thugz writes: "Ninety-nine percent of people just doing what they’re told — you couldn’t find half a brain among all of them. But the ones with the brains — don’t let them go.†

The problem is that the bonus plans give them all bonuses...which suggests that management itself is unable to distinguish between the ones with half a brain and the ones without...

Curt: Although I can't prove it -- it would be pretty clear from the Freakonomics work that the "I spent the last month on grand jury duty, putting Manhattan’s poor minorities behind bars" line is sarcasm. Whether the tone they took comparing our economic problems and the "Thugz" economic problems is justified is a separate issue.

Now I am more confused than ever. Was he actually on a grand jury? If he wasn't, I guess I don't understand the sarcasm or the guy's voice in general.

If he was a grand juror, it seems like a hell of a joke. It'd be like if a surgeon said he spent the last month "cutting people open and then watching them bleed to death".

I totally disagree with the Ayn Rand style thinking that these guys on top had all of the brains, and that 99% of people have none.

I'm tired of this thinking that the brilliant CEO's are "super-smart" and the rest are peons, and this cuts across all industries.

People, together, have more knowledge between them than any single man can.

re "But the ones with the brains — don’t let them go."

Our country's current financial crisis originates from having done precisely that--letting the ones with brains go from "TBTF" financial institution--over the last decade or two. In the Newspeak "having brains" now means "able to enrich oneself egregiously while bankrupting the firm so outlandishly as to bankrupt the nation." In times of yore, a few such people "having brains" were tolerated in the name of social order but they had to suffer some modest opprobrium from an occasional sobriquent like "robber baron." In modern times the opprobrium has been replaced with glorification.

Man! what a lot of tards commenting here.

You just dont get what Venkatesh is talking about do you.
I guess none of you is either a boss or a killer or shares a brain amongst the lot of you.

Read the post again, then read"The Prince", then watch the Soprano's then read the post again.

Venkatesh is being sarcastic and using a lot of irony. But if you don't " get" the essential truths over here, about "organizational leadership"; What can i say? You are incapable of ever getting them, but let me give it one more try.

Gang bangers, corporate ceo's and successful politicians are all very likely high IQ sociopaths.... at times useful sociopaths... but sociopaths neverthless.

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