Tuesday, September 23, 2008

susan's at work - & i'm not...

susan says she's tired of the whole 'bailout' thing at this point, & who's to blame her - like the run-up to the invasion of afghanistan (& iraq), once the narrative's in place, & the 'shoot first, & ask questions later' mainstream conversation's reduced to the hows & whens, with all thoughts on whether or not it's a good idea in the first place assigned to the dustbin, well, one's personal options are once again reduced to a) either lighting a candle or cursing the darkness (i prefer the latter, myself - pointless, yet childishly satisfying), & b) moving on...

that said, as we now enter into this brave new commercial dystopia, where, overnight, we find what used to be our country now transformed into the world's largest hedge fund & we, as citizens, its disenfranchised shareholders, i'd (with her okay) like to share a couple of parting observations on the whole mess...

observation #1: it's not 'all of our fault' that this happened

from eliot spitzer's wapo editorial 'predatory lenders' partner in crime' (021408):

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

this editorial seems to provide conclusive evidence that the financial industry, via the white house, & in the face of any attempt to inject some level of sanity into the proceedings, was dead determined to take the (traditionally unqualified) prospective american home buyer for every cent it could get its hands on - now! - , whatever the cost of the potential consequences down the road. period...

now, i realize it takes 2 to tango (i love that expression!), & that ignorance, even on the part of the illiterate & the elderly, is no excuse. & i realize that house-fippers/equity-cashers knew full well what kind of pyramid scheme they were involved in. but i also realize this: if our government no longer exists to protect us (even from ourselves) by way of imposing restrictions & protections, but rather to simply expedite greed & fraud, then we really need not have any government, or elected officials, or 'laws', at all...

the current situation is not 'all of our fault' - those of us who were tricked & lied to, & those of us who either knew well enough to steer clear of the whole thing, or couldn't afford to house-flip even if we'd wanted to, had absolutely nothing to do with this mess... & i'm thinking this includes a helluva lot of us...

observation #2: the current mess is not 'all about bad mortgages'

from james kelleher's reuters.uk article 'buffett's 'time bomb' goes off on wall street' (091908):

Recent events suggest Buffett was right. The collapse of Bear Stearns. The fire sale of Merrill Lynch. The meltdown at American International Group (AIG.N: Quote, Profile, Research, Stock Buzz). In each case, credit default swaps played a role in the fall of these financial giants.

The latest victim is insurer AIG, which received an emergency $85 billion (47 billion pounds) loan from the U.S. Federal Reserve late on Tuesday to stave off a bankruptcy.

Over the last three quarters, AIG suffered $18 billion of losses tied to guarantees it wrote on mortgage-linked derivatives.

Its struggles intensified in recent weeks as losses in its own investments led to cuts in its credit ratings. Those cuts triggered clauses in the policies AIG had written that forced it to put up billions of dollars in extra collateral -- billions it did not have and could not raise.


When the credit default market began back in the mid-1990s, the transactions were simpler, more transparent affairs. Not all the sellers were insurance companies like AIG -- most were not. But the protection buyer usually knew the protection seller.

As it grew -- according to the industry's trade group, the credit default market grew to $46 trillion by the first half of 2007 from $631 billion in 2000 -- all that changed.

An over-the-counter market grew up and some of the most active players became asset managers, including hedge fund managers, who bought and sold the policies like any other investment.

And in those deals, they sold protection as often as they bought it -- although they rarely set aside the reserves they would need if the obligation ever had to be paid.

while, msm-wise, it may not be quite as sexy as 'mortgage defaults', you can't tell me that $46 trillion dollars, all of it non-transparent & completely unregulated, an amount of money that actually dwarfs the holdings of all of wall street & the non-shadow banking industry, isn't at least somewhat sexy? isn't at least worthy of some mention?...

think about it: had this current 'crisis' happened way back when, back before mortgages were bundled, re-bundled, & then re-bundled again, what would the solution involve? at most, a take-over/dissolution of a finite number of broken lenders, & a dissolution/restructuring of a number of existent mortgages - a bad situation, to be sure, but much more doable, & much more along the lines of the s&l bailout, than this current mess...

this current mess, unfortunately, is not all about bad mortgages. rather, it's (partially) about what was done with those bad mortgages. it's about how a bunch of brokers/traders basically took those bad mortgages, threw them into a blender, added them to &/or combined them with any number of other similar, fabricated 'instruments', then went ahead & created more new 'instruments' based on those 'instruments', all of which in service to the interests of their own, self-created, computer-animated financial shadow casino. & it's this fantasy casino, free of oversight, where basically everyone who can afford to play is absolutely, positively guaranteed to win every time, that's now hit the wall, as the inevitable day of reckoning finally arrives, & the other, real-world economy (via a struggling consumer base) rears its head...

which's why the sudden rush, & why the initial version of the paulson-bernanke legislation is as brief (& as starkly, creepily revealing) as it is, & leaves such minor concerns as (re-)regulation & assisting homeowners to be dealt with down the road. it's because they themselves don't see bad mortgages as what this's really about. on the other hand, they don't see the existence of the casino as the true source of the problem - rather, they actually, desperately, want to attempt to save it, at least in some form, even if it means flushing even more real-world assets (ie, the fed, the treasury, the dollar) down the toilet in order to do so...

which, at this point, is similar to a child attempting to stop the incoming tide in order to save his/her sand castle. &, sadly, the fact that the shadow casino was created in such a way that its collapse will cause wide-spread, real-world collateral damage doesn't alter that...

i have no doubts that the situation's critical, & that the results of a collapse will be painful. but, to my mind, that's just one more good reason that, for better or worse, the casino really needs to be destroyed. never mind that any solution which involves preserving the cause of a problem will never be a way of truly solving it...

whew! - now you know why i don't blog :) ... thanks for hearing me out, & see you at the next shareholders meeting...

ps: & wouldn't you know it, the sec's chairman, appearing at a senate hearing today, just requested congressional authority to regulate credit default swaps (which the s&p is also - now! - acknowledging are contributing to a 'systemic crisis')...

the ap's take: 'A third witness, Securities and Exchange Commission Chairman Christopher Cox, urged Congress to regulate a type of corporate debt insurance that figured prominently in the country’s financial crisis.' put that way, credit default swaps sound kinda harmless... maybe even benign, in a way...

edit: okay - one last, final, final word...


Avshar said...

Lol, thanks for the info. It is hard to believe this was allowed to happen but then again i seem to think nothing can surprise me about the economics in this country until something beyond belief like this happens and i just shake my head at the fact that yet again the depth of self interest and criminal negligence of our government does indeed still manage to surprise me now and then.

lindsaylobe said...

Thanks for stepping in for Susan with such a comprehensive posting.

According to Michael Hudson (in his brief e-mail reply he sent me) its not just transparency; the whole system needs revision.

I think both the lack of transparency and regulation were key aspects but another more puzzling aspect is the lack of quantifiable and qualitative data being made available or commented upon by those leading economists.

Taking into consideration the fall in world bourses, often more so overseas than in the USA it would lead one to conclude much of the misery has been successfully exported, particularly in the UK/Europe. This factor seems to me to be overlooked as the effect overseas could be equally as devastating as the grim prospects now evident in the USA.

I also noticed Berkshire is now taking a stake in Goldman Sachs – Berkshire will get preferred stock with a 10 % dividend to be called at any time at a 10 percent premium.

Berkshire it was reported will also receive warrants to purchase $5 billion of common stock under a strike price of $115 per share, exercisable at any time in five years.
Goldman wasn't leveraged as badly as some of the other investment Banks ( 23 to 1) and seems to have avoided others excesses except for outrageous salary packages - $67 million for the CEO !!

That leads me to the question of warrants for all USA citizens to the extent that they share in any of the future gains by virtue of any bailout for those companies that benefit from this action.

It’s easily implemented and already been suggested by number of congressman.

Best wishes

The Cunning Runt said...

Poor Eliot. There's little sadder than a smart man with a boner.

I mean, er, a horny genius.

I mean... oh, never mind!

Randal Graves said...

@TCR, ha!

My head hurts. No, not that one, the brainy one. Very informative post on something that I detest reading about but know that I must. Damn you, reality.

Seraphine said...

i don't think even spider man can help us this time.
but i'm an optimist.
i light a candle in the dark
or i bump into things.
every time i put a root beer barrell in my mouth, the phone rings.
it's a beautiful day. i'm going to pop a fresh rbb into my mouth and go for a walk.
the chances are about a billion to one that the world will crash on me during my walk.
if i'm lucky, i'll die one day in my sleep. i don't want to die alone. i don't want everyone looking neither.
i'd like to suck on my root beer barrell in peace.

numb said...

lindsay -

yeah, that's a nice arrangement that mr. buffett's got there - what exactly is the reason he get's all that when he throws his cash around, but when the taxpayer throws his, he gets zilch? (also gotta love how the very next day he's bullish on the bailout - can you blame'm? :) )...

seraphine -

i'd kinda been planning on looking, actually - but now that i know how you feel, i promise i won't...

as good a source of continually updated insight/opinion (& biting humor) re: 'the mess' as any i've been reading:

paul krugman's blog

the 'hanky-panky bill', indeed :) ...

Seraphine said...

10% is a very high interest rate for goldman sachs to pay. why so much? the answer is probably too scary.
remember to think happy thoughts.

lindsaylobe said...

Why so high? Warren Buffet sums it up in his strategy for Berkshire – ‘We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful’. ‘Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it’.

A 10 % dividend yield for Goldman stock is excellent but less than one of our big banks (quoted on the NY stock market) 8% after tax and 12% before. That’s due in the latter’s case to a drop in the share price (fear factor) racheting up the maintainable dividend.i think Buffet was interested at one stage.

Buffet as you’re probably aware is giving all of his fortune away to the Bill Gates Foundation (because he says they are better at giving it away effectively than he is) whilst Bill’s retired trying to give it all away to the 3rd world.

So there are some nice thoughts!!

As to the $800 billion Bail out- if the government sticks to the prices predators have been recently buying the impaired securities on a market to market basis they are going to make good returns on eventual realisation.

That’s likely given even half decent supervision, in which event it won’t cost the taxpayer a penny and could well show healthy returns which could be shared with taxpayer citizens in the form of non voting warrants.

Best wishes

Mary Ellen said...

I haven't even turned on the TV today because I'm so sick of all this doom and gloom. There is nothing I can do about it, other than the voting booth, I'm powerless. They don't care about phone calls or street protests or e-mail or letter campaigns. They care about one thing only...will they hold power in office. Will they keep their seat. Right now, they aren't worried because they figure everyone will just vote their own party and that's it. All will remain the same.

I'm just going to take my husband's advice. Don't look at the 401K...what goes up will go down and visa versa.

My new mantra...don't worry, be happy....tomorrow's another day...no pain no gain (ok,that has more to do with the exercise machine I'm ignoring at this moment). But you get my drift.

Have a great day, kiddo!

Seraphine said...

i'd be inspired to give my "fortune" away, but unfortunately, i think the government is beating me to it.

Seraphine said...

mary ellen. at least you have a 401k to ignore.
and good for you for exercizing!

numb said...

from the internet:

Joe goes to the track and bets $2 on a horse.

Two guys standing nearby get into a discussion and Fred says to Sam, “I’ll bet you $5 that Joe wins his bet.”

Next to them are Bill and Bob. Bill says: “I’ll bet you $10 that Fred welshes on his bet if he loses.”

Next to them is Sally. Sally says: “For $3 I’ll guarantee to Bill that if Bob fails to pay off, I’ll make good on the bet.”

Sally then goes to Mary and borrows the $7 needed in case she has to ever pay off and promises to pay back $8. She doesn’t expect to ever have to pay since she believes Bob will always make good. So she expects to net $2 no matter what happens to Joe.

A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.


How much has been “invested” in the horse race?


$50,000, by the owner of the horse who is expecting to recoup his investment from the winnings of the horse and other future deals.

Everyone else is gambling, not investing.

Ben said...

I haven't blogged much about the banking crisis/bailout. If I do, I'll wind up ranting for hours, so it's best if it's a night before a morning I don't have to get up early. That letter in the link from Minister of Treasury Paulson was spot on, I can tell you that.

Anonymous said...

Hello, Susan.
This whole banking to-do chaps my ass.

Here is a very basic violation of the fundamentals of free market capitalism:
that returns are proportionate according to risks.

The equation should state that with no risk, no return.
We see that set upside down, and damn the consequences.

Risk must necessarily once again equate to loss.
(mumble, mumble)