Off The Run

We keep hearing about how brilliant Ben S. Bernanke is and what a serious student he is of the Great Depression.  It’s obvious to us that he is, indeed a very astute student of the Great Depression.  He’s so bright and well-read that he’s managed to create a Depression of his very own.  If he’s lucky, his name, and that of his boss, the lamentable Secretary of the Treasury, Henry Paulson, will be linked, as in arm-in-arm, with the Depression that the world is about to experience.  Everlasting fame.  Won’t his teachers be proud?

Ben should take Henry aside and educate him about some of the things that government did wrong between 1921 and 1940.  Maybe they should include that ersatz “Professor of Economics,” Phil Gramm, and his wife, Wendy, the Super Commodities regulator in the class.  Maybe they can find a couple of chairs for Chris “What’s my Job?” Cox and Alan “Two Bubbles” Greenspan, as well.

Herewith a small list of some things BS and Hank should be aware of.  If there seem to be one or two parallels with today, rest assured, gentle reader (aren’t readers always gentle.  Wonder where that started.), it’s just coincidence.

Securities markets were unregulated in the 1920s.  Stocks could be purchased on very high margin.  Short selling was totally unregulated.  The SEC didn’t exist.  Pools may have been illegal, but they were still around.  Money was very easy in the 1920s, then very tight in the 1930s.  As the stock market was crashing in October 1929, the bankers put together a rescue team and sent one of the boys to the floor of the NYSE to buy all sort of stocks:  “Give me 20,000 Radio!  Hooray!!”  “I’ll take 50,000 Steel!  Hazzah!!”  The Federal Reserve didn’t know what to do after the stock market crashed, so they did nothing.  As conditions worsened, President Hoover tried all sorts of measures save the one thing that might have worked — helping the little guy, putting some purchasing power in his hand so he could buy something, like food and shelter.  When Roosevelt convinced the public that Hoover was incompetent and uncaring, he inherited the mess.  FDR may have been a very good person, opinions differ, but he had no plan at all for what to do.  He tried quite a few things, mostly pages stolen from the fascist’s playbook, but nothing worked.  He tried to rig prices high — made it illegal to charge less than a stated price, created a veritable alphabet soup of all sorts of commissions, authorities and administrations to operate and manage all sorts of things, but nothing worked. 

In 1936-7, just as the nation might have been moving up a little bit, the Federal Reserve, in its infinite wisdom, decided that the banking system had too many reserves and set about “sopping them up.”  What the Fed didn’t realize, or perhaps did but didn’t care, was that the level of reserves that the bankers had was what they wanted to have. These guys had been through seven decidedly lean years and they wanted a cushion.  What happened?  Back in the soup, a nasty, sharp little contraction that almost, should have, put paid to FDR after one term.

We sure are glad now is nothing like then.  For those of you who have been in a cave for a few years, we’ve indicated a few things that might give one pause, if one were the pausing type.  We aren’t.  We believe our government is all-knowing and all-seeing (especially after the Patriot Act) and always acts in the best interests of all Americans.  We believe the CEOs of Ford and GM are worth millions of dollars a year.  We think CitiCorp got great value from paying Bob Rubin $160,000,000 over eight years. 

The growth of the money supply is carefully matched with the growth of the economy.  (Tight money, Loose money, Greenspan mumbo-jumbo)

Securities markets and derivatives instruments are carefully regulated and the regulators are carefully trained.  (Commodities non-regulation by law, Chris Cox)

Margin rates are carefully controlled by the government.  (Hedge funds operating unregulated with massive leverage, or gearing, as the Brits would say.)

Banks and brokerage houses are carefully regulated and all risks are identified and managed prudently.  (OHMIGOD!  Did he really say that?)  (Phil Gramm and Co., 1999, derivatives, repeal of Glass-Steagall)

Bankers make loans only to well-qualified borrowers.  (Liars Loans — No-Doc and Lo-Doc)

Short selling is tightly regulated, with prompt delivery of borrowed shares ensured.  (Naked short selling)

The government bailout plan is committed to helping the average American get his house in order, starting with helping him keep his home and meet his mortgage obligations.  (Henry Paulson testimony and many press conferences)

Prices of financial assets are widely available.  (Derivatives markets)

The government wouldn’t think of intervening in the securities markets.  (Plunge Protection Team)

The pension system is robust and well-cared for.  (Look around you.  Check out the pension promises vis-a-vis the assets to meet those promises.  Especially federal and state and local government pensions.  Ho Boy!  There’s a rats nest!)

We shouldn’t be so hard on Ben and Hank, they are just doing what we suspect they were sent to do: bail out the banks and brokerage houses, protect the interests of the rentier class, keep the country safe for debt and keep the people in debt.  With Citibank stock trading around $5 and Ford and GM trading around $2, Hank has his work cut out for him.  Our advice to him is to let the car companies go, take over then break up Citi and a few other banks and let the market-that-all-the-Republicans-profess-to-love-so-much do its job of destroying some of the rest.  He may not have much choice, as the bill will be in the multiple trillions, and the Chinese aren’t in a position to fund it for us.  Fortunately for us, the price of oil is under $50 a barrel.  Oooops!  Poor OPEC is going to suffer.  Too bad, so sad.

In the final analysis, the government has been too protective of old companies and institutions.  Schumpeter was right:  Creative destruction is a necessary part of the capitalist system.  Businesses and institutions are born, exist and die.  It is not the government’s place to favor one over another.  We just hope that one of those groups that gets destroyed this time around is the one that above all others bears the responsibility for most of our problems in the 20th century:  the Federal Reserve.  (You didn’t think we’d miss a chance to ask for this, did you?)  If Ben wants to be known as the savior of the nation, a great central banker, all he has to do is put the money supply on autopilot, turn out the lights at the Fed HQ and disappear, pull a Judge Crater or John Galt, if you will.  (It’s not that simple, but it’s a good start.)  Certainly the evidence is overwhelming that the nation and the world would have been better off without the Fed.

Is there any hope?  Maybe.   Next: Two candidates for Treasury jobs.

Would you buy a car (or a car company) from this guy?

Rick Waggoner, the man responsible for much of GM’s failure, yesterday told Congress (and by inference, the American people) that they just didn’t understand.  They weren’t giving GM credit for making just tremendous, huge, momentous, megalactic (just made that up — neat eh?) changes in their menu of cars and that the best is yet to come.  He also dropped the not-so-subtle thought that GM operates in a lot of areas, not just Detroit, and that if GM were to go out of business then a lot of areas would suffer.

We still favor a stern Chapter 11 filing.  Get rid of the current management.  Get rid of the current union contracts.  Slim down the head offices.  Cut executive compensation.  Cut costs.  Maybe break up the company into some component parts.  Cadillac, Buick and Chevy could each be stand-alone companies.  GMAC could become a bank or an insurance company.

Bankruptcy is not the end of the world for a company.  It affords the opportunity to take a step back, take a deep breath and start over with a slate that is at least semi-clear.

Throwing government money — our taxes — at the auto companies and their problems is a waste of money.  Unless we force massive, Draconian (there it is again) change on the companies, they will continue business as usual.  We find it interesting that public opinion is for letting GM and the others go while we moved heaven and earth to save banks and insurance companies that were probably more poorly managed than GM could ever imagine.  Think about it.  GM at least made something;  Cadillacs and Buicks and Chevys came out of those doors.  The wise guys just shuffled paper.  GM is in a bind because its business isn’t doing well, partly as a result of bad business decisions and partly as a result of economic conditions.  The Wall Street guys are doing poorly because of borderline fraud.  (Borderline?  Who are we Kiddering?)  On the other hand (there, we’ve shown our economic training), we wonder what would have happened if the Secretary of the Treasury had been an ex GM person.  Kinda makes you wonder, eh?

The real reason people are considering bailing out the auto companies is that the auto companies have very cleverly gotten into the derivatives business in a big way, or so we gather from reading various sources.  In other words, the idiocy of Wall Street has also worked to bring down the auto companies.  “Say it isn’t so, Joe.”  But we would bet that it is so and that any bankruptcy filing would have to be carefully crafted to take cognizance of all derivative exposure.  Ain’t unregulated markets just barrel-of-monkeys delightful?

On a lighter front, an Australian reader told us about John Clark, a very popular entertainer Down Under.

Seems Mr. Clark dressed himself in the mantle of the Australian Federal Treasurer and held a “Press Conference.”  He announced that the “Trickle Down” economic policies of the past few years haven’t been working.  The money that has been poured into the system has trickled in, trickled around and then trickled out, it never trickled down.  So, announced the “Federal Treasurer,” from now on the official policy will be Trickle Up.  They will throw money in at the bottom and see if it trickles up.

Can we hire an Australian as our Secretary of the Treasury?  The only problem might be the Presidential succession, but even that’s a bit unclear, since the prohibition may only apply to elections.  Mr. Clark seems to have a much better handle on the solution than anyone in power in Washington.

On an even lighter note, lighter than air, where has Ben Bernanke been hiding recently?  Maybe he’s re-reading his Economics 101 texts, the parts about the 1921-1950 period.  We certainly hope so, ’cause his performance so far shows an almost total lack of understanding of both the problem and the solution.  Of course, when you’ve been a large part of the problem, it’s hard to figure a solution that isn’t just same old, same old, as the young would say.

Maybe Mr. Clark would like to be Chairman of the Federal Reserve for the year or two before we (let’s hope and pray) abolish it.

Stay tuned — we have a couple of thought on people to fill the Treasury position.

We read in the paper the other day that personal bankruptcies are up a whole lot over the comparable period last year.  Judging from a chart we saw, bankruptcies are running about where they were in 2004 before the Bush administration cashed the payoff check from the banks and signed legislation to make it very difficult for people such as you and me to file bankruptcy.  And, they appear to be rising.

So people are filing for Chapter whatever and getting out from under credit cards and other debts, most of which, we are sure, carry sky-high interest rates and are subject to Draconian (Draco was a person, hence the capital.  Aren’t you glad you asked.) penalties for late payment.

 Then, in the next column, or so it seemed, we read about how Hank Paulson and his buddies are angry with the banks because the banks aren’t getting people to borrow money from them.  He’s threatening some sort of action if they can’t get more loans on the books.

 HUH??!!??

The homeowner is having trouble making his monthly payment, the economy is in the tank, Citibank, home of Bob Rubin, the $160,000,000 man, is getting set to lay off 52,000 people, GM is flirting with Chapter 11 and should be pushed to file, producer prices were down almost 3% in the latest reporting period, China is in dire straits, Iceland is about to float off into the Atlantic and Hank wants people to borrow. 

Is the man delusional?  Or just out of touch?  Doesn’t he read the newspaper?  Doesn’t he realize that it is debt that got us into this mess?  Doesn’t he realize that as bad as the Liars loans were three years ago, they would be even worse now, since consumer balance sheets have deteriorated massively since 2005?  Hasn’t he noticed the figures on new filings for unemployment?  Doesn’t he know that one of the driving forces behind the economy these past five or ten years has been homeowners taking equity out of their homes to support their lifestyle?  Hasn’t he looked at the wages component of the National Income Accounts lately?  Maybe guys at Goldman, Sachs don’t have problems, but there are plenty of Joe Sixpacks and Polly Esters who do, and they are hurting big time.   Maybe the answer is to ask Hank to fund the first $500,000,000 for these loans.  Ya think? 

Instead of chastising the banks, he should be trying to figure ways to

1.  Help homeowners keep their homes.

2.  Help consumers dig their way out from under the mountain of debt.

3.  Rein in the predatory lenders, such as the credit card companies and — dare we speak its name, or as Kurtz said, “The Horror.” – banks.  There, we said it.  We feel a lot better.

Sure he will.  There is no hope he or any other person presently in power will attempt any of these three tasks.  To do so would be to work against everything the Federal Reserve System has tried to do for the past 95 years, which is to build up public and private debt for the benefit of the banking system and at the expense of the private citizen and small business. 

We must begin to dismantle the privately-owned Federal Reserve System.  For starters, we must enforce Executive Order 11110, signed by John F. Kennedy in 1963 and never repealed.   http://www.fdrs.org/executive_order_11110.html 

Although we are registered Republicans, we are thankful that John McCain lost to Barack Obama.  McCain had Phil Gramm as an advisor, and Phil Gramm is the legislator most responsible for this mess, as he was the principle architect (cheered on by Bob Rubin and Alan “Two Bubbles” Greenspan) of the repeal of Glass-Steagall and the limitation of oversight of derivatives by the CFTC.  Obama has what appears to be an eclectic group of economic advisors; we wish them well and hope they do as well as their potential indicates they may.  We hope and pray that Obama will not create a Clinton II at Treasury; the world doesn’t need Rubin or Summers anywhere near positions of power.   We’ll go out on a limb and predict that Hank Paulson will not figure in the Obama Administration, except as an exemplar of failure.  Poor Ol’ Hank will have to content himself with his $500,000,000 tax-free payout and the honorific “Mr. Secretary” for the rest of his life.  He will also have to contend with having run one of the most Incompenent Treasury Departments in history. 

Keep in touch.  Things are just starting to get interesting.

 We just filled up at the pump and paid $1.99 a gallon, down from well over $4 a gallon a few months ago.  Wonder what happened.

 Remember the conspiracy theorists, the nuts, the ones who said that the “evil speculators” were driving up prices?  Well, the people in the know, the guys running government and the markets, put that theory to rest when they assured us that speculation had nothing to do with high oil and gas prices.  Boy, we were relieved to get the true story straight from the horse’s mouth.

 Turns out, we may well have been listening to the other end of the Appaloosa.  See what you make of this time line.

 Oil rockets from $60 a barrel to $140 a barrel, financial firms make a lot of money.

 Sub-prime mortgages cause a lot of problems.

 Banks, hedge funds and other financial firms get savaged.

 Oil falls from $140 a barrel to $70 a barrel.

 During this time period, oil production expanded a bit and the world’s economies were about level.

 Sure looks to us as though there was something going on that stopped going on.  Think it might have been, just maybe, just possibly, that there were a lot of people at banks, brokerages and hedge funds betting on oil going higher and then they couldn’t bet anymore?  That speculators had built what looked a lot like a corner and then failed to hold it.  We’ll never know, however, because the government, in its infinite wisdom, eviscerated the commodity regulators back in the 1990s.

Maybe we’re all wrong and it was sun spots or alien-produced force fields, but from here, it sure looks as if there were some speculators of some sort involved in the price of oil and gas.  Maybe it’s time to report positions and tilt the playing field toward those with a commercial interest in the commodity involved.

 Listening to and reading about Henry Paulson and Neel Kashkari, we’re reminded of a Bruce McCall cartoon sequence in a long-ago issue of “National Lampoon”.

 Bruce lovingly described the wonders of a gigantic ocean liner from the 1920s or 1930s.  He detailed the marvelous food and appointments for those who could afford them, things like lawn tennis, ten-course meals and huge empty spaces on deck, so one could have one’s privacy, don’t you know.

 He then showed the steerage section, with its five or ten high racks of bunks, the soup kitchen and the entertainment:  “There is a deck of cards available in steerage.”

 We’re mentioning this because Henry Paulson, aka Just Plain Hank, has made it blindingly clear that he will do nothing for those of us in steerage, the ones who are suffering through the mortgage crisis without the benefit of a $500,000,000 tax-free cash-out from Goldman Sachs.  His chosen helper, Neel Kashkari, aka Cash ‘n’ Carry, obviously agrees with the decision.  Or we think he does; he won’t talk to the press, so we don’t really know.

 What Hank doesn’t realize is that the quickest and easiest way to start to solve the mess he and his predecessors created is to make the homeowner whole, to help him make his mortgage payments.  At one stroke, this would make a lot of the paper related to the financial mess a lot more credit worthy (Think Moody’s, S&P and Fitch could rate it properly?) and give the consumers a bit of hope that they could survive to spend another day.  After all, aren’t we hearing about how the consumer has closed his pocketbook and gone home?  The consumer is about 65% of the economy; to help the consumer seems like common sense.

 Alas, Hank can’t do this, perhaps because there isn’t anything in it for his buddies on Wall Street.  You know the guys, the ones who are like the Colorado River.  Water enters the headwaters of the Colorado.  By the time the Colorado River water enters The Sea of Cortez, what pitiful trickle there is is hopelessly polluted.  Same with Wall Street lately.  They take money or mortgages, take the lion’s share of the good stuff, work their magic on the rest and leave us peons with toxic waste.  Good work, guys!  (Thanks to an anonymous friend for the analogy.)  (He asked to remain anonymous.)  (I don’t blame him.  Who’d want to be associated with this blog?)

  So what’s Hank planning to do for his umpteenth “New!  Improved!  Startling!  Wonderful!” plan?  Here’s going to set up a loan facility to help the consumer borrowing market get back on its feet.  Wow!  That’s really great!  Just what Joe Sixpack and Polly Ester need!  More debt!  Gotta hand it to the boys in Washington, they’re on the ball.   The government will put up about $50,000,000,000 and private investors will put up maybe $1,000,000,000,000.  (20-to-1 leverage.  Doncha love it?)  Investors or companies could put up consumer loans as collateral and the government would lend against this collateral.  So the companies get bailed out and the homeowner gets the shaft.  Thanks but no thanks.  Where’s the beef?  Where’s the help for the people at the pointy end of the stick, the people about to lose their houses and their lives?  This plan sounds to us a whole lot like Enron and its nefarious Special Purpose vehicles, you know, the ones that weren’t exactly environmentally friendly.  As usual, Hank and his boys are out of touch with what the country needs.  It’s time for him to quit.  He’s earned installation in the Hall of Opprobium, let him enjoy the fruits of his labors in some other venue, but get him out of the Treasury Department.

 The peasants should grab their pitchforks and torches and proceed posthaste to the castle.   Should we get in, we think we’d be appalled at what we’d find.

 We welcome Neel Kashkari to the wonderful world of the US government.  He came to the Treasury department from — where else — Goldman Sachs.  He’s the guy in charge of doling out all the money to the various businesses that have failed or are about to fail.

 But all is not sweetness and light along the banks of the Potomac,  We see where Mr. Cash ‘n’ Carry is a little reluctant to meet the press and answer questions.  We also see where Bloombereg News has sued the government under the Freedom of Information Act for the names of the aid recipients and the amounts allotted to each one.  Good luck on that one.  That info will surface about the time one of the Obama kids runs for President, right after Mrs. O’s second term.  (Gotta get a Kennedy or two in there someplace.)  Sounds to us as if the natives are getting a tad restless.  Good thing George W. had the foresight to station a brigade of troops in the Continental United States to enforce the Patriot Act’s provisions for quelling civil unrest.  We sleep better at night for this.  Posse comitus be damned!

 Also read a lovely article by our favorite reporter, Gretchen Morgenson, in the Sunday NYTimes Business section entitled “How the Thundering Herd Faltered and Fell.”  Ms. Morgenson usually writes on interesting topics and always does a good job, but she outdid herself this time, since she paired it with an article entitled “Open the Door and Turn On the Lights,” discussing the need for transparency and sound thinking in times of government intervention in the economy.  Good luck on that one, too.  Can’t tell people what’s going on, there’s too much money to be made by keeping things secret.  If you don’t believe that, I’ve got a bridge you might be interested in.

 The pictures of the three bozos who ran Merrill into the ground look like something out of Facebook’s worst nightmare; would you claim these guys as friends?  We didn’t think so.   Maybe the 3 No Evils: See No, Speak No and Dr. No.  Oh wait!  That can’t be right — Merrill is out of business!  Something must have happened!  Maybe aliens intervened.  Maybe it’s the 3 Graces or the 3 Idiots or the 3 Arrogants.  The article made it sound like these were three nasty, arrogant, clueless hacks.  In other words, the article was right on the money.

 The reason we’re so upset is we spent 4 years plus in the halls of 1 Liberty Plaza and came to know and respect Merrill.  When a no-talent like E. Stanley O’Neal can single-handedly bring down an institution like Merrill, he should have to pay, and pay big time.   Instead, he walks with well over $161 million, that we know about.  Merrill should have paid him off with a pile of the CDOs he and his minions loaded them with, sort of Payment in Kind.

The bill for the AIG bailout is now $160,000,000,000 and counting.  ($533 for each man, woman and child in the USA; have you sent in your fair share yet?)   Wonder where this one will end.  Fear not, Cash ‘N’ Carry is on the job.  Looks to us like we have arrived at a point where the whole economy will have to be bailed out.  So we run the printing presses to bail out all these clueless dolts, prop up a bunch of companies that should have been allowed (forced!) to fail and call it capitalism.  Oh Boy!  Can’t wait for Obama to take over and do his little presto-chango with capitalism!  Dear reader, we are well and truly a fascist nation right now, and Obama won’t change that one bit, he will only make it worse.  If you don’t believe we are fascist, read Jonah Goldberg’s “Liberal Fascism” and then get back to us.

What we can’t figure out, though, is, if all our financial companies are belly-up, and GM, Ford and Chrisler are belly-up, and we don’t make anything anymore, who are we going to tax to raise the money to bailout all these bozos?  Where’s the value-added?  Mr. and Mrs. Middle America aren’t exactly prime targets and there are only so many hedge fund guys we can rob.  Are we just going to issue bonds and monetize the debt and to hell with the consequences?  We sure don’t envy Obama on this one. 

That’s enough for now.  See you next time in this, the best of all possible worlds.

Sometimes when we read the paper and watch the news, we feel like we’re watching Kabuki theater.  We all know that what’s in front of us is just a bit of theater that will lead to a pre-determined conclusion.  But life and reality have a way of intruding sometimes, which makes things interesing.

We noted with interest that Michael Blomberg, the creator of the Blomberg media empire, has decided  not only that he is the indispensible mayor of New York City, but that he really likes the job.  Likes it enough to overturn the will of the people and run for a third term as mayor.  We love term limits, since they go back to the idea of gevernment service in the US:  Serve for a while, then go back home.  If you’ve been anywhere except under a rock for the past fifty years, you’ll know that the idea of limited term of government service has been slaughtered, since the reelection rate for Congress is something around 100%.  We hope Mayor Mike changes his mind.  He’s been a good mayor and was a great businessman before that, but thee is a time to move on, and this is it for him.   Of course, it could be the opening round of his run for the presidency in 2012, since it will keep his name and face before the public for four more years.  Who knows?  President Mike?  We can think of a lot worse — Like the two running now.

Elesewhere in the news, we see that the SEC is finally showing some intelligence — Chris Cox must not have been involved with this decision — and is attempting to put a lid on the mark-to-market rule for asset valuation.  Specificly Rule S.F.A.S. 157 is to be “interpreted,” not dropped.  The rule should be interred.  We hope the SEC goes all the way and either abolishes the rule or has it rewritten so it make allowances for the types of assets that are involved.

It appears that Congress is working as our founders wished.  The House is the People’s legislature and the Senate is the Insider’s legislature.  (rememeber that the Senate was originally chosen by political leaders, not the people)  We say that things are working because the House continues to refuse the Wall Street and Banker’s Bailout that Ben and Hank have attempted to foist off on the nation, in spite of extreme senate interest.  Watching the Ben and Hank Show, it’s no wonder the House and the People didn’t buy it.  Would you buy a used car from these guys?

We continue to read that the world will end the instant we don’t bail out all these banks, brokerage houses, hedge funds, etc., that brought us this mess.  Funny, we’ve refused it for a while now, and the sun still comes up in the east in the morning and sets in the west in the evening.   Speaking of the east, all the European leaders who have been so openly contemptuous of the US for the past ten or twenty years are now demanding, pleading, begging, that we come to their aid.  Sounds to us like it’s time to take a vacation from crisis-mongering and assess what’s really going on and what’s at risk, which may be another way of saying that there are some unintended consequences waiting in the wings.  Going slow at this point would also let some people stew in their own juice, which isn’t all bad.  We must do what is in our best interests and our best interests require that we take our time with this bailout, if there is to be one.

We have a hunch, and it’s must that, nothing more, that this bailout and the examination of the markets we are conducting could mark a turning point in the economic and financial organization of the country.  There appears to be a realization that most markets need some forms of regulation, which means that the free-market (actually not free-market, but we’ll save that for another time.) movement may have crested.  Look for a reimposition of some sort of Glass-Steagall  Act and regulation of derivatives.  Also in the crosshairs of change is the notion of fiat money and its control by the Federal Reserve, although this is a more fundamental change and will take longer to accomplish.  The Fed, as it’s lovingly called by its many admirers, is the number one candidate for the guilty organzation in all this mess.  And Alan “Two Bubbles” Greenspan is the one person most at fault for the mess.   He has demonstrated to one and all why the Fed shouldn’t exist and why its continued existance is inimical to the  the people and the nation.   Another body of crime … er, business … that’s ripe for change is the credit card industry and its fees, rates and influence peddling.  Taking this a bit further, can we hope for a loosening of the close ties between business and government?  We hope so.  Finally, we dare not hope that the lobbying industry will take a fatal hit from all this, but it could happen.  Elephants could learn to fly, too. 

That’s it for now.  Thanks for reading and keep the faith.  We’ll stay Off The Run; you should, too.

The House of Representatives Monday did not pass the Administration’s bailout bill, despite fears of the collapse of the United States.  The House did good work.  Let’s hope they can keep it up and not allow guys like Henry “Just Plain Hank” Paulson and Ben “I Love My Helicopter” Bernanke to stampede them into something that is not only unnecessary but detrimental to the health of the nation and the people.

The proposed bailout bill is the reverse of what’s needed to contain and solve the Fed-created crisis.  Here’s why.

There are two aspects of the problem:  The homeowner part and the derivative part.

The homeowner part is obvious.  People have been borrowing against their houses for a long time, just to keep their spending at a level they desire.  The Fed accommodated them and kept credit cheap and money plentiful.  This led to an inflation in home prices and an inevitable lowering of lending standards — why bother with lending standards when houses are going up 20% a year or more?  Some of these mortgages were No-Doc (no proof of income or assets –think “Can you fog a mirror?”) or Lo-Doc (You can sign your name?  Here’s the money.)  Quite a few mortgages were Adjustable Rate Mortgages, ARMs.  Most ARMs are granted with a low interest rate for the first year or two — the teaser rate.  After the teaser period, the rate on the mortgage goes to the market rate or above, the teaser becomes a taser, as in ZAP!  Gotcha!.  Alan “Two Bubbles” Greenspan, the former and soon to be disgraced head of the Fed, had declared early and often that ARMs were just the perfect thing for most people, that they represented a welcome innovation in the mortgage market.  Well, the teaser ARM rates from 2004 transmogrified into market or above rates in 2006, the economy had a hiccup and the rest is history.  Except it isn’t, it’s what we’re suffering through now.

The derivative part is a little more complicated.  The mortgage banks sold these mortgages to investment banks, where the genius quants sliced and diced and otherwise mangled the original mortgage into some sort of sausage they could package and sell to sophisticated investors.  Like banks, Norwegian local governments, pension funds, German banks and investment funds.  Since some of the buyers were a little worried that these wondrous financial instruments might be a bit out of tune, the quants dug into their bag of tricks and came up with the sure-fire-got-it-this-time insurance:  credit default swaps.  Credit default swaps allow the owner of the sliced-and-diced mortgage paper to take the paper to an insurance company and get the insurance company to guarantee the timely payment of principal and interest.  This isn’t an exact description, but it’s close enough for us.

The final piece of the puzzle concerns a group that doesn’t have a dog in this fight:  the rating agencies.  In order to have make the whole thing fly, the rating agencies rated the mortgages AAA or Aaa and rated the insurance companies as AAA or Aaa. 

Got the picture?  Borrowers of unknown ability to pay, mortgages sliced and diced, the mortgages sold to unsophisticated buyers, the insurance companies on the hook for the payments and the rating agencies with their keyboards stuck on AAA or Aaa.

That’s it, except we left out the best part:  Anyone can buy or sell a credit default swap.  That’s right.  It’s like me taking out an insurance policy on your aunt Jane. It’s another way to speculate, the buyer don’t have to have a direct commercial interest in the outcome.  Enter a bunch of really sophisticated buyers, like hedge funds.  They expanded the market until it was a big larger that it used to be.  Like now it totals $62,000,000,000,000.  All bet on the health of the US homeowner, the AAA or Aaa rating of a rating agency and the ability of an insurance company to make good if the homeowner can’t make the payment.   For the curious, $62 trillion is about $200,000 for each man, woman and child in the country.  I wonder how many times the total of mortgages that is?

Here’s where it gets delightful.   Each credit default swap (CDS from now on) has two sides, a buyer and a seller.  Each of these is known as a counterparty.   The buyer pays an insurance premium to the seller.  If the CDS is activated, for want of a better word, then the seller has to pay the buyer the agreed-upon amount.  If A goes to B to get his payment and B says, “Sorry, I don’t have it”, then A gets a quick lesson in Counterparty Risk, the risk that the other side of a derivative transaction will not be able to live up to the terms of the contract.  Counterparty risk is the 800-pound canary sitting in Ben Bernanke’s office – it has to sit there, it can’t fit into the helicopter.  Counterparty risk is the reason AIG got bailed out and Lehman didn’t.  The Bank for International Settlements has estimated that there are some $1,140,000,000,000,000 (That’s 1.14 quadrillion dollars) notional value of derivatives outstanding around the world.  If one large counterparty, such as AIG, fails, who knows what happens.  The problem has never been the American homeowner, it’s always been the derivatives around the world, a large portion of which are associated with the mortgage sausage paper.

So where are we now?  Well, the rating agencies have suddenly gotten religion and are now allowing as how they might have been a trifle optimistic in their assessment of the credit worthiness of the mortgage sausage paper.  When the ratings went down, the terms of many CDSs required a bit more earnest money, increased reserves, just to be sure, don’t you now.  Trouble is, the insurance companies didn’t have the money, and they suffered.  The brokerage houses, the guys that did the slicing and dicing, had a bit of this suddenly-less-than-AAA paper on their shelves and they suddenly found that they had to pay more to finance it and that they had to mark the stuff to market and take losses as a result.  For a while, they pretended that there was nothing wrong.  Then Bear Stearns hit the pavement and the game was up.  Stan O’Neil was revealed to have destroyed Merrill Lynch, Dick Fuld likewise at Lehman, etc.  Don’t cry for them; Stan walked with $162,000,000.  Nice work, eh.  Destroy a company and walk with a lot of money. 

The solution that Hammerin’ Hank is proposing will bail out the buyers of the sliced and diced paper and the credit default swaps.  In effect, he is proposing to pay a lot of money to banks, insurance companies and, would you believe it, brokerage houses, to prop them up because CDSs have become the tail wagging the dog.  But just as Paul O’Neill was misguided in the aftermath of 9/11 when he proposed giving his Business Roundtable buddies a bunch of money in hopes a few pennies would trickle down to us peons, Hank’s proposal is merely a giveaway to the brokerage business that brought us this mess. 

Here’s what they should do. 

Figure out a way to help the homeowner meet his payments.  Maybe it means reducing the interest rate on his ARM back to the teaser rate.  Maybe it means direct payments to people who can’t make their payments.  Maybe it means — well, it could mean one of several things.

The important part is that the payments be made to the homeowner or his mortgage loan comany and an explicit government guarantee be placed over these mortgages.  (There is a problem identifying the mortgage holder, but that’s a story for another time.)

Start netting out the outstanding CDSs, forcing the process if necessary.

We must bring derivatives under the regulatory aparatus of the SEC and the CFTC — repeal the legislation that prohibits this.

We must assign culpability and determine if there has been criminal activity.  If there have been some laws broken, those responsible should pay the price — fines, really big ones, and jail time, and not in a country club prison.

At one stroke, we make the CDSs good, at least those that were entered into with a legitimate commercial interest.  Since there is no danger of default, we can get rid of a lot of the CDSs.  Since the homeowner now has a bit of breathing room, he can work his way out of his mess.  The mortgage paper is now solid.  But we must prevent a new recurrance of this disease, so there must be regulation on the slicing and dicing industry.  By posting fines and jail time, we send notice to anyone tempted to pull one of these schemes in the future that they should think twice before proceeding.

Since the solution doesn’t require the assistance of the buffoons who created this mess, they will not be able easily to loot and rape and pillage their way into the process and ride off with the lion’s share of the money.  How about that?  A government program that will directly help the people and not the Masters of the Universe or the lawyers.  Who’d a thunk?

It seems to us that people are not paying attention to the problems in the financial arena.  We have been told countless times that the problems are with the homebuyers who can’t pay their mortgages, for whatever reason.  Quite a few of these mortgages were made with either very little documentation of income or no documentation of income.  Quite a few of these mortgages were adjustable rate mortgages, the kind Alan “Two-Bubbles” Greenspan said were the cat’s meow.

Well, if the problem is that the homebuyers can’t make their payments and if this non-payment is threatening to bring down the system, why don’t we just establish legislation to help people pay their mortgages for a while?

Here’s how it would work.

Pick some start date.  January 1, 2004 might do.

Anyone who took out a mortgage on or after that date is eligible for mortgage payment assistance.

The assistance could be in the form of lowered interest rates, actual forgiveness of a portion of the debt or a cash credit against monthly payments, or a combination of these, or some other assistance.  The plan could be limited by income or limited to primary residences.

This plan has several good points.

1.  It provides help directly to the people who need it the most, homeowners who are in danger of losing their primary residence.

2.  It gets at what we are told is the heart of the matter, the inability of the homeowner to make his payments.

3.  It prevents the government and the people who got us into this mess from profiting from the solution.

4.  It would immediately raise the value of all these underperforming mortgage assets at the banks.

5.  It helps keep houses out of foreclosure and off the market.

 We’ll have further comment shortly.  In the meantime, give this some thought.

It certainly was comforting, refreshing and uplifting to read in today’s paper that Christopher Cox, the head of the SEC, is joining Andrew Cuomo, the New York State Attorney General, and pledging his assistance in rooting out the nefarious short sellers, the guys who have destroyed so many fine, upstanding firms these past few months. 

Now that he’s awakened from his 38-month snooze, maybe he’ll look at the piles and piles of information that have accumulated on naked short selling.  Naked short-selling, for those who have been on the same snooze-fest as Chairman Cox, is the practice of selling a stock that one doesn’t own and not borrowing shares to deliver to the buyer.  This is an illegal practice.  It should generate a fail-to-deliver notice.  It has been illegal since the reforms of the 1930s.  The data regarding naked short selling is readily available and accessible, it’s not written in Mayan glyphs.    But for some reason, Chairman Cox and the SEC have not seen fit to enforce the laws that are on the books.   We wonder why.  Read on — it gets interesting.

Chairman Cox may hop on his trusty war horse and lead the charge to put things right.  We wouldn’t bet on it, however.  Here’s why.  Chairman Cox and his SEC woke from their snooze just over a year ago, and eliminated the short-sale-uptick rule.  This was a rule that required a short sale to be done on an uptick.  In other words, the last sale of a stock had to be at a higher price than the previous sale, the price had to tick up, or you couldn’t short the stock.  The result of this rule is that it was illegal to sell short into a falling stock price unless you waited for an uptick.  By eliminating the short sale uptick rule, Chairman Cox and his merry band of de-regulators made it possible to return to the gay old days of unfettered bear raids, the likes of which we haven’t seen since the 1920s.  We get nostalgic at times, too, but not for these shenanigans.  Where, oh where, are those heroes of yesteryear, the Pool Operators and their buddies when we need them?  Maybe they’ve morphed into hedgies.  Ya think?

Yes, Chairman Cox and the SEC may move against naked short selling.  They may reimpose the short-sale-uptick rule.  Elephants may learn to do the tango.  Chairman Cox has made all sorts of comments about both his position and his actions.  He claims to be too important to fire in the middle of a crisis.  He has said that he will make short sellers disclose their positions.  And so on.  But nowhere did he say that he would move to force compliance with the short sale rules or reimpose the uptick rule.  In effect, he’s got his ruler and is making absotively, posilutely sure that the deck chairs on this ship are properly aligned.  It’s like saying to a bank robber, “Make sure you stack the money safely in your getaway car.” 

One has to ask a couple of questions:  First, are the same people doing the naked short selling and on the Repubocratic Party Mega Donor List?  In other words, are the people who have been benefiting from the naked short selling buying the SEC to look the other way and to change the rules?  Second, how do the brokerage house people like the result of the short selling rule changes?  Maybe we should “Talk to Chuck.”

Chairman Cox is one Bozo we can get rid of right now.  He’s gotta go.