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Sunday: Bad Bank

Take the red pill and go down the rabbit hole

Take the red pill and go down the rabbit hole

Knowledge is power, Conflucians.  When it comes to the economy, I feel like a novice.   Playing with money never interested me.  It was enough to diversify my options in my 401K and leave it at that, although, I had a sneaking suspicion in the back of my mind that I should learn what it was they were up to.  But I opted for a degree in chemistry, not finance.  The truth is, it isn’t possible to know everything about everything.  There are limits to how much time out of our very busy lives we can dedicate to learning someone else’s area of expertise.  That has always been the danger of the 401K, IRA and pie-in-the-sky Grover Norquistesque wetdream of private Social Security accounts:  We’re busy and we have to trust people to handle our money responbsibly.   Needless to say, they’ve really let us down and now we are faced with the sometimes overwhelming task of learning the rules of  this high-stakes financial risk game.

The past several months have left me feeling a bit like Neo in the Matrix after they pulled his headplug and the world is revealed as it truly is.  I should have taken the blue pill.  What I see is not pretty.  I see a lot of shallow CEOs, oblivious to the fates of the people whose money they are entrusted with, determined to protect their lifestyles at any cost.  I see traders, addicted to adrenaline, looking for fixes and laying our nest eggs on the line for the rush of a big payoff.  I see corporations walking away from their future obligations because the people who work for them put their faith in them and deferred their compensation for promises that were never meant to be kept.  I see a government that was bought and paid for by these people and who will sacrifice the working class to pay its debt to its backers.  I see a Whole Foods Nation that doesn’t realize that it entered the ranks of the working class a couple decades ago in the era of Reagan’s “voodoo economics”.

You can’t be too careful these days.  If you want to know how to protect yourself from the predators who, in the end, are really no better than the common thugs who rob you at gunpoint, you’ve got to learn how to avoid the financial dark alleys. I’m so glad that we have Dakinikat to help explain stuff like “moral hazard” and “collateralized debt obligations”.  We have Paul Krugman, NakedCapitalism and Baseline Scenario who are keeping their ears to the ground and interpreting the entrails for us.  And we also have Planet Money and This American Life who are teaming up to break down the complex so we all get it.  Tonight, their joint project called Bad Bank airs on NPR and PRI stations at the This American Life regular time slot.  You can catch the podcast here or check your local NPR station.  The feed from WNYC starts at 4:00PM EST.  I urge everyone who has a mental black hole where their finance center should be to tune in for Bad Bank.

It’s time they stopped playing us for suckers.

68 Responses

  1. Good morning, Riverdaughter!

    Thanks for your continuing efforts to learn about the economic situation and share your growing knowledge with the rest of us.

    For weeks now I’ve been reading economic blogs more than political ones. And I’m digging into books on economics. The funny thing is, I always enjoyed economics in high school, but, being math phobic, I never thought I could handle it at the college level. Now I’m reading two books on the economic crisis at the same time.

    I think my understanding is helped by the way we’ve all following politics so closely for the past year, and shared our knowledge and understanding with each other here at The Confluence.

    • If you want a little more food for thought, Fred Harrison has an interesting book about the 18 year cycle. I listened to some of his interviews at Renegade Economist.com. Was interesting to say the least.

      • I posted his latest interview on my post yesterday. Did you see it?

        • I saw the interview with Hudson which I found very interesting. I was not totally convinced that he meant to take debt to zero but thought he meant to put debt to current market value.

          • That was the way I interpreted it. I don’t agree with Three Wickets that he meant to wipe out the Federal Government’s debt to Social Security. I think he meant that the big banks need to go into bankruptcy and individual Americans need to have their debt reduced similar to a bankruptcy process. Debts are going to be defaulted on anyway. Once people lose their jobs, they won’t be able to pay credit cards for long either.

    • Ditto that bostonboomer. I became interested in economics way after high school and college because it seemed to impact things around me. I never liked finance, still don’t. But if RD is morpheus and she’s offering red pill or blue pill, I’m going for red. With everything going down, it’s an easy choice, at least for me. Can’t promise not to scream tumbling down the rabbit chute, but I want that tube out of my neck. Like neo it will take study, training, and dakinikat calling us out or sending us back to the pool.

  2. I just went to Naked Capitalism again. I found it recently on the advice of a friend, and it is interesting and has a diversity of opinion in the comments. If any of you have a chance, check it out (see link in RD’s post), as lately it includes the most adorable pictures of interspecies love, the latest being a beagle and a fawn (the kitty and puppy are my favorite).

  3. It’s time they stopped playing us for suckers.

    We fired the dog, took down the fence and told the foxes we we trusting them to stay out of the henhouse.

    Why is anyone surprised at what happened?

  4. Hello RD. Your post is a point of optimism for me. Because, i think it marks the beginning a wide awaikening among the American public.

    I am not by a long shot a financial whiz but I still have enough memories of Wharton classes to know grosso modo what’s going on.

    It was obvious to me that we were going to a real estate crash back in 2004-2005. And it was obvious to me the financial sector was on the verge of collapse back in january 2008.

    But when I was saying it around, I was looked at as if I was just plain crazy.

    So it is of a great relief to see that people like you, intelligent but not interested enough in finance to educate themselves beyond the local bank counter pamplets, are now changing their tune and getting an education.

    Only then the villagers will change their tunes. And maybe be replaced by a new crop of dilligent public servants.

    (Still no desire to run one day? May be once broke is all grown up?)

    • I’m afraid that the only way to run here in NJ-07 is to get in tight with the Democratic party. I have no desire to do that. In fact, I think the party was less helpful to Linda Stender this past election season than they were before. She was too Clintonesque. We got another fricking Republican in 2008 where we nearly beat the GOP in 2006.
      Sad.

      • Sniff… I am still rooting for you though. I am not giving up. The future is long. Who knows what the Democratic party will be in 10 years.

        • I’m wondering if in 10 years they will be where the Whigs are today – pffft.

  5. Thank you RD or your clarity in this post … …Sometimes when I try to make my way thru financial writing my eyes just fog over and refuse to read anymore ………..
    But I can read Scientific American cover to cover LOL fascinated with the mating habits and genetics of the most obscure species of flora or fauna , and medical journals are also fairly light readings..

    What I fail to understand is why economics has to be so very complicated… and I do feel we will unlitmately recover from this “contraction” as some people call it ; but we are in a position of great transition in so many areas ..
    The American consumer was destined to become the American Conserver at some point , but it is more urgent now , and bo is so far from having a handle on that , he is still wasting valuable time and resources .
    And worst of all no one is challenging him because they are all afraid .
    For instance ……….
    WHY do we need a rail between disney world and Las vegas ?? ( the answer is obvious but I am all out of snark at the moment ) How is that productive??
    Don’t we need one from LA to say San Francisco instead ?? Would that not serve the peoples needs more efficiently ?? How about mass trasportation on each coast north to south ??? if we really mean to serve the greater good ………

    • Yes, on your transit ideas!

    • There is a secret…. Financials are complicated just too keep the lookers away.

      But in reality it is not at all. It is all about people and not at all about money. Money is not an entity on its own. It is a reflection of people actions. Understanding economics is understanding people. And the basic rule of : I want this and I am willing to give that for it. Every thing else is verbiage.

      If you understand that above a certain number I do not want what you have to offer, you understand economics, Financials are just widow dressings of economics.

      And under Bush Wall Street went mad on window dressings.

      • I agree. It really isn’t all that complicated. It’s the jargon that gets in the way. That’s why I think shows like Planet Money are so invaluable. I didn’t know diddly squat about this whole financial stuff before I started listening to them. But the learning curve is very steep. I’m still not an expert by any means but I know just enough now to know when I’m being screwed.

    • swanspirit- the state of rail service in the US is abysmal (despite all the pr from Joe the Biden). Your proposals make good sense, as do upgrades in our current intercontinental service, which will likely be totally defunct soon. People forget that there are numerous communities throughout the country that are 100’s of miles from airports and are dependent on rail service, which in its current form is laughable. Bus service, which used to be an alternative, is so bad that it is either non-existent or highly uncomfortable or sometimes dangerous (it can be intimidating to the uninitiated). Congress has argued that such rail service is archaic, but that isn’t the case in Europe, that relies on international rail service, somewhat equivalent to interstate.

      • The “argument” that rails are archaic comes from wanting to serve special intersts and making paybacks and payments toward future elections in congress ….. instead of meeting the needs of the people and the country and the future…

        Magnetic electric hi speed rails would serve so many purposes …they could be green and efficient at the same time they would provide employment to many areas
        … but that is just one idea that the current administration is not folowing because his agenda revolves around himself not the greater good ……… or the future

        • That is so true swannie re. special interests and paybacks.

          Here in Italy many towns in the 1930s had trams- first they were horse drawn, then they went electric.
          Many of these towns got rid of their trams, and dug up the rails during the early 60s. (Milan wasn’t stupid and kept theirs).

          Here in Florence it was a disaster. Heavy diesel buses filled up the narrow streets and caused so meny vibrations around the 14th century Duomo (cathedral) that they had to change routes.

          For the past two years they’ve been trying to build 2 new tram lines totally blocking the traffic around the main railway station.

          It’s all a question of paybacks-getting rid of the old and putting in the new is always profitable for politicians.

      • I don’t know if you saw my post the other day about the CRRNJ (Central Rail Road of NJ). It was in business for decades and the origination point was the first stop after Ellis Island. It serviced many points west from Jersey City. In the 60’s, it was shut down because more and more commuters took to their cars. But the lines and stations are all there. Imagine that: a rail line where the infrastructure is all there and intact. It’s owned by Conrail now. What would it take to get it up and running? I don’t know. But the naysayers who think that new housing developments built near the tracks would make it impossible aren’t thinking. This is NEW JERSEY. There are *already* old buildings and residences built near railroad tracks. Anyone who’s ever taken the NE Corridor train from Trenton to NYC knows how closely houses can be built to tracks. So, I don’t buy this argument. And anyone who bought a new house recently that was built near an old track should have been forewarned by their agent, lawyers and townships that there was a possibility of the track being revived. Otherwise, Conrail would have removed the tracks. I’m sorry, but these lines are a goldmine and we are stupid if we don’t find a way of reusing them.

        • RD Didn”t we just have a post about um “Stupid” in chief 😉

        • In my book that would be called “infrastructure spending” -something Obama promised during the campaign as a way to get out of the hole……

      • When I tell my family in Europe that I got stuck in a train in the middle of nowhere for 36 hours in 2005 because of a rail being so old that it gave (that is 36 hours on top of the regular journey time) they do not believe me.

        From that experience, I learned what most Americans do not know. The rails are owned privately and those private companies sell the maintenance contracts to the lowest bidder or subsidiaries, looking for the biggest buck for the smallest effort.

        Our entire rail web is collasping. I bet somewhere in those spending bills there are small print provisions to bail out those private companies of their failure to maintain their assets.

    • The rail between Disney and Las Vegas can be thought of as symptomatic of the Porkulus package in general, if I read correctly. Far too much of it is things from the Democratic wish list of the last 30 years or so and far too little actual stimulus. It had a lot more to do with rewarding constituencies than serving the greater good.

    • there was just a story in my paper today about this. They think NC is going to be at the front of the line for the high speed rail money since we’ve already poured millions in to the prep work for a high speed route from charlotte to DC. I guess they don’t know how things work yet in Obamaland and that the most deserving aren’t always at the front of the line. Link to article:

      http://www.newsobserver.com/news/growth/story/1423971.html

    • Swan: we need a rail between Disney and Las Vegas (& it’s a large chunk of the $8 billion for transrail in the bailout) because Harry Reid wants to get re-elected in NV! He was the one pushing that through. Same old, same old.

      • exactly !! the real needs of the people and the country are subordinate to the ambitions and greed of the government …

        Why are we in this mess again ?? who is actually helping ??certainly not stupid in cheif and his band of buds

      • I think a way to make Reid re-think this pork for Nevada is for someone credible in California to seriously initiate a ballot proposition to allow casino gambling in the state. If it is good for Nevada, it should be good for California in terms of jobs, tourism, state revenues.

  6. I am fighting two conflicting urges – to know or bury my head in the sand.
    Meanwhile, W gets his dues just like Poppy and some insight on Bo from CPAC
    http://edgeoforever.wordpress.com/2009/03/01/w-schadenfreude-and-agreeing-with-gingrich-again/

    • Resist the urge of burying your head in the sand. You will be better at the end. Because may be YOU cannot do anything about the big picture directly, but once informed you can make better choices in your own life. For instance, the governement want to sell us the idea we’re going to get out of this mess by spending, and you can reach the decision that YOU will be better off by saving.

      But what is America if it is not the compilation of every single one of us? Eventually, your individual actions do affect the big picture. That is your power.

      Never mind getting educated to know the extend of the mess. Get educated to know what to do at your own level.

      • I agree Frenchnail.

        The entire system is about the human behavior of greed and avarice. We need to save right now ,pay down our debt and spending moderately. The government needs to spend. Unfortunately not sure about the actual benefits of some of the governmental spending programs. I just hope there is more good than bad.

        Investing and pensions really are individual depending on numerous factors. We cannot be afraid of our money. Don’t listen to “the talking heads”, but look at you own situation and what is around you. The “talking heads” are into group think not wanting to listen or consider reality. When Americans developed a negative net worth that was the clue that this was going to come crashing down.

        • Ironically, now is *not* the time to save. Now is the time to spend money to stimulate the economy. If you’ve got it, spend it. It’s sounds counterintuitive but every dollar you put back into the economy is going to put money in someone else’s pocket and they will spend it on something, etc, etc, etc. I think this is part of the multiplier that Dakinikat was talking about. I’ve done my part. I finished my basement, bought a new TV (I’ve got one that needed to be replaced) and am planning to buy some new furniture. Am I scared of being laid off? Um, yeah. Scared to death. But I feel it’s my responsibility to help keep people employed where I can. I save enough in the meantime. For the time being, I am very fortunate to be able to do this.
          So, do what you can. Buy a piece of furniture if you can. Hire a handyman to do those repairs you’ve put off. Buy a Vente latte at Starbucks. (I *like* their coffee, so there, myiq. I prefer the burned taste.) Spend a little and spread the wealth.

          • Agree RD and thanks for this piece (posting? blog? entry? article?).

            As long as our savings are met first, then after that I am spending judiciously. It’s hard to do. I’m basically risk averse, cheap with a money hoarding tendency, arising from an insecure chaotic background, and I can feel the urge to totally clamp down. But there is a balance to be struck, a difference that can be made, and in my life I’ve found it crucial to try to act with courage in the face of fear.

            I tell myself – Don’t get owned by fear.

            I also tell myself – reality is my friend. Pass me one of them there red pills.

          • That’s not what Suze Ormond said on CNN this morning. She said don’t spend, don’t charge; invest in cash.

          • Selfishy, selfishy..

          • yup, it’s called the paradox of thrift, saving for the individual at a time like this is prudent, but when we all do it, it makes the recession worse.

      • I totally agree, FrencNail. Besides, if one doesn’t have the revenues coming in, how can one spend? And whatever reserves available, for sheer survival purposes, one should let it stay where it’s safe.

        There was a time when American companies produced goods and services for the American consumers. And Americans had jobs in those companies. Now we have American companies locating their production facilities in other countries, providing employment for citizens/nationals of foreign countries and bloating the trade deficit by importing those products back into the U.S. They say it is good for consumers to have cheap products from abroad. But what if you don’t have any money to buy those cheap products, because the company you used to work for transferred all production operations abroad or across the border?

        Now they trillions of “bailout money” but hardly anything to encourage manufacuturing back in the U.S.? The money they are giving to the banks would have been better spent if they were equally distributed to American taxpayers–not on the basis of the amount of taxes paid.

  7. More banking news in the roundup…and look what China’s up to!! And, some speculation in the comments about what Hillary’s mission to China may have been??

    The Past Week: February 22-29, 2009 (Laura Bush Lives On; Budget Director Peter Orszag/Robert E. Rubin, Iceland Bankrupters; China Taking Advantage of U.S. Weakness As It Looks to Buy Foreign Oil Companies?; U.S. Deaths Spike in Afghanistan; Baracus Caesar Obamacus Meets Barackistanis)

    http://tinyurl.com/d5xrmv

  8. I am suffering through a horrible cold/flu this week, so haven’t been able to blog much. Right now, it’s a lovely form of vertigo that makes me feel like I’m on a tossing ship. Having such poor concentration, it’s even more difficult to follow the economic turmoil. I understood the arguments about the stimulus package, and why it fell short according to Krugman et. al., but then with BO’s brand new shiny budget, Krugman seemed pleased. Listening to Michael Hudson below (bb’s post), after the banking bailout, the enormous spending proposals, coupled with extremely optimistic financial projections (and $2 trillion in savings) that the BO team anticipates, seems like pouring gasoline on the fire. It seems to me that BO is using the economic collapse to completely restructure government at a time when we are not just broke, we are severely in the hole–and it’s all based on questionable savings and recovery? Why am I hearing the Jaws theme?

    • fif,

      Take Vitamin C, drink fluids and sleep! Rest is the most important thing. And I hope you have a neti pot and are using it.

    • Dear fif you said Right now, it’s a lovely form of vertigo that makes me feel like I’m on a tossing ship.

      I always feel that way trying to understand economics ….

      sending lots of healing

    • fif, hope you’ll get some rest today. I agree. The deficit is scary. The 1.7 trillion over budget for fiscal 2010, and another 400 billion omnibus stopgap bill for fiscal 2009 that will vote this week. This is on top of the 700 billion Tarp which I assume is mainly 2009, and the 800 billion Stimulus which is mostly baked into fiscal 2010. Add in the Bush legacy programs, and it seems they are running at least a 2 trillion annual deficit, which will keep adding to the national debt. That’s before thinking about the implications of the expanding balance sheet at the Fed.

      Barry says he’ll bring it down to a 500 billion deficit pace by 2013. Guessing he won’t do it by cutting spending, since this is not going to be a short recession. He is expecting no new Tarps and Stimuli by then. There will be taxes on the wealthy, fewer loopholes for business (not heard anything on capital gains). But most significant, as you point out, are higher expected revenues from a speedy economic recovery. He says 3.2% positive GDP by 2010, even though last quarter we shrunk at a 6.2% annualized rate. Optimism is good. Delusion is bad.

    • fif, feel better. I had a cold that was going around here that was awful and seemed to linger for weeks, so I know it sucks. But your point about restructuring the whole financial landscape is a good one, imo. Especially when we consider that some big banks were forced to take bailout money to avoid singling out the ones who were really in trouble. Why? Doesn’t that only make it look like a potentially manageable problem with a few banks is already industry-wide? How is portraying the problem as bigger than it is, instead of letting it be seen as something that could get bigger if not effectively contained, a good thing?

      • Cinie, the rationale is that if one bank looks weak, it will go down like Lehman because investors will smell the bleeding. Natural selection, survival of the fittest and all. But, when that weak bank goes down, because it is so interlinked with all the others, it will take down the whole system. A weird paradox which I’m not sure I buy. But that was Paulson’s rationale, after Lehman.

        I’ve always thought one of the big commercial banks should fail, to give a shock to the system. Have been thinking that for months. We’ve had a big investment bank fail in Lehman. A giant mortgage lender in Countrywide. A giant insurance company in AIG. Always thought Citi would be the commercial bank that bit the dust, but Geithner and Bernanke seem dead set against it. Citi is very interlinked with the other banks no doubt, it is also very global. Who knows. It’s back down to a buck fifty.

        • I understand the professed “logic,” I just think it’s faulty. A blanket effect or a domino effect, either way, everybody’s tarnished, everybody suffers. But, if you really have a manageable problem with a small number of bad actors, why not cull them from the herd and let the rest ride it out? Aren’t you going to end up doing that sooner or later anyway?

          • Probably the best big bank out there is Wells, and they have fallen 70% in the past six months. The market sees the big banks as interlinked. They own each other’s debt/swaps/insurance, and collectively they own people’s debt with mortgages, credit cards, car loans, business loans, etc. Govt tries to keep banks solvent so people remain solvent. The theory at least.

  9. A rail line between Disney and Las Vegas ….LOL LOL!!!

    doesn’t that say it all?

    We are soooo cooked.

    • I’m not advocating spending the money now, but there really is only one incredibly clogged road between LA and Vegas, and pretty much one airline. No rail at all. Commuting, which would be beneficial to a lot of folks, considering the realities of the two cities’ entertainment and tourism industries, is needlessly rendered almost impossible.

      • Yes. Disney to Vegas makes it sound like a theme park monorail. LA to Vegas is plenty busy for business. They could build another airport I suppose? Maybe not right next to the Strip. Dunno. McCarren is so busy, it’s almost like, well, a casino.

        • Another airport? Who can afford to fly? Aren’t airlines hurting bad, cutting flights? All things considered, a supertrain’s not a bad idea. Who should be funding it and why now are the questionable things to my mind.

          • Thought Jet Blue was making money on the Bay Area to LA shuttle, and the cost is less than driving. Everything is different these days, so I really don’t know.

  10. RD, thank you for this post.

    Barry economies, In a nut shell

    They want everything

    ….up to and including that barrel with the suspenders with which you seek to cover yourself .

    They will come at us until we have dirt floors and then they will wonder at thier generosity that we have floors at all. Until the pitchforks are grasped, they will be coming . ….or so it seems. All else is kabuki meant to confuse as they steal. The line in the sand must be Social Security . Resistance to thier stealing , ….er I mean , fixing it must be immediate and hard. I hope it will be…that’s where my hope is.

  11. an odd bit of theater lately was the car people being grilled by congress on how they planned to spend bailout money, while the banks were handed money without so much as a question. the explanation I heard is that the public understands cars better than they understand banking, and would be totally bored listening to bankers. in other words, political points would not be scored, and it would piss the bankers off.

    I think a public educated on economic matters is probably the last thing our leaders want. so it’s what we must do.

    in other news, I had dinner with Fuzzy last night. he’s wonderful – we had a great time, and of course we spoke fondly of all of you. it would be so fun if we could all have a get-together.

    • A friend , whose an intelligent person , was ticked off the car guys came to Washington in private jets….just like the media wanted her to be. I pointed out the banks did not travel to DC in a turnip truck and were given so very much more without having to cry for it either.

      I think the cars guys got much less etc. because they are, at least supposedly, a state side manufacturer. That is something the Barry people scrap off thier shoes The bailout are for banks…multinational banks and they don’t like sharing. Particularly for an industry that employs Americans at a living wage. That goes against everything they are trying to achieve . That is, 3rd world here. IMO

  12. Among the ironies in life and talking about trains…
    one of the things Louisiana wants to do is to establish a rail link between Baton Rouge and New Orleans with part of the stimulus pkg money that Bobby wants to bad mouth.

    Benefits to such a line:
    It would originate in the CBD in NOLA and one stop would be at Louis Armstrong Int’l Airport, thus taking a strain off of I-10 and not having to pay for parking at the airport.

    A large number of people relocated to B.R. post-Katrina and commuted to work in NOLA. A post-storm bus service funded by FEMA was doing a booming business.

    LSU’s medical school is in NOLA while the main campus is in B.R. Would provide an easier way to travel back and forth.

    What they want to do is to upgrade track that exists so it’s more compatible with passenger trains versus freight trains.

    • I hope it happens. These kinds of programs are beneficial to so many people. Many of those in NOLA have no private transportation, either, correct? So this would be helpful. I love trains. Interestingly, if you take the Amtrak cross-country, the tracks through such states as Nebraska are so rough that they gave me a headache, as my head kept banging against the side wall. I doubt that many of these freight lines have ever been upgraded. Another tidbit, since track is owned by freight lines, the Amtrak always defers to the freight train, producing many of the tediously long waits.

      • Oh I hope it does too. And you’re right about a lot of folks in nola not having cars. That’s why the bus thing they had going on was so successful. A large number of people were in a FEMA village right outside of B.R. and they used those buses to get back and forth to nola to jobs they had.

        When my cousin lived in Hammond, across the lake from nola (where dakinikat teaches) I used to take the train to visit her on weekends. It was the one that went from nola to chicago. It was such a relaxing ride. You just put your mind on hold and enjoyed the scenes of the lake and marshes as you passed by them.

  13. Found this great page full of links(includes planet money) for beginners:

    http://baselinescenario.com/financial-crisis-for-beginners/

  14. Paul Krugman seems to be pulling his punches lately. I’ve heard him on Fox and CNN and read his latest stuff; he seems to be blessing the one. I suppose in the current NY-DC time bubble, one can not be much w/o curtsey’s to the O.

  15. I sat thru the CPAC deliveries of Limbaugh. The conservatives just do not get it that government has to play a role as gatekeeper and keeper of the fields. I so wish we had leadership that really understood how important it is to craft a fine and fragile balance between the role of government and the role of private enterprise.

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