Last night´s episode of The Daily Show with Jon Stewart included a segment on the Obama administration´s adherence to an "Orwellian renaming process" that the Bush administration used to make things such as the war in Afghanistan sound less unpleasant. The segment ridiculed the Treasury Department´s rechristening of the underperforming assets and securities banks are holding from "toxic" to "legacy." In order to dress up these up these assets for sale to investors, the Treasury has made a collection of shaky loans and ill-fated structured products sound like an upscale pro-am golf tournament.
It´s ironic, because some of the structured products and even the hedge funds trading them also bore names packed with impenetrable references to wealth and stability. The concept of using an attractive name to heighten a product´s appeal is a simple and time-tested one.
But as home prices continue to fall and unemployment climbs, it´s worth asking what investors and the government are really going to get for their money when they buy into the public-private investment funds. As this post describing the mechanics of a collateralized debt obligation notes, the top-rated tranches of CDOs are heavily exposed to systemic risks and a worsening economy.
The representatives from the Office of Thrift Supervision and the New York State Insurance Department who claimed, during AIG hearings in Congress, that many of AIG´s structured products hadn´t seen any real losses (only drops in value relating to market conditions and accounting rules) may soon be silenced. Then what will the Treasury do to make the picture of defaulting CDO tranches look rosier?
In Newsweek, columnist Daniel Gross discussed the history of renaming products on Wall Street, starting with the conversion of "junk bonds" into "high-yield debt," and on down the line. "The accepted terms turn out not to mean what people think they mean," Gross wrote. What´s different now from earlier times is the reach that these names have acquired. Few people in Elkhart, Ind. knew or cared what high-yield debt was, but Americans at all points distant from Lower Manhattan now know about the toxic assets that threatened to bring down their banking giants and the money each person gave the federal government to bail them out.
"America needs to be swaddled in a blanket of impenetrable jargon, to be literally confused into reassurance," said John Oliver, the comedian leading the Daily Show´s renaming segment. But neither investors nor taxpayers would be happy with the kind of surprise that could follow such mind-dulling reassurance. Maybe Treasury should spend more time worrying about what the toxic assets are doing and less time thinking of new names to call them.