Dean Baker at Beat the Press is doing a great job of tearing apart the media for its analysis of the Fed's bailout moves yesterday.

He writes: "Can’t the media find any economists who don’t think that handing hundreds of billions of taxpayer dollars to the big banks and the incredibly rich people who own and manage them is a good idea?"

In December I wrote some subprime-inspired carols about Goldman Sachs for the Home for the Holidays initiative of NTIC's Save the American Dream campaign. I had written the report posted on the left for that campaign, which was demanding that investment banks like Goldman give up bonuses for foreclosure prevention. A group of us from the Northwest Bronx Community and Clergy Coalition and PUSH Buffalo (the two organizations that initiated the call for bonus paybacks) and a few other organizations braved the weather to sing those songs and others outside one of Goldman's holiday parties on the same day that they announced their record $20 billion in bonuses.

This week a profile of CEO Lloyd Blankfein in Fortune points to the event as a sign of the pressures Goldman faces:

Whoa: Citigroup Falls to Lowest Since 1998 as Analysts Project Loss (Bloomberg).

I'm not sure what it means to party like it's 1998 (something involving the World Wide Web and the Backstreet Boys?), but the 1998 collapse of Long Term Capital Management, a huge, highly-leveraged hedge fund, was thought to pose a systemic threat to world financial markets and spurred a bailout of LTCM's creditors by the central planners at the Fed.

I don't typically turn to the pages of the Wall Street Journal for a laugh, but today they posted a good bit on Wall Street's recent dealings surrounding credit default swaps on CDOs and other subprime-related junk (a credit default swap acts like insurance on a bond; the seller of the contract receives streams of payments from the buyer, who in return receives insurance against future losses).

Hedge funds are apparently getting bullied by the big banks in a myriad of ways. Some of the details are a bit sketchy, so I'm going to take a stab at translating the tale of woe in the last paragraph as I understand it, in the spirit of the excellent Subprime Primer (no relation):

Hedge fund: Hi there. I'd like to cash out this extremely lucrative position.

Investment bank: Great, I've got just the deal for you. For the month of March, we are offering customers just like you the chance to sell us insurance on a bag of toxic waste!

At the end of 2007, Goldman Sachs had separated itself from the Wall Street horde and was smugly sitting on a pile of riches it had brought in by shorting subprime to the tune of billions of dollars. Though the bank attracted some negative attention for making massive bets against the same toxic waste that it was selling investors, most of the press and business world had words of praise and admiration for the boys club on Broad, with stories that offered less scrutiny of the regulatory and ethical issues in play than the types of sandwiches the traders ate while they figured out how to make ungodly sums of money. Oh, and look how many venerable leaders in our government hail from Goldman Sachs! Isn't that impressive?!

Jan. 22, 2007 Robert Rubin tells Charlie Rose that he will not endorse a candidate in the Democratic primary, citing a desire to be a neutral voice in ongoing economic policy debates.

July 9 Citigroup CEO Chuck Prince makes infamously misguided comments on how Citigroup is dealing with the summer credit crunch. “When the music stops, in terms of liquidity, things will be complicated," he tells the Financial Times. "But as long as the music is playing, you’ve got to get up and dance. We’re still dancing." At the time, Rubin is advising Prince on how to deal with the credit crisis.

Oct. 1 Citigroup warns investors that profits will take a 60% hit in the third quarter due to subprime-related write-downs, prompting fresh scrutiny of Prince.

This post is a follow-up to with Pension Friends like these and Bringing Home the Kevin Bacon, which discussed the New Jersey Division of Investment’s surprising investment in Citigroup and Merrill Lynch.

So why get all hung up on a $700 million investment from an $80 billion pension fund?

Not too many people have. The story was spun as a sort of bizarre human interest news item – Kuwait, Singapore, Korea...and New Jersey?? What strange company for a pension fund to keep! But there doesn’t appear to be much controversy surrounding the deal. I spoke to several members of the Investment Council and they all had good things to say about the investment. Most of the public employee unions didn’t have negative reactions. CWA Local 1032 president James Marketti, who has been a vocal critic of Kramer’s strategy of investing in hedge funds, was cautiously optimistic, crediting the DOI with a good track record on equity investments in recent years.

This post is a follow-up to with Pension Friends like these, which discussed the New Jersey Division of Investment’s surprising investment in Citigroup and Merrill Lynch and the role played by well-connected hedge fund manager Orin Kramer, chair of the board that oversees the DOI, in making the deal happen.

Citigroup chairman Robert Rubin boarded a plane to Abu Dhabi in late November of last year in order to reel in a massive and much-needed investment from the world’s largest sovereign wealth fund. The press described it as an 11th hour attempt to bring home Abu Dhabi’s billions, after similar trips by i-banking head Michael Klein and marathon video conferences had failed to seal the deal. When Rubin succeeded in securing the $7.5 billion stake, CIBC financial analyst Meredith Whitney called it a “desperate” move by a board that had yet to come to grips with the reality of subprime-related losses.

The New Jersey Division of Investment, the Garden State’s $80 billion public employee pension fund, recently took a large stake in Citigroup and Merrill Lynch through the banks’ private offerings of preferred stock. The investment raised a lot of eyebrows, not only because it was an unusual move for a pension fund, but also because New Jersey had lined up alongside sovereign wealth funds from Kuwait, Singapore, and Korea to pony up cash for the undercapitalized banks.

Both Citi and Merrill are in dire straits: because of billions in subprime-related writedowns and sinking stock prices, they are desperate to raise capital from outside investors. Some would say that they are looking for a bailout after their misdeeds in the subprime sector.

Though several articles have speculated that there were political dimensions to New Jersey’s move, none produced signs that this was the case. subPrimer, however, recently discovered that Orin Kramer, the chair of the board that oversees the fund, played an important role in the New Jersey investment. Kramer is an extremely well-connected hedge fund manager and top Democratic fundraiser with close ties to prominent elected officials and Wall Street financiers, including New Jersey Governor Jon Corzine and former Treasury Secretary Robert Rubin – currently a high-level executive at Citigroup.

Though stock markets continue to get pummeled by bad news (see yesterday's service sector report), I think we are in the middle of a lull in the subprime storm. It's not that things have gotten better, just that they could get a whole lot worse, and many people in the financial world are holding their breath and waiting to see what will happen with the bond insurers.

Bond insurers (also called monolines) such as MBIA and Ambac insure trillions of dollars in debt and carry the top ratings granted by ratings agencies. By insuring bonds, these companies essentially bestow their top-notch ratings on bonds issued by entities that aren't able to score this rating on their own, thereby increasing the value of the bond.

The monolines initially guaranteed payments to investors in municipal debt, but over the past several years they started insuring more and more mortgage securities and structured credit products (such as CDOs), and that's where the current problems lie - the value of these securities has plummeted in the past year, but the insurers don't seem to have the capital to pay out on their obligations to investors.