9/30/08
As you might guess, I am delighted that the Troubled Assets Relief Fund (“TARF”), a moniker that seems not to have caught on but sounds especially apt because of a word with which it rhymes, was voted down by a bipartisan group of courageous legislators, led by a group of GOPers who seem to have found their long missing spines.
The more I listen to the hysteria on CNBC (the voice of the Wall Street downtrodden) the more I am convinced that TARF was unnecessary. Despite all the tortured screeching about “companies not being able to meet payrolls,” very few of the Wall Street cheerleaders offer any solid evidence that such cataclysms are occurring. Deal flow is down, way down, but is not non-existent, and even severely reduced deal flow does not seem to warrant a $700b raid on the taxpayers’ wallets and nationalization of a sizable chunk of the financial system. CNBC (again, consider the source) indicated that ATT is having a hard time rolling its commercial paper, but offers only vague evidence of this contention, all of which is coming from people with a dog in this fight. Even if it is true that ATT is having trouble rolling its CP, this won’t last long. A friend asked what would happen if GE couldn’t roll its CP. While I doubt this would happen, I suppose such a well deserved slap in the face would force Jeff Immelt and his team (or perhaps a replacement crew) to dismantle the rickety and ill-considered house that Jack built, separating the financial anchor that threatens to sink that venerable ship from the bankable industrial companies and allowing the financial arm to flounder, if indeed this is necessary. (The “business community” might also want to reconsider its hagiographic approach to Jack Welch, but that will never happen.) This is creative destruction in the most Schumpeterian sense and it is how a well functioning free market economy works. It’s not painless, nor should it be.
The larger point is that even if good risks are not getting credit, this situation cannot prevail for long. People and financial institutions are not going to stuff their money in their mattresses and they can’t buy T-bills forever. Money will seek a profitable, yet prudent, home, if it is allowed to do so. One thing is certain, though: bad risks will not get credit. Perhaps that is what the Wall Street rah-rahs on CNBC and in that bastion of shameless hypocrisy, the Wall Street Journal, fear. But is it such a bad thing? This economy is severely overleveraged at the consumer, business, and government level. We have to return to financial prudence.
Speaking of financial prudence, I am getting tired of the pom-pom section at CNBC and elsewhere asking “How will people buy cars if they can’t borrow money?” Here’s an idea: Save your money and pay cash! What concept! Yes, it sounds alien, but it was common only a generation ago, and, in the Quinn household, has always been our practice. It’s not that we’ve made tremendous money; we haven’t. But maybe it has something to do with the cars we buy and the way we live: within our means. My ancestors came from Ireland and Poland (but the south side of Chicago, really), my wife’s people from Poland. But when we mention things like paying cash for cars, people look at us as if our people came from much father away—like Mars.
The bad news, of course, is that the GOPers will probably buckle in exchange for eliminating the mark to market rule. Apparently, the Party of Prudence favors the “out of sight, out of mind” approach to economic problems, but that is another discussion.
Point of clarification: I am not saying everything will be fine if we don’t fund the TARF. Regular readers know that I am quite convinced that the world, and not just the financial world, is in a rapid downward spiral. Passing the TARF would not make any difference in this seemingly inevitable degeneration of our economy and society. And, as I said in my 9/19/08 post, TARF might not work in achieving the aims it is designed to address. What if the detritus is removed from the books and spilled in the laps of the taxpayers, yet the arteries of the economy remain clogged due to a dearth of decent credits? What will we have accomplished then?
Tuesday, September 30, 2008
Sunday, September 28, 2008
THOUGHTS ON BEING LED TO THE FINANCIAL AND SOCIETAL GALLOWS
9/28/08
It looks like a deal has been struck on the $700 billion (Again, who wants to bet that number doesn’t go up?) bailout deal. A few thoughts:
--The administration apparently got its Rube Goldberg scheme to take the financial Frankensteins off the books of the Wall Streeters who created them, rewarding irresponsibility at the top of the food chain. The Democrats apparently got “relief for homeowners,” rewarding irresponsibility at the bottom of the food chain. Responsible homeowners, taxpayers, and investors will, or already have been, certainly in the case of the last, get stuck with the bill. And we wonder why the ranks of people acting responsibly seem to shrink by the day.
--Apparently, the insurance scheme pushed by the House Republicans, under which financial institutions would pay premia to have their “investments” insured by the government, will make it into the final bill. However, it appeared that this badly misguided and open ended insurance scheme was a sop to the reflexive activists in both parties, a tactical ruse to convince these busybodies that the House GOP approach, a fundamentally free market, principled approach, would “do something” when “doing something” seems to be the only imperative in Washington. Apparently, in the final bill, the House Republicans got their tactical ruse and have abandoned their purported fundamental principles. We now see which of the two is important to them.
--Thank God for Richard Shelby. Had people like him remained in the Democratic Party, perhaps the lunatics would not be in charge of that particular asylum.
--One of the criticisms of John McCain in the wake, or in the center, of this crisis is that he is fundamentally a deregulator when more regulation would have avoided the problems we are now facing. This is a misguided criticism. There is nothing wrong with deregulation per se. Problems arise when deregulation is decoupled from accountability. For deregulation to work, the deregulated players must be subject to the discipline of the market and, to a lesser extent, a vigorous, yet sane, tort system. John McCain’s problem is not that he is in favor of deregulation but that he is in favor of removal of accountability in the form of a market place that deals harshly with those who do not act responsibly, as demonstrated by his fealty to this abominable bailout plan.
--Both John McCain and Barack Obama support, or will support, this abomination before God and man. Yet some still refuse to vote for a Third Party, fearing they are “wasting their vote.” I will never understand this mindset.
--One of the reasons, probably the major reason, advanced for supporting this plan, is that the credit markets will “freeze up,” that lenders will not lend, that investors will not invest, and our economy will grind to a halt. The same argument was made in the ‘70s in wake of the Penn Central default. We were told that the commercial paper market would evaporate and the markets would “freeze up.” Richard Nixon (mirabile dictu!) stood on principle and the economy did not evaporate. It wouldn’t happen now, either. People aren’t going to stuff their money in the mattress or bury it in the backyard. Yes, there will be pain and recession as the market sorts itself out. But the market will sort itself out and responsible loans and investments will be made. Business will get done. But the financial feces that have been jamming up the system will no longer be created, at least in such malodorous and abundant varieties and quantities. People will act responsibly again. Would that be such a bad thing? Or have we created such a Potemkin economy that the removal of irresponsibility will cause it to implode?
--Today’s (i.e., Sunday, 9/28’s) edition of the Chicago Tribune contains a succinct quote by David Ruder, a former Chairman of the SEC, concerning the CMOs that lie not at the root, as many “experts” repeatedly and incorrectly argue, but at least somewhere down the trunk of our national financial problems: “I’m not surprised these esoteric instruments crashed. I don’t think they were well understood by the people who created them and certainly not by the people who bought them.” The people to whom Mr. Ruder is referring are the people you and I are bailing out. I hope they send a nice thank you card, most likely from a laughably expensive store in which you and I would never dream of shopping not necessarily out of inability but, rather, out of a sense of sanity. But what the hell? It’s nothing to them, and they certainly wouldn’t want to shop someplace their forever subsidized brethren would find tacky.
It looks like a deal has been struck on the $700 billion (Again, who wants to bet that number doesn’t go up?) bailout deal. A few thoughts:
--The administration apparently got its Rube Goldberg scheme to take the financial Frankensteins off the books of the Wall Streeters who created them, rewarding irresponsibility at the top of the food chain. The Democrats apparently got “relief for homeowners,” rewarding irresponsibility at the bottom of the food chain. Responsible homeowners, taxpayers, and investors will, or already have been, certainly in the case of the last, get stuck with the bill. And we wonder why the ranks of people acting responsibly seem to shrink by the day.
--Apparently, the insurance scheme pushed by the House Republicans, under which financial institutions would pay premia to have their “investments” insured by the government, will make it into the final bill. However, it appeared that this badly misguided and open ended insurance scheme was a sop to the reflexive activists in both parties, a tactical ruse to convince these busybodies that the House GOP approach, a fundamentally free market, principled approach, would “do something” when “doing something” seems to be the only imperative in Washington. Apparently, in the final bill, the House Republicans got their tactical ruse and have abandoned their purported fundamental principles. We now see which of the two is important to them.
--Thank God for Richard Shelby. Had people like him remained in the Democratic Party, perhaps the lunatics would not be in charge of that particular asylum.
--One of the criticisms of John McCain in the wake, or in the center, of this crisis is that he is fundamentally a deregulator when more regulation would have avoided the problems we are now facing. This is a misguided criticism. There is nothing wrong with deregulation per se. Problems arise when deregulation is decoupled from accountability. For deregulation to work, the deregulated players must be subject to the discipline of the market and, to a lesser extent, a vigorous, yet sane, tort system. John McCain’s problem is not that he is in favor of deregulation but that he is in favor of removal of accountability in the form of a market place that deals harshly with those who do not act responsibly, as demonstrated by his fealty to this abominable bailout plan.
--Both John McCain and Barack Obama support, or will support, this abomination before God and man. Yet some still refuse to vote for a Third Party, fearing they are “wasting their vote.” I will never understand this mindset.
--One of the reasons, probably the major reason, advanced for supporting this plan, is that the credit markets will “freeze up,” that lenders will not lend, that investors will not invest, and our economy will grind to a halt. The same argument was made in the ‘70s in wake of the Penn Central default. We were told that the commercial paper market would evaporate and the markets would “freeze up.” Richard Nixon (mirabile dictu!) stood on principle and the economy did not evaporate. It wouldn’t happen now, either. People aren’t going to stuff their money in the mattress or bury it in the backyard. Yes, there will be pain and recession as the market sorts itself out. But the market will sort itself out and responsible loans and investments will be made. Business will get done. But the financial feces that have been jamming up the system will no longer be created, at least in such malodorous and abundant varieties and quantities. People will act responsibly again. Would that be such a bad thing? Or have we created such a Potemkin economy that the removal of irresponsibility will cause it to implode?
--Today’s (i.e., Sunday, 9/28’s) edition of the Chicago Tribune contains a succinct quote by David Ruder, a former Chairman of the SEC, concerning the CMOs that lie not at the root, as many “experts” repeatedly and incorrectly argue, but at least somewhere down the trunk of our national financial problems: “I’m not surprised these esoteric instruments crashed. I don’t think they were well understood by the people who created them and certainly not by the people who bought them.” The people to whom Mr. Ruder is referring are the people you and I are bailing out. I hope they send a nice thank you card, most likely from a laughably expensive store in which you and I would never dream of shopping not necessarily out of inability but, rather, out of a sense of sanity. But what the hell? It’s nothing to them, and they certainly wouldn’t want to shop someplace their forever subsidized brethren would find tacky.
Thursday, September 25, 2008
THE EMPEROR HAS NO CLOTHES
9/25/08
For people who think like I do, lack of Washington experience is not a demerit. Rather, such inexperience it is admirable. People who go to Washington, even with the best of intentions, tend to get too comfortable with the ways of that den of iniquity, too used to thinking like a politician. They lose touch with their constituents. They may not lose their souls, but they trade the mindset of a citizen for the mindset of a politician. They become part of the governing class that our founding fathers had no intention of creating. This is one of the reasons that term limits are so attractive, but that is another issue.
So the accusation that Sarah Palin has no Washington experience rings hollow for those of us who are inherently suspicious of government, and certainly of Washington. We seek out candidates who are not “wise in the ways of Washington.” We prefer candidates who are simply wise and see Washington as something that must adapt rather than be adapted to.
However, not being a Washington insider, while admirable on any number of fronts, does not make up for what appears, in Palin’s case, to be a woeful lack of knowledge into public issues or of other matters of great import to anyone, and especially to anyone who aspires to high office. In other words, not being wise in the ways of Washington does not exonerate one for not being, or certainly not appearing to be, knowledgeable, or even all that curious, about the way the political and economic world works. Repeating talking points and cant is not a substitute for seriously thinking about serious issues.
Rumors are swirling (and they are only rumors at this stage) that John McCain’s fatuous offer to postpone Friday night’s debate is being coupled with an offer to reschedule that debate for the slot currently occupied by the Vice-Presidential debate. Then, the McCain camp disingenuously assures us, the VP debate can be “rescheduled.” If this is true, it appears that McCain’s nonsensical proposal is nothing more than a ham-handed ruse to enable Sarah Palin to avoid debating Joe Biden.
My opinion of Ms. Palin has evolved slightly from my initial Palin post (See my 9/2/08 post): She just doesn’t appear to be very bright, or at least does not seem to have even the most remote knowledge of foreign affairs, economics, or any number of the elements of what we call “public policy.” If what we are hearing about Friday’s debate is true, apparently the opinion of the McCain camp regarding their VP candidate has evolved in a similar direction.
This particular aspiring emperor is indeed quite naked. As I said before, her selection was a Hail Mary that didn’t have to be thrown.
For people who think like I do, lack of Washington experience is not a demerit. Rather, such inexperience it is admirable. People who go to Washington, even with the best of intentions, tend to get too comfortable with the ways of that den of iniquity, too used to thinking like a politician. They lose touch with their constituents. They may not lose their souls, but they trade the mindset of a citizen for the mindset of a politician. They become part of the governing class that our founding fathers had no intention of creating. This is one of the reasons that term limits are so attractive, but that is another issue.
So the accusation that Sarah Palin has no Washington experience rings hollow for those of us who are inherently suspicious of government, and certainly of Washington. We seek out candidates who are not “wise in the ways of Washington.” We prefer candidates who are simply wise and see Washington as something that must adapt rather than be adapted to.
However, not being a Washington insider, while admirable on any number of fronts, does not make up for what appears, in Palin’s case, to be a woeful lack of knowledge into public issues or of other matters of great import to anyone, and especially to anyone who aspires to high office. In other words, not being wise in the ways of Washington does not exonerate one for not being, or certainly not appearing to be, knowledgeable, or even all that curious, about the way the political and economic world works. Repeating talking points and cant is not a substitute for seriously thinking about serious issues.
Rumors are swirling (and they are only rumors at this stage) that John McCain’s fatuous offer to postpone Friday night’s debate is being coupled with an offer to reschedule that debate for the slot currently occupied by the Vice-Presidential debate. Then, the McCain camp disingenuously assures us, the VP debate can be “rescheduled.” If this is true, it appears that McCain’s nonsensical proposal is nothing more than a ham-handed ruse to enable Sarah Palin to avoid debating Joe Biden.
My opinion of Ms. Palin has evolved slightly from my initial Palin post (See my 9/2/08 post): She just doesn’t appear to be very bright, or at least does not seem to have even the most remote knowledge of foreign affairs, economics, or any number of the elements of what we call “public policy.” If what we are hearing about Friday’s debate is true, apparently the opinion of the McCain camp regarding their VP candidate has evolved in a similar direction.
This particular aspiring emperor is indeed quite naked. As I said before, her selection was a Hail Mary that didn’t have to be thrown.
Wednesday, September 24, 2008
WE HEAR GEORGE BAILEY IS LOOKING FOR INVESTORS
9/24/08
The previous rules concerning what constitutes a “bank holding company” for regulatory purposes understandably discouraged private equity firms from buying big stakes in banks; being classified as a “bank holding company” would preclude most private equity firms’ major activity: buying large, usually controlling, interests in other companies. Any investments by private equity firms in banks (e.g., TPG’s taking a stake in Washington Mutual early this year) were thus carefully structured to avoid the bank holding company rules and, of necessity, limited. Desperate to find potential investors in troubled banks, and realizing that the private equity industry has plenty of money looking for a home, the Fed earlier this week loosened its rules concerning what constitutes a “bank holding company” for regulatory purposes. Until these rule changes, any investor that was deemed to control a bank was considered a bank holding company and thus subject to relatively stringent regulation. While the threshold for control for this purpose was 25% ownership, control could be construed with ownership of as little as 10% of a bank. Under the newly issued rules, an investor can now own as much as 33% of a bank, of which 15% can be voting common, without being considered a bank holding company and thus subject to regulation as such by the Fed.
The hope is that, freed from the risks of being considered a bank holding company and thus effectively being put out of business, private equity firms will now invest heavily in the banking sector, thus becoming a large element in the rescue of this critical sector of the economy. The dangers of this hope’s being realized are not inconsiderable. The most salient of these perils is that a private equity firm that owned a large share in a commercial bank could force the bank to lend money to other companies that its private equity owner controls, thus putting the FDIC (and thus the taxpayers) on the hook for investments that are not necessarily good for the bank but are instead designed to enrich its private equity owners. (Given the size of the bailout currently being jammed down the taxpayers’ gullets (er, sorry, being carefully considered) in Washington, this concern sounds almost laughable, but it’s in no one’s interests to let them get away with small ones by diverting us with big ones. But I digress.) Another fear is that, since private equity firms by their nature employ plenty of financial leverage in their acquisitions, allowing aggressive purchases of banks by private equity holders amounts to putting leverage on top of (or beneath, I suppose, technically) leverage.
Another less obvious danger of allowing greater private equity investment in banks can be discerned by taking a look at AIG. Recall that, in the case of AIG, which seemingly “required” an investment of roughly $85 billion of more or less public funds, it was the holding company that was in trouble. The insurance units of AIG were well, or at least adequately, capitalized and thus no policyholders were in danger of losing their insurance. However, the holding company, which had metamorphosized into an enormous hedge fund, had gotten into trouble primarily through its amateurish dabbling in credit default swaps (“CDS”s) and, to a lesser extent, various mortgage related securities. The Fed felt compelled to bail out AIG partly out of the general public’s, and thus the politicians’, misplaced concern that the insurance policies of John Q. Public were in jeopardy, mostly because of the political class’s pathological readiness to use other people’s (i.e., your) money to alleviate even the slightest hint of discomfort to a major, cash paying constituency, and partly due to fear of the ramifications for the CDS market of a failure of AIG.
Now consider the case in which a private equity firm (admittedly a different animal from a hedge fund, which is what parent AIG had become) owns a big stake in a bank, or several banks. Imagine that the private equity fund gets into trouble through the failure of one or several of its non-bank investments. Such a scenario indeed does not take much imagination. Consider Cerberus and an industry with which I have more than passing familiarity. Cerberus’s automotive investments, GMAC and Chrysler are, if shaky is not a completely appropriate adjective, shall we say not robust and/or not working out according to plan at the moment. Furthermore, Dave Tepper at Appaloosa (Though I knew Dave a long, long time ago, we have not seen each other for at least twenty years and would not know each other if we passed on the street. Thus I have absolutely no more information than you do regarding what Dave is thinking, but I still feel comfortable with this sentence.) is probably (or at least ought to be) grateful that his deal to purchase Delphi fell apart before it could do serious damage to Appaloosa and thus to his personal fortune. The fact is that private equity firms do make bad investments and those investments have the potential to put such firms in precarious financial positions. It is no stretch to imagine such things happening with greater frequency in the near future.
So suppose a private equity firm gets into trouble with its non-bank investments. Will the Fed feel compelled to bail out, a’la AIG, that private equity firm due to a perhaps ill-considered run on its banks triggered by news of their parents’ financial travails or just a generalized fear that “XYZ Private Equity Firm is in trouble and, now that it controls several banks, who knows what ramifications such trouble will have for our financial system?” This is something to consider, and seems to have gotten little or no consideration, perhaps because of the understandable focus on RTC II or because of the relatively arcane nature of the problem.
The previous rules concerning what constitutes a “bank holding company” for regulatory purposes understandably discouraged private equity firms from buying big stakes in banks; being classified as a “bank holding company” would preclude most private equity firms’ major activity: buying large, usually controlling, interests in other companies. Any investments by private equity firms in banks (e.g., TPG’s taking a stake in Washington Mutual early this year) were thus carefully structured to avoid the bank holding company rules and, of necessity, limited. Desperate to find potential investors in troubled banks, and realizing that the private equity industry has plenty of money looking for a home, the Fed earlier this week loosened its rules concerning what constitutes a “bank holding company” for regulatory purposes. Until these rule changes, any investor that was deemed to control a bank was considered a bank holding company and thus subject to relatively stringent regulation. While the threshold for control for this purpose was 25% ownership, control could be construed with ownership of as little as 10% of a bank. Under the newly issued rules, an investor can now own as much as 33% of a bank, of which 15% can be voting common, without being considered a bank holding company and thus subject to regulation as such by the Fed.
The hope is that, freed from the risks of being considered a bank holding company and thus effectively being put out of business, private equity firms will now invest heavily in the banking sector, thus becoming a large element in the rescue of this critical sector of the economy. The dangers of this hope’s being realized are not inconsiderable. The most salient of these perils is that a private equity firm that owned a large share in a commercial bank could force the bank to lend money to other companies that its private equity owner controls, thus putting the FDIC (and thus the taxpayers) on the hook for investments that are not necessarily good for the bank but are instead designed to enrich its private equity owners. (Given the size of the bailout currently being jammed down the taxpayers’ gullets (er, sorry, being carefully considered) in Washington, this concern sounds almost laughable, but it’s in no one’s interests to let them get away with small ones by diverting us with big ones. But I digress.) Another fear is that, since private equity firms by their nature employ plenty of financial leverage in their acquisitions, allowing aggressive purchases of banks by private equity holders amounts to putting leverage on top of (or beneath, I suppose, technically) leverage.
Another less obvious danger of allowing greater private equity investment in banks can be discerned by taking a look at AIG. Recall that, in the case of AIG, which seemingly “required” an investment of roughly $85 billion of more or less public funds, it was the holding company that was in trouble. The insurance units of AIG were well, or at least adequately, capitalized and thus no policyholders were in danger of losing their insurance. However, the holding company, which had metamorphosized into an enormous hedge fund, had gotten into trouble primarily through its amateurish dabbling in credit default swaps (“CDS”s) and, to a lesser extent, various mortgage related securities. The Fed felt compelled to bail out AIG partly out of the general public’s, and thus the politicians’, misplaced concern that the insurance policies of John Q. Public were in jeopardy, mostly because of the political class’s pathological readiness to use other people’s (i.e., your) money to alleviate even the slightest hint of discomfort to a major, cash paying constituency, and partly due to fear of the ramifications for the CDS market of a failure of AIG.
Now consider the case in which a private equity firm (admittedly a different animal from a hedge fund, which is what parent AIG had become) owns a big stake in a bank, or several banks. Imagine that the private equity fund gets into trouble through the failure of one or several of its non-bank investments. Such a scenario indeed does not take much imagination. Consider Cerberus and an industry with which I have more than passing familiarity. Cerberus’s automotive investments, GMAC and Chrysler are, if shaky is not a completely appropriate adjective, shall we say not robust and/or not working out according to plan at the moment. Furthermore, Dave Tepper at Appaloosa (Though I knew Dave a long, long time ago, we have not seen each other for at least twenty years and would not know each other if we passed on the street. Thus I have absolutely no more information than you do regarding what Dave is thinking, but I still feel comfortable with this sentence.) is probably (or at least ought to be) grateful that his deal to purchase Delphi fell apart before it could do serious damage to Appaloosa and thus to his personal fortune. The fact is that private equity firms do make bad investments and those investments have the potential to put such firms in precarious financial positions. It is no stretch to imagine such things happening with greater frequency in the near future.
So suppose a private equity firm gets into trouble with its non-bank investments. Will the Fed feel compelled to bail out, a’la AIG, that private equity firm due to a perhaps ill-considered run on its banks triggered by news of their parents’ financial travails or just a generalized fear that “XYZ Private Equity Firm is in trouble and, now that it controls several banks, who knows what ramifications such trouble will have for our financial system?” This is something to consider, and seems to have gotten little or no consideration, perhaps because of the understandable focus on RTC II or because of the relatively arcane nature of the problem.
Tuesday, September 23, 2008
“THERE’S A DEAD SKUNK IN THE MIDDLE OF THE ROAD…”
9/23/08
One of the prices Democrats are demanding for acceding to the bailout crafted plan by Free Market Hank Paulson and Obsequious Ben Bernanke is a limit on the compensation of the executives who participate in the plan. (Normally, I would be the last guy to argue that the government ought to tell private employers what they should pay their people. However, there is an old adage that says if you take the man’s money you have to do what the man tells you, and never was the application of this adage more obvious.) Most of the other demands that the Democrats have made for their agreement to the plan have met only token resistance, but Free Market Hank is hanging tough on this one. Mr. Paulson says that restricting their executive’s pay would discourage financial institutions from participating in the plan.
Hmm…
Aren’t we being sold this Leviathan as being absolutely necessary to save financial institutions, and the financial system, from seizing up and breaking down? Now Mr. Paulson is telling us that financial institutions might decide not to participate in the program merely because their executives’ pay might become subject to government scrutiny. So how “absolutely necessary” is the plan if institutions can opt out because they don’t like certain provisions of the plan that affect only their top executives? Put another way, taxpayers are being asked to fork over $700 billion (What do you want to be that’s a low number?) but, according to the Treasury, if highly paid executives are asked to maybe take a pay cut they might just say “no” to the money. Just how desperate is this situation anyway?
As this morning’s Wall Street Journal reports, some congresspersons are seeking to “call Mr. Paulson’s bluff,” betting that, if the situation is as dire as Free Market Hank and Obsequious Ben say it is, the people who run these institutions will have no choice but to accede to the plan, pay restrictions and all, since the alternative is bankruptcy. But the Journal reports that the Treasury is arguing that “the program isn’t aimed at preventing firms from filing for bankruptcy but is instead supposed to help relieve pressure on firms that are being weighed down by a glut of assets they can’t sell.”
Hmm…
What happened to the “massive failures within days” without the program that Obsequious Ben was talking about last week? Suddenly, the program is not designed to avert “massive failures” and bankruptcies but merely to “help relieve pressure” on Wall Street firms. $700 billion not to prevent cataclysm but merely to relieve what Treasury appears to be arguing is the equivalent of heartburn on Wall Street?
Wall Street’s representatives in Washington, especially the Street’s most visible and obvious tentacle in the executive branch, had better get the story straight or the public’s olfactory sense will detect this deal for what it is.
Here is hoping that the rugged free marketeers who are standing in line for this bailout are so incensed by the idea of giving the government influence over their pay packages that they all opt out of the program, thus ending this latest, and most dangerous, bipartisan flirtation with socialism.
One of the prices Democrats are demanding for acceding to the bailout crafted plan by Free Market Hank Paulson and Obsequious Ben Bernanke is a limit on the compensation of the executives who participate in the plan. (Normally, I would be the last guy to argue that the government ought to tell private employers what they should pay their people. However, there is an old adage that says if you take the man’s money you have to do what the man tells you, and never was the application of this adage more obvious.) Most of the other demands that the Democrats have made for their agreement to the plan have met only token resistance, but Free Market Hank is hanging tough on this one. Mr. Paulson says that restricting their executive’s pay would discourage financial institutions from participating in the plan.
Hmm…
Aren’t we being sold this Leviathan as being absolutely necessary to save financial institutions, and the financial system, from seizing up and breaking down? Now Mr. Paulson is telling us that financial institutions might decide not to participate in the program merely because their executives’ pay might become subject to government scrutiny. So how “absolutely necessary” is the plan if institutions can opt out because they don’t like certain provisions of the plan that affect only their top executives? Put another way, taxpayers are being asked to fork over $700 billion (What do you want to be that’s a low number?) but, according to the Treasury, if highly paid executives are asked to maybe take a pay cut they might just say “no” to the money. Just how desperate is this situation anyway?
As this morning’s Wall Street Journal reports, some congresspersons are seeking to “call Mr. Paulson’s bluff,” betting that, if the situation is as dire as Free Market Hank and Obsequious Ben say it is, the people who run these institutions will have no choice but to accede to the plan, pay restrictions and all, since the alternative is bankruptcy. But the Journal reports that the Treasury is arguing that “the program isn’t aimed at preventing firms from filing for bankruptcy but is instead supposed to help relieve pressure on firms that are being weighed down by a glut of assets they can’t sell.”
Hmm…
What happened to the “massive failures within days” without the program that Obsequious Ben was talking about last week? Suddenly, the program is not designed to avert “massive failures” and bankruptcies but merely to “help relieve pressure” on Wall Street firms. $700 billion not to prevent cataclysm but merely to relieve what Treasury appears to be arguing is the equivalent of heartburn on Wall Street?
Wall Street’s representatives in Washington, especially the Street’s most visible and obvious tentacle in the executive branch, had better get the story straight or the public’s olfactory sense will detect this deal for what it is.
Here is hoping that the rugged free marketeers who are standing in line for this bailout are so incensed by the idea of giving the government influence over their pay packages that they all opt out of the program, thus ending this latest, and most dangerous, bipartisan flirtation with socialism.
Friday, September 19, 2008
WALL STREETERS OF THE WORLD, UNITE!!!
8/19/08
Thanks to the free market Bush administration and the “get the government out of my life” GOP, we are all socialists now. Where do I begin pointing out the downside of the many steps announced in the last 36 hours or so?
Let me begin by saying something good about the plan. This is better than the haphazard, case-by-case, ad hoc approach that was being pursued before the modified RTC approach was unveiled: Bear gets bailed out, F&F sort of get bailed out, Lehman is let go, AIG is bailed out. The casual, or even the careful, observer is left to wonder if there is rhyme or reason to this approach. The critical observer is left somehow unsatisfied by the callow explanations offered by Free Market Hank, Obsequious Ben, and the other rogue’s gallery behind this effective government takeover of the financial industry. And it doesn’t take too much of a cynic to wonder if the campaign donor rolls were, or certainly could be, examined before the decision is made regarding who gets taxpayer financed succor. While I would have preferred the government do nothing (What a concept! Let the market work even when we don’t like the outcomes.), a modified RTC is better than the previous approach. But one also supposes that a life sentence is preferable to getting the final shot in the arm.
Time and the inability to say anything original on certain aspects of the bailout and the attendant actions behoove me to limit my comments to the following:
--The government has temporarily forbidden short selling in certain financial stocks. One can infer that, since the government can determine that the stock market is too low and short selling must be stopped, the government can also determine that the market is too high and that buying must thus be stopped. Crazy? Perhaps not. The Bush administration has apparently determined that the government knows best.
--Setting up the RTC II structure is supposed to unclog the financial system and get banks and other financial institutions lending again. But is the government, in all its wisdom, sure this will be the outcome? Are there enough good credits with good collateral out there to justify an expansion of prudent lending? Surely there are some, to use a currently fashionable and fast becoming nauseating expression, positive feedback loops from freeing up lending, but will they be enough with a weakening economy, spent consumers with precious little equity in their homes, and precarious commercial borrowers? Or are these merely minor details and thus the soundness of the lending being encouraged, or sought, is inconsequential? If the latter is the case, is the government thus encouraging careless lending, apparently on the theory that our Potemkin economy requires it? These questions boil down to: What if this doesn’t work? Or what if it works and its “working” constitutes encouraging new bout of reckless lending, surely landing us in this putrid brine again? What will we have accomplished then?
--The RTC II will supposedly buy assets at fair market value and the sellers (Wall Street and other financial geniuses) will thus take a hit. This is clearly specious. If the prices paid are genuine market prices, what need is there for such a Rube Goldberg structure? A market price means a price that a ready, willing, and able buyer will pay; if there are buyers at these prices, what need have we of the government? To ask the question is to answer it. The prices paid cannot be market prices and the sellers will thus receive a massive subsidy…thank you very much, Mr. and Mrs. Taxpayer. And, no, you can’t have any piece of the astronomical bonuses these financial wunderkinds were paid to destroy several of the nations’ venerable financial institutions.
--A large chunk of my money is in money market funds, as is a large chunk of yours, I would suppose. I knew these funds weren’t insured when I bought my shares, and so did you. We paid our money, we took our chances, and, so far, in this instance, doing so has worked out well. Why the busy-bodyism? Are Free Market Hank and his boss just reflexive busybodies?
--What if the government can’t afford this? What happens to Treasury’s international credit standing and the dollar? Is the pool bottomless? One wonders.
--To think I was once a Republican! (Seem like ages ago.) How can anyone who believes in free people and free markets continue to support this shameless band of hypocritical Janus-faces?
Thanks to the free market Bush administration and the “get the government out of my life” GOP, we are all socialists now. Where do I begin pointing out the downside of the many steps announced in the last 36 hours or so?
Let me begin by saying something good about the plan. This is better than the haphazard, case-by-case, ad hoc approach that was being pursued before the modified RTC approach was unveiled: Bear gets bailed out, F&F sort of get bailed out, Lehman is let go, AIG is bailed out. The casual, or even the careful, observer is left to wonder if there is rhyme or reason to this approach. The critical observer is left somehow unsatisfied by the callow explanations offered by Free Market Hank, Obsequious Ben, and the other rogue’s gallery behind this effective government takeover of the financial industry. And it doesn’t take too much of a cynic to wonder if the campaign donor rolls were, or certainly could be, examined before the decision is made regarding who gets taxpayer financed succor. While I would have preferred the government do nothing (What a concept! Let the market work even when we don’t like the outcomes.), a modified RTC is better than the previous approach. But one also supposes that a life sentence is preferable to getting the final shot in the arm.
Time and the inability to say anything original on certain aspects of the bailout and the attendant actions behoove me to limit my comments to the following:
--The government has temporarily forbidden short selling in certain financial stocks. One can infer that, since the government can determine that the stock market is too low and short selling must be stopped, the government can also determine that the market is too high and that buying must thus be stopped. Crazy? Perhaps not. The Bush administration has apparently determined that the government knows best.
--Setting up the RTC II structure is supposed to unclog the financial system and get banks and other financial institutions lending again. But is the government, in all its wisdom, sure this will be the outcome? Are there enough good credits with good collateral out there to justify an expansion of prudent lending? Surely there are some, to use a currently fashionable and fast becoming nauseating expression, positive feedback loops from freeing up lending, but will they be enough with a weakening economy, spent consumers with precious little equity in their homes, and precarious commercial borrowers? Or are these merely minor details and thus the soundness of the lending being encouraged, or sought, is inconsequential? If the latter is the case, is the government thus encouraging careless lending, apparently on the theory that our Potemkin economy requires it? These questions boil down to: What if this doesn’t work? Or what if it works and its “working” constitutes encouraging new bout of reckless lending, surely landing us in this putrid brine again? What will we have accomplished then?
--The RTC II will supposedly buy assets at fair market value and the sellers (Wall Street and other financial geniuses) will thus take a hit. This is clearly specious. If the prices paid are genuine market prices, what need is there for such a Rube Goldberg structure? A market price means a price that a ready, willing, and able buyer will pay; if there are buyers at these prices, what need have we of the government? To ask the question is to answer it. The prices paid cannot be market prices and the sellers will thus receive a massive subsidy…thank you very much, Mr. and Mrs. Taxpayer. And, no, you can’t have any piece of the astronomical bonuses these financial wunderkinds were paid to destroy several of the nations’ venerable financial institutions.
--A large chunk of my money is in money market funds, as is a large chunk of yours, I would suppose. I knew these funds weren’t insured when I bought my shares, and so did you. We paid our money, we took our chances, and, so far, in this instance, doing so has worked out well. Why the busy-bodyism? Are Free Market Hank and his boss just reflexive busybodies?
--What if the government can’t afford this? What happens to Treasury’s international credit standing and the dollar? Is the pool bottomless? One wonders.
--To think I was once a Republican! (Seem like ages ago.) How can anyone who believes in free people and free markets continue to support this shameless band of hypocritical Janus-faces?
Thursday, September 18, 2008
NEVER BEFORE SEEN ON TELEVISION
9/18/08
Yet another quick blog entry that had its genesis in a response to an e-mail query, this one from my nephew and Godson, who combines the keener aspects of the Quinn family intellect with a work ethic that seems to have skipped a generation, certainly in the case of his uncle and Godfather. Given that he shares his uncle’s cynical nature, he wondered if “this is not as unprecedented as everyone is saying.”
My response:
9/18/08
Under normal circumstances, you would be right. "Veterans" of the financial business who have been advising people on their money for as long as, in some instances, five years, usually deem things "unprecedented" when an analogous situation seems like it took place yesterday to those of us who have been around awhile.
HOWEVER... This is unprecedented (well, except for 1929). The S&Ls in the early '90s weren't nearly this big. LTCM was a hiccup. '87’s stock fall was larger: over 40% top to bottom, and we're nowhere near this; at last night's close, the S&P was down 26% from its 2007 high. So, from the perspective of the drop in the stock market, this is not unprecedented. But the depths of the underlying financial problems are far deeper than any we have seen since the late ‘20s/early 30s, and the public policy reactions, like those of the ‘20s and ‘30s, seem to be digging us in even deeper. So, as you might guess, I suspect we have more, plenty more, to go on the downside for the markets, always with the caveat that no one, including yours truly, knows where the markets are going.
So, now that I think of it, you are correct: This is not unprecedented, but the precedent is truly horrific.
And the real economy? Wait until this percolates through. Oh, boy. We are living in interesting times.
And this looks like yet another blog entry.
Yet another quick blog entry that had its genesis in a response to an e-mail query, this one from my nephew and Godson, who combines the keener aspects of the Quinn family intellect with a work ethic that seems to have skipped a generation, certainly in the case of his uncle and Godfather. Given that he shares his uncle’s cynical nature, he wondered if “this is not as unprecedented as everyone is saying.”
My response:
9/18/08
Under normal circumstances, you would be right. "Veterans" of the financial business who have been advising people on their money for as long as, in some instances, five years, usually deem things "unprecedented" when an analogous situation seems like it took place yesterday to those of us who have been around awhile.
HOWEVER... This is unprecedented (well, except for 1929). The S&Ls in the early '90s weren't nearly this big. LTCM was a hiccup. '87’s stock fall was larger: over 40% top to bottom, and we're nowhere near this; at last night's close, the S&P was down 26% from its 2007 high. So, from the perspective of the drop in the stock market, this is not unprecedented. But the depths of the underlying financial problems are far deeper than any we have seen since the late ‘20s/early 30s, and the public policy reactions, like those of the ‘20s and ‘30s, seem to be digging us in even deeper. So, as you might guess, I suspect we have more, plenty more, to go on the downside for the markets, always with the caveat that no one, including yours truly, knows where the markets are going.
So, now that I think of it, you are correct: This is not unprecedented, but the precedent is truly horrific.
And the real economy? Wait until this percolates through. Oh, boy. We are living in interesting times.
And this looks like yet another blog entry.
BETWEEN S--- AND SYPHILLIS
9/18/08
Another blog entry on the run, this one in response to one of my former colleagues and current close friends. He asked (jokingly—the man has known me for almost twenty years) if I had any sympathy for the Wall Street types, who thought the gravy train would go on forever, in the wake of the crisis they have created.
My response:
9/18/08
I got your call the other night; the geniuses are scratching their heads right now. But they're probably not confused; they're trying to figure out the next scam on the American public.
The sad thing is that it will go on forever for the Wall Street wizards: severance packages and nice, new jobs with other members of the "club," certainly for the guys at the top, who were ultimately responsible for this ongoing fiasco. Nothing stops these guys, not even brazen idiocy and incompetence, from making huge amounts of money. Then, when the average guy loses his job when it is shipped off to India or China, these poltroons say that he ought to "work at acquiring new skills to compete in the dynamic world economy." Yeah, new skills like destroying venerable financial institutions by creating financial Frankensteins, fine as long as they only prey on the peasants.
Again, capitalism without failure is like Christianity without hell. But we abandoned capitalism a long time ago; what we have now is corporatism/old boyism.
This, too, sounds like a blog entry.
Another blog entry on the run, this one in response to one of my former colleagues and current close friends. He asked (jokingly—the man has known me for almost twenty years) if I had any sympathy for the Wall Street types, who thought the gravy train would go on forever, in the wake of the crisis they have created.
My response:
9/18/08
I got your call the other night; the geniuses are scratching their heads right now. But they're probably not confused; they're trying to figure out the next scam on the American public.
The sad thing is that it will go on forever for the Wall Street wizards: severance packages and nice, new jobs with other members of the "club," certainly for the guys at the top, who were ultimately responsible for this ongoing fiasco. Nothing stops these guys, not even brazen idiocy and incompetence, from making huge amounts of money. Then, when the average guy loses his job when it is shipped off to India or China, these poltroons say that he ought to "work at acquiring new skills to compete in the dynamic world economy." Yeah, new skills like destroying venerable financial institutions by creating financial Frankensteins, fine as long as they only prey on the peasants.
Again, capitalism without failure is like Christianity without hell. But we abandoned capitalism a long time ago; what we have now is corporatism/old boyism.
This, too, sounds like a blog entry.
Wednesday, September 17, 2008
“SHE TOLD ME NOT TO PLAY AROUND, BUT I DONE LET THE DEAL GO DOWN…”
9/17/08
Time is understandably very tight these last few days, so I’ve had to limit my blog entries to my answers to e-mail queries from students, friends, and regular blog readers, all of whom show great insight and perspicacity.
Here is a response I sent to an e-mail I received from one of my most insightful correspondents on the AIG bailout:
9/17/08
Ah, don't you just love those free market Republican types? I guess they think the government should restrict itself to its proper function: bailing out Wall Street idiots. I don't see it at all, Don. The insurance policies at AIG's subsidiaries were safe; it was the holding company that was impaired. So what? Those who entered into CDS contracts with these guys were big boys and ought to take their licks. When you and I make stupid business decisions, the government doesn't bail us out.
I thought the government was proceeding, albeit slowly, on a righteous path: They bailed out Bear (bad), let the common and probably the preferred go on F&F (not quite as bad), and let Lehman go (almost) altogether (better). As I said on the blog, we weren't out of the woods as of Monday morning, but at least we weren't stepping further into them. Now comes AIG and all the progress toward making the market work goes down the drain. And then you have the problem of inconsistency. Why AIG and not Lehman? Could political influence have had anything to do with the Fed's and the Treasury's deliberations? To ask the question is to almost answer it.
And how much was BofA's arm twisted to buy Merrill at what looks, especially today, to be a very rich price?
Great thoughts as usual, Don. I might post my not quite as great responses on the blog.
Time is understandably very tight these last few days, so I’ve had to limit my blog entries to my answers to e-mail queries from students, friends, and regular blog readers, all of whom show great insight and perspicacity.
Here is a response I sent to an e-mail I received from one of my most insightful correspondents on the AIG bailout:
9/17/08
Ah, don't you just love those free market Republican types? I guess they think the government should restrict itself to its proper function: bailing out Wall Street idiots. I don't see it at all, Don. The insurance policies at AIG's subsidiaries were safe; it was the holding company that was impaired. So what? Those who entered into CDS contracts with these guys were big boys and ought to take their licks. When you and I make stupid business decisions, the government doesn't bail us out.
I thought the government was proceeding, albeit slowly, on a righteous path: They bailed out Bear (bad), let the common and probably the preferred go on F&F (not quite as bad), and let Lehman go (almost) altogether (better). As I said on the blog, we weren't out of the woods as of Monday morning, but at least we weren't stepping further into them. Now comes AIG and all the progress toward making the market work goes down the drain. And then you have the problem of inconsistency. Why AIG and not Lehman? Could political influence have had anything to do with the Fed's and the Treasury's deliberations? To ask the question is to almost answer it.
And how much was BofA's arm twisted to buy Merrill at what looks, especially today, to be a very rich price?
Great thoughts as usual, Don. I might post my not quite as great responses on the blog.
Monday, September 15, 2008
“AT LAST…”
9/15/08
This morning one of my more enthusiastic Finance students at Columbia College-Chicago sent me an e-mail asking my thoughts on the Lehman situation. Since today is a very busy day on a number of fronts, and hence I don’t have time to put up a more extensive commentary, I thought I’d post my reply to him as an abbreviated, and perhaps “for the time being,” reflection on Lehman, et. al.:
9/15/08
Hi Travis,
I am delighted that you are thinking and asking about things like this; perhaps I have planted a seed or perhaps you are just a very bright guy who follows things that have an impact on his world.
As you might guess, this morning is a busy one for one who makes his living trading, so I will have to encapsulate my thoughts. The punch line is that I am DELIGHTED that the "free market" Bush administration has finally let one of these financial behemoths go. This is a necessary FIRST step in resolving the difficulties born of too much debt and reckless disregard of risk. We are far from out of the woods, but at least we are not stepping deeper into them, as we have been doing up until now.
I will probably put up something more extensive on my blog
http://insightfulpontificator.blogspot.com/
tomorrow. For today, I will hopefully take some huge profits from my put positions (i.e., bets that the markets will go down) before heading out to NIU for a day of teaching. This is not a good day to be away from the desk, but duty calls.
I may put this response up on my blog, come to think of it.
Thanks, Travis.
This morning one of my more enthusiastic Finance students at Columbia College-Chicago sent me an e-mail asking my thoughts on the Lehman situation. Since today is a very busy day on a number of fronts, and hence I don’t have time to put up a more extensive commentary, I thought I’d post my reply to him as an abbreviated, and perhaps “for the time being,” reflection on Lehman, et. al.:
9/15/08
Hi Travis,
I am delighted that you are thinking and asking about things like this; perhaps I have planted a seed or perhaps you are just a very bright guy who follows things that have an impact on his world.
As you might guess, this morning is a busy one for one who makes his living trading, so I will have to encapsulate my thoughts. The punch line is that I am DELIGHTED that the "free market" Bush administration has finally let one of these financial behemoths go. This is a necessary FIRST step in resolving the difficulties born of too much debt and reckless disregard of risk. We are far from out of the woods, but at least we are not stepping deeper into them, as we have been doing up until now.
I will probably put up something more extensive on my blog
http://insightfulpontificator.blogspot.com/
tomorrow. For today, I will hopefully take some huge profits from my put positions (i.e., bets that the markets will go down) before heading out to NIU for a day of teaching. This is not a good day to be away from the desk, but duty calls.
I may put this response up on my blog, come to think of it.
Thanks, Travis.
Friday, September 12, 2008
“I’M FROM THE GOVERNMENT AND I’M HERE TO HELP YOU,” PART 9,000
9/12/08
This morning’s Wall Street Journal contained the following April, 2004 quote from President Bush. The “sic”s, inevitable in any Bush speech, were added by me.
“I proposed (sic) that mortgages that have FHA-backed insurance pay (sic) no down payment….What we’re trying to do is make it easier for somebody (sic) to own a home, and there’s (sic) practical ways the government can help.”
Wow! This quote is perfect for two (often intersecting, despite the best efforts of Republicans to tar anyone who opposes Mr. Bush as some sort of true believing, quiche eating, brie nibbling, white wine sipping elitist liberal or terrorist sympathizer, synonymous terms in the enduring GOP playbook) groups of people:
1. Those who are, er, not fans of Mr. Bush and who do not believe that the “R” after his name somehow exonerates him from any criticism. Perhaps this constitutes one and a half groups.
2. Those who believe that the government in most cases cannot help solve problems and, in its attempts to do so, usually exacerbates them.
The first group is fond of arguing that the economy is just fine due to Mr. Bush’s wise stewardship or, somehow failing in that argument, to say that Mr. Bush had nothing to do with the economy’s current travails. They will blame the Democratic congress, Bill Clinton (of course), or, more plausibly, economic events beyond the control of the politicians. While I like the third argument, the above quote is ample evidence that Bush’s “a house for every man and every man for a house” policies did plenty to help dunk us in the economic brine in which we are now swimming.
The second group is nearly reflexively opposed to government action, especially on the economy, arguing that it is futile at best, most likely counterproductive, and disastrous at worst. That efforts by Mr. Bush to act on his 2004 argument that “there’s (sic) practical ways that government can help” foster homeownership have had debilitating consequences, perhaps especially for those they were ostensibly designed to help, is beyond argument.
One more thing needs to be written concerning the “sic”s that become mandatory whenever the president opens his mouth. Perhaps we can get an answer to this question before the President leaves office: Is Mr. Bush’s generous use of malapropisms part of the good old boy shtick of this graduate of Andover, Yale, and Harvard or is he really that clumsy in his use of the English language? If the latter is the case, what can be done to improve the rigor of the English curriculum at the aforementioned schools?
This morning’s Wall Street Journal contained the following April, 2004 quote from President Bush. The “sic”s, inevitable in any Bush speech, were added by me.
“I proposed (sic) that mortgages that have FHA-backed insurance pay (sic) no down payment….What we’re trying to do is make it easier for somebody (sic) to own a home, and there’s (sic) practical ways the government can help.”
Wow! This quote is perfect for two (often intersecting, despite the best efforts of Republicans to tar anyone who opposes Mr. Bush as some sort of true believing, quiche eating, brie nibbling, white wine sipping elitist liberal or terrorist sympathizer, synonymous terms in the enduring GOP playbook) groups of people:
1. Those who are, er, not fans of Mr. Bush and who do not believe that the “R” after his name somehow exonerates him from any criticism. Perhaps this constitutes one and a half groups.
2. Those who believe that the government in most cases cannot help solve problems and, in its attempts to do so, usually exacerbates them.
The first group is fond of arguing that the economy is just fine due to Mr. Bush’s wise stewardship or, somehow failing in that argument, to say that Mr. Bush had nothing to do with the economy’s current travails. They will blame the Democratic congress, Bill Clinton (of course), or, more plausibly, economic events beyond the control of the politicians. While I like the third argument, the above quote is ample evidence that Bush’s “a house for every man and every man for a house” policies did plenty to help dunk us in the economic brine in which we are now swimming.
The second group is nearly reflexively opposed to government action, especially on the economy, arguing that it is futile at best, most likely counterproductive, and disastrous at worst. That efforts by Mr. Bush to act on his 2004 argument that “there’s (sic) practical ways that government can help” foster homeownership have had debilitating consequences, perhaps especially for those they were ostensibly designed to help, is beyond argument.
One more thing needs to be written concerning the “sic”s that become mandatory whenever the president opens his mouth. Perhaps we can get an answer to this question before the President leaves office: Is Mr. Bush’s generous use of malapropisms part of the good old boy shtick of this graduate of Andover, Yale, and Harvard or is he really that clumsy in his use of the English language? If the latter is the case, what can be done to improve the rigor of the English curriculum at the aforementioned schools?
Wednesday, September 10, 2008
NO FINANCIAL INSTITUTION LEFT BEHIND
9/10/08
As many of you might have guessed, I am reflexively opposed to the government seizure of Fannie and Freddie (“F&F”). However, having, like most of you, followed this story exhaustively, I came close to drinking the kool-aid and agreeing that, as regrettable as this particular bout of Republican style socialism was, it was necessary to avoid “systemic risks to the financial system.” On further consideration, though, I have concluded that my reflexes were as sharp as always—the nationalization of Fannie and Freddie were indeed wrong.
Let me start by saying that it is admirable that the federal government did not follow the baleful Bear Stearns precedent and use the public dime to provide financial succor to the equity investors in Fannie and Freddie. (I am told by an insightful and well placed source that there were contractual reasons that Bear common holders got their $10 smooch. I still am not convinced that those contractual reasons could not be circumvented with sufficient will on the part of the rescuers, but that is another conversation.) It is even more admirable that the government let the preferred holders go in the Fannie and Freddie 911 call. Given the widespread holding of F&F preferred among the nation’s banks, especially its smaller banks, I was willing to wager that the government would protect the preferred, but am delighted that it didn’t, especially since I didn’t consummate my bet.
However, as “toughly” structured as this bailout may have been, it still should not have been done. Fannie and Freddie should have been allowed to fail. The taxpayers are once again being put in the position of bailing out investors who should have known better than to conclude that F&F debt was riskless. In fact, the talk is that it was entreaties by foreign banks, especially by the Chinese central bank, that provided the final catalyst for the rescue operation. (So the American taxpayer is being put in a position of subsidizing highly paid, and supposedly highly skilled, investment managers throughout the world.) These central banks, like many domestic investors, had bought the paper with the notion that it was essentially the equivalent of U.S. treasuries in credit quality. But F&F paper traded at a spread for a reason that is (or was until the Free Market Hank and the Bushites rode to the rescue) made abundantly clear by recent events.
The argument that F&F should have been allowed to crash and burn is considered preposterous and naïve by most financial professionals, many of whom are talking their positions. We are told the financial system would freeze up if F&F were to fail. Lenders wouldn’t lend. Investors wouldn’t invest. Foreign investors and central bank would shy away from all American liabilities, including treasury liabilities, an especially scary prospect now that we are a “buddy, can you lend me a dime?” nation. But would investors and lenders take a long vacation? The people who make these investment decisions are very well paid and, despite abundant recent evidence to the contrary, pretty smart. They wouldn’t stop investing. Rather, they would stop investing in a careless and haphazard fashion. They would start earning their astronomical pay packages rather than merely saying “Yeah, it’s not full faith and credit, but it really is. Back up the truck” before going off to expensive broker paid “research conferences” financed by their investor’s “management fees”. Mirabile dictu, credit research would start coming back into vogue. Lending wouldn’t stop; careless lending would stop. If one is to argue that such a development amounts to the financial system’s seizing up, one must be prepared to argue that our financial system depends on careless lending. If that is indeed the case, we are in more trouble than even I think.
One more argument for the Fannie and Freddie bailout is that letting them go would provide a further “devastating blow” to the housing market. But, given that part of the bailout package is a very modest expansion in F&F’s balance sheets for the next year followed by a series of 10% contractions in those balance sheets, it’s hard to see how a shrinking F&F will provide lots of juice for the housing market. One could legitimately argue that, without F&F, housing lending would grind to a virtual halt. That is highly doubtful; given the much ballyhooed innovation in our financial system, good loans will get made, albeit at higher spreads. But is having credit spreads reflect a prudent assessment of the underlying risks, rather than a “what the hell, I’ll only hold it for a few weeks, if that long” attitude such a bad thing? A housing market propped up by insouciant lending standards needs further correction.
As many of you might have guessed, I am reflexively opposed to the government seizure of Fannie and Freddie (“F&F”). However, having, like most of you, followed this story exhaustively, I came close to drinking the kool-aid and agreeing that, as regrettable as this particular bout of Republican style socialism was, it was necessary to avoid “systemic risks to the financial system.” On further consideration, though, I have concluded that my reflexes were as sharp as always—the nationalization of Fannie and Freddie were indeed wrong.
Let me start by saying that it is admirable that the federal government did not follow the baleful Bear Stearns precedent and use the public dime to provide financial succor to the equity investors in Fannie and Freddie. (I am told by an insightful and well placed source that there were contractual reasons that Bear common holders got their $10 smooch. I still am not convinced that those contractual reasons could not be circumvented with sufficient will on the part of the rescuers, but that is another conversation.) It is even more admirable that the government let the preferred holders go in the Fannie and Freddie 911 call. Given the widespread holding of F&F preferred among the nation’s banks, especially its smaller banks, I was willing to wager that the government would protect the preferred, but am delighted that it didn’t, especially since I didn’t consummate my bet.
However, as “toughly” structured as this bailout may have been, it still should not have been done. Fannie and Freddie should have been allowed to fail. The taxpayers are once again being put in the position of bailing out investors who should have known better than to conclude that F&F debt was riskless. In fact, the talk is that it was entreaties by foreign banks, especially by the Chinese central bank, that provided the final catalyst for the rescue operation. (So the American taxpayer is being put in a position of subsidizing highly paid, and supposedly highly skilled, investment managers throughout the world.) These central banks, like many domestic investors, had bought the paper with the notion that it was essentially the equivalent of U.S. treasuries in credit quality. But F&F paper traded at a spread for a reason that is (or was until the Free Market Hank and the Bushites rode to the rescue) made abundantly clear by recent events.
The argument that F&F should have been allowed to crash and burn is considered preposterous and naïve by most financial professionals, many of whom are talking their positions. We are told the financial system would freeze up if F&F were to fail. Lenders wouldn’t lend. Investors wouldn’t invest. Foreign investors and central bank would shy away from all American liabilities, including treasury liabilities, an especially scary prospect now that we are a “buddy, can you lend me a dime?” nation. But would investors and lenders take a long vacation? The people who make these investment decisions are very well paid and, despite abundant recent evidence to the contrary, pretty smart. They wouldn’t stop investing. Rather, they would stop investing in a careless and haphazard fashion. They would start earning their astronomical pay packages rather than merely saying “Yeah, it’s not full faith and credit, but it really is. Back up the truck” before going off to expensive broker paid “research conferences” financed by their investor’s “management fees”. Mirabile dictu, credit research would start coming back into vogue. Lending wouldn’t stop; careless lending would stop. If one is to argue that such a development amounts to the financial system’s seizing up, one must be prepared to argue that our financial system depends on careless lending. If that is indeed the case, we are in more trouble than even I think.
One more argument for the Fannie and Freddie bailout is that letting them go would provide a further “devastating blow” to the housing market. But, given that part of the bailout package is a very modest expansion in F&F’s balance sheets for the next year followed by a series of 10% contractions in those balance sheets, it’s hard to see how a shrinking F&F will provide lots of juice for the housing market. One could legitimately argue that, without F&F, housing lending would grind to a virtual halt. That is highly doubtful; given the much ballyhooed innovation in our financial system, good loans will get made, albeit at higher spreads. But is having credit spreads reflect a prudent assessment of the underlying risks, rather than a “what the hell, I’ll only hold it for a few weeks, if that long” attitude such a bad thing? A housing market propped up by insouciant lending standards needs further correction.
Tuesday, September 2, 2008
JUST WHEN YOU THOUGHT THIS ELECTION SEASON COULD NOT GET MORE BIZARRE…
9/2/08
There is so much to say about Sarah Palin, and John McCain’s selection of her (for now) as his running mate that it is difficult to know where to commence and even more difficult to encapsulate my argument, but here goes:
--My initial reaction was that this was a silly pick; McCain threw the Hail Mary when doing so was not necessary. (See my 8/18/08 and 8/28/08 posts.) Tactically, he would have been better off with a safe pick, like Tim Pawlenty or a slightly more daring pick, like Kaye Bailey Hutchison. My feelings have not changed on my assessment of the tactical benefits for selecting Sarah Palin. The experience/celebrity argument will resonate with a substantial number of voters, largely justifiably, no matter how effectively the GOP spins it.
--The more I learned about Sarah Palin (Which was just about everything; even I, who follows these things with, if not the rigor I once did, with more attention than most people, knew almost nothing about Sarah Palin.), the more I liked her politics, ideas, and, especially, her approach to the political establishment. I would even go so far as to say that if she were at the top of the ticket, I might even consider voting Republican, but still probably wouldn’t. Further, the argument that she has more administrative experience than Barack Obama or Joe Biden makes sense; she has actually run something, which is more than one can say about Messrs. Obama, Biden, or McCain. (Funny how Ms. Palin’s defender never seem to mention the last when engaging in the “having run something” defense.) Further, given the derision the GOP, and its standard-bearer, have given Mr. Obama’s level of experience, the bar they have chosen to boost Ms. Palin over is very low.
--The pregnancy of Ms. Palin’s 17 year old daughter Bristol does change things. Tactically, one has to wonder how those not very engaged voters (who will ultimately decide the election) who would like her story line will react to this one. I know several of those relatively apolitical Moms who were initially drawn to her who are now hesitating. Tactically, this can’t help.
--I’m not comfortable with the argument that Ms. Palin is an evangelical Christian, the type that likes to tell everyone else how to run their families, but can’t seem to run her own. It fails, or at least is unsatisfactory and/or mean spirited, at any number of points. But this simplistic argument will appeal to a lot of undecideds.
--My bigger problem with the pregnancy, or, really, Ms. Palin’s reaction to it, is her use of the word “proud” when describing both her daughter’s decisions to have the baby and to marry his or her father and Ms. Palin’s and her husband’s feelings regarding becoming the grandparents of a child of a teen mother. If Palin had said that she was proud that her daughter decided not to abort the baby, I would wholeheartedly agree. But is she proud of the fact that her daughter has decided to marry the 18 year old father of her child? It seems like adoption would the best option here for the unborn child and for his or her parents. That would be a decision of which one could be justifiably proud. But to be proud of teenage motherhood? The self-appointed champions of the unborn and of family values seem to be rallying around this decision. Hmm….If the idea of teenagers’ getting married because of pregnancy is the Religious Right’s idea of family values (which it sure seems like they would like to impose on all of us), perhaps the Religious Right is as scary as my liberal and moderate friends seem to think. Teen pregnancy is a HUGE problem in this country, and, as politically incorrect as it seems to be, restoring some of the stigma formerly attached to it might help reduce teen pregnancy. Having a potential VP of the United States tell us how “proud” she will be to be the grandparent of the child of a teen mom doesn’t help.
--It seems to me that Ms. Palin, with a Down’s syndrome baby and a pregnant daughter, has a lot on her plate at the moment. Is this the time to be running for a job like VP that could soon turn into the biggest job in the world? It is one of the odd juxtapositions of this campaign that it is people, primarily women, on the more liberal end of the spectrum who are making this argument while “family values” conservatives tend to argue that it is perfectly acceptable for Ms. Palin to be (Let’s be brutally honest here.) displaying at least a degree of neglect of her family’s current dire needs, and exposing her very vulnerable daughter to some harsh worldwide publicity at a very tough time, in order to further her own career. That’s the funny thing about principles: They seem to be amazingly disposable when they become inconvenient or interfere with ambition.
--John McCain (Did you know he was a POW in Vietnam? (Only once per post, Susan, I promise.)) tells us he was aware of the pregnancy when he offered Ms. Palin the VP spot on the ticket. Do you believe that? I don’t. Why would one take on all this baggage and grief? Is energizing the base worth it? If McCain is indeed lying and he did not know about the pregnancy, then Palin either lied or was not asked the final question: “Is there anything I should know before I ask you to be my running mate?” One or both members of the GOP ticket do not look great under this scenario. If Mr. McCain is not lying and did indeed know of the Bristol’s pregnancy, it says a lot about his judgment, his stubbornness, his ability to make an effective cost/benefit analysis, and/or his new found subservience to the Religious Right base. He looks bad under any scenario.
The best outcome for the GOP, Mr. McCain, Ms. Palin, her family, and especially Bristol, would be for Palin to “voluntarily” leave the ticket in order to attend to her family’s needs, which are indeed very great right now. It’s the right thing to do morally; Ms. Palin is a very strong woman whose family really needs her now. It might even turn out to be the right thing to do politically. Mr. McCain and the GOP can do without the baggage Ms. Palin brings. And Ms. Palin is a very young woman whose time will come again, and her living the values she propounds can only help her with her base when she resumes her political career, as I certainly hope she does…at a more opportune time.
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