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.
Saturday, March 29, 2008
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.
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.
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?
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.
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.
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.
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.
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