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If Not VP Then JP; Our T-Bob’s Got a Future

Our Governor has built quite a resume. Aiming initially at a Bain type profile, he has developed an innovative finance background along the way. Balancing budgets by cooking the books, dabbling in high stakes derivatives with the state retirement system, now bringing a whole new opaqueness to accounting.

"Here's the simple truth: our state retirement system is underfunded, and this situation threatens the system's long term solvency."- Governor McDonnell in his 2013/14 budget remarks

Riddle this: Is the Virginia Retirement System (VRS) any healthier today than it was when Bob McDonnell became governor? This may be the most difficult riddle of the Virginia fiscal landscape. Here is a good faith effort to help everyone understand how Bob McDonnell claimed this year's budget recommendation doubled contributions from FY2011/2012.

On the face of it, McDonnell's recommended contribution of $2.21 billion (per year) in total funding to the systems for state employees and teachers does not look like double the $1.55 billion reported contributions in 2011 . It is clearly not double the $2.1 billion contributed in both 2008 and 2009, before he took the helm. But, bear with me.  By lowering the contributions for the year ended 30 June, 2011 from that of his predecessor by half a billion and by assuming the VRS reflected the $620 million IOU as part of the 2011 reported contribution amount, the cash contributions for 2011 are really $0.9 billion. Voila! He has "doubled" the fiscally irresponsible contribution his administration ponied up to VRS in 2011.

"The bottom line is that it's not going to affect the long-term health of the [VRS] fund because it's being paid back with interest." - Governor McDonnell discussing the $620 million funding shortfall on WNIS in September 2011

The Financial Crisis Redux: JP Morgan

Frontline's third episode of Money, Power, and Wall Street concludes: the financial crisis never ended. Last Friday that became more evident. Firing three executives at JP Morgan solves nothing. The time for "Old Testament Justice" is past. But Congress seems powerless against the bank lobby.

Three years ago, in the midst of a home grown global financial crisis, President Obama erred on the side of caution. Instead of systemic changes to the financial sector, he and his team chose a course of confidence building, a course advocated by Secretary of the Treasury Tim Geithner who argued against "Old Testament Justice." Others close to Obama, like Larry Summers and Christina Romer, called for a more dramatic course: heads should roll.

It is clear now, and hindsight is always more vivid, that in the midst of the crisis the opportunity for substantive change was lost. The fight to keep the markets afloat fatigued the new administration with other irons in the fire. The success of the bailout was the enemy of any regulatory structure designed to avoid bailouts including eliminating banks "Too Big to Fail." Flush with cash from the Obama policy success, banks successfully lobbied for the status quo.

Now, on its own, JP Morgan has managed to lay out the case for regulation following another episode of the malfeasance that precipitated the economic disaster of 2008.  

Money, Power, and Wall Street: The Financial Collapse

By March 2008, the prospect of a meltdown was looming. Bear Stearns fell first. It started with rumors about investment in sub-prime mortgages, tagged as toxic assets. Bear Stearns bought hundreds of thousands of sub-prime mortgages and bundled them. Little then did candidate Obama know the role he would play.

This continuation of the Frontline documentary takes up with the events of 2008, a Presidential election year. In this installment, the very foundation of the financial world trembles while we meet the major players: Secretary of the Treasury Hank Paulson, Chairman of the Federal Reserve, Ben Bernanke, and Tim Geithner, president of the Federal Reserve Bank of New York.

Tim Geithner distinguished himself from the moment he received the first panicked call. Instead of acting without intelligence, he dispatched a team to survey the situation at Bear Stearns. They and teams from the SEC and JP Morgan discovered a drowning pool of toxic assets. Bear had made credit default swap deals worth trillions of dollars that had infected all of Wall Street and the financial world. Geither recognized the systemic risk to the world economy. This was the moment of realization that Bear Stearns was too big to fail. This took Federal regulators by surprise.  

Money, Power, and Wall Street: an Invisible Market

The myth of a strong economy heralded by the Bush administration unraveled in a series of Wall Street financial earthquakes. $11 trillion of America's net worth dissolved; 8.5 million jobs were lost in the resulting recession. People's homes weren't worth what they paid for them. College graduates moved home.

"The real story of this financial crisis is not so much whether the bailout was the right thing or the wrong thing to do. The real question is: How did it come to be?" - Phil Angelides, Chair, Financial Crisis Inquiry Committee

This beginning of a PBS Frontline documentary depicts the dramatic succession of events that led to and through the financial cataclysm that altered the economic landscape. In the first installment, events leading up to the 2008 crisis are brought into focus. Some of the key players are introduced. Most important is the development of a financial layman's understanding of the complex machinations involved.

It didn't begin with credit default obligations (CDOs) but that is as good a place as any to start explaining this mess. A group of innovators at JP Morgan developed the concept of a derivative to trade loan risks in the early 1990s. That is where the Frontline documentary begins the journey through a sorry tale of a failed economic credo and its victims.