Saturday, March 29, 2008

“IT MIGHT BE, IT COULD BE...IT PROBABLY ISN’T”

3/29/08

Two recent news stories, which most would consider only tangentially related, are probably both more closely intertwined, and better, news than many people think.

The Wall Street Journal’s print edition reported today what its online edition reported yesterday: The Labor Department says that personal income increased 0.5% in February while personal spending increased only 0.1%. The Chicago Sun-Times reported today that revenues at Illinois “riverboat” casinos were down 13% in February following an 18% drop in January.

Both stories are being reported as bad news, and understandably so. The conventional wisdom is that what this economy needs right now is spending, spending, and more spending, so news of the paltry (negative, adjusted for inflation) increase in personal spending is added, by conventional thinkers, to the litany of bad omens for our economy. Similarly, any news of an industry taking the kinds of hits the Illinois casino industry is taking is perceived as bad. It is hard to argue with either argument in the short run.

However, as I was saying to a friend of mine at lunch yesterday, if our economy has any hope of surviving, we have to increase our savings rate, and we have to do so quickly and drastically. The genesis of our current economic problems lies in overspending and its flipside, under saving. So news of personal income outrunning personal spending, with the axiomatic increase in personal savings such statistics entail, is good news in the long run. Our politicians and Wall Street economists, ever focused on the short run, will respond with antipodean proposals and programs to increase savings, like the fatuous Bush rebate program, which are akin to curing alcoholism with generous doses of cheap hooch. But if we really want to cure our economic diseases, rather than treat their symptoms, we have to increase our savings rate. Yes, doing so will involve pain, probably lots of pain. But this problem has been developing for over twenty years, and efforts to avoid pain, like curing a hangover by chugging half a bottle of rot gut booze, are bound to make the ultimate problem even more acute and the cure perhaps even worse than the malady it was designed to treat.

The connection to the gambling story should now be obvious. While a drop in casino business is tough for the industry, and the economy in the short run, the growth in (at least legal) gambling in this country over the last twenty or thirty years is alarming. Money that could be saved or invested in more substantial businesses has been frittered away at the tables and machines and has gone to support a business that, well, holds little promise for making people’s lives substantially better. Given my instincts, I have no problem at all with legalized gambling; I just wish people would exercise their freedom of choice to gamble less. The growth in the industry not only is financially debilitating in the long run but reflects a soul sickness, or at least a spiritual and moral hunger, that has increasingly come to permeate our society. So a falloff in gambling revenue is, while perhaps regrettable in the short run, a positive development in the long run.

My realistic (er, sorry, cynical) nature suggests that both these developments are fleeting; in March, personal spending could outrun personal income…again. And the financial problems with Illinois “riverboat” casinos could be entirely due to overall economic difficulties and a 2008 law that forbids smoking indoors in public places, including casinos, in Illinois while gamblers in Iowa and Indiana can ingest as much malodorous poison as they please as they fritter away their credit lines while complaining that they just can’t make ends meet. But, at the risk of endangering my reputation as one of the most cynical scribes in cyber-space, I can still hope that maybe, just maybe, the American people are starting to figuratively sober up.

Thursday, March 27, 2008

“AHH, SPEAK ENGLISH, YA DUMB STOOP”

3/27/08

Today’s Wall Street Journal reports that countries on the periphery of Europe (The Journal specifically cited, inter alia, Latvia, Iceland, Romania, and Hungary.) are raising interest rates while the Federal Reserve here in the U.S. is cutting rates. Why? The Journal did not cite, as would the Insightful Pontificator, the good sense of those foreign central bankers and their focus on their key mission of controlling inflation while Obsequious Ben sees his key mission as pleasing the free marketeer Wall Street tough guys who got themselves into a whole heap of trouble and now need the mother’s milk of federal help to keep them in their Allen Edmonds and their Ferraris, but I digress. Instead, the Journal says those countries “…need high interest rates to attract the investment and credit from abroad that pays for their huge deficits in trade and other foreign income…”

Hmm…

What other country must “…attract the investment and credit from abroad that pays for (its) huge deficits and other foreign income…”? That’s right—the United States of America. While we don’t have the same currency problems those “periphery of Europe” countries have (They are borrowing, in most cases, in foreign currencies and thus would see their liabilities in their domestic currencies increase should their currencies depreciate.), we also must borrow heavily abroad to finance our federal deficit, our homes, our extravagant vacations, expensive cars, $200 + nights out, $300 pairs of shoes, $200 ties, $1,000 suits, and the other necessities of life we expect foreigners who work for perhaps $10 per week to finance for us. And yet Obsequious Ben and his accomplice Hank Paulson continue to follow a “dollar be damned policy” and count on foreign “investors” (increasingly foreign central banks since foreign private investors are onto us and the central banks have little choice at this juncture) to be as financially foolish as your typical American consumer, or your typical Wall Street seven figure financial wunderkind.

Monday, March 24, 2008

YOU’D THINK YOU’D GET AT LEAST A THANK YOU CARD FROM JAMIE AND JIMMY

3/24/08

Like most others who have even the slightest inkling of what’s going on in financial news, the Insightful Pontificator has been following the Bear Stearns story closely. (See my 3/15 post “HILLARY CLINTON WAS RIGHT,” my 3/17 post “STILL A BAILOUT,” and, more generally, my 3/21 post “THERE HAS TO BE SOMETHING AROUND HERE WE CAN HOCK!”.)

In that already seminal 3/15 post, I stated

“Bear’s stock (BSC) fell 47% yesterday to close at $30.00. Perhaps this is putting it too simplistically, but if BSC does not eventually go to zero, or close to it, then we will know that this bailout, ostensibly to help the innocent investor in money market funds exposed to Bear repos and/or to avert the collapse of the financial system, was really designed to help out those poor souls, like Jimmy Cayne and Alan Schwartz, who run, and are heavily invested in, Bear.”

After the $2 Bear deal was announced, I stated (3/17)

“This is still a bailout, not so much for Bear holders (though $2.00 is infinitely more than $0), but for those who lent Bear money and those who did business with Bear.”

Apparently, in an effort to appear more good-natured, I put my realism, which some still insist is cynicism, aside too easily. This morning we all read that the bid for Bear is being increased to $10, so Jimmy Cayne, Joe Lewis, and the boys will not do as badly as some people thought, courtesy of you, the taxpayer. Had I not put my realism aside, I would not only have not had to reassess my 3/15 post on 3/17, I would have bought BSC with a $3 handle on Monday morning, as my realism was advising.

Did the Fed, by the way, think that they could sneak this naked bailout for Bear holders by us after only a week? Perhaps Jamie Dimon and his friend and benefactor Obsequious Ben Bernanke have been spending the last week watching American prime time television and have concluded, probably correctly, that the American people are a bunch of brain-addled dolts anyway whose attention span is so incredibly short that we can take their money, give it to ourselves and other members of our club, and the suckers won’t notice. After all, March madness is on and people have other things on their minds. Every pickpocket knows that distraction is his best friend.

Think about today’s action. JPM was going to pay about $236mm for Bear’s equity until the increase in the bid to $10, which brought the total price of the equity to about $1,180mm, an increase of about $944mm. One would think that if Jamie Dimon had another billion dollars or so of his shareholders’ money to thrown at Jimmy Cayne and the boys, he should have a few bucks around for the taxpayers who are being forced to backstop the deal. And he does, almost literally. According to the revised deal, instead of assuming $30b of BSC’s liabilities, the Fed will only have to assume $29b; JPM will be on the hook for the first $1b of losses that the Fed would have been forced to take under the former deal. Wow. Big deal.

So the money goes from the Fed (you, ultimately. See my 3/21/08 post.) to Jamie Dimon to Jimmy Cayne, et. al., all in the interests of “smooth functioning of the markets,” of course, not in the interests of saving jobs for the poverty stricken friends of Jim Cramer on Wall Street. Everyone avoids getting his or her toe stubbed, stays rich, and you are stuck with a bigger federal deficit, lower returns on your money market accounts, a plummeting dollar and attendant high inflation, and, probably, a bill for your neighbor’s mortgage. You know, the guy driving the Mercedes, which he bought with that same mortgage you are being forced to pick up, and laughing at you in your Ford.

You can hear the tough, self-reliant, smartest guys on Wall Street now:

Moral hazard be damned! Full speed ahead, and, if there are problems, stick that guy with the bill. So what if the ultimate bill increases exponentially? . Hell, it’s only my money when it’s coming in. It’s that guy’s when it’s going out After all, he’s asking for it, and he can always pass it along to his kids anyway.

Your government at work, leaving no Wall Street billionaire or careless, overpaid money manager behind. But, to haul out this paraphrase from H.L. Mencken again, the American people get the government they deserve, and they get it good.

Sunday, March 23, 2008

DON’T VOTE, PART II

3/23/08

On the last page of the first section of the Sunday Chicago Tribune, there is a sub-section called “Personals.” This is not the “Personals” one usually finds in the Classified sections of less reputable papers, e.g., “SWBVF seeks MBLVF for SM and other activities, only those interested in a committed, loving relationship need apply.” No, this “Personals” page is a fluff, gossip piece of the type that is growing and proliferating like kudzu to the point at which it and its kindred now occupy virtually the entirety of the modern day “newspaper.”

As you might guess, the Trib’s “Personals” page is a page I skip. In fact, once I have reached this page, I know that I have finished the first section of the Trib and can move on to Perspective, Metro, and, finally, Transportation. However, this Sunday, the “Personals” section of the Trib featured a picture of an especially attractive (not necessarily good looking, but attractive in the sense that her photo grabbed one’s attention. In a more literate age, we referred to such women as “stunning,” or “striking,” but I digress.) woman, and such pictures usually grab my attention. Then I read, next to her photo, and under the headline “Punch Line,” the following:

“For the record—I know everyone wants to know this—they were an extra pair. They did not literally come off my body.’
-Stacey Elza, the Chicago grad student who raised eyebrows on Monday’s “The Bachelor: London Calling” when she handed Matt Grant her panties. Said bachelor did not hand her a rose.”

I confess to know absolutely nothing about what this is all about, but I do have to commend Miss Elza on her proper use of the word “literally,” which is one of those words that has been misused so much it has entirely lost its, well, literal meaning. I do have to break the sad news to Miss Elza, however, that not “everyone” wants to know about her panties. In fact, most of us (all of us, really) would be far better off and would digest far more easily, if we didn’t hear anything about her panties.

However, the most salient thing that struck me about this “news” article is that there are some people, probably many people, given the circulation of the Tribune, that think this "news" is important. And those people get to vote. How scary a thought is that?

Friday, March 21, 2008

“THERE HAS TO BE SOMETHING AROUND HERE WE CAN HOCK!”

3/21/08

Pawn shops are reporting a dramatic uptick in business. Pawn shop owners and other less directly involved observers attribute this bonanza to two factors. First, with the price of gold (still) near record levels, people are taking advantage of a perceived opportunity by pawing jewelry, other baubles, and even gold teeth and fillings, the last an especially dyspeptic notion. Second, in this wonderful economy we are experiencing (“the greatest story never told,” as Larry Kudlow never stops telling us), people are having a hard time making ends meet (which, admittedly, might have something to do with the size of the ends) and thus are turning to what is perhaps the world’s oldest financial institution for help. Often, those seeking to cash in on gold’s rise and those struggling to pay their bills are the same people.

As I was contemplating this development, a thought came to me. Now that the Fed has opened its discount window, formerly restricted to commercial banks, to securities firms and has agreed to take all manner of collateral, including dicey mortgage backed paper, the Fed has become Wall Street’s pawn broker. (The Wall Street Journal reports that, as of last Wednesday, the Fed had $28.8 billion outstanding under this facility, so this program is not a mere confidence fortifying backstop.) This analogy is, of course, strained for three reasons.

--Pawn shops demand better and more (on a per dollar basis) collateral than the Fed.

--Pawn shops generally deal with a higher class of clientele than the Fed, or at least this is the case under the new “wide open window” policy under Obsequious Ben Bernanke.

--If the pawn shop owner has to seize collateral (as he usually does) and sells it at a loss, it is his problem. He bears the loss. If the Fed ends up having to seize Wall Street’s collateral and takes a loss, it loses the money, like the pawnbroker. However, the Fed, while not formally an agency of the federal government, remits a substantial chunk of its profits to the U.S. Treasury. Last year it distributed $34.4 billion to the Treasury. This is money on which the federal government relies. (Whether it should is another matter.) If the Fed’s profits fall, as they will if they take losses selling malodorous collateral, less money will be remitted to the Treasury and thus spending must be cut (Ha!), taxes must be raised, or, most likely, more money must be borrowed to make up for the shortfall. Since the interest and the principal (eventually) on these borrowings must be paid by the taxpayers, you, or your children, are ultimately responsible for the Fed’s new “Pawnshop to Wall Street” venture. Of course, if it all works out, the Fed will make a profit on this business and the taxpayers will be commensurately rewarded. That could happen, but this probably wasn’t what the founding fathers had in mind when they created the Fed. Oh, wait…the founding fathers didn’t create the Fed, did they? But I digress.

You didn’t know that you, as a taxpayer, have now been put in the pawn shop business, did you?



On a far more important note…

Have a blessed Triduum (I know I am a day late here.), a holy Easter. God bless you all, at this most sacred time of the year, and always.

Thursday, March 20, 2008

HAIR OF THE DOG

3/20/08

As I predicted (See, inter alia, my 1/17/08 post, “NOT THE CANDY COMPANY, NOT THE PAUL NEWMAN/PATRICIA NEAL MOVIE …”), federal regulators, at the prodding of the Bush Administration, are moving to get Fannie Mae and Freddie Mac to buy more mortgages and mortgage backed securities (“MBS”) in an effort to “stabilize” the housing market. Regulators are reducing the capital these two government sponsored enterprises (“GSEs”) must hold from 3.25% of their mortgage holdings to 3.00% of their mortgage holdings. If Fannie and Freddie take full advantage of the “opportunity” presented them by OFHEO, their primary regulator (Remember, these are private businesses with shareholders to consider, so expansion of their balance sheets is not a foregone conclusion.), they could increase their combined mortgage holdings by about $200 billion which, even in Washington, is not small change.

Fannie and Freddie lost a combined $9 billion in the second half of 2007, largely because a growing proportion of the mortgage loans they guarantee defaulted. Those losses are expected to continue through the second half. This does not seem to be the time to be adding leverage in order to buy more mortgage loans that may go sour. We, of course, are being assured that the mortgage loans that Freddie and Fannie will buy with this new leverage will be subject to stringent underwriting guidelines and thus will be of the highest quality with little chance of default, no sir. The people delivering these assurances are the same people who were telling you that the mortgage problem was an isolated one, limited to sub-prime mortgages, that would never spread to Alt-A mortgages, and that the mere suggestion, being made by lost in the ‘80s rubes like the Insightful Pontificator, that this problem could spread to prime mortgages and beyond was absolutely risible. After all, as astute observers like Jim Cramer were telling us, the “guys on the Street” assured these financial wiremen that the problem was a trifling one, easily handled by the type of financial wizardry that got us into this mess in the first place.

It looks to me like this latest move to prod Fannie and Freddie to buy more mortgages amounts to attempting to solve problems caused by using leverage to buy dyspeptic assets by using more leverage to buy more dyspeptic assets. Sounds like a great plan to me, but what do I know? I thought that this mortgage “problem” would turn out to be a real mess, and I had the temerity to suggest that, consequently, the stock market was not going to soar upward as 2007 turned into 2008, undergirded by “strong fundamentals.”

Further, since Fannie and Freddie are GSEs and as such have the implicit guarantee of the U.S. government, who will be left holding the bag? So now not only have you bailed out creditors and counterparties to Bear Stearns, addle-brained practitioners of the recondite arts of financial alchemy, and “homeowners” who borrowed beyond their means partially in an effort to look down their noses at those of you who still practice financial prudence; now you’ll be bailing out all of the above, only to a greater degree, and the financial wizards at Fannie and Freddie. All this, of course, in the interest of making the world more comfortable for the ardent champions of free market capitalism and self-reliance who inhabit Wall Street and Republican administrations.

Monday, March 17, 2008

STILL A BAILOUT

3/17/08

Toward the end of my Saturday posting on Bear (See “HILLARY CLINTON WAS RIGHT,” 3/15/08), I stated

“Bear’s stock (BSC) fell 47% yesterday to close at $30.00. Perhaps this is putting it too simplistically, but if BSC does not eventually go to zero, or close to it, then we will know that this bailout, ostensibly to help the innocent investor in money market funds exposed to Bear repos and/or to avert the collapse of the financial system, was really designed to help out those poor souls, like Jimmy Cayne and Alan Schwartz, who run, and are heavily invested in, Bear.”

So now that Bear has been sold, with the help of the Fed’s and the Treasury’s cudgel of withholding support, to JP Morgan for $2.00 (if the deal is approved by Bear holders, which is not an entirely foregone conclusion) and the risks of Bear have been effectively nationalized, with you, the taxpayer, ultimately assuming the risk wrought by the frivolousness of Bear’s traders and their counterparties, are last night’s actions still a bailout? Of course. This is still a bailout, not so much for Bear holders (though $2.00 is infinitely more than $0), but for those who lent Bear money and those who did business with Bear.

Again, people did foolish things with other people’s money, and one of those foolish things was doing business with Bear Stearns as a lender, a counterparty, or both. People in the money business don’t get paid big money for saying “Hey, it was f…ing Bear Stearns, how was I do know that they weren’t good for it?” People took risks. If those risks worked out, they would have made money. Those risks didn’t work out. They, not you, should bear the costs.

Saturday, March 15, 2008

MAYBE WE OUGHT TO POSTPONE THE CANONIZATION

3/15/08

The Chicago Tribune and the Chicago Sun-Times reported this morning that, uh-oh, it looks like Barack Obama took more campaign money from Tony Rezko than Obama’s staff had thought, perhaps up to $250,000 during Obama’s meteoric rise to the precipice of the presidency. Oh, well, that bookkeeping stuff can be very complicated, especially when you want it to be.

More telling is the Tribune headline this morning: “Obama: I trusted Rezko.” This, of course, leads to questions regarding young Mr. Obama’s judgment: Who else has he, or will he, naively trust?

One must add these revelations and questions to doubts involving Senator Obama’s purchase of his mansion in Kenwood/Hyde Park. It is now, if not clear, logical and understandable to infer, that all or some of the following took place:

--Tony Rezko helped Barack Obama buy his dream house, and not just a little bit. Obama got a multi-hundred thousand dollar discount on the house, Rezko paid full price for the adjoining lot. The transactions closed on the same day, and Rezko’s interest in the adjoining property only developed days before the closing, roughly coinciding with the day he and the Senator took a look at the house the Senator wanted to buy. This all could be above board, I’m sure, but I wasn’t born yesterday, and neither were you.

--Tony Rezko helped Barack Obama buy a bigger lot than that on which his dream house sat. Rezko purchased the adjoining property, at full price, and then sold Barack Obama a portion of it to expand the Senator’s yard. This was done either to somehow legitimize the transaction (since the sale was made at roughly the price Rezko paid for the property) or in order to make possible for the Senator the purchase of a relatively small parcel another buyer for the adjoining lot might not be willing to sell.

--If Tony Rezko didn’t get into trouble (and he was already, at the time of this deal, “toxic,” as the papers put it) and have to dispose of the property adjoining Obama’s, he would have had a convenient cudgel to hold over young Mr. Obama’s head, to wit: “Say, Senator, I’d really like your help with this particular (contract, piece of legislation, appointment, etc.), and, by the way, did I tell you that I have a condo developer interested in that lot next to yours. Yeah, he’d like to build a 6 (or 12) unit building. The deal’s looking good to me…”

My state’s senior senator, Dick Durbin, defends his protégé by saying the people just don’t understand (Ever notice that so many politicians seem to start statements with contentions that the people who elect them “just don’t understand…”? It kind of betrays their attitude toward us simple-minded peons, don’t you think? But I digress.) that there are people who will contribute to pols’ campaigns and don’t want anything other than to be close to politicians, to be close to the process. And I believe Mr. Durbin…this time. If there are people just dying for the opportunity to be close to the likes of Paris Hilton, I am sure there are people who just want to be close to politicians like Dick Durbin and Barack Obama and will pay big money to do so. I have belonged to several political organizations and civic organizations whose membership is rife with people who just want to be close to it. Politicians are like rock stars to a lot of people. So Durbin is right: There are people who will contribute to campaigns just to say that they did or to get their pictures taken with their idols. But, unless Tony Rezko’s current trial is a frivolous waste of time, believe me, Tony Rezko isn’t one of them.

This Rezko/Obama business is unseemly enough, but another Obama deal that has barely gotten any attention (Surprise!) is even more malodorous. As reported by Lynn Sweet in yesterday’s (i.e., Friday, 3/14’s) edition of the Sun-Times (page 4), Senator Obama requested a $1mm earmark for a hospital pavilion at the University of Chicago while his wife Michelle was something called Vice-President, Community and External Affairs at the University of Chicago Hospitals.

Hmm… This looks to us who live, or who have spent a good (both meanings) portion of their lives, in Chicago as a classic Windy City politics deal: “Yeah, I’ll get you the money (or the contract or whatever else it is you are seeking), but ya gotta pay me back. Tell ya what…put my wife (or kid or brother or brother-in-law or…) on the payroll and we’ll call it even.” It looks like a simple case of money finding its way from the taxpayers through a conduit (the U of Chicago Hospitals) to Obama’s family. Some might argue that the Senator failed in this effort, that the U of C didn’t receive the earmark, so everything is okay. But that’s like a bank robber arguing that, since he got caught before he got away with any money, he didn’t do anything wrong.

I know that, given the hagiography that passes for coverage of Obama in the mainstream press, the following remarks will elicit cries of “Sexism!,” with “Racism” probably thrown in for good measure. Remember, though, that when one’s opponent starts throwing around words like “racist,” “sexist,” “fascist,” “communist,” or “pro-terrorist,” one is in all likelihood winning the argument. But I digress.

Back in the ‘90s when Hillary Clinton’s cattle futures deal and other nefarious shenanigans came to light, I remarked on how tragic it was that a woman with her ability and brains had become “…little more than a bag lady for a corrupt southern governor.” Now that I am older and more restrained, I will not express similar disappointment that Michelle Obama, with all her smarts and talent, has become little more than a bag lady for a corrupt Chicago politician. (I also will not say the same thing about Patti Blagojevich, doubtless yet another manifestation of the restraint that comes with age. But I digress again. (Okay, one more digression, but at least a parenthetical one: Boy, did Rod Blagojevich get the better end of that deal. Patti is smart, tough, attractive, and has as her father one of the most powerful men in Chicago politics, a man who made Rod’s career but whom the omniscient Rod has seen fit to anger beyond hope of restoration their relationship. And Rod’s little more than a blow-dried popinjay.)) But this deal with the U of C really stinks to high heaven.

It’s beginning to look like the voters who so fervently want Barack Obama to be our next president had better be prepared to accept the federalization of the political mores of my home town as part of the deal.

HILLARY CLINTON WAS RIGHT

3/15/08

Yesterday, the Fed came to the rescue of Bear Stearns using JPM/Chase as a conduit because, while not impossible, lending directly to non-banks through the discount window is an unusual, eye-brow raising, and potentially precedent setting event. That JPM/Chase is a mere conduit is confirmed by news that it is the Fed, not JPM/Chase, that is on the hook should Bear default. Hillary Clinton, on the campaign trail said of the Bush administration (paraphrasing, not quoting; I don’t have the quote in front of me) that when the average person needs help, Bush says to let the market work, but when a major investment firm gets into trouble, the Bush people snap to attention. She is absolutely right.

One could argue that the Bear bailout was a Fed, rather than an Administration, operation, that the Administration had nothing to do with it. That would be more than disingenuous; it would be wrong. Treasury Secretary and former Goldman Sachs CEO Hank “Mr. Free Market” Paulson was in on the conference calls on which the bailout was arranged, according to Mr. Paulson, who also said that he had a stake in making the effort work. Clearly, the “free market” Bush administration was involved in this effort. They admit it, despite their repeated protestations (a $12 word for “lies,” in this case) that they believe the government ought not to overreact to our current economic travails.

One could also argue that this is one of those cases in which the Fed, even if at the behest of the Administration, did its job, which is to avert financial disasters. Whether averting financial disaster is the Fed’s job is another conversation, but clearly this bailout transcends the government’s role of protecting seemingly innocent small depositors and investors from unforeseen financial follies or facinorousness. Bear did trades with big players: mutual funds, hedge funds, other brokers, the U.S. government, etc. Bear is not a community bank. Bear isn’t a commercial bank. Bear isn’t Charles Schwab, E-Trade, or even Merrill Lynch. Bear plays with the big boys and used to pride itself on being a big boy. But such is the case with most Wall Street free marketeer tough guy types…until they need to dip their hands into your wallet. But I digress. Proponents of the bailout admit, if even in a sideways manner, that Bear really was not one of those financial ingénues that needs help from the government when those proponents argue that, while some degree of moral hazard may be involved here (Even the most shameless do not completely eschew the notion that this transaction reeks of moral hazard.), the bailout was necessary because, without it, Bear might default on its repos causing losses among money market funds that hold such paper. The argument seems to be that, yes, bailing out a big tough guy (And make no mistake, even back in the ‘80s and ‘90s, when I was in the institutional money business, Bear prided itself on being one of the really tough guys.) like Bear Stearns might be fraught with moral hazard and is not the government’s business, but the government should do it to protect the small guy’s money market fund.
However, money market fund shareholders (and I am, and doubtless most, if not all, of you are, among them) should be aware that such funds are not guaranteed or backed by the government. Money market fund managers can, and did, in this case, make mistakes. Just because many, if not most, people own money market funds does not mean that the government is responsible for the amateurish misdeeds of their highly paid managers. What next? Just because many people owe more on their houses than they can afford to pay, the government should…..Never mind.

Others will argue that the bailout was necessary to prevent a collapse of the financial system. But Drexel and Refco were allowed to fail without a collapse of the financial system. Yes, I know…this time it’s different. In what way? Because there are far more derivative contracts involved, contracts the traders of which, even the creators of which, don’t understand? Why should the financial foppishness of the bad boys on Wall Street be of concern to the average taxpayer? They bet. They lost. Too bad. Undoubtedly, the real economy will be damaged, and there will be pain for the innocent, as a result of the misguided adventures these charlatans took with other people’s money, but that is the way the world works. Trying to avoid the damage merely postpones, and intensifies, the damage.

Bear’s stock (BSC) fell 47% yesterday to close at $30.00. Perhaps this is putting it too simplistically, but if BSC does not eventually go to zero, or close to it, then we will know that this bailout, ostensibly to help the innocent investor in money market funds exposed to Bear repos and/or to avert the collapse of the financial system, was really designed to help out those poor souls, like Jimmy Cayne and Alan Schwartz, who run, and are heavily invested in, Bear.

Your tax dollars at work.

And, full disclosure: At this juncture, I am neither long nor short Bear common, puts, or calls, and I don’t know whether that will change. And no, I wasn’t long puts on BSC Friday morning. Oh, well. I wasn’t long calls, either, but that should come as no surprise to regular readers of the Pontificator.

Friday, March 14, 2008

MAYBE YOU CAN GET A RIDE IN ONE OF THOSE LEXI YOU BOUGHT

3/14/08

As the “housing crisis” heats up, the Democrats predictably are continuing to push their cockamamie scheme to have the FHA (i.e., you, the taxpayer) guarantee the mortgages of those who spent more than they made in order to lead a lifestyle they couldn’t afford and now want the government (i.e., you the taxpayer) to pay their bills. The proposals by House Financial Services Committee Chairman Barney Frank (D., Mass.) and Senator Chris Dodd (D., Conn.) involve the lenders’ (assuming they can be identified) writing down “a portion” of their mortgages and having the remainder guaranteed by the FHA (i.e., you, the taxpayer). The Democrats, of course, protest that this is a bailout for neither irresponsible homeowners nor for the Wall Street types who hold these mortgages and who, purely by coincidence, I am sure, are quite bipartisan in their campaign contributions. However, even the Democrats admit that the losses the lenders will have to take are far smaller than the losses they would suffer if they were forced to foreclose. But this isn’t a bailout, no sir.

In reality, then, the Democratic plan amounts to having the FHA (i.e., you, the taxpayer), bail out irresponsible, overspending homeowners, Wall Street bigwigs, and politicians quaking at the prospects for their campaign funds should some of their most generous contributors actually have to suffer the consequences of their excerebrose actions. This is what they call a trifecta in Washington.

Those of us who have long (in this case, almost since the inception of the Pontificator well over a year ago) worried about the moral hazard (i.e., the sense in the markets that risks can be disregarded because the government will usually (always, really) be there to bail out those whose fatuous and/or esurient bets didn’t quite work out as they had hoped when they committed to buying the $ multi mm house) involved in such bailout schemes can doubtless draw great comfort from the assurances of Rep. Frank, my former Congressperson. He says his plan wouldn’t create a moral hazard. He offered no proof, no argument, nothing in support of this statement. But surely we can take the word of a gormless politician on such matters.

The “free market” Bush administration immediately chimed in on the matter. The White House issued a statement that said “…it is important not to overreact, because government intervention in the market can have unexpected and far-reaching consequences.” (See my 2/27/08 post “IF ONLY THESE GUYS WOULD DO AS THEY SAY…”). At the same time it was reported that one idea that intrigues the White House is that advanced by Martin Feldstein on the editorial page of the Wall Street Journal (See my 3/7/08 post “THE FREE MARKET LOOKS GOOD ON YOU, THOUGH”). Under this brilliant piece of Republican, rugged American individualist, free market thinking, the government will lend troubled homeowners 20% of their mortgage loan balance on an unsecured basis on very generous terms. The homeowner will then transfer that money to the lender, lightening the burden on the financially frivolous “homeowner” and bailing out the fatuous, if not facinorous, lender and investor.

Oh, yeah…there’s a lot of difference between the Democrats and the Republicans.

Monday, March 10, 2008

OTHER THAN THAT, MRS. SPITZER, HOW WAS THE PLAY?

3/10/08

Eliot Spitzer is just too juicy a target after his reprehensible, but predictable (After all, he is a politician; see my 2/18/08 post, “CYNICAL ENOUGH FOR YA?”) conduct. Plenty of people are going to have a field day with this latest poltroon who thought he was going to be President of the United States one day. Come to think of it, perhaps Eliot the Lech will be president one day. What has he done that virtually every other aspirant for that office has not done, literally or figuratively, at one time or another? Every politician engages in meretricious behavior of one kind or another; Spitzer just got caught in an especially salacious form of such behavior. And we keep electing these clowns, so whence does our right to complain and moralize arise? But I digress.

So I am not going to beat up on Eliot Spencer, but not because this particular popinjay doesn’t deserve it. No, I am refraining from castigating Mr. Spitzer because plenty of less insightful thinkers will be doing that over the next few days. Instead, I am going to tee off on another target, and I can already hear the pious, self-righteous accusations of “Blaming the Victim!” However, such callow codswallop never deterred me from saying things that had to be said, and won’t in this case, either.

What in the world was Mrs. Spitzer doing up there when her sexual bindlestiff of a husband made his eminently predictable, “Hey, let’s see if they’ll fall for this pile of malodorous baloney” statement? Why do these wives of political and financial powerbrokers feel the need to stand by their men when those men spit in their faces? Even if (and this is a huge “if”) this came out of the blue, that there was no hint of such conduct in anything that her husband had done or said up until the point he was caught, she should not be absolving him of such conduct. As a woman who is especially close to me said on viewing the Spitzers doing their shuffling two-step on stage, “If he doesn’t show up in some emergency room tonight with his male member severed, she ought to be ashamed of herself.” (Doubtless if I ever entertained thoughts of such extracurricular activity, that notion has been permanently removed from my thought process.)

More likely, this did not come out of the blue, but Mrs. Spitzer somehow managed to forgive, or overlook, her husband’s conduct. The more mawkish among us will say something like “Oh, but she loves him!” Hmm… The more realistic (some might wrongly say cynical) among us will counter that this is probably just another case of the wives’ of powerful and/or wealthy men overlooking the priapean escapades of their men as long as the access to power, money, fame, etc., continues.

We could call this tendency of the wives of powerful men to stand by their men for solipsistic reasons the Hillary Clinton Syndrome, but that would be too easy. Perhaps it would be more apt to call it the Carmella Soprano Syndrome.

YET ANOTHER HANDOUT FOR THE RUGGED, FREE MARKET TYPES

3/10/08
One of my best and most respected friends and I got into an e-mail exchange about Bill Gross’s calling for the government to support agency paper. When I answered in a manner any regular reader of the Pontificator might expect, my buddy replied that, “Like it or not, he (Bill Gross) has a point. If agency financing tanks, the housing market is shot forever.”

Here is my reply (Incidentally, my wife often asks me if I ever just chit-chat with my friends. The answer is “No.” Why waste one’s time with chit-chat when one can discuss things like this?):


3/10/08


People should have thought about that, shouldn't they have? These guys aren't paid the money they're paid to assume that an implicit guarantee is an explicit guarantee, to ask "Is it insured?", or to look up ratings in an S&P or Moody's book.

Screw 'em all. The grossly inflated housing market, built on carelessness and financial foolishness, will come back when we regain our sanity as a nation. Meanwhile, the knaves and poltroons who got us into this mess will feel some real pain, and hence will never do it again. Hopefully, these grossly overpaid buffoons won't be given the chance to commit such heinous acts of irresponsibility with other people's money again, but, if they do, MAYBE they will have learned IF they are made to feel some pain, real pain, not a big severance package, a kiss on the lips, and another job they have no idea how to do after a month on the Vineyard.

But I doubt it; after all, they are in the club, and that is all that matters in today's America.

O tempora, o mores!

Friday, March 7, 2008

THE FREE MARKET LOOKS GOOD ON YOU, THOUGH

3/7/08

On the editorial page of today’s Wall Street Journal, Martin Feldstein, Harvard professor, noted Republican economist, and chief proponent of the “Economy as a Machine that Can be Perfectly Calibrated” school of economics, outlined his “solution” for the “mortgage crisis.” Dr. Feldstein proposed that the federal government (i.e., the taxpayers) lend homeowners who are having a hard time meeting their obligations an amount of money equaling 20% of their outstanding mortgage on an unsecured but senior basis. The proceeds from this “loan” would then be paid to the mortgage lender (if such a lender can be located) in order to reduce the principal of the troublesome mortgage. This latest helping of the codswallop emanating from the “free market” Republican Party would put responsible taxpayers on the hook for irresponsible “homeowners” in an effort to bail out reckless, tough guy “investors” who bet it all on Red 7 and now want to have Mommy make all the bad stuff go away. At least the misguided, flim-flam “plans” to “solve” the “mortgage crisis” proposed by the Democrats involve putting the taxpayers in a secured position.

Remember, Dr. Feldstein’s idea comes from a Republican, a former Chairman of the Council of Economic Advisors under Ronald Reagan, no less.

I give up.

OUR ECONOMIC STAR CHAMBER

3/7/08

Mark Gongloff’s and Scott Patterson’s “Ahead of the Tape” column in today’s Wall Street Journal addressed the hot topic du jour, the commodity, specifically the oil and gold, bubble. In the column, Ed Yardeni, one of the sharpest economists to ply the Street, was quoted as saying

“We may be going from bubble to bubble. The Fed was created to avoid financial crises and get us out of them when they happen, and that’s what they’re trying to do.”

Mr. Yardeni is right, wrong, and sort of right. He is right in arguing that we are going from bubble to bubble, from a stock bubble to a real estate bubble to a commodity bubble, all of which were inflated by the Fed’s efforts to avoid recession and to please Wall Street at all costs. He is wrong when he says that the Fed was “created to avoid financial crises and get us out of them when they happen.” The Fed was not created to avoid financial crises, but, rather, to manage the nation’s money supply, primarily with the aim of avoiding inflation, and to regulate banks. However, Mr. Yardeni is sort of right; the Fed has come to see its job as avoiding financial crises and otherwise acting as a sort of uber economic manager. This is not entirely the Fed’s fault. The Humphrey-Hawkins law, passed in 1978, charged the Fed with controlling both inflation and unemployment, and, ever since then, our lily-livered politicians, largely ignorant of the supposedly recondite basics of economics, terrified at the prospect of having to make any decision, that might cost them votes, and constantly on the lookout for a fall guy, have increasingly looked to the Fed to take charge of the entire economy.

So the Fed was not created to avoid financial crises or to act as a Council of Economic Czars, but a combination of its own hubris and the inability and/or unwillingness of our public servants to make economic decisions has thrust this role upon it. This is both regrettable and the source of much of our economic difficulty. When combined with the utter inability of our society to take a recession or for our Wall Street mavens to operate far from the apron strings of their Mother Fed, such a division of economic responsibility contains the seeds of our financial ruin.

Wednesday, March 5, 2008

HE’LL “BEN” OVER BACKWARDS TO MAKE A DEAL

3/5/08

Yesterday, Fed Chairman Ben Bernanke called for lenders to aid “homeowners” by reducing the principal amount of troubled home loans, arguing that doing so makes more sense than other forms of loan modification because, as Dr. Bernanke put it, “a stressed borrower has less ability…and less financial incentive to try to remain in the home.” Bernanke also said that a “potentially important step” in getting lenders to go along with principal reduction is to increase the principal amount of loans the FHA can guarantee. Thus Obsequious Ben once again tries to straddle the fence between the aggressively interventionist Democrats and the surreptitiously interventionist Republicans in a brave attempt to please everyone.

Principal reduction does have some intuitive appeal, especially in this new age of ethics in which borrowers feel no compunction about welshing on their debts when it makes financial sense to do so. Hey, it’s just another deal, so why keep paying on a mortgage loan when the value of the asset you are trying to save is less than the amount of the loan you must service to save it? If the lender made a bad deal, it’s his problem, not the borrower’s, according to the new mores, which comply completely with the new American motto: It’s not my fault. And, after all, it’s more important to be facinorously clever than scrupulously honest. But I digress.

From the perspective of the lender, principal reduction is merely recognition of reality. A mortgage loan is rarely worth more than the underlying collateral, especially in the brave new ethical world outlined in the last paragraph. If the books are kept honestly (Try not to laugh too loud at that conditional clause; we must maintain some semblance of decorum while conducting such searingly insightful examination of the issues.), principal reduction should have little or no accounting impact, and even if the books are of the same basic genre as the Harry Potter novels, principal reduction has little or no economic impact.

So what’s the problem with Obsequious Ben’s plan? Besides its tacit endorsement of scrofulous conduct on the part of borrowers, the big problem is, of course, the expansion of the FHA’s guaranteeing powers. Once again, it is being proposed that taxpayers, most of whom have been reasonably responsible, be put on the hook for those who acted irresponsibly on both the lending and the borrowing side.

Lenders made lousy loans to homeowners who had no business buying as much home as they bought and/or borrowed against their homes to finance lifestyles they couldn’t afford but simply HAD to have. The lenders sold those loans to clueless financial wizards who didn’t understand what they were buying but kept telling us not to worry about it; after all, they were financial wizards, that’s what they do for a living. So who is made to pay? The taxpayers. This makes sense only to the following constituencies:

--otherwise staunch supporters of the “free market” who suddenly need a handout due to their own financial foolishness.
--politicians, many of whom are self-professed acolytes of the “free market,” looking to win votes and campaign contributions from former free marketeers who see an urgent need for government action due to “special circumstances,” hoping no one will notice that those “special circumstances” arose because those valiant defenders of the free market bollixed up something.
--central bank chairmen who see their primary function as keeping Wall Street charlatans and Washington parasites happy.

Meanwhile, moral hazard, in more ways than one, eats away at the already frail underpinnings of our financial and economic systems.

JUST TO KEEP IT INTERESTING…

3/5/08

I’ve dropped my former hobby of political prognosticating. Why? I’m not very good at it. Earlier in this campaign season, I was convinced that we would be seeing a Rudy Giuliani/Hillary Clinton race in November. The former is long gone and the latter, even after last night, is still far from a sure thing and probably a long shot. (No, I wasn’t prognosticating there!) However, though I have given up political prognosticating, I have not given up on political pontificating, opining, or otherwise enlightening my friends and readers. So here are some random thoughts in the wake of last night, none of which is especially profound or previously unuttered:

· Most observers are arguing that the now continuing Democratic nomination race will hurt the Dems, that the Republicans can only benefit from the Democrats “tearing each other apart” while John McCain (Did you know he was a POW in Vietnam?) plans for the general election. I disagree. The race on the Dem side of the aisle should keep the voters focused on the Democrats and leaves Republican primary results as a footnote, if that, on the election nights last night’s results assured will continue. Sure, it costs money to keep up the internecine battle, but the amounts spent will pale compared to the free media the continuing race will garner.

· The continuing Democratic race will also keep political game day enthusiasts enthralled and pining for our ultimate political dream: a convention that is more than a demonstration of the callowness and excerebrosity of the types that get themselves elected delegates to these now shameless and meaningless political bacchanals. Here is one political enthusiast, albeit one who would never vote Democratic (or probably Republican, for that matter) nationally, who is delighted with last night’s outcome.

· The Formerly Corpulent Bloviator (“FCB”) Rush Limbaugh will, with his characteristic generous dollops of humility, take credit for Clinton’s victories, claiming that it was his urging of his ditto-brained disciples to cross over to vote for Hillary in order to keep the Democrats fighting with themselves, that sealed her victories in Texas and Ohio. Even if this is true (and I doubt that it is), it will in all likelihood backfire on the FCB for the reasons outlined in the last bullet point, unless his motivation was to help the Democrats nominate the weaker candidate, in which case he might have helped accomplish something. However, even if the latter was his motivation, it is hard to see how even the termagant Hillary Clinton could blow this one for the Democrats. But these are the Democrats, after all, who have displayed an amazing ability to pull defeat from the jaws of victory.

· Hillary Clinton has now won California, Texas, New York, New Jersey, Massachusetts, and Ohio. That anyone, especially any Democrat, who has carried these states does not have the nomination sewn up is testimony to the sheer convolutedness of the methods the Democrats have chosen to select their nominee. She could even add Pennsylvania to that list and still not be nominated. Hmm…

· While Clinton and Obama argue about who gets the better press, has anyone looked at how the reputedly liberal press treats John McCain? (Did you know he was a POW in Vietnam?) Words like “brave,” “a fighter,” “never gives up,” “war hero,” “straight shooter,” “foreign policy expertise” (Whence does the notion that John McCain is a foreign policy expert come? Since when does service in combat, even very valiant military service under almost unimaginably horrific circumstances, make one a foreign policy expert? If so, why did John Kennedy bring sink us deeper and deeper into the quagmire of Vietnam, oversee the Bay of Pigs, bring us to the brink of World War III over something that could have been avoided with a concession he was to make anyway, and design a ruinous Cuba policy that handcuffs us to this very day? If military service makes one a foreign policy expert, why did John McCain’s most ardent supporters only three years ago dismiss John Kerry as an ingénue in the field of foreign policy while touting the foreign policy expertise of their candidate, whose only “military” experience consisted of going AWOL from the Texas Air National Guard? If military service makes one a foreign policy expert, why did Richard Nixon and Ronald Reagan achieve so much on the foreign policy front despite neither having seen anything that could remotely be construed as combat? Just asking.) fly off the lips, and the fingers, of various media types as if there were some kind of key on their word processors that they are compelled to hit immediately after typing in the words “John McCain” (Did you know he was a POW in Vietnam?). NO ONE GETS BETTER PRESS THAN JOHN McCAIN. (Did you know he was a POW in Vietnam?)

· President Bush is going to endorse John McCain (Did you know he was a POW in Vietnam?) today. Oh boy! The Democrats ought to pay all of McCain’s expenses for this trip to the White House, and doubtless will replay the tape of the endorsement speech endlessly during the upcoming general election campaign. Surely there are some who, as Bill Bennett said last night “like George Bush and feel grateful to George Bush,” but there aren’t many with such feelings if Mr. Bush’s favorable/unfavorable numbers bear any resemblance to reality. Even those few right wing pundits who are not so myopic to think that George W. Bush is the greatest personage ever to grace us with his holy presence in the history of mankind (well, maybe after Dick Cheney) argue that, while Bush might be, er, unpopular with the public in general, his endorsement should shore up “the base” for John McCain. (Did you know he was a POW in Vietnam?) But since when is “the base” so enamored with George Bush? Only those in love with this war still support George Bush, and they are in McCain’s corner anyway. “The base” has the same problems with George Bush that they have with John McCain over such issues as immigration and federal funding of public schools. So it’s hard to see how this endorsement does nothing but help the Democrats.

Tuesday, March 4, 2008

BETTER CALL FRIENDLY BOB ADAMS!

3/4/08

In a page C1 article today entitled “Swap Skirmish: Risks Hidden, Says Hedge Fund,” The Wall Street Journal reports that hedge funds are suing their counterparties in credit default swap trades, primarily banks and investment banks, for (gasp!) asking those hedge funds to fulfill their obligations under the contracts underlying the swap trades. The nerve!

The Journal specifically cites a small ($58mm in capital) Florida hedge fund, variously named VCG Special Opportunities Master Fund, Ltd. or CDO Plus Master Fund Ltd., which is suing Citicorp and Wachovia for having the temerity to ask for additional collateral when the swaps that VCG/CDO wrote didn’t work out for the hedge fund. Donald Uderitz, VCG/CDO’s manager says that he believed that there was little likelihood of having to make good on the contracts when he entered into them and that he bought the investment to earn the fees Citi and Wachovia would pay his fund (ranging from 275 to 550 basis points) for effectively insuring them against loss on the underlying position. Mr. Uderitz’s statement, and lawsuit, amounts to arguing that he’ll take the fees when things go his way but can’t be expected to make good on his obligations when things don’t. After all, as the Journal reports, he thought that there was little likelihood of actually having to make good on the contract when he entered into it, and what could be more controlling than the judgment of a barely post-pubescent hedge fund manager? (I have no idea how old Mr. Uderitz is, but he is not the only hedge fund trying to welsh on its obligations under credit default swaps, and many hedge fund managers, into which we have entrusted large swaths of our financial markets and economy, are indeed barely post-pubescent. But I am sure they are sharp, really sharp, rowed crew at Yale, and came from very good (i.e., wealthy) families, which is all that matters anyway. But I digress.) Hey, they thought it was all a game. Can’t they just go home and have mommy, perhaps Mother Ben, kiss it and make it all better?

The case of the hedge funds’ suing their counterparties is another case of “a plague on both your houses.” Why in the world did the reputedly responsible Citi, Wachovia, and any number of other venerable financial institutions feel comfortable buying default swaps (effectively insuring against credit losses on instruments they held or in which they were speculating, either directly or indirectly) from obscure hedge funds with microscopic capital bases? Who approved such an arrangement? The sycophantic clown who calls himself the “risk manager?” The CEO in a hurry to make his appointment with Muffie on the company yacht? The guy who runs the cafeteria?

This reminds me of two stories, or perhaps one extended story from my personal experience. Several years ago I was having dinner with some friends. There was a guy at dinner whom I have met on several occasions but whom I didn’t, and don’t, know well. He was running a hedge fund at the time. Not having access to his books, I didn’t know how big the fund was, but, from what I did know of the guy, I would guess that his capital base was even smaller than the aforementioned VCG/CDO, probably considerably smaller. At the time, I knew next to nothing about credit default swaps and knew he was active in them. I wanted to learn more about them, so I engaged him in conversation. He was eager to talk to me because he had written swaps on some of the car companies and he knew that I knew (and know) something about the car companies and had made a dollar or two trading their common. He informed me that he had written scores of millions (He’s not the kind of guy who uses terms like “scores of millions;” I am trying to avoid being too specific here.) in credit default swaps on one of the car companies that had been given up for dead but about which I was more enthusiastic than the market. Given my lack of experience with credit default swaps, I asked him for clarification, asking something like “So if (name of the car company) defaults, you have to come up with (scores of millions)?” He replied “Yes.” I replied “Just asking, but where are you going to come up with that kind of money?” Trying to avoid banal discourse, I refuse to use the term “deer in the headlights,” so let’s just say he looked like Tom (of the famous “Tom and Jerry”) when the maid came home from a Saturday night bridge game (after a call from Jerry, of course) to find Tom partying with his various alley cat pals. My dinner companion looked as if he had never considered actually having to make good on his obligations, and certainly didn’t have enough money to do so. I wondered how thoroughly his counterparties had vetted his ability to pay. The conversation ended, but my curiosity didn’t. I asked several people familiar with the credit default swap market about controlling counterparty risk, and none had a very good, or reassuring, answer. This situation, as you might guess, added to my even then growing consternation about the solidity of our financial system.

Several weeks later, I was discussing this situation (while omitting names) with my brother, who is not a financial guy and who has more innate intelligence than just about anybody I know. He asked a very good question: “Mark, why don’t we go out and write a bunch of these contracts, take the fees, and then close up shop? We could make a fortune!” If we had maybe a few more bucks and the ethics, cluelessness and figurative potvaliance of your average hedge fund trader, I suppose we could have. Oh, well…yet another example of that damn prudence and those blasted ethics getting in the way of a golden opportunity!

Sunday, March 2, 2008

IT IS YOUR FAULT!!! WELL, YOURS AND LOTS OF OTHER PEOPLES’…

3/2/08

This morning’s Chicago Tribune reported that a recent study by the General Accountability Office (“GAO”) concluded that banks are “not providing consumers with information about fees on savings and checking accounts even though federal rules require disclosures…”

Many of you may remember the General Accountability Office as the General Accounting Office. The name was changed either because it sounds better (as if the politicians are (Get this!) demanding some accountability for taxpayer dollars) or because some overpaid bureaucrats, trying desperately to justify their taxpayer funded sinecures, decided they had to do something and thus decided to change the name of one small arm of the federal leviathan. This is what passes for action in Washington, but I digress.

The GAO report specifically cited the average overdraft fee, which has increased 11% from 2000 to 2007. Consumers, it seems “are getting increasingly hit with overdraft fees that now reach $17.5 billion per year.” Banks now, rather than bounce checks or deny debit card purchases, cover the overdraft but charge a hefty fee for doing so. Consumers don’t seem to mind that; Carol Kaplan, a spokeswoman for the American Bankers Association (“ABA”) says “They (consumers) would rather pay the overdraft fee than go through the embarrassment of not having enough money.” Hmm…

Three thoughts arise.

First, 11% between 2000 and 2007? That works out to an annual rate of 1.5% per year, not all that bad. Perhaps the GAO is not called the General Accounting Office any more because no one at that office owns a calculator.

Second, someone has got to cover the losses the banks incurred when their managements handed kid traders the keys to the vault with predictable consequences. It isn’t going to be the kids themselves; in many cases, they don’t have any money anyway, having applied in their personal lives the miracles of financial leverage that worked so well in their professional lives. Even if these wunderkinds did have the spondulicks, their pusillanimous bosses would not demand restitution for fear that they will be next. The bank managements, whose pathetic attempts to profit by entering businesses about which they have not the slightest clue, certainly won’t pay, unless “payment” takes the form of being given an eight figure “don’t call it severance” package and being put in contact with another member of the club who will clear the path to the next management position from which the recipient can wreak further havoc. The shareholders have paid, and may continue to pay. But, to the extent they can, the same astute managements that let the kids decimate the banks will make the customers pay for the ineptitude of the top brass and the charlatans, knaves, and mountebanks that they hired to decimate some of this nation’s most important financial institutions. Hence the fees about which consumers are complaining.

Third, I know a way for the complainants to avoid overdraft fees. Now, I don’t mean to ask too much of an overburdened American public, but how about NOT OVERDRAWING YOUR ACCOUNT?! I know this is an exotic concept in modern American finance, but perhaps those given to habitually overdrawing their accounts ought to give it a try. And those other fees—how about (Steady yourself.) asking questions about fees and considering moving your business to a less fee hungry bank, perhaps a community bank that didn’t bet its depositors' and shareholders' assets on Red 7 and thus feels no compulsion to force you to pay for its self-debasement? Just some crazy thoughts, I know, but I was just thinking such an approach just might work.

As is most of the financial mess in which we find ourselves, this “excessive” bank fee situation is a case of “a plague on both your houses.” Bank managements, perhaps because they feel somehow less than testicular for not being on the “cutting edge of modern finance” and thus are compelled to go into businesses about which they know less than nothing, have been incredibly irresponsible with their shareholders’ and depositors’ money. Since bank managements don’t want to feel any pain as a result of their maladroit, or nefarious, management of the assets with which they have been entrusted, they are concocting schemes to make ordinary customers pay for the mistakes of the Ivy League Whiz Kids they hired to cripple these financial institutions. But customers, due to their inability to manage their own personal lives, have put themselves into a position in which the bank poobahs CAN make those customers pay for managements’ mistakes.

Bank customers who cannot manage to keep their bank balances above zero and who can’t be bothered to ask questions regarding their accounts may as well paint huge signs on their backs that say “I am an idiot. Kick me.” Can one blame the perfidious poltroons who have decimated major financial institutions for not trying to recoup some of the dough they have blown by doing as their customers advise?

NOBODY’S BUSINESS BUT THE TURKS'...

3/2/08

Being a fan of old jazz, especially big band jazz, of the 30s, 40s, and 50s, I have run across what can best be described as a novelty tune, “Istanbul (not Constantinople),” written by Jimmy Kennedy (lyrics) and Nat Simon (music), and a gold record for the Four Lads in 1953. (A (not much) younger relative of mine pointed out to me at dinner tonight that the song was remade by someone in the ‘80s.) It’s a silly, yet catchy, tune, the most popular and oft-repeated line of which is

“Istanbul, not Constantinople, no you can’t go back to Constantinople, for it’s Istanbul, not Constantinople.”

The song professes confusion as to why the town of Constantinople was renamed “Istanbul” but reminds the listener that

“…even old New York was once New Amsterdam” perhaps because

“…people just liked it better that way.”

The song concludes with another asking of the question regarding the changing of Constantinople’s name and the reply

“…it’s nobody’s business but the Turks’.”

to end the song.

On perhaps my first hearing of this song, I declared at its conclusion that there was a profound geopolitical message in this seemingly harmless bit of musical fluff. My wife, ever the sensible one in the family, responded with something to the effect that only I would find geopolitical profundity in a silly old ditty from the ‘50s.

But think about it. “It’s nobody’s business but the Turks’” What if we were to apply that simple conclusion to all of the globe’s puzzles, questions, and problems? Where do we get off taking it upon ourselves to solve everyone’s problems, and answer everyone’s inquiries, our way?

If Jimmy Kennedy, or any of the Four Lads, still walks this planet, perhaps the next president might consider asking one of them to become Secretary of State.