Thursday, April 2, was one of those curious days when things changed – pivoting not on events or any big news, but on changes in how we decide to assess what we have decided is reality. Sometimes everyone decides the problem is that we’ve just been looking at things the wrong way. Redefine a problem and sometimes it just goes away – and what do you know, on this day the stock market soared and the Dow capped off its biggest percentage gain in any four-week period since the spring of 1933 with ruffles and flourishes. On CNBC, Jim Cramer declared that the depression was over – everything is all better now. No one was mentioning that 1934 through 1939 was an awful time, with the real bottom in 1937 or so. Hope is a wonderful thing.
As for what changed, it was the mark-to-market rule. Floyd Norris of the New York Times explains:
A once-obscure accounting rule that infuriated banks, who blamed it for worsening the financial crisis, was changed Thursday to give banks more discretion in reporting the value of mortgage securities.
The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made.
Critics also said that since the rules were changed under heavy political pressure, the move compromised the independence of the organization that did it, the Financial Accounting Standards Board.
Be that as it may, the rule was changed. You’re a bank and you’re leveraged thirty-to-one on assets you’ve purchased, those bundled packages of slices of home mortgages and credit card debt and car loans and whatnot – all promise to pay a certain amount at a certain time. You’ve gambled thirty dollars on every dollar you’ve spent acquiring these assets – and they are assets, really. They are contractual promises, after all. And if you list them at face value – what they say they will pay when – your bank is well-capitalized. You’re not insolvent – you’re flush with money.
But the old mark-to-market rule said you had to list those assets on your books at market value – each day you had to state what these securities would be worth if you had had to sell them in the open market for whatever anyone was willing to pay you for them. Norris summarizes the problem with that:
During the financial crisis, the market prices of many securities, particularly those backed by subprime home mortgages, have plunged to fractions of their original prices. That has forced banks to report hundreds of billions of dollars in losses over the last year, because some of those securities must be reported at market value each three months, with the bank showing a profit or loss based on the change.
Yes, these are the toxic assets, and no one knows what they’re really worth. Everyone knows that with the economy in its slow collapse they aren’t worth their face value, and given the crap mortgages that were bundled into these things, they’ll never be worth their face value. But the markets are in distress, and they’re surely worth more than what they would fetch if you had to sell them at this time, or this quarter, or this year. So, if you want to know if any given bank, large or small, is healthy and solvent and can meet its obligations and all that – go fish. This ruling is the best that can be done – list the damned things at face value, and make additional mandatory disclosures about the assets in question. In short, prove you’re solvent and disclose why that may be a bit of a fib.
The Dow soared as shares of the banks and other financial institutions jumped up – after all, the “change makes it possible for banks to keep some declines in asset values off their income statements.” You know how it goes:
The American Bankers Association, which pushed legislators to demand the board make changes, praised the board. “Today’s decision should improve information for investors by providing more accurate estimates of market values,” said Edward Yingling, the association’s president.
Or as “dday” put it succinctly – Problem Solved, The Banksters Get To Lie Again!
Today the Financial Accounting Standards Board voted – by one vote – to relax accounting standards for certain types of securities, giving banks greater discretion in determining what price to carry them at on their balance sheets. The new rules were sought by the American Bankers Association, and not surprisingly will allow banks to increase their reported profits and strengthen their balance sheets by allowing them to increase the reported values of their toxic assets… I don’t know any of the back-room dealing, but it seems like the banking industry is taking advantage of the confusion to push through a change it wants, because it will make it easier for banks to massage their balance sheets and harder for investors to see what is really going on.
One of Sullivan’s readers adds this:
The traders just got a big rock of crack. This is called a bear market bubble, and it’s going to do damage. The fact that stocks still went up significantly in spite of rather horrifying unemployment numbers coming out the same day tells you: a big rock of crack.
And at Curious Capitalist there was Justin Fox:
One can never know for sure why the stock market does what it does on a daily basis – it could just be excitement about those Sizzling G-20 Wives – but the fact that financial stocks are up more than the overall market would seem to indicate that there’s something to the FASB-did-it explanation.
There is of course something very weird about this. Investors seem to be saying: Banks now have permission to lie to us more, so let’s bid up their stock prices! Then again, if investors are that dumb, maybe it makes sense for accountants to pay less attention to market prices in valuing the assets on banks’ books.
Oh, by the way, a photo of those Sizzling G-20 Wives is here – but that’s beside the point. What is odd here is that no big event moved the markets, but for what Paul Kedrosky noted – “We are giving banks a pass in terms of how they report losses and value goofy assets.” There was no news – no war breaking out, or peace agreement, or major bankruptcy, and no amazing good new economic data – none of that. There was just a concession – you can tell people what you’d like about the worth of things and about what this or that really means. And that changed everything.
The same day there was a lot of that going around, as across the pond in London there was, as Time reports, the big Michelle Obama scandal:
The rules are set in stone, and so the eagerly watching British media sputtered when the First Lady of the United States, Michelle Obama, briefly put her hand on the back of Queen Elizabeth II as the two chatted at a reception. Etiquette is quite stern about this (“Whatever you do, don’t touch the Queen!”). In 2000 John Howard, then Prime Minister of Australia, got plenty of criticism for apparently putting his arm around the Queen to direct her through a crowd. He denied actually touching her, but photographs suggest that he came quite close. (Another former Australian Prime Minister did put his hand on the Queen in a similar circumstance and was later branded “the Lizard of Oz.”)
Of course, there are corollaries to this. One must certainly touch the Queen if the monarch offers her hand (though you should return this not with a firm handshake but just a touch). On Wednesday, Michelle Obama put her hand on the Queen only after the Queen had placed her own hand on the First Lady’s back as part of their conversation. So there is room for theological argument as to whether the American reciprocity of touch was allowable given the social dynamics of the situation. (Less explicable was when President George W. Bush winked at the Queen.) Still, the sight of anyone apparently touching the Queen with anything more than a limp handshake is enough to send the British (or traditionalists in the old Commonwealth) twittering.
Duncan Black was exasperated:
I haven’t been able to figure out what’s been more amusing about all of the tut-tutting of the Obama trip to England. Was it the general tendency to just manufacture rules of etiquette? The racism-tinged “of course those people won’t know how to behave?” The irony of tea party fetishists caring what the English monarch might think about anything? The general tendency to portray foreigners as alien children?
Our discourse is so stupid.
But this was a big story, although Valentine Low in the Times of London suggests the American reporters were being silly:
When Michelle Obama put her arm round the Queen at Buckingham Palace, some of the more excitable elements of the media – particularly the Americans – suggested she may have been guilty of a breach of protocol.
They missed the real story, however. What was far more interesting was that the Queen put her arm round the First Lady.
This is no big deal:
“This was a mutual and spontaneous display of affection and appreciation between The Queen and Michelle Obama,” said a Palace spokeswoman.
Almost from the moment they first met it was clear that the Queen and the Obamas were getting on well. They joked together, and by the time came to pose for photographs they were acting almost like old friends. Which, considering that they met for the first time that afternoon, was quick work.
You see, the real news was this:
The Queen liked the Obamas, clearly, and she is past master at being nice to people the Foreign Office wants her to be nice to: a long line of American presidents would testify to that. But she is also expert at letting people know, in the subtlest but most unmistakable way, when they have overstepped the mark.
“She is a very warm person off duty,” said a Palace insider. “On duty, she has a very professional approach.”
And the BBC quoted what Her Majesty the Queen did say to Michelle Obama – “Now we’ve met, will you please keep in touch?”
Andrew Sullivan, that Brit, says something is up:
What they don’t quite understand is how Michelle Obama’s informality and realness was a huge hit, even among the royals. London was agog. This is an America Britons actually relate to in the 21st century.
And that may matter. The whole London Summit went well, with Time offering How the G-20 Succeeded – And Why It Matters:
One measure of a summit’s success is the number of participants who attempt to lay claim to its outcome. And by that measure, the G-20 summit in London was a rip-roaring sensation, with several countries seeking to share in the glory. “This is the day that the world came together to fight back against the global recession, not with words but with a plan for global recovery and for reform and with a clear timetable for its delivery,” declared the summit host, British Prime Minister Gordon Brown. Speaking of the agreements reached on tighter regulation of financial markets and institutions, French President Nicolas Sarkozy bigged up his own role in agitating for the measures: “That our Anglo-Saxon friends accepted all of this represents immense progress,” he said, adding that “while there were moments of tension, we never thought we’d obtain such a big deal.”
Yet as American officials tell it, the real hero of the hour, proving his mettle at his first summit, was President Barack Obama.
Fred Kaplan calls it The Return of Statecraft:
Take Obama’s meeting on April 1 with Russian President Dmitry Medvedev, which produced an unusually substantive 19-paragraph joint statement laying out a broad but specific agenda – all stemming from a clear- eyed, even somewhat steely grasp of what international relations are all about.
“What I believe we began today,” Obama said at a joint press conference afterward, “is a very constructive dialogue that will allow us to work on issues of mutual interest.”
The italics are mine, but a “senior administration official” also drew attention to the phrase in a background press briefing and contrasted the approach with George W. Bush’s first meeting with a Russian president, after which he proclaimed that he’d looked into Vladimir Putin’s eyes and seen his soul.
This actually may have been a change in the substance of things:
Bush’s diplomacy tended to the black and white: I get along with you, or I don’t; you’re with us, or you’re against us; you’re a terrorist, or you’re opposed to terrorists. This approach led – and, in general, leads – to disaster not because it’s moralistic, but because it so egregiously misapprehends the world and leaves us with so little leverage to affect it.
For instance, Obama will almost certainly open up talks with Syria as a means of isolating Iran and cutting off both countries’ links with Hezbollah. Bush always opposed any contact – and vetoed efforts by some of his top officials to go that route – because Syria supported terrorists. By this argument, had someone with this view been president during World War II, the United States wouldn’t have struck up an alliance with the Soviet Union against Nazi Germany on the grounds that Stalin wasn’t much less evil than Hitler – and we would faced catastrophic defeat in our high moral dudgeon.
And Kaplan also says what seemed a change in appearances – Obama abandoning the phrase “global war on terror” – was a change in substance, really. What you call things does matter, and the Global War on Terror was stupid:
It implies that all terrorist movements form a single bloc of equal weight and danger; and it therefore prevents us from even contemplating the notion of splitting the movements apart or playing off one against the others. One definition of skillful diplomacy is to unite allies and divide enemies; Bush’s pronouncements tended to do the precise opposite.
And Bush just confused himself, where Obama does not:
American leaders and diplomats have long struggled with the tension between their interests and ideals. Bush finessed the issue by pretending that the tension didn’t exist. In his second inaugural address, he declared that our interests and ideals coincided, invoking an appealing but empty syllogism: Tyranny sires terrorism; terrorism threatens our security; therefore, promoting democracy enhances our security; hence, our interests and our ideals are one. The problem was that terrorism is a tactic, not an enemy, and democracy is not necessarily a cure for it in any case. (Hamas won fair and free elections in the Palestinian territories – elections that Bush insisted on, over the advice of many, on the premise that Hamas couldn’t win the election because terrorism and democracy were incompatible.)
Obama seems to be aware of the tension between interests and ideals without letting it paralyze policymaking. In this sense, he is like most presidents in American history – and his foreign policy, or for the moment his approach to foreign policy, signals a restoration of what was once called statecraft: literally, the art of conducting the affairs of state. The term has always implied a meshing of interests and ideals with reality while navigating the shoals of a dangerous world. Leaders can try to reshape an agenda, but they can’t toss away maps or ignore laws of physics to get there. They have to deal with the world as it is, and that’s what Obama seems to be doing.
So this is a change in substance, but then Fred Kaplan had his recent book – Daydream Believers: How a Few Grand Ideas Wrecked American Power – and he thinks about such things.
The inability to get the Europeans to commit to more fiscal stimulus is disappointing, if expected. But I think the part about increased support for the multilateral economic institutions is very important, and the statement on trade is very encouraging. On top of that there was the side agreement with Russia on nuclear arms reductions that’s extremely important. All in all you see here that diplomacy can’t transcend fundamental differences of perspective on the issues. At the same time, I think we also saw the difference between a situation in which, at the margin, world leaders would prefer to be seen as cooperating with the President of the United States and the situation that previously prevailed in which, at the margin, world leaders would prefer to be seen as hostile to the President of the United States.
Now there is a change.
And sometimes the minor things matter. McClatchy reports that things were tense at the G20 meeting until Barack Obama stepped in to save the day, as they say. And the incident was quite curious:
Heading into the summit’s final hour it appeared that the group would fail to reach a consensus, as French President Nicolas Sarkozy pushed to have the G-20 spotlight offending tax havens based on a list published Thursday by the Organization for Economic Cooperation and Development, and China objected, largely because it doesn’t belong to the OECD.
That was when Obama, long a champion of ending or curbing tax havens, decided to float a compromise and pulled Sarkozy aside… Obama proposed that the G-20 merely “take note” of the OECD list, thus opening the door to implicit but not direct endorsement of that list. …
Obama then met with Chinese President Hu Jintao and Sarkozy in a corner of the summit meeting room, as the other world leaders waited. Upon the trio’s reaching agreement, the G-20 summit then agreed to note the list of tax havens.
Kevin Drum tries to separate the substance from the spin with this:
I guess I shouldn’t make fun of this stuff. The world is what it is. But seriously: today’s big ruckus was about whether to “spotlight” tax havens or to merely “take note” of them? Jeebus.
Of course, this is all based on the word of an anonymous White House official who’s got a vested interest in making Obama look like a diplomatic powerhouse. And this business of China objecting to an OECD list because it doesn’t belong to the OECD is almost certainly bogus. (More likely it’s because Macau and Hong Kong are tax havens and China isn’t keen on having them cleaned up.) So who knows if this story is even true?
But it sounds disturbingly plausible. Of such stuff are diplomatic communiqués made.
And of such stuff things do change. Actually, when you think about all these events of this one day, it seems events don’t move the world along. Appearances can be deceiving. Sometime, it seems, they are the substance.