Rescue Mission

Friday, September 26, 2008


Show me the crisis. In an open letter to colleagues on Tuesday, former New York Times reporter David Cay Johnston urged fellow journalists to be skeptical of the bailout proposal. Don’t question around the edges, says Johnston. Question the premise.
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Comments [24]

Jack from Chicago

OTM, how about getting Brian as a guest. He put yours to shame. You guys should think beyond the New York Times once in a while. Makes me wonder about all the other "experts" you've interviewed.

Oct. 02 2008 11:12 PM
Chris Gray from New Haven, CT

Back in the ‘60s I read a great amount of science fiction and I noticed that many writers substituted the word “credit” for the word “dollar” in prices or, in the manner my grandnephew might illustrate it, credit=$.:) I remember wondering if and when credit would replace dollars in our vocabulary, though I really felt that the writers were trying to provide an alienating element meant to emphasize a story’s placement in some unknown future.

I never imagined that it would not be figurative speech but an actual reality that credit would replace dollars in our economy.

Brian provides an interesting tutorial. I am much impressed if still mystified.

Oct. 02 2008 03:13 PM
Erich Riesenberg

OTM and Fresh Air about the last two quality shows on NPR, playing in Iowa at least. Guess I need to expand my podcast search.

I hope OTM will invite someone from Marketplace on to discuss that show's hysterics on the credit dislocation. Sometimes when the host is yammering about how the market will melt down without a bailout, I wait for the punchline, but there is none. The show has always been lightweight and glib, but this is nonsense.

I have read or heard very few "journalists" inquire how this plan is supposed to work, and why it is the best plan. It reminds me of the rush to Iraq. One obviously superior alternative seems to buy preferred stock in the companies, with warrants to boot, as Buffett has done with GE and Goldman.

I hope some real journalism gets done by NPR, even if it is well after the fact. It reminds me so much of the rush into Iraq it makes me almost physically ill. NPR has failed the public.

Oct. 02 2008 11:21 AM

Lotta words Brian dude but DKJ is still right. Merican Hero.

Oct. 01 2008 10:48 PM

Given the complex and perilous nature of the market state, the last thing we need in the public discourse is yet another ignoramus spreading inaccuracies. Though I do agree with his thoughts on the shorts not being responsible, Johnson losses all credibility after time and again demonstrating his lack of knowledge on the matter. Brooke’s pandering only made the matter worse: “But David, it’s urgent. There’s no time for that kind of folderol.”, “Those are cool. I've seen those.” I expect more out of OTM specifically and NPR in general.

Good luck out there,
A loyal listener.

Oct. 01 2008 09:38 PM

“Now, the Treasury Department, which in this administration has said free markets are virtually a god, free markets are not to be interfered with, has now interfered in the market. It has put its thumb on the scale by prohibiting trading in about 900 companies by the shorts.

Wrong. Anyone who read the headlines, participates in the market, knows of the regulatory environment, or listened to congressional testimony would know that it was Chairman Cox of the SEC that imposed the short ban. The ramifications of this short sighted maneuver could fill volumes, but sufficient to say, this has caused significant strife in markets beyond equities. Amongst my peers, this was considered to be a pure political ploy by Cox to save his job. His sycophantic testimony only reinforced this belief. By the way, the ban now encompasses more than nine hundred names and includes such “financial” names as the dot come legend CMGI, the pharmacy CVS, Atlas energy (a natural gas and oil producing firm in the Appalachian Basis), as well as Ford and GM.

Continued . . .

Oct. 01 2008 09:38 PM

“No one I've seen has asked the Treasury, did you ask every bank to submit to you data on how many illiquid assets you have, what you bought them at and what you value them at now?”

Clearly, Mr. Johnston hasn’t read any SEC filings or listened into any shareholder conference calls, which you need not be one to listen. 10K, 10Q? Most of what he’s looking for is there, just ask David Einhorn or Bill Ackman.

“Congress had set September 26th as the date when they would go into recess so the members could go home and campaign. If this is such a gigantic crisis that we have to put out 700 billion dollars, which we may never get back, then perhaps Congress needs to stay in session.”

Many congressional leaders said time and again that they would stay to see this through. Aside from those members taking time for the religious holidays, they have done just that.

Continued . . .

Oct. 01 2008 09:38 PM

Another sign of the market stress is shown in the Fed Fund rate. This it the interest rate you hear Bernanke and the open market committee adjusting and maintaining. It’s currently targeted at two percent, but there were days where it swung from zero to six percent! An interest rate swing of six percent in any market is huge (consider if your mortgage increased six percent in a day), a swing of six percent in an interest rate maintained by the Federal Reserve is unimaginable. If all of that is too convoluted then consider this. Alabama County is on the verge of filing the biggest municipal default in this country’s history, farmers are beginning to face difficulties obtains lines of credit to purchase next year’s seed and fertilizer, and last week we witnessed the biggest bank failure in the history of the United States. The final nail in the Washington Mutual’s coffin came after almost seventeen billion dollars of retail deposit money fled the bank. That’s right; the bank went down in large part to a good old fashion, circa 1930 bank run.

Continued . . .

Oct. 01 2008 09:37 PM

“But you've also seen the markets going, you know, down 500, up 300. I mean, if that’s not an indication of crisis, what is?”
“Well, we've had many other occasions in the past where the markets have behaved like this.”

Anyone who thinks that the equity markets are the best reflection of the current turmoil is not paying attention. Stocks are the proverbial tail on the credit dog. This is a credit based problem best reflected by the credit and fixed income markets (hence the focus on spreads such as the TED spread.) Rather than explain the workings of the credit market to someone who thinks that Eurodollars are Euro denominated accounts (that’s a good one) let me point out more obvious stresses. A couple weeks ago, market participants were willing to PAY interest to hold short dated Treasury Bills. Normally, when someone buys a bond, they expect to receive their money and then some after holding it to maturity. However, given the market uncertainty, people were willing to buy more for these bonds then they would receive if held to maturity. This took place because market participants weren’t certain they would recover the bond premium from corporate bonds due to the firm filing for bankruptcy. They didn’t want to hold cash for the same reason; they could loss the entire cash amount if the holding institution filed for bankruptcy.

Continued . . .

Oct. 01 2008 09:37 PM

“And the TED spread is quite large right now, but if you look back many years, it’s been this large on other occasions. So it’s an indicator there may be a big problem, but it’s not definitive proof of that.”

It would appear that Johnston is as knowledgeable of the history of the TED spread as he is about its definition. The current levels are the most stressed (i.e. widest) seen in all of my 26 years of data. The spread is wider than it was during the crash of 1987, wider than any Gulf War, wider than Russia defaulting on their bonds and the other global stresses of 1998, and wider than the events of September 11th. I’m curious at what level Johnston would consider outside the realm of normalcy.

Continued . . .

Oct. 01 2008 09:36 PM

“Likewise, much has been made of a technical issue called the TED spread. It’s the difference between the interest rate on short-term Euros and short-term Treasuries.”

The TED spread is most definitely not the spread between USD and Euro deposit rates. It historically was the spread between three month Treasury Bill futures and three month Eurodollar futures. The fact that a learned journalist thought that Eurodollar contracts actually involved Euros brought a much needed laugh among my colleagues on the trading desk. Eurodollars are US dollar denominated accounts held outside of the United States. Since the T-Bill futures aren’t traded anymore, the TED spread now refers to the spread between the three month T-Bill yield and the three month US dollar London Interbank Offered Rate (LIBOR).

Continued . . .

Oct. 01 2008 09:36 PM

“Goldman Sachs has announced that it’s converting itself to an investment bank, which will allow it, by the way, to get in on the 700 billion dollars.”

Probably a slip of the tongue, Goldman in fact converted, loosely speaking, to a commercial bank. Contrary to Johnston’s conspiracies, this was a result not of an effort to partake in the Treasury plan, but because the investment business model has been found to be less stable than assumed possible. The term financing used in this model was more fragile than anticipated in times of market distress and has been replaced with a more stable model using retail deposits as an asset base. Johnston’s assertions that they converted to take advantage of the proposed program is wrong. Any student of auction markets or anyone listening to Paulson’s testimony would know that he wants to include a broad range of intuitions including investment banks, commercial banks, and insurance institutions. Having as many participants in the reverse auction as possible will insure the best price paid by the Treasury for the distressed assets.

Continued . . .

Oct. 01 2008 09:35 PM

Dear On The Media,

As a longtime listener of OTM, I was disappointed in the interview with David Cay Johnston. If you are going to have an expert on the program, you would do well to actually have someone who knows what he or she is talking about. This segment had so many factual inaccuracies that I was embarrassed for your program. This was particularly acute given the premise that journalists should be more skeptical of the information given to them. Let me point out some of the errors.

Continued . . .

Oct. 01 2008 09:34 PM
Matt from Arlington, Virginia

David Cay Johnson is right that the Media needs to do a better job of questioning congressional leaders negotiating the bailout. Until they ask Barney Frank about his committee statements that Fannie Mae and Freddie Mac do not need any additional regulation in 2003 or until they demand the release of all records of Fredddie Mac's board of directors when Rahm Emanuel was sitting on the board and collecting large paychecks.
Lets look into the underlying problems! Lets look at the alternatives like reducing the Capital Gains Tax which will bring instant liquidity, yet undercut a policy proposal of Senator Obama to raise that tax rate.

Oct. 01 2008 06:39 PM
Jennifer from Minnesota

Within 12 hours of the "bailout" bill failing in the House, everyone in congress and the media (including Marketplace) had renamed it a "rescue plan." If nothing fundamental has changed in the bill, renaming it seems a cynical and lazy attempt to sell the idea to the American people. I can understand why congressional leaders would all buy in to changing the terminology, but why the media? What is a fair name for this plan? And what obligation does the media have to call people out on this?

Oct. 01 2008 06:14 PM
DaveK from Brooklyn, NY

Great segment and a great program as usual. OTM is the best show on NPR in my opinion. Keep asking the right questions and looking behind the sound bites and talking points to get at the real issues. Thank you!

Sep. 29 2008 03:45 PM
Richard Lindgren from Kansas City, MO

Stories about the bailout that do NOT explain this $60+ Trillion mess called "credit default swaps" are irresponsibly incomplete. It was CDS that brought down Lehman and AIG. Mortgages were the trigger, but CDS are what Warren Buffett correctly called "Financial WMDs."

Sep. 29 2008 02:05 PM
problembear from

excellent program tonight. very informative. makes me wish the MSM could do their jobs once in awhile instead of blindly accepting statements as fact. it is long past time for some healthy scepticism on the part of the fourth estate, or as i like to call it "asleep at the switch."
thanks for staying awake.

Sep. 28 2008 11:23 PM
Richard Breton from HoHoKus, NJ

Another solution that Henry Paulson has rejected is to modify the mark-to-market accounting regulations that are forcing otherwise solvent institutions to write off assets and equity based on fire-sale prices in markets that are temporarily dysfunctional, but can correct themselves as time reveals more accurate default information, and the good and bad loans can be accurately evaluated and segregated. Mark-to-market accounting rules were designed to require corporations to reflect realistic values of their assets, but when the markets are unexpectedly illiquid or unrealistically priced due to uncertainty or a temporary inability to evaluate assets accurately, this rule has the unintended consequence of assigning unrealistic short-term values to long-term assets. This is currently causing many financial institutions to mark their assets, and equity capital down to disastrous levels because of a relatively new rule combined with an unexpected “black swan event”. Allowing owners to phase-in the recognition of mark-to-market losses over several years might more accurately match the long-term nature of these assets.

Sep. 28 2008 10:18 PM
jerry from Phoenix

Terrific segment. The press has done their usual job of not asking questions, not questioning assumptions, and yet, acting as if they know it all.

On the other hand, your site sucks. You shouldn't require JavaScript to comment.

Sep. 28 2008 05:15 PM
MB from Philadelphia, PA

HA! The industry sold so many bad loans with no money down to so many people with bad credit and inability to pay that now they expect the same--to get a lot for a little and with no credibility. Maybe Paulson and friends should watch commercials on late-night tv and call toll free numbers to consolidate their debt into one easy payment.

Sep. 28 2008 11:51 AM
Richard Breton from HoHoKus, NJ

Thank you for presenting David Kay Johnson's insight that reporters, the public and our legislators need to be sceptical about this Administration's claims for this "Big Bail".

One example of other solutions is to purchase only the non-performing mortgages, not the fractional derivatives. It will be impossible to restructure loans for borrowers if we own only partial interests in them. It is also a waste of money to buy all the performing loans, when the valuation problems are due to a small fraction of the loan pools. It will be much easier to value individual mortgages instead of all the pooled and subdivided interests, known as “tranches”, and to buy the bad mortgages from the trustees that administer these securities than the many owners of the divided interests.

Sep. 28 2008 10:55 AM
Brooke Gladstone from Brooklyn, NY

Hey, Zan,
Here is a link to the site maintained by Jim Romenesko at, that has long been a 'must-read' clearinghouse for discussion and debate over topics ranging from journalism ethics to job gossip.

Sep. 27 2008 01:25 PM
Zan Kelly from Long Island City, NY

David Cay Johnston mentioned a blog that sounds like Romanesque Q where he posted...PLEASE repeat the name and perhaps the spelling or post it some where for those of us who would like to check it out. Thank You.

Sep. 27 2008 07:35 AM

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