Scrutinizing Warren's warranty for Goldman

Good for James B. Stewart for pushing back against Warren Buffett's defense of Goldman's conduct in the Abacus CDO deal that prompted the SEC to sue Goldman for fraud.  Buffet, Stewart recounts, affirms that there was nothing wrong in Goldman's failing to disclose the identity of the short investor, Paulson, to those going long on the portfolio of mortgage bonds that comprised the synthetic CDO.

"The essence of the alleged fraud," Stewart reminds readers, is not that Goldman did not disclose Paulson's identity, nor that there was a short seller, but "that Goldman let the short seller choose some of the underlying subprime mortgages, failed to disclose that, and instead promoted the idea that an independent third party chose those securities."  He then joins the panoply of observers who have sought a metaphor to illuminate the moral essense of this kind of dealmaking, and comes up with a good one:

With the Kentucky Derby in mind, let's consider a horse-racing analogy. There are just two horses and two bettors. The promoter offers you the opportunity to bet on one horse. Someone else is betting on the other. He doesn't tell you that the other bettor chose the two horses in the race, and picked one horse with no chance of winning. Instead, he says the horses were picked by an independent racing federation. You bet and lose. Would you feel that was fair?

If I may venture an emendation: it's as if Goldman allowed "the other bettor" not to choose two horses but to assemble one horse, Frankenstein-style, picking more than half of its genes at the outset from an available pool (admittedly of a specified, dicey quality) and signing off on every gene eventually included -- all with an eye to creating a horse misbegotten enough to be almost certain to break all its limbs should the race terrain grow at all rocky  (the race will be across unknown terrain) . The promoter seeks bettors on the other side, emphasizing that an expert genetic designer of horses created this specimen, and thus suggesting that it is  sturdiest horse that could be created from the agreed-upon gene pool.  (I've compiled various other informed perspectives on the ethics of the deal here.)

Our bankers sell a cow

Reading this morning about new proposals for the Federal government to buy and "ring-fence" banks' bad assets,' and reflecting briefly on the whole phenomenon of banks being stuck with billions in nearly worthless securities, I was reminded of a folk tale about a man who sets out to sell a cow:

...when he had gone a bit of the way, a man met him who had a horse to sell, so Gudbrand thought 'twas better to have a horse than a cow, so he swopped with the man. A little farther on he met a man walking along and driving a fat pig before him, and he thought it better to have a fat pig than a horse, so he swopped with the man. After that he went a little farther, and a man met him with a goat; so he thought it better to have a goat than a pig, and he swopped with the man that owned the goat. Then he went on a good bit till he met a man who had a sheep, and he swopped with him too, for he thought it always better to have a sheep than a goat. After a while he met a man with a goose, and he swopped away the sheep for the goose; and when he had walked a long, long time, he met a man with a cock, and he swopped with him, for he thought in this wise, " 'Tis surely better to have a cock than a goose." Then he went on till the day was far spent, and he began to get very hungry, so he sold the cock for a shilling, and bought food with the money, for, thought Gudbrand on the Hill-side, " 'Tis always better to save one's life than to have a cock."

But the story doesn't end there. Like many of our bank chiefs, the man pulls out an ace in the hole. Here's what happens when he turns in at his neighbor's on the way home:

"Well," said the owner of the house, "how did things go with you in town?"

"Rather so so," said Gudbrand. "I can't praise my luck, nor do I blame it either," and with that he told the whole story from first to last.

"Ah!" said his friend, "you'll get nicely called over the coals, that one can see, when you get home to your wife. Heaven help you, I wouldn't stand in your shoes for something."

"Well," said Gudbrand on the Hill-side, "I think things might have gone much worse with me; but now, whether I have done wrong or not, I have so kind a good-wife, she never has a word to say against anything that I do."

"Oh!" answered his neighbour, "I hear what you say, but I don't believe it for all that."

"Shall we lay a bet upon it?" asked Gudbrand on the Hill-side. "I have a hundred dollars at the bottom of my chest at home; will you lay as many against them?"

Who says that credit default swaps are always risky? Our peasant was trading on (fully disclosed) inside information:

Yes, the friend was ready to bet; so Gudbrand stayed there till evening, when it began to get dark, and then they went together to his house, and the neighbour was to stand outside the door and listen, while the man went in to see his wife.

"Good evening!" said Gudbrand on the Hill-side.

"Good evening!" said the goodwife. "Oh, is that you? now God be praised."

Yes! it was he. So the wife asked how things had gone with him in town.

"Oh! only so so," answered Gudbrand; "not much to brag of. When I got to the town there was no one who would buy the cow, so you must know I swopped it away for a horse."

"For a horse," said his wife; "well, that is good of you; thanks with all my heart. We are so well to do that we may drive to church, just as well as other people; and if we choose to keep a horse we have a right to get one, I should think. So run out, child, and put up the horse."

"Ah!" said Gudbrand, "but you see I've not got the horse after all; for when I got a bit farther on the road I swopped it away for a pig."

"Think of that, now!" said the wife; "you did just as I should have done myself; a thousand thanks! Now I can have a bit of bacon in the house to set before people when they come to see me, that I can. What do we want with a horse? People would only say we had got so proud that we couldn't walk to church. Go out, child, and put up the pig in the stye."

"But I've not got the pig either," said Gudbrand; "for when I got a little farther on I swopped it away for a milch goat."

"Bless us!" cried his wife, "how well you manage everything! Now I think it over, what should I do with a pig? People would only point at us and say, 'Yonder they eat up all they have got.' No! now I have got a goat, and I shall have milk and cheese, and keep the goat too. Run out, child, and put up the goat."

"Nay, but I haven't got the goat either," said Gudbrand, "for a little farther on I swopped it away, and got a fine sheep instead."

"You don't say so!" cried his wife; "why, you do everything to please me, just as if I had been with you; what do we want with a goat! If I had it I should lose half my time in climbing up the hills to get it down. No! if I have a sheep, I shall have both wool and clothing, and fresh meat in the house. Run out, child, and put up the sheep."

"But I haven't got the sheep any more than the rest," said Gudbrand; "for when I had gone a bit farther I swopped it away for a goose."

"Thank you! thank you! with all my heart," cried his wife; "what should I do with a sheep? I have no spinning-wheel, nor carding-comb, nor should I care to worry myself with cutting, and shaping, and sewing clothes. We can buy clothes now, as we have always done; and now I shall have roast goose, which I have longed for so often; and, besides, down to stuff my little pillow with. Run out, child, and put up the goose."

"Ah!" said Gudbrand, "but I haven't the goose either; for when I had gone a bit farther I swopped it away for a cock."

"Dear me!" cried his wife, "how you think of everything! just as I should have done myself. A cock! think of that! why it's as good as an eight-day clock, for every morning the cock crows at four o'clock, and we shall be able to stir our stumps in good time. What should we do with a goose? I don't know how to cook it; and as for my pillow, I can stuff it with cotton-grass. Run out, child, and put up the cock."

"But after all I haven't got the cock," said Gudbrand; "for when I had gone a bit farther, I got as hungry as a hunter, so I was forced to sell the cock for a shilling, for fear I should starve."

"Now, God be praised that you did so!" cried his wife; "whatever you do, you do it always just after my own heart. What should we do with the cock? We are our own masters, I should think, and can lie a-bed in the morning, as long as we like. Heaven be thanked that I have got you safe back again; you who do everything so well that I want neither cock nor goose; neither pigs nor kine."

Then Gudbrand opened the door and said,—

"Well, what do you say now? Have I won the hundred dollars?" and his neighbour was forced to allow that he had.

And like a good neighbor, Treasury's there....

Bypassing the bomb throwers

Bush tinkered a bit on the brink, but did the right thing:

"In the midst of a financial crisis...allowing the U.S. auto industry to collapse is not a responsible course of action," Mr. Bush said.

The terms are more lenient than in the deal the Senate Republicans scotched:

The deal generally tracks key provisions of the bailout legislation that nearly passed Congress earlier this month. But it is relatively lenient in allowing the companies to show their viability. It defines viability as having a positive net present value -- a way of gauging the companies' worth, taking into account all their future obligations.

Notably, it provides significant flexibility to the companies in showing their viability. It sets out targets for the companies to hit in determining their financial health, such as reducing debt and current cash payments for future health care obligations.

But according to a White House fact sheet, the targets "would be non-binding in the sense that negotiations can deviate from the quantitative targets...providing that the [company] reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations."

One potential move that could help the companies achieve some savings: the companies will be required to reach new agreements with major stakeholders, including dealers and suppliers, by March 31.

Determining viability apparently will be up to the Obama administration. The agreement designates a person to oversee the government's effort, although officials stopped short of referring to that as a "car czar." For the outgoing Bush administration, that person will be Treasury Secretary Henry Paulson. President-elect Barack Obama will choose his own point person later.

Sometimes, kicking the can down the road is the only responsible course of action. Obama has said that he wants to bring all the auto industry stakeholders together to hammer out a deal. Bush has given him space to do it.

Bush's Treasury turns its lonely eyes to emerging Democratic majority

Ever since September, we've been treated periodically to the odd spectacle of Bush and Paulson, Obama and Democratic Congressional leaders allied against revanchist Republicans in Congress in their efforts to prevent economic cardiac arrest.

Accustomed though we may be, this statement from Treasury today takes these extraordinary alignments to a mind-bending new level:

The Treasury Department promptly indicated that it would provide short-term relief to the automakers. “Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,” a Treasury spokeswoman, Brookly McLaughlin, said.

So: Bush's Treasury is looking forward to the advent of a 58-42 Democratic Senate majority to save the economy.

It seems clear that no one with ultimate responsibility -- e.g., presidents and treasury secretaries at opposite ends of the ideological spectrum -- would allow the automakers to fail at this moment when recession totters on the edge of Depression.