10/31/07 (After the cuts)
This is just what we need at this crucial juncture for our economy…a Fed Chairman who judges his performance by the volume of the cheers emanating from Wall Street.
Wednesday, October 31, 2007
MOTHER BEN
10/31/07—After the fed funds and discount rates were reduced 25 basis points.
Well, it’s official, folks….
We have a Bernanke put!
We have a WPA for Wall Street!
No hedge fund manager will be left behind!
No trading desk can miss!
No asinine financial decision will go unpardoned!
No one on Wall Street need sleep fitfully!
No more singing “Brother can you spare me a billion?”!
No more need to assess risks and exercise prudence!
No reason to avoid taking the most outrageous risks—the rewards are officially privatized and the risks are officially socialized!
Sleep well, Wall Street—your Mother Ben has gathered you under his wings. After all, he can’t bear to see his children experience any degree of discomfort. Why, you are the financial titans, the rugged American individualists on whom our economy depends! And Mommy is never far away!
So, no need to worry, Wall Street wise men…
…until the fox comes along. Then you have to start worrying. But, what the hell, Mother Ben can always…voila…CUT RATES!!!
But what will you do when that doesn’t work any more? Then there will be even more hell to pay, no?
Aw, stop being such a killjoy! Eat, drink, and be merry, for tomorrow we shall die.
Well, it’s official, folks….
We have a Bernanke put!
We have a WPA for Wall Street!
No hedge fund manager will be left behind!
No trading desk can miss!
No asinine financial decision will go unpardoned!
No one on Wall Street need sleep fitfully!
No more singing “Brother can you spare me a billion?”!
No more need to assess risks and exercise prudence!
No reason to avoid taking the most outrageous risks—the rewards are officially privatized and the risks are officially socialized!
Sleep well, Wall Street—your Mother Ben has gathered you under his wings. After all, he can’t bear to see his children experience any degree of discomfort. Why, you are the financial titans, the rugged American individualists on whom our economy depends! And Mommy is never far away!
So, no need to worry, Wall Street wise men…
…until the fox comes along. Then you have to start worrying. But, what the hell, Mother Ben can always…voila…CUT RATES!!!
But what will you do when that doesn’t work any more? Then there will be even more hell to pay, no?
Aw, stop being such a killjoy! Eat, drink, and be merry, for tomorrow we shall die.
Tuesday, October 30, 2007
“IT’S OVER…OVER..”
10/30/07
Maybe Stan O’Neal didn’t blow up Merrill Lynch. Maybe he merely didn’t do his job while the kids on the trading desk lost Merrill $7.9 billion, at last count. So what does Merrill’s ever vigilant Board do? Fires O’Neal. Good. Then what does it do? Negotiates an exit (not severance…no, no, no) package for the bumbling (at best) Mr. O’Neal that could total $160 million!!!
Okay, some of that consoling going away present is the result of restricted stock and stock options (the most lucrative of which, by the way, were conveniently dated 9/24/01). But, still, $160 million? For going ahead with major merger negotiations without the consent of the Board, as if the firm were called “Stan O’Neal” rather than “Merrill Lynch,” and crippling, or conniving while others crippled, a venerable U.S. business icon? It is not a question of whether, but rather when, the Merrill Board had taken leave of its senses.
This post is not designed so much to lambaste Merrill. I’m not a Merrill shareholder, and if the Merrill board wants to betray its shareholders and make a laughingstock out of itself, that is the problem of the Merrill shareholders. I bring up the case of Mr. O’Neal to point out that this is yet another example of how far we have strayed from the free enterprise system that made this country the economic juggernaut it once was.
Free enterprise, you see, includes the possibility of failure. This tempers wild risk taking and counsels prudence. Not excessive prudence, but measured risk taking. But now as capitalism is being replaced with corporatism, there is no accountability. There is no price to pay for failure. There is no reckoning for taking wild hindquartered risks with other people’s money. There is no way to lose once one finds himself in the corporate club.
This used to be a country of innovators and people who took risks fully mindful that there would be a price to be paid for failure and willing to pay that price in order to get rich. It also used to be composed of people with morals and principles, people who could think, read, and reason. Now we have an economy run by corporate titans who know nothing of personal risk, who are already rich and seek only to get richer by gambling with other people’s money, and have no sense of accountability. Capitalism, free markets, and accountability are being replaced with corporatism, tilted playing fields, and buck-passing. Meanwhile, the citizenry laughs and consoles itself with tacky trinkets, cotton candy for the mind, and endless self-congratulation. It injects its collective brain and soul with healthy doses of novocain while indulging in one of the classic definitions of decadence: spending money it doesn’t have on things it doesn’t need, that, indeed, contain the seeds of its destruction. The citizenry is thoroughly anesthetized while being sodomized by the forces that are steering our economy and society toward ruin.
It is indeed over. This is a hopelessly decadent society and economy living through its final death throes. The good news is that Marcus Tullius Cicero, one of the Pontificator’s idols, warned of the decadence of Roman society even before the Republic was thrown over the side for the Empire. It took almost another 500 years for Rome to rot from within. Further, the last 100 or so years of this decay were, by and large, thoroughly enjoyable. Squandering the stored up treasures of one’s forbearers can be quite pleasurable for those doing the squandering, provided they have no sense of history, no sense of responsibility, no principles, no consciences, and no genuine concern for the generations that will follow. So the present American society may be in for a hundred year party. Whoopee!!! Or not. Things move much more quickly than they did 2000 years ago.
Maybe Stan O’Neal didn’t blow up Merrill Lynch. Maybe he merely didn’t do his job while the kids on the trading desk lost Merrill $7.9 billion, at last count. So what does Merrill’s ever vigilant Board do? Fires O’Neal. Good. Then what does it do? Negotiates an exit (not severance…no, no, no) package for the bumbling (at best) Mr. O’Neal that could total $160 million!!!
Okay, some of that consoling going away present is the result of restricted stock and stock options (the most lucrative of which, by the way, were conveniently dated 9/24/01). But, still, $160 million? For going ahead with major merger negotiations without the consent of the Board, as if the firm were called “Stan O’Neal” rather than “Merrill Lynch,” and crippling, or conniving while others crippled, a venerable U.S. business icon? It is not a question of whether, but rather when, the Merrill Board had taken leave of its senses.
This post is not designed so much to lambaste Merrill. I’m not a Merrill shareholder, and if the Merrill board wants to betray its shareholders and make a laughingstock out of itself, that is the problem of the Merrill shareholders. I bring up the case of Mr. O’Neal to point out that this is yet another example of how far we have strayed from the free enterprise system that made this country the economic juggernaut it once was.
Free enterprise, you see, includes the possibility of failure. This tempers wild risk taking and counsels prudence. Not excessive prudence, but measured risk taking. But now as capitalism is being replaced with corporatism, there is no accountability. There is no price to pay for failure. There is no reckoning for taking wild hindquartered risks with other people’s money. There is no way to lose once one finds himself in the corporate club.
This used to be a country of innovators and people who took risks fully mindful that there would be a price to be paid for failure and willing to pay that price in order to get rich. It also used to be composed of people with morals and principles, people who could think, read, and reason. Now we have an economy run by corporate titans who know nothing of personal risk, who are already rich and seek only to get richer by gambling with other people’s money, and have no sense of accountability. Capitalism, free markets, and accountability are being replaced with corporatism, tilted playing fields, and buck-passing. Meanwhile, the citizenry laughs and consoles itself with tacky trinkets, cotton candy for the mind, and endless self-congratulation. It injects its collective brain and soul with healthy doses of novocain while indulging in one of the classic definitions of decadence: spending money it doesn’t have on things it doesn’t need, that, indeed, contain the seeds of its destruction. The citizenry is thoroughly anesthetized while being sodomized by the forces that are steering our economy and society toward ruin.
It is indeed over. This is a hopelessly decadent society and economy living through its final death throes. The good news is that Marcus Tullius Cicero, one of the Pontificator’s idols, warned of the decadence of Roman society even before the Republic was thrown over the side for the Empire. It took almost another 500 years for Rome to rot from within. Further, the last 100 or so years of this decay were, by and large, thoroughly enjoyable. Squandering the stored up treasures of one’s forbearers can be quite pleasurable for those doing the squandering, provided they have no sense of history, no sense of responsibility, no principles, no consciences, and no genuine concern for the generations that will follow. So the present American society may be in for a hundred year party. Whoopee!!! Or not. Things move much more quickly than they did 2000 years ago.
THE STREET VS. THE VOLCANO
10/30/07
At Mass this morning, the Gospel included the parable of the mustard seed. Jesus started the parable by asking “To what shall I liken the kingdom of heaven?” My mind was wandering, as it too often does, during the Gospel, and, at the risk of sounding profane or sacrilegious, I conjured up a similar parable for our economy.
To what shall I liken our economy and our stock market? It is like small children playing on the side of the volcano, pointing out the beauty of the surrounding plants and trees while dismissing as a mere inconvenience the massive lava cap that is about to explode and rain destruction upon them. We get a good earnings report here, a favorable economic statistic there, and, most delightful to the economic experts, a Fed “rate cut” now and then, and the pundits and cheerleaders declare everything is fine. They don’t ignore the debt problem; they see it. But they opine that the underlying economy is strong enough, as evidenced by a scattered healthy earnings or economic report, to withstand a temporary credit setback. Soon the lava will come cascading down the side of the mountain and engulf them, and these notables will never know what hit them.
One of the arguments that we often hear is that the job market and wage growth are fine, or at least decent, so the consumer should be in good shape even if he can’t “tap the equity” in his home due to a complete absence of equity in his home. What those who make this argument are missing is that this economy, the whole worldwide economic shell game, really, has only been sustained because the American consumer has been able to spend well beyond his pay check. If the consumer is forced to spend within his means, even if those means are as healthy as some claim, the whole system gets gummed up. If he is forced to actually service his debt with his paycheck, the whole system collapses. In fact, that the world economy has depended for years on Americans’ living well beyond their means shows how overextended the typical American is. The bills are starting to come due. Further, as I have said in the past, this isn’t a “sub-prime” problem. Angelo Mozilo, Chairman of Countrywide Credit, admitted last week what the Pontificator was telling you months ago: the problem has reached into the prime mortgage market. But this debt problem isn’t only a mortgage problem. Levels of all forms of consumer debt have reached astronomical heights. And it isn’t only a consumer debt problem. Corporate balance sheets, for years bastions of sanity in an otherwise debt-crazed world, are becoming increasingly saddled with debt for stock buybacks and leveraged buyouts. And it isn’t even a private sector problem. After seven years of George Bush and a (until 2006) Republican Congress with all the fiscal restraint of Juan Peron, federal debt is virtually incalculable.
Another argument we hear from the experts is that the debt level is manageable, and therefore the economy and stocks should do fine, because household balance sheets are in good shape. But household balance sheets are in good shape only because cheap debt has enabled investors to grossly inflate the prices of stocks and (until recently, and, in historical context, even now) houses. So this argument is tantamount to saying that the debt level is manageable because we have created so much debt, and that stock prices should be fine because they are so high. This is much like the argument that the same experts used to make (but now have somehow forgotten they ever made) that house prices should remain healthy because they were so high. After all, homeowners’ balance sheets were in fine shape!
A third argument with which the experts comfort themselves is that the economy might be “slow” over here, but that things are going gangbusters overseas. But these are the same guys who trumpet the interconnectedness of the world economy. Can’t they see that the health of the world economy depends on the inebriated mariner spending habits of the American consumer? Eventually, when the emerging nations develop a larger middle class that can sustain growing production levels in developing countries, the American consumer will no longer be as vital a cog in the world economy. But such developments will involve a long and traumatic adjustment period, and, when they are completed, what will America have to bring to the table? That is a long run horror, though. Sufficient for today is today’s horror.
Back in 1988, Lloyd Bentsen, Texas senator and Democratic candidate for Vice-President, uttered a famous line in his debate with his Republican rival, Indiana Senator Dan Quayle. I am not referring to the “…you’re no John Kennedy” line, but rather to Bentsen’s reply to Quayle’s trumpeting the success of the “Reagan” economy (as if any politician can claim credit for the success of the economy; note Bill Clinton’s frequently repeated canard “I (sometimes we) created (some outrageously high number) jobs.” The private sector, not the bloodsucking leaches in Washington, creates jobs, but that is another matter.) that he (Bentsen) could have created such a great economy, too, “if I could write hundreds of billions of dollars of hot checks.” That particular gem from Senator Bentsen, who was given to such gems, was quickly overshadowed by the Kennedy comment and soon forgotten. However, it resonates today. We have written trillions of dollars of hot checks, and the world is growing more hesitant about taking our post-dated rubber. The day of reckoning is upon us.
At Mass this morning, the Gospel included the parable of the mustard seed. Jesus started the parable by asking “To what shall I liken the kingdom of heaven?” My mind was wandering, as it too often does, during the Gospel, and, at the risk of sounding profane or sacrilegious, I conjured up a similar parable for our economy.
To what shall I liken our economy and our stock market? It is like small children playing on the side of the volcano, pointing out the beauty of the surrounding plants and trees while dismissing as a mere inconvenience the massive lava cap that is about to explode and rain destruction upon them. We get a good earnings report here, a favorable economic statistic there, and, most delightful to the economic experts, a Fed “rate cut” now and then, and the pundits and cheerleaders declare everything is fine. They don’t ignore the debt problem; they see it. But they opine that the underlying economy is strong enough, as evidenced by a scattered healthy earnings or economic report, to withstand a temporary credit setback. Soon the lava will come cascading down the side of the mountain and engulf them, and these notables will never know what hit them.
One of the arguments that we often hear is that the job market and wage growth are fine, or at least decent, so the consumer should be in good shape even if he can’t “tap the equity” in his home due to a complete absence of equity in his home. What those who make this argument are missing is that this economy, the whole worldwide economic shell game, really, has only been sustained because the American consumer has been able to spend well beyond his pay check. If the consumer is forced to spend within his means, even if those means are as healthy as some claim, the whole system gets gummed up. If he is forced to actually service his debt with his paycheck, the whole system collapses. In fact, that the world economy has depended for years on Americans’ living well beyond their means shows how overextended the typical American is. The bills are starting to come due. Further, as I have said in the past, this isn’t a “sub-prime” problem. Angelo Mozilo, Chairman of Countrywide Credit, admitted last week what the Pontificator was telling you months ago: the problem has reached into the prime mortgage market. But this debt problem isn’t only a mortgage problem. Levels of all forms of consumer debt have reached astronomical heights. And it isn’t only a consumer debt problem. Corporate balance sheets, for years bastions of sanity in an otherwise debt-crazed world, are becoming increasingly saddled with debt for stock buybacks and leveraged buyouts. And it isn’t even a private sector problem. After seven years of George Bush and a (until 2006) Republican Congress with all the fiscal restraint of Juan Peron, federal debt is virtually incalculable.
Another argument we hear from the experts is that the debt level is manageable, and therefore the economy and stocks should do fine, because household balance sheets are in good shape. But household balance sheets are in good shape only because cheap debt has enabled investors to grossly inflate the prices of stocks and (until recently, and, in historical context, even now) houses. So this argument is tantamount to saying that the debt level is manageable because we have created so much debt, and that stock prices should be fine because they are so high. This is much like the argument that the same experts used to make (but now have somehow forgotten they ever made) that house prices should remain healthy because they were so high. After all, homeowners’ balance sheets were in fine shape!
A third argument with which the experts comfort themselves is that the economy might be “slow” over here, but that things are going gangbusters overseas. But these are the same guys who trumpet the interconnectedness of the world economy. Can’t they see that the health of the world economy depends on the inebriated mariner spending habits of the American consumer? Eventually, when the emerging nations develop a larger middle class that can sustain growing production levels in developing countries, the American consumer will no longer be as vital a cog in the world economy. But such developments will involve a long and traumatic adjustment period, and, when they are completed, what will America have to bring to the table? That is a long run horror, though. Sufficient for today is today’s horror.
Back in 1988, Lloyd Bentsen, Texas senator and Democratic candidate for Vice-President, uttered a famous line in his debate with his Republican rival, Indiana Senator Dan Quayle. I am not referring to the “…you’re no John Kennedy” line, but rather to Bentsen’s reply to Quayle’s trumpeting the success of the “Reagan” economy (as if any politician can claim credit for the success of the economy; note Bill Clinton’s frequently repeated canard “I (sometimes we) created (some outrageously high number) jobs.” The private sector, not the bloodsucking leaches in Washington, creates jobs, but that is another matter.) that he (Bentsen) could have created such a great economy, too, “if I could write hundreds of billions of dollars of hot checks.” That particular gem from Senator Bentsen, who was given to such gems, was quickly overshadowed by the Kennedy comment and soon forgotten. However, it resonates today. We have written trillions of dollars of hot checks, and the world is growing more hesitant about taking our post-dated rubber. The day of reckoning is upon us.
Thursday, October 18, 2007
Will this man speak of nothing else?
This is a letter I sent to the Wall Street Journal today concerning the (Surprise!) superconduit.
10/18/07
In his 10/18/07 Opinion piece, Peter J. Wallison, expressing support for the “superconduit,” argues that “…without a liquid market for the assets they created, originators of mortgages, credit-card loans and other loan facilities would reduce the availability of credit, raise their rates, or both. The economy might enter a recession.”
Several points merit making:
First, Mr. Wallison presupposes that the superconduit will create a liquid market. It’s easy to agree that liquidity will be created, or at least provided. However, that the superconduit will create a market, in the sense of buyers and sellers freely coming together of their own volition with their own money is a harder argument to make.
Second, the reason that we are in the midst of these difficulties is that credit was too widely available at rates that were too low. Would a reduction in the availability of credit and/or higher rates be such a bad thing? Some might argue that a little more prudence on the credit side would have spared the economy its current travails. As they used to tell recovering alcoholics, it’s never too late to reform.
Third, when did avoiding recession become the chief goal of all monetary and fiscal policy? Some of us are old enough to remember when a recession was a normal part of the business cycle that could be expected every five to ten years. While painful, recessions served to wring excesses and imbalances out of the economy and were a natural mechanism for getting the economy back on its normal growth path. Where did we develop such hubris to think that we can, and should, avoid recession altogether? Such an attitude indeed helped put us in the midst of the difficulties we are now confronting.
Mark Quinn
Naperville, IL
10/18/07
In his 10/18/07 Opinion piece, Peter J. Wallison, expressing support for the “superconduit,” argues that “…without a liquid market for the assets they created, originators of mortgages, credit-card loans and other loan facilities would reduce the availability of credit, raise their rates, or both. The economy might enter a recession.”
Several points merit making:
First, Mr. Wallison presupposes that the superconduit will create a liquid market. It’s easy to agree that liquidity will be created, or at least provided. However, that the superconduit will create a market, in the sense of buyers and sellers freely coming together of their own volition with their own money is a harder argument to make.
Second, the reason that we are in the midst of these difficulties is that credit was too widely available at rates that were too low. Would a reduction in the availability of credit and/or higher rates be such a bad thing? Some might argue that a little more prudence on the credit side would have spared the economy its current travails. As they used to tell recovering alcoholics, it’s never too late to reform.
Third, when did avoiding recession become the chief goal of all monetary and fiscal policy? Some of us are old enough to remember when a recession was a normal part of the business cycle that could be expected every five to ten years. While painful, recessions served to wring excesses and imbalances out of the economy and were a natural mechanism for getting the economy back on its normal growth path. Where did we develop such hubris to think that we can, and should, avoid recession altogether? Such an attitude indeed helped put us in the midst of the difficulties we are now confronting.
Mark Quinn
Naperville, IL
Monday, October 15, 2007
“AND ALL AT NO COST* TO YOU!!!”
10/15/07
Over the weekend, a consortium of banks, at the prodding of Treasury Secretary Hank Paulson, finalized plans for the Master-Liquidity Enhancement Conduit, a “super conduit” set up to buy troubled assets, primarily assets backed by sub-prime mortgages and other less than stellar credits, from bank affiliates known as structured investment vehicles, or SIVs. (This is separate from the “Hope Fund” discussed in the previous post.) This Rube Goldberg contraption was put together out of fear that, with the commercial paper of the SIVs rolling and unlikely to find buyers for paper issued to refinance it, the SIVs will be forced to unload their risky assets at, to quote the Wall Street Journal “new, lower market prices.” This would lead to big losses at the SIVs and, indirectly, at their bank sponsors and the distinct possibility that their bank affiliates would have to put the SIVs on their own books, forcing the banks to set aside the sizable reserves that the SIVs were set up to avoid. In other words, banks (horrors!) would have to face the downside of making bad financial bets.
Several things are malodorous about this arrangement:
--Hank Paulson and the others who knocked heads to get this arrangement done insist that there will be no government money involved in the bailout. Let’s suspend disbelief here and take Mr. Paulson, and the government for which he works, at his word; after all, there is precedent here: no government money was involved in the LTCM bailout. But even if we assume that there will be no taxpayer money involved here, there had to be an element of government coercion in forming the superconduit. Citibank needed no persuasion to enter into the superconduit arrangement; it is by far the most heavily exposed to SIVs, accounting for 25% of the global SIV market. However, other participants in the Master-Liquidity Enhancement Conduit, such as JP Morgan and Bank of America, have no SIVs. They are saying that the lure for them is the fees they will generate for setting up the conduit and the business their broker-dealer arms will generate from it. So the managements of these institutions are putting the banks’ credit, and profitability, on the line to back risky securities at above market prices (See the next bullet point.) in order to save a competitor that they both would like to displace as the largest bank in the world. “Yeah, that’s the way it was. Honest.”
--The superconduit is supposed to pay market prices for the securities it will buy. But the whole arrangement is designed to allow the SIVs to avoid selling the securities at, as the Wall Street Journal put it, “new, lower market prices” that would result from a panic sale. So the conduit will pay market prices in order to save the SIVs from having to sell at market prices. Uh huh. In the absence of the supposedly market price bid from the conduit, put together for the very purpose of making that bid, the market price of the securities in question would be far lower. Sounds logical…to the Mad Hatter.
--Besides the SIVs who hold this dicey paper, and Citicorp, who benefits here? Of course: hedge funds and other holders of this funny paper, who eschew government interference in the market place until the market place begins to make them feel uncomfortable. And who invests in hedge funds? Could it possibly be Hank Paulson’s Wall Street friends, or George Bush’s Wall Street friends, or the mucky-mucks, pooh-bahs, and suzerains of the banks that will become contributors to the superconduit, along with their pals at the yacht and country clubs in Greenwich? Hmm…Perhaps healthy dollops of government coercion were not all that necessary to get these captains of finance to use their shareholders’ money to effectively bail out some of their investments. Is that too cynical?
--Shareholders ought to start asking questions, but from different perspectives. Citi shareholders ought to be delighted by the bailout, but ought to be asking Mr. Prince and his minions why in the world the bank got so heavily involved in SIVs in the first place. What, besides seeming gross incompetence, was the bank trying to hide? Shareholders of JP Morgan and Bank of America ought to ask why their banks’ credit, and profitability and hence the investments of the holders, should be put on the line to bail out a careless competitor and, perhaps, the investments of the people who run their banks. Can the fees involved be that good? Or is this a case of these banks’ not being able to say no the federal government, perhaps for fear that, because of some idiotic adventure on the part of their managements, they will be next in line, hat in hand, to see Mr. Paulson.
--Taxpayers ought to keep a close eye on these developments. The government is already deeply involved in this. Why? When will government money have to be employed? Why? Should taxpayers be forced to bail people, usually people with a lot more money than they, out of the consequences of their own financial folly?
Over the weekend, a consortium of banks, at the prodding of Treasury Secretary Hank Paulson, finalized plans for the Master-Liquidity Enhancement Conduit, a “super conduit” set up to buy troubled assets, primarily assets backed by sub-prime mortgages and other less than stellar credits, from bank affiliates known as structured investment vehicles, or SIVs. (This is separate from the “Hope Fund” discussed in the previous post.) This Rube Goldberg contraption was put together out of fear that, with the commercial paper of the SIVs rolling and unlikely to find buyers for paper issued to refinance it, the SIVs will be forced to unload their risky assets at, to quote the Wall Street Journal “new, lower market prices.” This would lead to big losses at the SIVs and, indirectly, at their bank sponsors and the distinct possibility that their bank affiliates would have to put the SIVs on their own books, forcing the banks to set aside the sizable reserves that the SIVs were set up to avoid. In other words, banks (horrors!) would have to face the downside of making bad financial bets.
Several things are malodorous about this arrangement:
--Hank Paulson and the others who knocked heads to get this arrangement done insist that there will be no government money involved in the bailout. Let’s suspend disbelief here and take Mr. Paulson, and the government for which he works, at his word; after all, there is precedent here: no government money was involved in the LTCM bailout. But even if we assume that there will be no taxpayer money involved here, there had to be an element of government coercion in forming the superconduit. Citibank needed no persuasion to enter into the superconduit arrangement; it is by far the most heavily exposed to SIVs, accounting for 25% of the global SIV market. However, other participants in the Master-Liquidity Enhancement Conduit, such as JP Morgan and Bank of America, have no SIVs. They are saying that the lure for them is the fees they will generate for setting up the conduit and the business their broker-dealer arms will generate from it. So the managements of these institutions are putting the banks’ credit, and profitability, on the line to back risky securities at above market prices (See the next bullet point.) in order to save a competitor that they both would like to displace as the largest bank in the world. “Yeah, that’s the way it was. Honest.”
--The superconduit is supposed to pay market prices for the securities it will buy. But the whole arrangement is designed to allow the SIVs to avoid selling the securities at, as the Wall Street Journal put it, “new, lower market prices” that would result from a panic sale. So the conduit will pay market prices in order to save the SIVs from having to sell at market prices. Uh huh. In the absence of the supposedly market price bid from the conduit, put together for the very purpose of making that bid, the market price of the securities in question would be far lower. Sounds logical…to the Mad Hatter.
--Besides the SIVs who hold this dicey paper, and Citicorp, who benefits here? Of course: hedge funds and other holders of this funny paper, who eschew government interference in the market place until the market place begins to make them feel uncomfortable. And who invests in hedge funds? Could it possibly be Hank Paulson’s Wall Street friends, or George Bush’s Wall Street friends, or the mucky-mucks, pooh-bahs, and suzerains of the banks that will become contributors to the superconduit, along with their pals at the yacht and country clubs in Greenwich? Hmm…Perhaps healthy dollops of government coercion were not all that necessary to get these captains of finance to use their shareholders’ money to effectively bail out some of their investments. Is that too cynical?
--Shareholders ought to start asking questions, but from different perspectives. Citi shareholders ought to be delighted by the bailout, but ought to be asking Mr. Prince and his minions why in the world the bank got so heavily involved in SIVs in the first place. What, besides seeming gross incompetence, was the bank trying to hide? Shareholders of JP Morgan and Bank of America ought to ask why their banks’ credit, and profitability and hence the investments of the holders, should be put on the line to bail out a careless competitor and, perhaps, the investments of the people who run their banks. Can the fees involved be that good? Or is this a case of these banks’ not being able to say no the federal government, perhaps for fear that, because of some idiotic adventure on the part of their managements, they will be next in line, hat in hand, to see Mr. Paulson.
--Taxpayers ought to keep a close eye on these developments. The government is already deeply involved in this. Why? When will government money have to be employed? Why? Should taxpayers be forced to bail people, usually people with a lot more money than they, out of the consequences of their own financial folly?
Sunday, October 14, 2007
“I’M FROM THE GOVERNMENT, AND I’M HERE TO HELP YOU!”
10/14/07
Last week, the Bush Administration, with Treasury Secretary Hank Paulson leading the charge, announced with great fanfare something called the Hope Fund (or something like that), yet another scheme to bail out people who bought too much house and are now asking the rest of us to bail them out. The plan, of course, does not involve any taxpayer funds, but merely asks mortgage servicers and holders, along with the FHA (remember, no taxpayer money…hmm) to find ways to help homeowners avoid foreclosure.
To hear Hank Paulson and his various hangers-on and toadies promoting this program, one conjures up images of suddenly poverty stricken homeowners who, through no fault of their own, are about to be tossed into the street by ravenous financial slicksters. The truth, of course, is far from the picture painted by the politicians. On Thursday, the Wall Street Journal revealed the results of an analysis of more than 130mm home loans nationwide. The analysis focused on “high-rate” loans, which do not precisely coincide with subprime loans; focusing on high rate loans understates the problem. As the Journal article pointed out, “some subprime teaser loans do no show up as having high rates.” So the problem is actually greater than the study indicates.
Some of the findings of the study were as follows:
--Among white borrowers with incomes exceeding $300,000, the number of high rate loans jumped 74% last year.
--The amount of the average high rate loan grew 10% to $158,000 last year. Lest you think this is not all that high a number, second mortgages were included in the analysis.
--Last year, 13% of all high rate loans were made for properties not occupied by the borrowers.
--Among the geographic areas with the highest proportions of high rate loans (taken as a percentage of all mortgages made) in 2004-2006 were the poverty stricken areas of Miami-Miami Beach-Kendall, FL, Bakersfield, CA, Ocala, FL, Cape Coral-Ft. Meyers. FL, and Las Vegas.
--Lee County, FL, home of that bastion of poverty and hard luck Ft. Meyers, has the second highest rate of mortgage defaults in the U.S. so far this year.
The Journal went on to report the heart rending tale of Kristine McMahon, a (You guessed it.) mortgage broker with a “six figure income” who chose a sub-prime mortgage when it came time to refinance her $2.7mm home in the Hamptons because a conventional lender would not allow her to take out as much cash.
These are the types of people the “free market” Bush Administration is scrambling to help avoid default.
One cannot single out the Administration for criticism on this score; this half-hindquartered program was trotted out in response to even more grandiose plans by the Democrats to force the frugal to bail out the profligate. This is in the normal course of our government’s workings: The Democrats come up with some asinine plan to remedy some problem, real or imagined, with your money. The Republicans respond with a slightly less asinine plan to attack the problem, also with your money, making sure that the primary beneficiaries of the program are among the GOP’s favored constituencies. That is how the world works. But at least the Democrats don’t fall all over themselves bragging about their belief in “the free market” and “the private sector.” Their Party, at least in its modern guise, is built on suspicion of the free market. The Republicans are guilty of rank hypocrisy in this instance; while piously proclaiming their confidence in free enterprise and their distrust of big government, their Party exists merely to make sure that government grows in a direction that will enrich them and their favored constituencies. A real cynic (like the Pontificator) might go so far as to say that the Paulson plan emerged not in response to even more bloated Democratic plans but, rather, because the typical rock-ribbed, I pulled myself up by the bootstraps, why can’t those lazy louts with their hands ever extended, it’s all the fault of the poor, I love the free markets as long as the game is played on a field tilted in my direction GOPer is beginning to feel some heat from the free interplay of the markets, and will feel even more heat if the market is allowed to play itself out in the case of the mortgage mess. After all, there is nothing a “conservative” GOPer hates more than the free market when it isn’t making him rich. When that happens, “extraordinary circumstances” demand government action. But I digress.
The point, however, is not that the people who face financial ruin when their floating rate loans reset are wealthy, not so wealthy, or even poor. The point is that they bought more house than they could afford. They knew that a reset was coming that would render their mortgage payment unaffordable but thought they could somehow avoid the day of reckoning, perhaps because they thought that real estate can only go in one direction. Some might try to blame unscrupulous mortgage brokers (many of whom were selling shoes, hardware, gasoline, or fast food before becoming “mortgage consultants), and there is plenty of culpability there. However, as the old saying goes, you only fall for lies and stories when you really want to. People simply convinced themselves that they could have everything they wanted without having to pay for it. Now they are facing the day of reckoning. Why is that a problem of those of us who learned something of self-control, delaying of gratification, thrift, prudence, or simply waiting to get what we wanted until we were able to afford it? Or, better yet, why should those of us who have come to realize that life does not consist of possessions, that happiness and peace come not from getting what one wants but being satisfied with what one has be forced to indulge the deep seated insecurities of those who are desperately trying to fill the holes in their lives with, to put it bluntly, crap that they can’t afford?
Oh, yes, we are all being assured by both the Democrats and the Administration that no one wants the taxpayers to bail out profligate homeowners. Such assurances serve only to confirm that such a coerced transfer from the frugal to the profligate is exactly what’s coming. After all, which is the larger constituency? To which group do you think the average politician belongs? These are people who spend millions for offices that pay, at most, a couple hundred grand a year.
Last week, the Bush Administration, with Treasury Secretary Hank Paulson leading the charge, announced with great fanfare something called the Hope Fund (or something like that), yet another scheme to bail out people who bought too much house and are now asking the rest of us to bail them out. The plan, of course, does not involve any taxpayer funds, but merely asks mortgage servicers and holders, along with the FHA (remember, no taxpayer money…hmm) to find ways to help homeowners avoid foreclosure.
To hear Hank Paulson and his various hangers-on and toadies promoting this program, one conjures up images of suddenly poverty stricken homeowners who, through no fault of their own, are about to be tossed into the street by ravenous financial slicksters. The truth, of course, is far from the picture painted by the politicians. On Thursday, the Wall Street Journal revealed the results of an analysis of more than 130mm home loans nationwide. The analysis focused on “high-rate” loans, which do not precisely coincide with subprime loans; focusing on high rate loans understates the problem. As the Journal article pointed out, “some subprime teaser loans do no show up as having high rates.” So the problem is actually greater than the study indicates.
Some of the findings of the study were as follows:
--Among white borrowers with incomes exceeding $300,000, the number of high rate loans jumped 74% last year.
--The amount of the average high rate loan grew 10% to $158,000 last year. Lest you think this is not all that high a number, second mortgages were included in the analysis.
--Last year, 13% of all high rate loans were made for properties not occupied by the borrowers.
--Among the geographic areas with the highest proportions of high rate loans (taken as a percentage of all mortgages made) in 2004-2006 were the poverty stricken areas of Miami-Miami Beach-Kendall, FL, Bakersfield, CA, Ocala, FL, Cape Coral-Ft. Meyers. FL, and Las Vegas.
--Lee County, FL, home of that bastion of poverty and hard luck Ft. Meyers, has the second highest rate of mortgage defaults in the U.S. so far this year.
The Journal went on to report the heart rending tale of Kristine McMahon, a (You guessed it.) mortgage broker with a “six figure income” who chose a sub-prime mortgage when it came time to refinance her $2.7mm home in the Hamptons because a conventional lender would not allow her to take out as much cash.
These are the types of people the “free market” Bush Administration is scrambling to help avoid default.
One cannot single out the Administration for criticism on this score; this half-hindquartered program was trotted out in response to even more grandiose plans by the Democrats to force the frugal to bail out the profligate. This is in the normal course of our government’s workings: The Democrats come up with some asinine plan to remedy some problem, real or imagined, with your money. The Republicans respond with a slightly less asinine plan to attack the problem, also with your money, making sure that the primary beneficiaries of the program are among the GOP’s favored constituencies. That is how the world works. But at least the Democrats don’t fall all over themselves bragging about their belief in “the free market” and “the private sector.” Their Party, at least in its modern guise, is built on suspicion of the free market. The Republicans are guilty of rank hypocrisy in this instance; while piously proclaiming their confidence in free enterprise and their distrust of big government, their Party exists merely to make sure that government grows in a direction that will enrich them and their favored constituencies. A real cynic (like the Pontificator) might go so far as to say that the Paulson plan emerged not in response to even more bloated Democratic plans but, rather, because the typical rock-ribbed, I pulled myself up by the bootstraps, why can’t those lazy louts with their hands ever extended, it’s all the fault of the poor, I love the free markets as long as the game is played on a field tilted in my direction GOPer is beginning to feel some heat from the free interplay of the markets, and will feel even more heat if the market is allowed to play itself out in the case of the mortgage mess. After all, there is nothing a “conservative” GOPer hates more than the free market when it isn’t making him rich. When that happens, “extraordinary circumstances” demand government action. But I digress.
The point, however, is not that the people who face financial ruin when their floating rate loans reset are wealthy, not so wealthy, or even poor. The point is that they bought more house than they could afford. They knew that a reset was coming that would render their mortgage payment unaffordable but thought they could somehow avoid the day of reckoning, perhaps because they thought that real estate can only go in one direction. Some might try to blame unscrupulous mortgage brokers (many of whom were selling shoes, hardware, gasoline, or fast food before becoming “mortgage consultants), and there is plenty of culpability there. However, as the old saying goes, you only fall for lies and stories when you really want to. People simply convinced themselves that they could have everything they wanted without having to pay for it. Now they are facing the day of reckoning. Why is that a problem of those of us who learned something of self-control, delaying of gratification, thrift, prudence, or simply waiting to get what we wanted until we were able to afford it? Or, better yet, why should those of us who have come to realize that life does not consist of possessions, that happiness and peace come not from getting what one wants but being satisfied with what one has be forced to indulge the deep seated insecurities of those who are desperately trying to fill the holes in their lives with, to put it bluntly, crap that they can’t afford?
Oh, yes, we are all being assured by both the Democrats and the Administration that no one wants the taxpayers to bail out profligate homeowners. Such assurances serve only to confirm that such a coerced transfer from the frugal to the profligate is exactly what’s coming. After all, which is the larger constituency? To which group do you think the average politician belongs? These are people who spend millions for offices that pay, at most, a couple hundred grand a year.
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