Good grief, Washington is keeping me busy. They're coming out with stupid ideas faster than I can shoot them down. It's always shocking when Washington does anything fast.
Lawmakers from Barack Obama to John McCain to Nancy Pelosi to - ah, heck, I'm tired of naming them all, let's just say th usual suspects - are clamoring for a hike in federal insurance on bank deposits from the current $100,000 per account, to $250,000.
Obama put it this way: "The current insurance limit of $100,000 was set 28 years ago and has not been adjusted for inflation."
Okay, let's do a little historical analysis of both deposit insurance and inflation, and see how well the former has kept up with the latter.
The FDIC was established with the Glass-Steagall Act of 1933. The initial insurance limit was $2,500.
In 1935, it was upped to $5,000, a 100% increase. Inflation during that period? In aggregate, up 7.9%. (I'm using June-to-June data for inflation, since Glass-Steagall passed in June of 1933. That's close enough for government work.)
In 1950, it was doubled again, to $10,000. Inflation? Up 73.7%. Closer, at least.
In 1966 it was increased 50% to $15,000. Inflation rose 36.1%. In 1969, the insurance limit went up 33%, to $20,000. Inflation rose 13.0% during those three years.
In the inflation-plagued '70s, we saw the insurance limit doubled again, in 1974, to $40,000 per account. Inflation? Up 33.9%. But by 1980, inflation had risen 68.8%. So we raised the deposit insurance limit 150%, to the present $100,000 per account.
So, overall, how has deposit insurance fared relative to inflation, even considering Sen. Obama's point that the former hasn't been adjusted for the latter in 28 years?
Since the inception of deposit insurance in June 1933 through the latest reading of August 2008, inflation is up a whopping 1,625%.
Over the same period, the deposit insurance limit - even at the 28-year-old $100,000 level - has increased 4,000%.
If we raise it to $250,000, it will be up 10,000%.
The FDIC is already nearly bankrupt. Where does it get its funding? Fees levied on insured banks, backstopped by the federal government - that is, you and me. You think banks can afford a 150% increase in their fees to match the proposed increase in the insurance limit, given the current state of affairs? So guess who gets left holding the bag?
Write your Congressperson and Senators. Tell them to stop this madness, and let inflation catch up to the insurance limit, which will take several lifetimes. Better still, encourage them to just go ahead and recess, for crying out loud. They can't do much damage if they're sitting at home doing whatever they do when they're not screwing up the country.
Tuesday, September 30, 2008
Monday, September 29, 2008
The Next Big Threat
Now that the TARP is dead, there's another threat looming on the horizon. One that lawmakers on both sides of the aisle are attempting to perpetuate on the American people. And the American people are ignorant of the facts. So here they are, free for the taking. Read this - it's in plain English - then write your Members of Congress, and tell them in no uncertain terms how you feel.
What they're proposing is to eliminate the "mark-to-market" accounting rule, at least temporarily. First I'll explain the rule and how and why it came about. Then I'll explain what they want to do, and I'll de-bunk the myths they're floating out there to sell this bad idea. Finally, I'll explain the consequences if they get it done.
What is Mark-to-Market Accounting?
Mark-to-market accounting was ushered in with Statement of Financial Accounting Standards (SFAS) No. 115, back in 1993 (I wrote an industry white paper on it at the time.) SFAS 115 required financial institutions - banks, S&Ls, credit unions, insurance companies, etc. - to account for their investments as follows.
First, they had to classify their investments into three categories, based on the following criteria, and with the following implications for financial statement reporting:
Held-to-Maturity (HTM). For investments classified in this category, the institution has to show "the positive intent and ability" to hold the investments on their books until they mature. They can record these on the books at historical cost, without taking any mark-to-market adjustments through either the income statement or the capital account on their balance sheet.
However, if an institution sells one security out of the held-to-maturity account, the entire portfolio is considered to be "tainted," and it must then mark its entire portfolio to market. So again, it has to have the "positive intent and ability" to hold the investment until it matures.
Available-for Sale (AFS). The institution can sell these securities freely, but for frequent, short-term trading activity, the next category applies. Securities in this category must be marked to the current market value, and the difference between historical cost and market value is recorded as an adjustment to capital on the balance sheet, but it doesn't flow through the income statement so it doesn't affect earnings.
Note that the adjustments go both ways. If the value of the security rises, the result is an increase in book capital, or net worth. If the value of the security falls, capital declines.
Note also - and this is very important - that an institution can transfer securities from AFS to HTM at the current market value, thereby avoiding future mark-to-market adjustments on those securities. But it must then hold them to maturity, or risk tainting the portfolio. We'll come back to this point later.
Trading (T). If the institution employs frequent, short-term trading in and out of a portion of its portfolio (or all of it), those investments get classified as "Trading." The accounting treatment here is similar to that for the AFS category, except that it's the full Monty: the mark-to-market adjustment flows through both the income statement and the capital account on the balance sheet. So gains and losses affect both current earnings and book capital.
Now let's turn our attention to some practical implications.
Early Treatment and Current Practice
Initially, many institutions - especially smaller and more conservative ones, like credit unions, S&Ls, and community banks - classified everything HTM to avoid having to make mark-to-market adjustments. These institutions live and die by their monthly budgets, so they sought to avoid potential losses. They also tended not to sell investments. They invested in short-term government bonds, typically maturing in less than five years, and held them until they matured.
SFAS 115 took effect beginning in 1994. That year, two things were happening in financial institution-land. First, interest rates were rising as the economy grew out of the 1990-91 recession and the subsequent two years of job market stagnation. Bond prices fall when interest rates rise, and vice versa. So institutions were even more reluctant to classify their securities AFS and have to take the mark-to-market losses. (We should note here that these are "paper" losses only, or "unrealized" losses. The loss is "realized" when we actually sell at a loss. Until then, any mark-to-market gain or loss is "unrealized."
The other dynamic in 1994 was that people started saving less now that the recession and the job market crunch were over, and they started borrowing more. So banks, S&Ls and credit unions had less deposits coming in, but more loan demand. To free up liquid funds to make loans, they needed to sell some investments - but they'd classified their portfolios as HTM, and they didn't want to taint the whole portfolio.
So, in either 1994 or 1995 - I forget which, and I'm too lazy to research it, besides which it isn't really important for our purposes - the Financial Accounting Standards Board (FASB), which creates the accounting rules, opened a window of time during which institutions could make a one-time transfer of part or all of their HTM portfolios into AFS, so that they could then sell the securities to free up cash to make loans.
Today, most institutions have seen the light, and carry everything or almost everything in AFS. They recognize that the ability to generate cash to make loans when deposits are scarce overrides the mark-to-market adjustments they may have to make, which they've learned to manage - for the most part.
Dirty Little Secrets
Fast-forward to today. Those smaller institutions are still fine, for the most part, as the vast majority of them avoided the subprime and Alt-A contagion.
But the big boys didn't. They sought the juicy yields offered by bonds backed by those loans. But now, with defaults soaring on the underlying loans, those bonds' values have been decimated. And, having to mark their values to market, big institutions are taking huge quarterly write-downs, affecting at a minimum, their capital, and in many cases, their earnings.
The big banks and Wall Street firms, now aided and abetted by Congress, are calling for the elimination of mark-to-market accounting, at least temporarily. Dave Ramsey - normally a voice of reason - is apparently drinking the kool-aid, and he sums up the argument nicely:
"However, (mark-to-market accounting is) part of what's caused this in the news now. Merrill Lynch was sitting with $30 billion tied up in sub-prime loans with houses. Stupid! They get what they deserve for doing that, and I'm with you on that. Those houses didn't become worthless all of a sudden because (Merrill) couldn't sell their bonds. Since they couldn't sell them, they basically gave them away for 22 cents on the dollar. Now do you think all those houses lost 80% of their value underneath that deal? No, they didn't, so they gave them away for 22 cents on the dollar (about $6 billion total) because there was no market for them. Nobody wants to buy sub-prime bonds because they suck. They're junk bonds. But at 22 cents on the dollar, it's a bargain because even if you foreclosed on every one of the houses in there, you'd probably get $20 billion back out of $30 billion, and so the company that bought those for $6 billion got a deal! But there's no market for them. That's where these companies are stuck. They can't sell this stuff, but accounting-wise, they've had to mark it down to market and it's frozen the marketplace.
Economist (Brian) Wesbury is saying that if we change that one rule and don't force them to mark down to market value and just let them hold on to all the stuff, and say just on sub-primes for this period of time you can change that rule - a temporary change - that'll free the market up. It's seized right now; it's frozen. This will thaw it out and get it going again. He says that'll solve 60% of the problem ... and I think he's right.
That one accounting rule is what made Merrill Lynch sell out. That one accounting rule is what's driving other ones into the dirt. Would you rather let them change their accounting rule or loan them $700 billion for us to buyout their bad paper?"
Myth-Busting
I like Dave Ramsey. He understands personal financial management, and he's fiscally conservative, like me. I respect that. But he doesn't understand how the fixed-income market works, he doesn't understand mark-to-market accounting, and he doesn't understand the institutional investment world. Allow me to de-bunk these myths.
First and foremost, mark-to-market accounting did not cause market values to fall. Mark-to-market accounting adjustments, by definition, come after the market values have fallen. Saying the rules even played a role in the current mess is like saying the diagnosis made the patient sick.
Second, let's examine closely what happened with the Merrill sale. Merrill did not sell its bonds because of "that one accounting rule." Merrill would have been better off continuing to hold the bonds under "that one accounting rule." Here's why.
Merrill - and so many other financials - have been marking their bonds to market, all right. But the market values they've been using have been artificially high. They don't want to take the full write-downs. That's why we get so many ugly surprises after the auditors come in. I know of one large institution that initially reported $7 million in earnings last year. Then, their auditors arrived. They fought the auditors until July (normally, the audit is done in March), and when it was all said and done, they were forced to admit that their initial valuations had been too high, and that they actually lost about $50 million.
Here's one of the dirty little secrets the industry and Congress would have us believe: that financial institutions are having to mark their bonds too low. Ben Bernanke told Congress they're being forced to write investments down to "fire-sale" prices.
If that were true, then when they subsequently sold them, they'd sell them for more than where they were carrying them on the books, and they'd record gains. That has yet to happen in any instance.
Oh, they argue, but they're not selling. Nobody's buying. That's why the prices are so low.
I've said it before and I'll say it again: I see this stuff trade every day. I see bids, and I see offers. And the Merrill sale proves that sales are taking place. The fact of the matter is that institutions aren't marking their investments low enough. That's why they want to change the rule. Next time the auditors come in, they'll take bigger hits. And it will be revealed that they're actually insolvent. But more on that later.
So back to Merrill: why did they sell, if not for the accounting rule? They sold because, quite simply, they were running out of money. Nobody wanted to lend to them anymore, because they were destined to be the next Bear Stearns or Lehman. So they had to sell something to raise money. And the 22 cents on the dollar they got belies the fact that they had to lend much of the money to the eventual buyer. Factoring in the loan terms, they actually sold for about six cents on the dollar.
As for Ramsey's assertions regarding the recovery potential on the homes whose mortgages underlie these bonds, we need to understand how these bonds are structured, and what the actual collateral is.
Financial "Innovation"
Take a bunch of mortgages, bundle them together, and you have a mortgage pool. Now, let's say those mortgages are all subprime loans, and all the houses are in LA, or Vegas, or Phoenix - three of the hardest-hit markets in the housing bust. What do you think the chances are that such a combination of concentration and credit risk could earn that pool a triple-A rating? If you answered, "slim to none," you get a gold star.
So, we have to slice up the cash flows. We create a "senior" bond, which has the greatest protection from the collateral's risk, and it gets the AAA rating. How do we do that? We create some crappy, risky bonds called support bonds that get low ratings, and they take the first hit when the defaults start rolling in. On top of those, we create some less risky "mezzanine" bonds that take the secondary hit if the supports all go away through defaults. Those get an intermediate rating.
The problem is that the ratings agencies - like most of the financial world - missed the boat when it came to foreseeing the inevitable correction to the housing bubble. They didn't anticipate the high level of defaults. They didn't anticipate the complete erosion of the supports, which has happened, and the mezzanines, which is happening even as we speak - and rapidly. Thus, they didn't anticipate the threat of real losses to the senior bonds.
Ramsey's assertion that when you sell the homes you'll get $20 billion back out of $30 billion - a two-thirds recovery rate - is consistent with home price trends. Home prices in Vegas are down 33% from their peak at last count; in LA, they're down 30%. But for one thing, they're expected to fall further. And for another, many foreclosed homes fall into disrepair or get vandalized - often by the former owners on their way out the door. Their neglected swimming pools become pestilent breeding grounds for mosquitoes. There are significant clean-up and repair costs to be borne by the lenders before they can be sold, which reduces the recovery rate, as do real estate commissions.
But the real disconnect between Ramsey's two-thirds recovery on the eventual real estate sale, and the value of the bonds themselves, has to do with the bonds' structure. Let's understand that better.
If Merrill owned the support bonds, which erode first, they probably are worth only six cents on the dollar. Since they take the first hit from defaults, their value could fall all the way to zero. By the time there's any recovery from selling the foreclosed homes, the supports - and the mezzanines, in many instances - are long gone, and the only recovery will accrue to the senior bonds.
But the senior bonds are being rapidly downgraded, due to the erosion of the supports and the mezzanines. That has contributed to their valuations. Investors initially paid up to get a AAA rating on a bond that's now junk-grade. In essence, they overpaid because the ratings agencies got it wrong.
Also, some of the bonds had further "credit enhancements" to get up to the AAA level. That often came in the form of bond insurance. The biggest bond insurers are MBIA, Ambac, and FGIC. You may recall seeing those names in the news. The reason is that they, too, have been downgraded due to bad bonds they themselves own. Thus their ability to make good on the mounting claims made by holders of bonds they insure has been impaired. And that has resulted in further write-downs of the bonds they insure. Again, investors paid up for the insurance "wrap" that gave the bonds they bought a triple-A rating. Thus the value has been decimated.
Finally, in some instances the collateral isn't first mortgages, it's home equity lines, or HELOCs. The problem there is that if there's less than a 100% recovery rate on the sale of the home, the first mortgage holder gets all that is recovered, and the HELOC holder gets nada. I know of one HELOC-backed bond that has FGIC insurance, and has been downgraded from AAA to junk status. The issuer? IndyMac, the failed California lender. The price is currently being quoted at 26 cents on the dollar.
Why is this last bond an important example? Because thus far, not a single payment to the bondholders has been missed. That's why investors argue the bonds' market values are excessively pessimistic: "But the bonds are performing! They're paying as scheduled!"
Well, that's not how bonds trade, as I've noted in a previous post. Bonds trade based on expected future cash flows. And the future cash flows on a California HELOC-backed bond issued by a failed lender and insured by a downgraded and failing insurer, whose support bonds are gone and whose mezzanine protection is evaporating rapidly, don't look promising. If anything, a price of 26 may be optimistic.
Remember when I said Merrill may have benefited from "that one accounting rule" by holding the bonds? That's because they could have marked the bonds pretty much wherever they wanted, at least for a while. Once they needed cash so desperately they were forced to sell, they had to take the real market value, which is whatever the next guy will pay for the bonds. Having hinted at that distinction, let's examine pricing sources.
"Mommy, Where Do Prices Come From?"
Pricing relatively illiquid and structurally complex fixed-income securities is nearly as much a fairy tale process as the stork or the cabbage patch.
Theoretically speaking, you project the cash flows into the future, discount each cash flow at the discount rate associated with when it's projected to occur, and sum it all up in a net present value calculation (if you don't understand that, take it on faith).
Where you run into difficulty with this process is in projecting cash flows that can prepay. So you make assumptions - based on a model built using past prepayment behavior - as to when those cash flows will occur, factoring in prepayments.
Prepayments can occur when a mortgage borrower refinances. By the same token, if he defaults, the mortgage may never get paid off, at least in full.
Prepayment models don't always do a great job of factoring in when those things will happen based on past experience, because sometimes we encounter new territory in terms of the economic conditions that influence prepayments. To wit, until a few years ago, in the history of mortgage securitization, we'd never experienced a one percent Fed funds rate, which resulted in mortgage rates so low for so long that refinancings reached previously unfathomable levels. The models just weren't calibrated for that scenario.
Likewise, we never anticipated the housing slump we're in today (okay, some of us did, but I'm no longer in the business of building prepayment models).
The prepayment models are used to determine when the cash flows will occur. The timing of the cash flows determines their net present value, which is the "modeled price" of the bonds. Different investment firms have different prepayment models they use, thus their "modeled prices" may differ. Obviously, when they're faced with two different prices from two different models, they choose the price that results in the smallest unrealized loss.
The problem with using modeled prices is that models don't buy bonds (except maybe Gisele, but she'll want those denominated in euros, thank you very much). The actual market value is what the next guy will pay you for the bond. Absent a live bid, though, you've just got to go with the modeled pricing.
That's how the financials overstate the value of their bonds. They use the most optimistic assumptions possible to calculate the highest possible price. Until their auditors show up.
The Threat
Okay, we now understand mark-to-market accounting. Simply put, it's designed to introduce price transparency. Why are the financials opposed to that?
Because they don't want the investing public, their auditors, or the ratings agencies and regulators to know how little their bonds are really worth.
At a time when most market participants are clamoring for greater price transparency in markets for things like credit default swaps (a whole 'nother topic), the financials and Congress and even Dave Ramsey now want to take an eraser to it. Why is that a bad idea?
Look at a graph of WaMu's or Wachovia's or Lehman's or Fannie Mae's stock price over the last year or two. It will look much like a ski slope, if we smooth it out, beginning to decline in July 2007, when the Bear Stearns hedge fund melt-down started the credit crisis, eventually approaching zero when it failed or was acquired.
Why the gradual decline? Simple. With each quarterly earnings release, we learned of further write-downs. We had transparency about what the company was really worth. So we could factor that into their stock price. The ratings agencies had an early-warning mechanism to be able to downgrade those firms' own debt ratings, so that unsuspecting investors didn't buck up to buy their bonds, thinking they were safe. The regulators also had an early warning system, so they could step in before any depositors lost money.
Absent mark-to-market accounting, those firms would still eventually run out of capital. They'd become insolvent. They'd fail. Their poor investment decisions caused that to happen, exacerbated by a now-difficult lending, bond-selling and underwriting environment (which they brought upon themselves) that is crimping revenues.
So what would their price graphs look like? Well, without transparency, instead of a ski slope, you'd get a cliff. The price would perk along merrily at a high level until it dropped immediately to zero.
No early warning for the ratings agencies. No early warning for the regulators.
No early warning for investors.
And that last point is the most ominous one. Absent price transparency on the financials' bond holdings - and thus the financials themselves - no intelligent investor is going to buy that debt, or provide capital or credit to the financials.
You think credit markets are frozen now? How about a scenario where no one knows what anything is worth, from subprime bonds to bank stocks? Hey, if the regulators can't assess what my bank's worth, I'll be darned if I'm going to keep any money deposited in it. And the bonds that are trading now - the very bonds that the financials say aren't trading - will truly stop trading. And then the waters will get really murky.
Transparency is a good thing. Early warning mechanisms always are. I'm thankful for NOAA hurricane tracking reports and tornado sirens.
In summary, think about just the period from last Friday to yesterday - basically a four-day weekend. WaMu, Wachovia, Fortis, Dexia, Glitnir, and Bradford & Bingley - all financial institutions, from the US, the UK, Benelux and Iceland - effectively failed. They were either taken over or bailed out by their respective governments, or bought by another bank just before they would have imploded.
We knew it was coming. We'd watched their respective stock price declines. We'd seen one credit counterparty after another snub them. We'd seen them scramble for suitors.
They all failed, either Friday in the case of WaMu, or over the weekend in the case of the others. What was the market reaction to this unprecedented weekend of global bank failures?
The Dow opened down Friday from Thursday's close, but rallied to finish up about 160 points on the day. Monday morning, it opened down about 150, and fell another 150-200 points during the morning. But that had more to do with concerns the bailout wouldn't pass than the failed financials, which the market largely took in stride.
The Dow Jones Euro Stoxx Index behaved similarly, as did the UK's FTSE 100, as all eyes were on the US bailout vote, which would cover foreign banks as well.
Why were the markets calm? Because the gradual price declines of those firms' shares were already priced into the market. In short, we expected their demise, because price transparency had revealed their long, slow death march.
Now, imagine the blood-bath that would ensue if all of those names failed in a span of four days - only two of them being trading days - if the declines in those firms' values had not been anticipated. If they perked merrily along at a price of say, $45 a share in the case of WaMu, then suddenly went to zero. Overnight. All six of them at once.
There would be panic in the markets. Yesterday's 800-point sell-off would look like a rally. There would be a global run on banks, causing a financial collapse, as the insurance funds couldn't contain the carnage.
But see, investors would know this in advance. They like price transparency. So they'd simply stop investing, thus freezing the credit markets. Depositors with a lick of sense would go ahead and withdraw their funds anyway. So we'd have a true credit market freeze, not just the imagined one that the financials are whining about now.
Is credit near-frozen, though? To be sure, it is. But that's not a bad thing. It means you probably can't get a loan today unless you have squeaky-clean credit and not too much existing debt.
That's as it should be. That's as it should have been all along. We wouldn't be in this pickle had that been the case three to five years ago.
The fact is, if you're reading this from somewhere in the US - or even the UK, or Europe, or Australia - you probably fall into one of two categories.
Either you already have more debt than you should, and you need another loan like an overdose patient needs a fix, or you live so well within your means and are so content with what you have that you have no need to borrow money.
What they're proposing is to eliminate the "mark-to-market" accounting rule, at least temporarily. First I'll explain the rule and how and why it came about. Then I'll explain what they want to do, and I'll de-bunk the myths they're floating out there to sell this bad idea. Finally, I'll explain the consequences if they get it done.
What is Mark-to-Market Accounting?
Mark-to-market accounting was ushered in with Statement of Financial Accounting Standards (SFAS) No. 115, back in 1993 (I wrote an industry white paper on it at the time.) SFAS 115 required financial institutions - banks, S&Ls, credit unions, insurance companies, etc. - to account for their investments as follows.
First, they had to classify their investments into three categories, based on the following criteria, and with the following implications for financial statement reporting:
Held-to-Maturity (HTM). For investments classified in this category, the institution has to show "the positive intent and ability" to hold the investments on their books until they mature. They can record these on the books at historical cost, without taking any mark-to-market adjustments through either the income statement or the capital account on their balance sheet.
However, if an institution sells one security out of the held-to-maturity account, the entire portfolio is considered to be "tainted," and it must then mark its entire portfolio to market. So again, it has to have the "positive intent and ability" to hold the investment until it matures.
Available-for Sale (AFS). The institution can sell these securities freely, but for frequent, short-term trading activity, the next category applies. Securities in this category must be marked to the current market value, and the difference between historical cost and market value is recorded as an adjustment to capital on the balance sheet, but it doesn't flow through the income statement so it doesn't affect earnings.
Note that the adjustments go both ways. If the value of the security rises, the result is an increase in book capital, or net worth. If the value of the security falls, capital declines.
Note also - and this is very important - that an institution can transfer securities from AFS to HTM at the current market value, thereby avoiding future mark-to-market adjustments on those securities. But it must then hold them to maturity, or risk tainting the portfolio. We'll come back to this point later.
Trading (T). If the institution employs frequent, short-term trading in and out of a portion of its portfolio (or all of it), those investments get classified as "Trading." The accounting treatment here is similar to that for the AFS category, except that it's the full Monty: the mark-to-market adjustment flows through both the income statement and the capital account on the balance sheet. So gains and losses affect both current earnings and book capital.
Now let's turn our attention to some practical implications.
Early Treatment and Current Practice
Initially, many institutions - especially smaller and more conservative ones, like credit unions, S&Ls, and community banks - classified everything HTM to avoid having to make mark-to-market adjustments. These institutions live and die by their monthly budgets, so they sought to avoid potential losses. They also tended not to sell investments. They invested in short-term government bonds, typically maturing in less than five years, and held them until they matured.
SFAS 115 took effect beginning in 1994. That year, two things were happening in financial institution-land. First, interest rates were rising as the economy grew out of the 1990-91 recession and the subsequent two years of job market stagnation. Bond prices fall when interest rates rise, and vice versa. So institutions were even more reluctant to classify their securities AFS and have to take the mark-to-market losses. (We should note here that these are "paper" losses only, or "unrealized" losses. The loss is "realized" when we actually sell at a loss. Until then, any mark-to-market gain or loss is "unrealized."
The other dynamic in 1994 was that people started saving less now that the recession and the job market crunch were over, and they started borrowing more. So banks, S&Ls and credit unions had less deposits coming in, but more loan demand. To free up liquid funds to make loans, they needed to sell some investments - but they'd classified their portfolios as HTM, and they didn't want to taint the whole portfolio.
So, in either 1994 or 1995 - I forget which, and I'm too lazy to research it, besides which it isn't really important for our purposes - the Financial Accounting Standards Board (FASB), which creates the accounting rules, opened a window of time during which institutions could make a one-time transfer of part or all of their HTM portfolios into AFS, so that they could then sell the securities to free up cash to make loans.
Today, most institutions have seen the light, and carry everything or almost everything in AFS. They recognize that the ability to generate cash to make loans when deposits are scarce overrides the mark-to-market adjustments they may have to make, which they've learned to manage - for the most part.
Dirty Little Secrets
Fast-forward to today. Those smaller institutions are still fine, for the most part, as the vast majority of them avoided the subprime and Alt-A contagion.
But the big boys didn't. They sought the juicy yields offered by bonds backed by those loans. But now, with defaults soaring on the underlying loans, those bonds' values have been decimated. And, having to mark their values to market, big institutions are taking huge quarterly write-downs, affecting at a minimum, their capital, and in many cases, their earnings.
The big banks and Wall Street firms, now aided and abetted by Congress, are calling for the elimination of mark-to-market accounting, at least temporarily. Dave Ramsey - normally a voice of reason - is apparently drinking the kool-aid, and he sums up the argument nicely:
"However, (mark-to-market accounting is) part of what's caused this in the news now. Merrill Lynch was sitting with $30 billion tied up in sub-prime loans with houses. Stupid! They get what they deserve for doing that, and I'm with you on that. Those houses didn't become worthless all of a sudden because (Merrill) couldn't sell their bonds. Since they couldn't sell them, they basically gave them away for 22 cents on the dollar. Now do you think all those houses lost 80% of their value underneath that deal? No, they didn't, so they gave them away for 22 cents on the dollar (about $6 billion total) because there was no market for them. Nobody wants to buy sub-prime bonds because they suck. They're junk bonds. But at 22 cents on the dollar, it's a bargain because even if you foreclosed on every one of the houses in there, you'd probably get $20 billion back out of $30 billion, and so the company that bought those for $6 billion got a deal! But there's no market for them. That's where these companies are stuck. They can't sell this stuff, but accounting-wise, they've had to mark it down to market and it's frozen the marketplace.
Economist (Brian) Wesbury is saying that if we change that one rule and don't force them to mark down to market value and just let them hold on to all the stuff, and say just on sub-primes for this period of time you can change that rule - a temporary change - that'll free the market up. It's seized right now; it's frozen. This will thaw it out and get it going again. He says that'll solve 60% of the problem ... and I think he's right.
That one accounting rule is what made Merrill Lynch sell out. That one accounting rule is what's driving other ones into the dirt. Would you rather let them change their accounting rule or loan them $700 billion for us to buyout their bad paper?"
Myth-Busting
I like Dave Ramsey. He understands personal financial management, and he's fiscally conservative, like me. I respect that. But he doesn't understand how the fixed-income market works, he doesn't understand mark-to-market accounting, and he doesn't understand the institutional investment world. Allow me to de-bunk these myths.
First and foremost, mark-to-market accounting did not cause market values to fall. Mark-to-market accounting adjustments, by definition, come after the market values have fallen. Saying the rules even played a role in the current mess is like saying the diagnosis made the patient sick.
Second, let's examine closely what happened with the Merrill sale. Merrill did not sell its bonds because of "that one accounting rule." Merrill would have been better off continuing to hold the bonds under "that one accounting rule." Here's why.
Merrill - and so many other financials - have been marking their bonds to market, all right. But the market values they've been using have been artificially high. They don't want to take the full write-downs. That's why we get so many ugly surprises after the auditors come in. I know of one large institution that initially reported $7 million in earnings last year. Then, their auditors arrived. They fought the auditors until July (normally, the audit is done in March), and when it was all said and done, they were forced to admit that their initial valuations had been too high, and that they actually lost about $50 million.
Here's one of the dirty little secrets the industry and Congress would have us believe: that financial institutions are having to mark their bonds too low. Ben Bernanke told Congress they're being forced to write investments down to "fire-sale" prices.
If that were true, then when they subsequently sold them, they'd sell them for more than where they were carrying them on the books, and they'd record gains. That has yet to happen in any instance.
Oh, they argue, but they're not selling. Nobody's buying. That's why the prices are so low.
I've said it before and I'll say it again: I see this stuff trade every day. I see bids, and I see offers. And the Merrill sale proves that sales are taking place. The fact of the matter is that institutions aren't marking their investments low enough. That's why they want to change the rule. Next time the auditors come in, they'll take bigger hits. And it will be revealed that they're actually insolvent. But more on that later.
So back to Merrill: why did they sell, if not for the accounting rule? They sold because, quite simply, they were running out of money. Nobody wanted to lend to them anymore, because they were destined to be the next Bear Stearns or Lehman. So they had to sell something to raise money. And the 22 cents on the dollar they got belies the fact that they had to lend much of the money to the eventual buyer. Factoring in the loan terms, they actually sold for about six cents on the dollar.
As for Ramsey's assertions regarding the recovery potential on the homes whose mortgages underlie these bonds, we need to understand how these bonds are structured, and what the actual collateral is.
Financial "Innovation"
Take a bunch of mortgages, bundle them together, and you have a mortgage pool. Now, let's say those mortgages are all subprime loans, and all the houses are in LA, or Vegas, or Phoenix - three of the hardest-hit markets in the housing bust. What do you think the chances are that such a combination of concentration and credit risk could earn that pool a triple-A rating? If you answered, "slim to none," you get a gold star.
So, we have to slice up the cash flows. We create a "senior" bond, which has the greatest protection from the collateral's risk, and it gets the AAA rating. How do we do that? We create some crappy, risky bonds called support bonds that get low ratings, and they take the first hit when the defaults start rolling in. On top of those, we create some less risky "mezzanine" bonds that take the secondary hit if the supports all go away through defaults. Those get an intermediate rating.
The problem is that the ratings agencies - like most of the financial world - missed the boat when it came to foreseeing the inevitable correction to the housing bubble. They didn't anticipate the high level of defaults. They didn't anticipate the complete erosion of the supports, which has happened, and the mezzanines, which is happening even as we speak - and rapidly. Thus, they didn't anticipate the threat of real losses to the senior bonds.
Ramsey's assertion that when you sell the homes you'll get $20 billion back out of $30 billion - a two-thirds recovery rate - is consistent with home price trends. Home prices in Vegas are down 33% from their peak at last count; in LA, they're down 30%. But for one thing, they're expected to fall further. And for another, many foreclosed homes fall into disrepair or get vandalized - often by the former owners on their way out the door. Their neglected swimming pools become pestilent breeding grounds for mosquitoes. There are significant clean-up and repair costs to be borne by the lenders before they can be sold, which reduces the recovery rate, as do real estate commissions.
But the real disconnect between Ramsey's two-thirds recovery on the eventual real estate sale, and the value of the bonds themselves, has to do with the bonds' structure. Let's understand that better.
If Merrill owned the support bonds, which erode first, they probably are worth only six cents on the dollar. Since they take the first hit from defaults, their value could fall all the way to zero. By the time there's any recovery from selling the foreclosed homes, the supports - and the mezzanines, in many instances - are long gone, and the only recovery will accrue to the senior bonds.
But the senior bonds are being rapidly downgraded, due to the erosion of the supports and the mezzanines. That has contributed to their valuations. Investors initially paid up to get a AAA rating on a bond that's now junk-grade. In essence, they overpaid because the ratings agencies got it wrong.
Also, some of the bonds had further "credit enhancements" to get up to the AAA level. That often came in the form of bond insurance. The biggest bond insurers are MBIA, Ambac, and FGIC. You may recall seeing those names in the news. The reason is that they, too, have been downgraded due to bad bonds they themselves own. Thus their ability to make good on the mounting claims made by holders of bonds they insure has been impaired. And that has resulted in further write-downs of the bonds they insure. Again, investors paid up for the insurance "wrap" that gave the bonds they bought a triple-A rating. Thus the value has been decimated.
Finally, in some instances the collateral isn't first mortgages, it's home equity lines, or HELOCs. The problem there is that if there's less than a 100% recovery rate on the sale of the home, the first mortgage holder gets all that is recovered, and the HELOC holder gets nada. I know of one HELOC-backed bond that has FGIC insurance, and has been downgraded from AAA to junk status. The issuer? IndyMac, the failed California lender. The price is currently being quoted at 26 cents on the dollar.
Why is this last bond an important example? Because thus far, not a single payment to the bondholders has been missed. That's why investors argue the bonds' market values are excessively pessimistic: "But the bonds are performing! They're paying as scheduled!"
Well, that's not how bonds trade, as I've noted in a previous post. Bonds trade based on expected future cash flows. And the future cash flows on a California HELOC-backed bond issued by a failed lender and insured by a downgraded and failing insurer, whose support bonds are gone and whose mezzanine protection is evaporating rapidly, don't look promising. If anything, a price of 26 may be optimistic.
Remember when I said Merrill may have benefited from "that one accounting rule" by holding the bonds? That's because they could have marked the bonds pretty much wherever they wanted, at least for a while. Once they needed cash so desperately they were forced to sell, they had to take the real market value, which is whatever the next guy will pay for the bonds. Having hinted at that distinction, let's examine pricing sources.
"Mommy, Where Do Prices Come From?"
Pricing relatively illiquid and structurally complex fixed-income securities is nearly as much a fairy tale process as the stork or the cabbage patch.
Theoretically speaking, you project the cash flows into the future, discount each cash flow at the discount rate associated with when it's projected to occur, and sum it all up in a net present value calculation (if you don't understand that, take it on faith).
Where you run into difficulty with this process is in projecting cash flows that can prepay. So you make assumptions - based on a model built using past prepayment behavior - as to when those cash flows will occur, factoring in prepayments.
Prepayments can occur when a mortgage borrower refinances. By the same token, if he defaults, the mortgage may never get paid off, at least in full.
Prepayment models don't always do a great job of factoring in when those things will happen based on past experience, because sometimes we encounter new territory in terms of the economic conditions that influence prepayments. To wit, until a few years ago, in the history of mortgage securitization, we'd never experienced a one percent Fed funds rate, which resulted in mortgage rates so low for so long that refinancings reached previously unfathomable levels. The models just weren't calibrated for that scenario.
Likewise, we never anticipated the housing slump we're in today (okay, some of us did, but I'm no longer in the business of building prepayment models).
The prepayment models are used to determine when the cash flows will occur. The timing of the cash flows determines their net present value, which is the "modeled price" of the bonds. Different investment firms have different prepayment models they use, thus their "modeled prices" may differ. Obviously, when they're faced with two different prices from two different models, they choose the price that results in the smallest unrealized loss.
The problem with using modeled prices is that models don't buy bonds (except maybe Gisele, but she'll want those denominated in euros, thank you very much). The actual market value is what the next guy will pay you for the bond. Absent a live bid, though, you've just got to go with the modeled pricing.
That's how the financials overstate the value of their bonds. They use the most optimistic assumptions possible to calculate the highest possible price. Until their auditors show up.
The Threat
Okay, we now understand mark-to-market accounting. Simply put, it's designed to introduce price transparency. Why are the financials opposed to that?
Because they don't want the investing public, their auditors, or the ratings agencies and regulators to know how little their bonds are really worth.
At a time when most market participants are clamoring for greater price transparency in markets for things like credit default swaps (a whole 'nother topic), the financials and Congress and even Dave Ramsey now want to take an eraser to it. Why is that a bad idea?
Look at a graph of WaMu's or Wachovia's or Lehman's or Fannie Mae's stock price over the last year or two. It will look much like a ski slope, if we smooth it out, beginning to decline in July 2007, when the Bear Stearns hedge fund melt-down started the credit crisis, eventually approaching zero when it failed or was acquired.
Why the gradual decline? Simple. With each quarterly earnings release, we learned of further write-downs. We had transparency about what the company was really worth. So we could factor that into their stock price. The ratings agencies had an early-warning mechanism to be able to downgrade those firms' own debt ratings, so that unsuspecting investors didn't buck up to buy their bonds, thinking they were safe. The regulators also had an early warning system, so they could step in before any depositors lost money.
Absent mark-to-market accounting, those firms would still eventually run out of capital. They'd become insolvent. They'd fail. Their poor investment decisions caused that to happen, exacerbated by a now-difficult lending, bond-selling and underwriting environment (which they brought upon themselves) that is crimping revenues.
So what would their price graphs look like? Well, without transparency, instead of a ski slope, you'd get a cliff. The price would perk along merrily at a high level until it dropped immediately to zero.
No early warning for the ratings agencies. No early warning for the regulators.
No early warning for investors.
And that last point is the most ominous one. Absent price transparency on the financials' bond holdings - and thus the financials themselves - no intelligent investor is going to buy that debt, or provide capital or credit to the financials.
You think credit markets are frozen now? How about a scenario where no one knows what anything is worth, from subprime bonds to bank stocks? Hey, if the regulators can't assess what my bank's worth, I'll be darned if I'm going to keep any money deposited in it. And the bonds that are trading now - the very bonds that the financials say aren't trading - will truly stop trading. And then the waters will get really murky.
Transparency is a good thing. Early warning mechanisms always are. I'm thankful for NOAA hurricane tracking reports and tornado sirens.
In summary, think about just the period from last Friday to yesterday - basically a four-day weekend. WaMu, Wachovia, Fortis, Dexia, Glitnir, and Bradford & Bingley - all financial institutions, from the US, the UK, Benelux and Iceland - effectively failed. They were either taken over or bailed out by their respective governments, or bought by another bank just before they would have imploded.
We knew it was coming. We'd watched their respective stock price declines. We'd seen one credit counterparty after another snub them. We'd seen them scramble for suitors.
They all failed, either Friday in the case of WaMu, or over the weekend in the case of the others. What was the market reaction to this unprecedented weekend of global bank failures?
The Dow opened down Friday from Thursday's close, but rallied to finish up about 160 points on the day. Monday morning, it opened down about 150, and fell another 150-200 points during the morning. But that had more to do with concerns the bailout wouldn't pass than the failed financials, which the market largely took in stride.
The Dow Jones Euro Stoxx Index behaved similarly, as did the UK's FTSE 100, as all eyes were on the US bailout vote, which would cover foreign banks as well.
Why were the markets calm? Because the gradual price declines of those firms' shares were already priced into the market. In short, we expected their demise, because price transparency had revealed their long, slow death march.
Now, imagine the blood-bath that would ensue if all of those names failed in a span of four days - only two of them being trading days - if the declines in those firms' values had not been anticipated. If they perked merrily along at a price of say, $45 a share in the case of WaMu, then suddenly went to zero. Overnight. All six of them at once.
There would be panic in the markets. Yesterday's 800-point sell-off would look like a rally. There would be a global run on banks, causing a financial collapse, as the insurance funds couldn't contain the carnage.
But see, investors would know this in advance. They like price transparency. So they'd simply stop investing, thus freezing the credit markets. Depositors with a lick of sense would go ahead and withdraw their funds anyway. So we'd have a true credit market freeze, not just the imagined one that the financials are whining about now.
Is credit near-frozen, though? To be sure, it is. But that's not a bad thing. It means you probably can't get a loan today unless you have squeaky-clean credit and not too much existing debt.
That's as it should be. That's as it should have been all along. We wouldn't be in this pickle had that been the case three to five years ago.
The fact is, if you're reading this from somewhere in the US - or even the UK, or Europe, or Australia - you probably fall into one of two categories.
Either you already have more debt than you should, and you need another loan like an overdose patient needs a fix, or you live so well within your means and are so content with what you have that you have no need to borrow money.
It's Independence Day!
September 29 should be a Federal holiday. It's the day the people prevailed. The day government worked. I never thought it could happen, but it did.
The House of Representatives voted down the bailout bill. A failed Republican administration, aided and abetted by a failed Democratic Congress, threatened our very sovereignty.
Representatives from both sides of the aisle listened to the overwhelming message from their constituents that they did not want their tax dollars to bail out irresponsible borrowers, lenders, securitizers and investors. They listened, and they voted the people's will.
They saved us from the demise of our economy. Yes, stocks tanked. So what? Stock market investors are subject to risk. They can't expect a free ride. Yes, we'll be in a recession, if we're not already (we are, IMO). So what? We would have been anyway.
But the dollar won't drop to worthlessness. Inflation won't double. Oil won't double (it actually fell $10/barrel). Tax rates won't double. China won't stop investing in Treasuries. All that, and worse, would have happened if the yeas outweighed the nays.
We should celebrate the triumph of capitalism, free enterprise, and the democratic process over socialism, nationalization, and partisanship.
God bless America!
The House of Representatives voted down the bailout bill. A failed Republican administration, aided and abetted by a failed Democratic Congress, threatened our very sovereignty.
Representatives from both sides of the aisle listened to the overwhelming message from their constituents that they did not want their tax dollars to bail out irresponsible borrowers, lenders, securitizers and investors. They listened, and they voted the people's will.
They saved us from the demise of our economy. Yes, stocks tanked. So what? Stock market investors are subject to risk. They can't expect a free ride. Yes, we'll be in a recession, if we're not already (we are, IMO). So what? We would have been anyway.
But the dollar won't drop to worthlessness. Inflation won't double. Oil won't double (it actually fell $10/barrel). Tax rates won't double. China won't stop investing in Treasuries. All that, and worse, would have happened if the yeas outweighed the nays.
We should celebrate the triumph of capitalism, free enterprise, and the democratic process over socialism, nationalization, and partisanship.
God bless America!
Friday, September 26, 2008
What a Difference a Year Makes
“The troubles in the subprime sector seem unlikely to spill over to the broader economy.” Ben Bernanke, September 2007.
“I believe if the credit markets are not functioning, that jobs will be lost; the unemployment rate will rise; more houses will be foreclosed upon; GDP will contract; that the economy will just not be able to recover in a normal, healthy way, no matter what other policies are taken.” Ben Bernanke, September 2008.
Wow. The Fed Chairman is supposed to be the calm voice of reason. It’s his job to avoid using the “R” word until, of course, the National Bureau of Economic Research tells us after the fact that, yes indeed, we have been in recession.
But now, Dr. Bernanke has donned the Chicken Little costume for Halloween. Meanwhile, his counterpart at the Treasury Department, Hank Paulson, has been doing his best Hollywood impersonations.
A year ago, Hank was playing the Kevin Bacon role from the closing parade scene in Animal House, running through the streets amid the chaos, screaming, “All is well! All is well!”
Now, he’s playing Jerry McGuire: “Show me the money!!”
Paulson's bailout request should scare you. It scares me. Here's the Secretary of the Treasury asking for an amount greater than the combined budgets of the Departments of Defense, Education, and Health and Human Services, with broad executive powers as to how to deploy it. And, he's insisting on immunity - in other words, a provision that he can't be sued if anyone is harmed.
Why does someone ask for that provision in advance, unless they know what they're going to do is going to be very harmful?
Here’s what you, the average American, need to understand about the proposed bailout plan. First, we’ll look at what the plan – called the TARP, or Troubled Asset Repurchase Program, actually means. Then, we’ll look at what happens to the US economy with or without the TARP.
Everyone has seen the $700 billion figure bandied about. But what is the actual cost of the plan?
The $700 billion figure is what the government – read, the US taxpayer – can actually hold in “troubled assets” at any given point in time between now and the end of 2010, when the sun sets on Treasury’s TARP authority.
Bernanke testified before Congress that it’s important that the government not pay “fire sale” prices for this toxic crap on the balance sheets of banks, investment banks, and other financial firms. He said the government should be prepared to pay “as close to the ‘hold-to-maturity’ values as possible.”
These are accounting terms, related to Statement of Financial Accounting Standards (SFAS) 115. Under SFAS 115, if an institution classifies its securities as “held to maturity” (HTM), they can carry them on their books at historical cost, without marking them to market. (Marking to market means writing down – or up – the value of the securities to their current market value.) If the institution classifies the bonds as “available for sale” (AFS), they have to mark them to market, and take the difference between cost and current market value as an adjustment to their capital, or net worth. And if they classify them as “trading,” the mark-to-market adjustment flows through the income statement as well as capital.
A significant problem in the whole credit debacle has been that institutions have been valuing their securities above their true market value, because they don’t want the full mark-to-market adjustment to be reflected on their financial statements. Some of them have even shifted securities from AFS to HTM in order to not even have to show “unrealized” losses on their books. (An unrealized loss is a paper loss; it becomes realized when they sell their bonds, at which time the loss hits both income and capital.)
These institutions try to argue that the market values are nebulous, because these securities aren’t actually trading, so no one really knows what the market value is.
Folks, let me present two truths to you. First, these bonds are trading. I know; I see them trade every day. They may not trade in significant volumes, but they do trade. And the prices are well below where most institutions are carrying their investments. Simply put, they are overstating the value of their bonds. The market value of any investment is not historical cost, or what you say current book is, or even the discounted value of the cash flows.
It is, quite simply, what the next buyer will pay you for it.
And the fact that the next buyer is only willing to pay 20 to 30 cents on the dollar has nothing to do with panic, as the Administration and Congress would have you believe. The only people panicked are Paulson, Bernanke, Bush, the Congressional Democrats, and a few CEOs on Wall Street who may - and should - lose their jobs.
Second, they argue that the bonds have been performing; that is, they have been paying as scheduled.
The problem is, that’s not how these bonds trade. They trade on expectations of how the underlying collateral – subprime and Alt-A mortgages, in this case – will pay in the future. Subprime delinquencies are more than 25% at latest count, and Alt-A delinquencies are not far behind that. Even prime mortgages – those made to the most credit-worthy borrowers – are going delinquent at a rapidly accelerating rate.
The bonds backed by these loans are structured with credit enhancements designed to make the highest-rated classes of bonds less risky. But they only remain less risky as long as the supporting classes remain intact to protect them. Those support bonds, as they’re called, take the hit from defaults first, protecting the senior bonds. But the support is eroding at an alarming rate as defaults mount. Once the support bonds have been completely wiped out – which is happening even as we speak – the senior bonds are at risk of taking actual losses.
So while the bonds have been paying as scheduled thus far, the day is soon coming when they won’t. Hence the widespread ratings downgrades on those bonds, and the decimation of their values. The bottom line is that the market values you hear about – 20 to 30 cents on the dollar – are the truly reflective values of the bonds, based on their anticipated, not historical, cash flows. And that’s verified by the fact that they are trading in the market, and those are the prices at which they’re trading.
So, Bernanke is proposing that the Treasury pay something close to the HTM value – in other words, the historical cost, which is around 100 cents on the dollar, or par value – for these bonds. But they’re actually worth 20 to 30 cents on the dollar.
Let’s do the math. If the TARP provides that Treasury can only own $700 billion at any one time, this is how the plan will work. Treasury will buy $700 billion worth of bonds, paying – under Bernanke’s vision for the plan, and he’s basically dancing to Paulson’s tune – something near par. Then, they’ll sell them to private investors willing to buy them, at whatever price those investors are willing to pay.
Private investors aren’t stupid. They won’t pay more than the market value. In fact, when they know securities are going to be dumped on the market, they’ll pay less than market value. More sellers than buyers mean it’s a buyer’s market, and the prices get driven down. So in round one, let’s say Treasury is able to sell the $700 billion worth of bonds at 30 cents on the dollar. So they clear that initial inventory, incurring a loss of 70 cents on the dollar. On $700 billion worth of bonds, that’s a $490 billion loss.
Let us not forget that when we say “the Treasury,” we’re talking about the American taxpayer – you and me.
So, now the Treasury has freed up the $700 billion limit, and can buy the next round. Guess what? Given the fire-sale mentality that has at this point ensued, the selling price this time will be maybe 20 cents on the dollar. So Treasury clears the second round of inventory at an 80-cents-on-the-dollar loss. That’s a $560 billion loss.
Round three might bring a price of 15 cents on the dollar, producing a loss of 85 cents on the dollar, or $595 billion. Round four, maybe 10 cents on the dollar, for a loss of 90 cents on the dollar, or $630 billion.
So after four rounds, the Treasury has cleared $2.8 trillion worth of bad bonds from the books of banks and investment firms – including foreign banks, let’s not forget, because Paulson wants to bail them out too – at a net loss to the US taxpayer of $2.275 trillion.
And Paulson wants Treasury’s authority to foist this debacle on the US taxpayer for two years. And he wants Treasury indemnified from any possible lawsuits brought by anyone who might be “harmed” by these actions.
The bottom line is that this fiasco could wind up costing the US taxpayer trillions of dollars, without recourse through the normal legal process.
Now, let’s look at the impact on the economy, with or without the TARP.
I actually find myself agreeing with Ben Bernanke, for the first time ever, perhaps: if the TARP is not passed, jobs will be lost, GDP will contract, financial institutions will fail, and more homes will be in foreclosure.
But what Ben’s not telling you – and here, you should take note of the fact that while Ben was pooh-poohing the notion that the subprime malaise would spill over to the broader economy, both here and abroad, yours truly was warning of the worst economic environment since the Great Depression – is that all that will come to pass anyway.
The US economy has shed about a million jobs since the end of last year. And it will shed more. A number of financial institutions have failed this year – upwards of 12 at last count, including the most recent, Washington Mutual, which was the biggest bank failure in US history, plus IndyMac, Bear Stearns, Lehman Brothers, and Fannie Mae and Freddie Mac. And more are going to fail. After third quarter earnings are announced, we’re going to see a rash of failures. And the TARP won’t prevent that.
Part of the reason is that a number of the most troubled institutions won’t take part in the plan. Why? Because the last thing they want is price discovery, which Paulson promises the TARP will bring. They’ve moved their bonds into their HTM account, where they can mask the market losses. If the true market values are discovered, they’ll have to acknowledge their losses, and take the write-downs.
And the truth will then be revealed: they are insolvent.
So they’ll keep holding the crap, but no one in the market will lend to them, thus depriving them of desperately needed liquidity, because the other market participants know that the market values are far below the HTM value. So they’ll dry up and fail, as was the case with Bear and Lehman.
GDP is going to contract no matter what. It was barely positive in the fourth quarter of last year, and was only positive because the fourth quarter includes the all-important holiday shopping season. Last year’s holiday season started earlier than most years because Thanksgiving came early. So we got a nice bump in consumption in November. But spending then fell out of bed in December. If we measured GDP growth monthly, instead of quarterly, we’d find that GDP growth was positive in October and November, but negative in December.
In the first quarter of this year, GDP also barely grew. And the only thing that kept it in positive territory was inventory growth. That inventory growth resulted from the fact that businesses built up inventories in anticipation that domestic consumption would remain fairly healthy. It wasn’t, so the inventories they built up couldn’t be worked off. Had they accurately forecasted the sharp drop in domestic consumption, GDP would have contracted, which is the definition of recession.
In the second quarter, GDP grew by 3.3%. It was aided in part by a temporary boost to consumption resulting from the mailing of the stimulus checks. About half of the stimulus was saved, not spent. What was spent, was largely spent on gas and groceries, because inflation was through the roof. There was very little discretionary spending – you know, i-phones and the like.
The other boost to second quarter growth came from exports. We had an improvement in our bulging trade deficit, because the dollar was so weak that US goods were cheap, and foreign economies were still sufficiently strong that there was demand for our stuff.
Those temporary boosts to output growth won’t be repeated. The stimulus package was a one-time deal. (Unless Nancy Pelosi gets her wish; she announced Wednesday that she wants another round of stimulus checks. When I heard that, I told my wife that the government should just send a letter to all of those who make more than $120,000 a year, with the name and address of a taxpayer who makes less than that amount, so the former can just send the latter a check. My wife made the sage observation that at least those benefactors could send their beneficiaries a nice card along with their check.)
And the boost from trade is unlikely to be repeated as well. The economies of Britain, Japan, southern Europe and Australia are either contracting or near contraction. So foreign demand is down, and we’ll be selling less stuff to them. The dollar has rebounded of late – at least, it was until Paulson unveiled the TARP – relative to those countries’ currencies. So our stuff doesn’t look as cheap anymore. Combine that with reduced foreign demand, and exports shrink.
So third quarter GDP growth is likely to be negative. Fourth quarter GDP will almost surely be negative, as will growth in 2009.
More homes will also be foreclosed upon. They’re not talking about this much, but the TARP won’t bring relief to homeowners who are late on their mortgage payments. It is designed to only benefit banks that already hold mortgages and mortgage-backed bonds that are in default. Plus, delinquencies on Alt-A mortgages, prime mortgages, option ARMs, and credit cards, home equity lines, and auto loans held by those whose mortgage payments are delinquent and/or have lost their jobs, are rising fast.
The bottom line is that, even with the TARP, jobs will be lost, homes will be foreclosed on, and GDP will contract.
So what happens if the TARP gets killed? Credit will dry up. Banks won’t lend to each other, much less to you and me. So consumption and business investment will stall, driving us into a recession that is inevitable anyway. And many banks and other financial institutions will fail. Other businesses will, too, and thus jobs will be lost, exacerbating the recession. In that scenario, we’re in for a long and painful recession.
On the back side of that recession – as with all recessions – we will recover. People will have curtailed their huge appetite for credit. Household debt will decline from today’s record levels. The ratio of debt payments to disposable income will decline from today’s record levels. And savings will grow.
Savings are the true engine of growth, not consumption, contrary to the kool-aid we’ve all been served since the consumption craze began in the late ‘80s. At the beginning of every long-term, sustainable economic growth period our country has experienced since the 1920s, the savings rate has been around 8-10% of disposable income.
It’s been near zero for several years now.
Now, what about the scenario if the TARP gets passed?
We’re in recession anyway. Financial institutions will fail anyway. Jobs will be lost anyway. Consumption and GDP will contract anyway.
But, we’ll have provided short-term relief to the banking sector. Credit might not freeze entirely. However, that will come at the cost of adding trillions of dollars to the US debt. Our national debt is currently 82% of GDP. Within two years, if the TARP is passed, it could reach 95% or more.
How do we finance our debt? We sell Treasury securities – that is, we literally print money to sell to others to finance our spending.
Those others are increasingly outside our borders. Japan is the largest holder of US Treasury debt, followed by China. But Japan’s economy is now in contraction, and China has made increasing amounts of noise suggesting that it will stop buying our bonds and invest elsewhere – the Middle East, sub-Saharan Africa, etc.
Do you honestly believe that foreign countries will want to continue buying Treasury debt as we approach insolvency (defined as the point at which our national debt exceeds our output)?
No, they won’t. Not unless we pay them a higher return. That means Treasury rates go up. Treasury rates are the basis for all other interest rates, from the rates our corporations pay on the debt they issue to fund their operations, to the rates you and I pay for a mortgage.
So interest rates on everything will go up – into double-digits. We’ve enjoyed relatively low mortgage rates for a long time now. My first mortgage, which I took out in 1989, had a rate of 10.5%. My last refinance was at about half that. But we’ll go back to those pre-1990 levels. What will that do to homeownership?
Also, when we’re printing money to fund our operations – for individuals, companies and state, local and federal government – we create inflation. So inflation will also hit double digits, as the dollar tanks. And I don’t mean it tanks like it has over the last few years. I mean it seriously tanks, as in 1930s Germany, when people took wheelbarrows full of marks to the grocery store.
What happened in the wake of that crisis? Hitler came into power on the promise of restoring sovereignty to Germany. And we had World War II.
Here’s the truth, in a nutshell. Without the TARP, we face a long and difficult recession. That recession will be the piper we pay for the leveraged excesses of the past two decades. It will hurt. People will suffer. But we’ll emerge stronger, and poised for long-term, sustainable growth.
With the TARP, we’ll still face a long and difficult recession. But it will be exacerbated by a decimated dollar, creating an erosion of our purchasing power. Interest rates, inflation and tax rates – to fund the gargantuan deficits we’ll be running, deficits in the trillions of dollars – will soar. So will joblessness. The Depression will be a fond memory, a walk in the park.
Until some savior waltzes in and promises to fix it all, if we’ll just follow his or her lead. And we’ll be desperate for a savior, so we’ll fall in line. That savior will have to be strong enough economically to bail us out. The only truly strong economy right now is China’s.
Look, I love kung pao chicken as much as the next guy. But I love my freedoms more.
So write your Congressperson and your Senators today, before it’s too late. Tell them you’ll vote them right out of office if they vote for this thing. Our very sovereignty may depend on it.
As an aside, if the TARP passes, US Treasury debt may be downgraded.
Do you get that? The world’s traditional safe haven, the Treasury bill, note or bond, may lose its triple-A rating.
This is unprecedented in my lifetime. But it’s already been threatened by the agencies. They’ve become more trigger-happy of late, quickly downgrading bonds, after too many years of slapping triple-A ratings on subprime toxic waste. They’re even being criticized for acting too fast now, which is incredible, seeing how they screwed the pooch for so long.
Early this week, a client called my firm and asked to buy some T-bills. We went to execute the trade using one of our online trading systems. When we entered the order, the screen went blank. Then it read, “Expired.” We couldn’t execute the trade.
We called the dealers behind the systems. They wouldn’t sell the bills. They were hoarding them for themselves. We finally executed the trades with one dealer, but at a considerable discount to the rates shown on the screens. And these were rates that were already less than half of one percent.
These are uncharted waters. These are scary times. I’ve never seen conditions like this in my 20-plus years in the capital markets. I’ve never heard of them in the 80 years of market history that I’ve studied in-depth.
But in the course of those studies and that experience, I’ve been right more often than I’ve been wrong. I called the dot-com collapse, and I predicted then that stocks would trade sideways for a decade or more.
The S&P 500 today, almost nine years later, is below where it was then.
I called this recession 18 months ago, and I said it would be severe. Ben Bernanke missed it, Hank Paulson missed it, but I didn’t.
I don’t say this to toot my own horn. I say it hoping beyond hope that I’m wrong. I’m not prone to sensationalization. I’m not a Chicken Little type.
But I’m worried. I can live with a recession. I’ve survived several, and if you’re an adult reading this, so have you.
I just don’t know if we can survive the sacrifice of our sovereignty, both economic and political.
“I believe if the credit markets are not functioning, that jobs will be lost; the unemployment rate will rise; more houses will be foreclosed upon; GDP will contract; that the economy will just not be able to recover in a normal, healthy way, no matter what other policies are taken.” Ben Bernanke, September 2008.
Wow. The Fed Chairman is supposed to be the calm voice of reason. It’s his job to avoid using the “R” word until, of course, the National Bureau of Economic Research tells us after the fact that, yes indeed, we have been in recession.
But now, Dr. Bernanke has donned the Chicken Little costume for Halloween. Meanwhile, his counterpart at the Treasury Department, Hank Paulson, has been doing his best Hollywood impersonations.
A year ago, Hank was playing the Kevin Bacon role from the closing parade scene in Animal House, running through the streets amid the chaos, screaming, “All is well! All is well!”
Now, he’s playing Jerry McGuire: “Show me the money!!”
Paulson's bailout request should scare you. It scares me. Here's the Secretary of the Treasury asking for an amount greater than the combined budgets of the Departments of Defense, Education, and Health and Human Services, with broad executive powers as to how to deploy it. And, he's insisting on immunity - in other words, a provision that he can't be sued if anyone is harmed.
Why does someone ask for that provision in advance, unless they know what they're going to do is going to be very harmful?
Here’s what you, the average American, need to understand about the proposed bailout plan. First, we’ll look at what the plan – called the TARP, or Troubled Asset Repurchase Program, actually means. Then, we’ll look at what happens to the US economy with or without the TARP.
Everyone has seen the $700 billion figure bandied about. But what is the actual cost of the plan?
The $700 billion figure is what the government – read, the US taxpayer – can actually hold in “troubled assets” at any given point in time between now and the end of 2010, when the sun sets on Treasury’s TARP authority.
Bernanke testified before Congress that it’s important that the government not pay “fire sale” prices for this toxic crap on the balance sheets of banks, investment banks, and other financial firms. He said the government should be prepared to pay “as close to the ‘hold-to-maturity’ values as possible.”
These are accounting terms, related to Statement of Financial Accounting Standards (SFAS) 115. Under SFAS 115, if an institution classifies its securities as “held to maturity” (HTM), they can carry them on their books at historical cost, without marking them to market. (Marking to market means writing down – or up – the value of the securities to their current market value.) If the institution classifies the bonds as “available for sale” (AFS), they have to mark them to market, and take the difference between cost and current market value as an adjustment to their capital, or net worth. And if they classify them as “trading,” the mark-to-market adjustment flows through the income statement as well as capital.
A significant problem in the whole credit debacle has been that institutions have been valuing their securities above their true market value, because they don’t want the full mark-to-market adjustment to be reflected on their financial statements. Some of them have even shifted securities from AFS to HTM in order to not even have to show “unrealized” losses on their books. (An unrealized loss is a paper loss; it becomes realized when they sell their bonds, at which time the loss hits both income and capital.)
These institutions try to argue that the market values are nebulous, because these securities aren’t actually trading, so no one really knows what the market value is.
Folks, let me present two truths to you. First, these bonds are trading. I know; I see them trade every day. They may not trade in significant volumes, but they do trade. And the prices are well below where most institutions are carrying their investments. Simply put, they are overstating the value of their bonds. The market value of any investment is not historical cost, or what you say current book is, or even the discounted value of the cash flows.
It is, quite simply, what the next buyer will pay you for it.
And the fact that the next buyer is only willing to pay 20 to 30 cents on the dollar has nothing to do with panic, as the Administration and Congress would have you believe. The only people panicked are Paulson, Bernanke, Bush, the Congressional Democrats, and a few CEOs on Wall Street who may - and should - lose their jobs.
Second, they argue that the bonds have been performing; that is, they have been paying as scheduled.
The problem is, that’s not how these bonds trade. They trade on expectations of how the underlying collateral – subprime and Alt-A mortgages, in this case – will pay in the future. Subprime delinquencies are more than 25% at latest count, and Alt-A delinquencies are not far behind that. Even prime mortgages – those made to the most credit-worthy borrowers – are going delinquent at a rapidly accelerating rate.
The bonds backed by these loans are structured with credit enhancements designed to make the highest-rated classes of bonds less risky. But they only remain less risky as long as the supporting classes remain intact to protect them. Those support bonds, as they’re called, take the hit from defaults first, protecting the senior bonds. But the support is eroding at an alarming rate as defaults mount. Once the support bonds have been completely wiped out – which is happening even as we speak – the senior bonds are at risk of taking actual losses.
So while the bonds have been paying as scheduled thus far, the day is soon coming when they won’t. Hence the widespread ratings downgrades on those bonds, and the decimation of their values. The bottom line is that the market values you hear about – 20 to 30 cents on the dollar – are the truly reflective values of the bonds, based on their anticipated, not historical, cash flows. And that’s verified by the fact that they are trading in the market, and those are the prices at which they’re trading.
So, Bernanke is proposing that the Treasury pay something close to the HTM value – in other words, the historical cost, which is around 100 cents on the dollar, or par value – for these bonds. But they’re actually worth 20 to 30 cents on the dollar.
Let’s do the math. If the TARP provides that Treasury can only own $700 billion at any one time, this is how the plan will work. Treasury will buy $700 billion worth of bonds, paying – under Bernanke’s vision for the plan, and he’s basically dancing to Paulson’s tune – something near par. Then, they’ll sell them to private investors willing to buy them, at whatever price those investors are willing to pay.
Private investors aren’t stupid. They won’t pay more than the market value. In fact, when they know securities are going to be dumped on the market, they’ll pay less than market value. More sellers than buyers mean it’s a buyer’s market, and the prices get driven down. So in round one, let’s say Treasury is able to sell the $700 billion worth of bonds at 30 cents on the dollar. So they clear that initial inventory, incurring a loss of 70 cents on the dollar. On $700 billion worth of bonds, that’s a $490 billion loss.
Let us not forget that when we say “the Treasury,” we’re talking about the American taxpayer – you and me.
So, now the Treasury has freed up the $700 billion limit, and can buy the next round. Guess what? Given the fire-sale mentality that has at this point ensued, the selling price this time will be maybe 20 cents on the dollar. So Treasury clears the second round of inventory at an 80-cents-on-the-dollar loss. That’s a $560 billion loss.
Round three might bring a price of 15 cents on the dollar, producing a loss of 85 cents on the dollar, or $595 billion. Round four, maybe 10 cents on the dollar, for a loss of 90 cents on the dollar, or $630 billion.
So after four rounds, the Treasury has cleared $2.8 trillion worth of bad bonds from the books of banks and investment firms – including foreign banks, let’s not forget, because Paulson wants to bail them out too – at a net loss to the US taxpayer of $2.275 trillion.
And Paulson wants Treasury’s authority to foist this debacle on the US taxpayer for two years. And he wants Treasury indemnified from any possible lawsuits brought by anyone who might be “harmed” by these actions.
The bottom line is that this fiasco could wind up costing the US taxpayer trillions of dollars, without recourse through the normal legal process.
Now, let’s look at the impact on the economy, with or without the TARP.
I actually find myself agreeing with Ben Bernanke, for the first time ever, perhaps: if the TARP is not passed, jobs will be lost, GDP will contract, financial institutions will fail, and more homes will be in foreclosure.
But what Ben’s not telling you – and here, you should take note of the fact that while Ben was pooh-poohing the notion that the subprime malaise would spill over to the broader economy, both here and abroad, yours truly was warning of the worst economic environment since the Great Depression – is that all that will come to pass anyway.
The US economy has shed about a million jobs since the end of last year. And it will shed more. A number of financial institutions have failed this year – upwards of 12 at last count, including the most recent, Washington Mutual, which was the biggest bank failure in US history, plus IndyMac, Bear Stearns, Lehman Brothers, and Fannie Mae and Freddie Mac. And more are going to fail. After third quarter earnings are announced, we’re going to see a rash of failures. And the TARP won’t prevent that.
Part of the reason is that a number of the most troubled institutions won’t take part in the plan. Why? Because the last thing they want is price discovery, which Paulson promises the TARP will bring. They’ve moved their bonds into their HTM account, where they can mask the market losses. If the true market values are discovered, they’ll have to acknowledge their losses, and take the write-downs.
And the truth will then be revealed: they are insolvent.
So they’ll keep holding the crap, but no one in the market will lend to them, thus depriving them of desperately needed liquidity, because the other market participants know that the market values are far below the HTM value. So they’ll dry up and fail, as was the case with Bear and Lehman.
GDP is going to contract no matter what. It was barely positive in the fourth quarter of last year, and was only positive because the fourth quarter includes the all-important holiday shopping season. Last year’s holiday season started earlier than most years because Thanksgiving came early. So we got a nice bump in consumption in November. But spending then fell out of bed in December. If we measured GDP growth monthly, instead of quarterly, we’d find that GDP growth was positive in October and November, but negative in December.
In the first quarter of this year, GDP also barely grew. And the only thing that kept it in positive territory was inventory growth. That inventory growth resulted from the fact that businesses built up inventories in anticipation that domestic consumption would remain fairly healthy. It wasn’t, so the inventories they built up couldn’t be worked off. Had they accurately forecasted the sharp drop in domestic consumption, GDP would have contracted, which is the definition of recession.
In the second quarter, GDP grew by 3.3%. It was aided in part by a temporary boost to consumption resulting from the mailing of the stimulus checks. About half of the stimulus was saved, not spent. What was spent, was largely spent on gas and groceries, because inflation was through the roof. There was very little discretionary spending – you know, i-phones and the like.
The other boost to second quarter growth came from exports. We had an improvement in our bulging trade deficit, because the dollar was so weak that US goods were cheap, and foreign economies were still sufficiently strong that there was demand for our stuff.
Those temporary boosts to output growth won’t be repeated. The stimulus package was a one-time deal. (Unless Nancy Pelosi gets her wish; she announced Wednesday that she wants another round of stimulus checks. When I heard that, I told my wife that the government should just send a letter to all of those who make more than $120,000 a year, with the name and address of a taxpayer who makes less than that amount, so the former can just send the latter a check. My wife made the sage observation that at least those benefactors could send their beneficiaries a nice card along with their check.)
And the boost from trade is unlikely to be repeated as well. The economies of Britain, Japan, southern Europe and Australia are either contracting or near contraction. So foreign demand is down, and we’ll be selling less stuff to them. The dollar has rebounded of late – at least, it was until Paulson unveiled the TARP – relative to those countries’ currencies. So our stuff doesn’t look as cheap anymore. Combine that with reduced foreign demand, and exports shrink.
So third quarter GDP growth is likely to be negative. Fourth quarter GDP will almost surely be negative, as will growth in 2009.
More homes will also be foreclosed upon. They’re not talking about this much, but the TARP won’t bring relief to homeowners who are late on their mortgage payments. It is designed to only benefit banks that already hold mortgages and mortgage-backed bonds that are in default. Plus, delinquencies on Alt-A mortgages, prime mortgages, option ARMs, and credit cards, home equity lines, and auto loans held by those whose mortgage payments are delinquent and/or have lost their jobs, are rising fast.
The bottom line is that, even with the TARP, jobs will be lost, homes will be foreclosed on, and GDP will contract.
So what happens if the TARP gets killed? Credit will dry up. Banks won’t lend to each other, much less to you and me. So consumption and business investment will stall, driving us into a recession that is inevitable anyway. And many banks and other financial institutions will fail. Other businesses will, too, and thus jobs will be lost, exacerbating the recession. In that scenario, we’re in for a long and painful recession.
On the back side of that recession – as with all recessions – we will recover. People will have curtailed their huge appetite for credit. Household debt will decline from today’s record levels. The ratio of debt payments to disposable income will decline from today’s record levels. And savings will grow.
Savings are the true engine of growth, not consumption, contrary to the kool-aid we’ve all been served since the consumption craze began in the late ‘80s. At the beginning of every long-term, sustainable economic growth period our country has experienced since the 1920s, the savings rate has been around 8-10% of disposable income.
It’s been near zero for several years now.
Now, what about the scenario if the TARP gets passed?
We’re in recession anyway. Financial institutions will fail anyway. Jobs will be lost anyway. Consumption and GDP will contract anyway.
But, we’ll have provided short-term relief to the banking sector. Credit might not freeze entirely. However, that will come at the cost of adding trillions of dollars to the US debt. Our national debt is currently 82% of GDP. Within two years, if the TARP is passed, it could reach 95% or more.
How do we finance our debt? We sell Treasury securities – that is, we literally print money to sell to others to finance our spending.
Those others are increasingly outside our borders. Japan is the largest holder of US Treasury debt, followed by China. But Japan’s economy is now in contraction, and China has made increasing amounts of noise suggesting that it will stop buying our bonds and invest elsewhere – the Middle East, sub-Saharan Africa, etc.
Do you honestly believe that foreign countries will want to continue buying Treasury debt as we approach insolvency (defined as the point at which our national debt exceeds our output)?
No, they won’t. Not unless we pay them a higher return. That means Treasury rates go up. Treasury rates are the basis for all other interest rates, from the rates our corporations pay on the debt they issue to fund their operations, to the rates you and I pay for a mortgage.
So interest rates on everything will go up – into double-digits. We’ve enjoyed relatively low mortgage rates for a long time now. My first mortgage, which I took out in 1989, had a rate of 10.5%. My last refinance was at about half that. But we’ll go back to those pre-1990 levels. What will that do to homeownership?
Also, when we’re printing money to fund our operations – for individuals, companies and state, local and federal government – we create inflation. So inflation will also hit double digits, as the dollar tanks. And I don’t mean it tanks like it has over the last few years. I mean it seriously tanks, as in 1930s Germany, when people took wheelbarrows full of marks to the grocery store.
What happened in the wake of that crisis? Hitler came into power on the promise of restoring sovereignty to Germany. And we had World War II.
Here’s the truth, in a nutshell. Without the TARP, we face a long and difficult recession. That recession will be the piper we pay for the leveraged excesses of the past two decades. It will hurt. People will suffer. But we’ll emerge stronger, and poised for long-term, sustainable growth.
With the TARP, we’ll still face a long and difficult recession. But it will be exacerbated by a decimated dollar, creating an erosion of our purchasing power. Interest rates, inflation and tax rates – to fund the gargantuan deficits we’ll be running, deficits in the trillions of dollars – will soar. So will joblessness. The Depression will be a fond memory, a walk in the park.
Until some savior waltzes in and promises to fix it all, if we’ll just follow his or her lead. And we’ll be desperate for a savior, so we’ll fall in line. That savior will have to be strong enough economically to bail us out. The only truly strong economy right now is China’s.
Look, I love kung pao chicken as much as the next guy. But I love my freedoms more.
So write your Congressperson and your Senators today, before it’s too late. Tell them you’ll vote them right out of office if they vote for this thing. Our very sovereignty may depend on it.
As an aside, if the TARP passes, US Treasury debt may be downgraded.
Do you get that? The world’s traditional safe haven, the Treasury bill, note or bond, may lose its triple-A rating.
This is unprecedented in my lifetime. But it’s already been threatened by the agencies. They’ve become more trigger-happy of late, quickly downgrading bonds, after too many years of slapping triple-A ratings on subprime toxic waste. They’re even being criticized for acting too fast now, which is incredible, seeing how they screwed the pooch for so long.
Early this week, a client called my firm and asked to buy some T-bills. We went to execute the trade using one of our online trading systems. When we entered the order, the screen went blank. Then it read, “Expired.” We couldn’t execute the trade.
We called the dealers behind the systems. They wouldn’t sell the bills. They were hoarding them for themselves. We finally executed the trades with one dealer, but at a considerable discount to the rates shown on the screens. And these were rates that were already less than half of one percent.
These are uncharted waters. These are scary times. I’ve never seen conditions like this in my 20-plus years in the capital markets. I’ve never heard of them in the 80 years of market history that I’ve studied in-depth.
But in the course of those studies and that experience, I’ve been right more often than I’ve been wrong. I called the dot-com collapse, and I predicted then that stocks would trade sideways for a decade or more.
The S&P 500 today, almost nine years later, is below where it was then.
I called this recession 18 months ago, and I said it would be severe. Ben Bernanke missed it, Hank Paulson missed it, but I didn’t.
I don’t say this to toot my own horn. I say it hoping beyond hope that I’m wrong. I’m not prone to sensationalization. I’m not a Chicken Little type.
But I’m worried. I can live with a recession. I’ve survived several, and if you’re an adult reading this, so have you.
I just don’t know if we can survive the sacrifice of our sovereignty, both economic and political.
Monday, September 22, 2008
"I See Dead People"
Last week, a couple of friends (who are also professional associates) were talking to me about the government's latest bailout plan. Referring to the economic near-collapse that precipitated the panic that led to the plan, they both commented that I had predicted this, anywhere from six to eighteen months ago.
"I know," I replied. "And I'm beginning to feel like the 'I see dead people' kid - I don't know if this is a gift or a curse."
In other words, I'm beginning to be terrified by what I see.
What do I see in this plan?
Abject failure, just like the New Deal that it's modeled after.
First, I don't like the idea of Congress being pushed to cobble together a near-trillion-dollar plan for anything in just a few short days' time. Especially given the general lack of economic and financial literacy in Congress. Take your time, folks. Think this one through. We're not talking about a few million dollars' worth of pork here.
Second, I don't like the way it came together. Here's a timeline:
Tuesday, Sept. 9. S&P downgraded Lehman's debt. Lehman had been shopping itself to potential suitors, and as they examined Lehman's books, they discovered Lehman had not been as aggressive as other Wall Street firms, like Merrill, in writing down its subprime crap. In other words, like so many other financials, it was overstating the bonds' value. So S&P took a fresh look, and cut its ratings. Lehman's stock plunged 45%.
Wednesday, Sept. 10. Lehman reports a record $3.9 billion loss. Lehman's stock plunged 46%.
Thursday, Sept. 11. AIG, which was also overvaluing its subprime and other mortgage-related holdings, saw its credit default swap spreads rise 42%.
Friday, Sept. 12. AIG's default swap spreads jump another 29%, and its stock price falls 31% after S&P says it may downgrade AIG.
Now, here's where it gets interesting.
That night, Hank Paulson and New York Fed Chief Timothy Geithner - two of the architects of the Bear Stearns bailout - tag-team a group of Wall Street execs, including Lehman's. They quickly state that Lehman - then the fourth-largest Street firm - isn't too big to fail in their view, even though Bear - then fifth-largest - was. Paulson's explanation:
"The situation in March and the situation and facts around Bear Stearns were very, very different with what we were looking at in September."
He added these words in arguing against government intervention:
"You have a responsibility to the marketplace."
By September 18, that responsibility to the marketplace had been abandoned. And Paulson's tone had gone from "the situation is very different from March" to "we're facing Armageddon." But we'll get to that momentarily.
Monday, September 15. Lehman declares bankruptcy. And B of A buys Merrill Lynch, after cutting off Merrill's credit lines over the weekend, essentially putting the firm at B of A's mercy. The market tanked.
Tuesday, September 16. AIG's stock fell 34% after Fitch, Moody's and S&P had cut its ratings after trading closed the day before. Tuesday night, Mr. "responsibility to the marketplace" intervened with a capital I, and had the Bernanke Fed lend AIG $85 billion in exchange for an 80% ownership stake.
The world's largest insurer had been nationalized by the supposedly capitalistic United States government.
One market observer rightly noted, "The banks are the recipients of the Fed's largesse." Well, almost rightly. Since the Fed is funded by the taxpayer, it was OUR largesse. I'd better get a Christmas card.
The AIG bailout was supposed to be the end-all fix. But the market kept tanking.
So on the afternoon of Thursday, September 18, as the market was once again in free-fall, New York Senator Chuck Schumer - the same Chuck Schumer who said IndyMac was going to fail, then absolved himself of all responsibility when the ensuing run on the bank caused it to do just that - announced to the press that "the Fed and Treasury were planning a 'comprehensive solution' to the financial crisis," according to Bloomberg.
Oh, really? That was news to Paulson and Bernanke. But Schumer's announcement caused the Dow to recover, staging a 400+-point rally. Hmmmm ... maybe there was something to this "comprehensive solution" idea after all. (It's not lost on me, by the way, that this was the second of Schumer's public comments to significantly affect the markets during this credit imbroglio. And he's the Senator from New York, you know, where Wall Street is. His top nine campaign contributors are financial institutions.)
House Majority Leader Nancy Pelosi called Paulson for an update on what was happening, and they agreed on a briefing of legislators that evening that would also be attended by the usual voice of calm reason, Ben Bernanke.
Ben said, "The credit lines in the American financial system, the lifeblood of the economy, are completely frozen. You could have massive failures within days," going beyond Wall Street and banks to "large brand-name companies," according to sources attending the meeting and quoted by Bloomberg.
So much for the voice of calm reason.
So, to recap our timeline, on September 12 Paulson and Bernanke stoically tell Lehman to go jump off a cliff, which it did. Less than a week later, AIG scares them so bad they do an about face. Two days later, they're ready to give the keys to Ft. Knox to China.
I also suspect that a big catalyst for the plan was pressure from foreign central banks, given that Paulson has since announced that foreign banks could participate in the US taxpayer-funded bailout, and that pressure from foreign central banks is what what precipitated the Fannie/Freddie bailout.
Speaking of which, it was reported this morning that it looks as if that bailout's price tag is going to be closer to $300 billion than the originally reported $200 billion - something I predicted two weeks ago, when Fan and Fred were propped up. Like I said, I see dead people. Why the higher cost? It appears the pair were overstating the value of their subprime holdings.
Are you beginning to see a pattern here? I hope so; the pattern is an important part of my criticism of the latest bailout plan.
And that leads me to my third problem with the plan. The price tag will ultimately be much, much higher once all this crap's valued, and the impact on things like credit default swaps is understood.
Fourth, many financials may not even want the government to buy their toxic waste. Why? Because too many of them are already overstating the value of the garbage, and if the government pays a market price, it'll reveal the true value of their holdings, and many of them will be proven to have been insolvent for some time now. That would be an unintended consequence, and is certainly something those institutions don't want.
Moreover, through the miracle of modern accounting, many of them are carrying those distressed securities on their books at "unrealized losses," meaning what mark-downs they have taken affect capital, but not earnings. But once they sell, the loss is "realized," and both capital and earnings are affected.
Exacerbating this problem is the accounting chicanery that some institutions have employed. The above accounting treatment only applies if the investment is classified as "available for sale," meaning the institution can sell the investment at any time. Bonds classified "held to maturity" don't have to be marked to market at all. But the institution has to demonstrate "the positive intent and ability" to hold them on their books until they mature, and if they sell bonds out of their "held to maturity" portfolio, they may have to mark their entire portfolio to market.
Some institutions, seeking to mask the true market values of their holdings, have been using an accounting gimmick that allows them to move bonds from available-for-sale to held-to-maturity, so they no longer have to show market values, thus masking their unrealized losses. They won't want to sell those bonds and expose the true valuations, thus booking realized losses that, again, could prove them insolvent.
So the bonds will stay on many institutions' books. They'll keep declining in value - especially once the Treasury's proposed reverse auction ensues - until eventually the losses wipe out their capital, and those institutions fail anyway.
Democrats in Washington are balking at the plan, but only because they want to add to its size. They want provisions that will help homeowners and other "little guys" affected by the credit collapse. That's noble - but expensive.
Speaking of the "little guy," how does this affect him? Bankrate.com, which is a consumer finance website that publishes loan and savings rates, has a little FAQ section on its website titled "What does the Treasury bailout mean for mortgages?", which I present in abbreviated form below.
"Q: What is the Treasury asking for?
A: The Treasury is asking for $700 billion to buy, own and sell mortgages and mortgage-backed securities.
Q: Will I still be able to get a mortgage?
A: It depends upon what type of loan you want. Mortgages are likely to remain available for qualified borrowers who get conforming loans, as long as they have sufficient equity. People who need to refinance, but owe more than their houses are worth, will not be helped. Jumbo loans might become more available and affordable. There's no guarantee of that, though. FHA loans remain available for purchasers and refinancers who can jump through multiple qualifying hoops.
Q: Help! I've fallen behind on my mortgage and I can't get up! Is the Treasury going to help me?
A: No. The Treasury plan is a bailout for financial institutions, not for homeowners who are in danger of losing their homes in foreclosure.
Q: My house has been falling in value for more than two years. Will this action reverse that decline?
A: No, and it's not designed to."
Great plan, huh?
Another reason I don't like it is that I'm suspicious of the prices Treasury will pay. As can be inferred from what I noted above, the only way they ensure more institutions don't fail is to pay above-market prices for the bonds. But when they then have to sell those bonds at their true market values - or hang on to them until they ultimately default because the underlying mortgages, the borrowers on which weren't helped by the plan, went into foreclosure - the taxpayer will take a hit. And there's a hold-harmless provision in the deal that says Treasury can't be sued for any of its decisions.
I'm also generally suspicious of any government intervention. (On that topic, my lovely wife had the line of the weekend. McCain was laying out his plan for a new super-regulator, the "Mortgage and Financial Institutions Trust," which he called the MFI. My wife said, "MFI - sounds like More Frigging Intervention to me.")
The government intervened in the natural course of free markets in 1932, with the New Deal. The result: a longer and more pronounced economic downturn, which required a global war to recover from, and long-lasting effects that are contributing to bubbles and recessions even today.
The government intervened in the natural course of free markets during the S&L crisis. The result: a longer crisis and more costly burden to the US taxpayer.
The government again intervened in the wake of the Long-Term Capital Management hedge fund collapse in 1998, by cutting the Fed funds target by three-quarters of a point in six weeks, from already-inflationary levels. The result: the dot-com bubble.
This time, the government intervention could spell the end of our economic and political independence. (I told you, I see dead people.) In focusing on this $700 billion (plus) albatross, we're forgetting the $800 billion the government authorized in July for the housing bill. Remember that?
Since that time, we've authorized (not we the people, we our socialist leadership) a $1.5 trillion increase in the limit on the national debt. That limit is now $11.3 trillion. Second-quarter GDP was $11.7 trillion. The actual national debt, as of last week, was $9.7 trillion. Add next year's projected deficit, the true cost of the Fan/Fred bailout, the AIG bailout, and this bloated hog of a bailout plan - even at just the $700 billion pitched thus far - and assume output growth will be flat, which is looking more optimistic all the time, and we're facing a national debt that's 95% of GDP by the end of the next fiscal year (September 2009).
You think China's going to want to buy Treasuries when the United States is teetering on the brink of insolvency, and may get its own debt downgraded? Not without much higher rates, they're not. And much higher rates mean higher mortgage rates, which means prolonging the housing melt-down, which means more bonds default, which means .... I see dead people.
But don't take my word for it. How did the markets like the way the plan's shaping up?
The Dow fell 370 points. The trade-weighted dollar index posted its largest one-day drop in a very long time, maybe ever - I was too depressed to look. Oil posted its biggest one-day jump ever. (Great - not only can the subprime borrowers not get a refi, they can't fill their gas tank, either.) Interest rates went up.
I think it's only appropriate that the acronym for this plan - Washington just loves a good acronym - is TARP, for Troubled Asset Relief Program. A tarp is something you throw on a destroyed home after a hurricane, as I've learned on my mission trips to the Gulf.
Or something you throw over a compost heap between turnings.
Hey, if my government is going to be socialist, I may as well move to France. It's a very pretty country, they've got the Riviera and that cool film festival, and the food and wine are better. Besides, I'm already minimally conversant in the language. And I'd get the whole month of July off to watch my former-fellow Americans whip the French's tails in their own bike race.
If this thing passes, I'm going to start getting seriously worried about the fact that I get paid in US dollars. I may pull a Gisele and ask to be paid in euros - since we're going to transfer US taxpayer wealth to foreign banks, that seems like a reasonable hedge. And I increasingly feel the need for a hedge. Because in the long run ...
I see dead people.
"I know," I replied. "And I'm beginning to feel like the 'I see dead people' kid - I don't know if this is a gift or a curse."
In other words, I'm beginning to be terrified by what I see.
What do I see in this plan?
Abject failure, just like the New Deal that it's modeled after.
First, I don't like the idea of Congress being pushed to cobble together a near-trillion-dollar plan for anything in just a few short days' time. Especially given the general lack of economic and financial literacy in Congress. Take your time, folks. Think this one through. We're not talking about a few million dollars' worth of pork here.
Second, I don't like the way it came together. Here's a timeline:
Tuesday, Sept. 9. S&P downgraded Lehman's debt. Lehman had been shopping itself to potential suitors, and as they examined Lehman's books, they discovered Lehman had not been as aggressive as other Wall Street firms, like Merrill, in writing down its subprime crap. In other words, like so many other financials, it was overstating the bonds' value. So S&P took a fresh look, and cut its ratings. Lehman's stock plunged 45%.
Wednesday, Sept. 10. Lehman reports a record $3.9 billion loss. Lehman's stock plunged 46%.
Thursday, Sept. 11. AIG, which was also overvaluing its subprime and other mortgage-related holdings, saw its credit default swap spreads rise 42%.
Friday, Sept. 12. AIG's default swap spreads jump another 29%, and its stock price falls 31% after S&P says it may downgrade AIG.
Now, here's where it gets interesting.
That night, Hank Paulson and New York Fed Chief Timothy Geithner - two of the architects of the Bear Stearns bailout - tag-team a group of Wall Street execs, including Lehman's. They quickly state that Lehman - then the fourth-largest Street firm - isn't too big to fail in their view, even though Bear - then fifth-largest - was. Paulson's explanation:
"The situation in March and the situation and facts around Bear Stearns were very, very different with what we were looking at in September."
He added these words in arguing against government intervention:
"You have a responsibility to the marketplace."
By September 18, that responsibility to the marketplace had been abandoned. And Paulson's tone had gone from "the situation is very different from March" to "we're facing Armageddon." But we'll get to that momentarily.
Monday, September 15. Lehman declares bankruptcy. And B of A buys Merrill Lynch, after cutting off Merrill's credit lines over the weekend, essentially putting the firm at B of A's mercy. The market tanked.
Tuesday, September 16. AIG's stock fell 34% after Fitch, Moody's and S&P had cut its ratings after trading closed the day before. Tuesday night, Mr. "responsibility to the marketplace" intervened with a capital I, and had the Bernanke Fed lend AIG $85 billion in exchange for an 80% ownership stake.
The world's largest insurer had been nationalized by the supposedly capitalistic United States government.
One market observer rightly noted, "The banks are the recipients of the Fed's largesse." Well, almost rightly. Since the Fed is funded by the taxpayer, it was OUR largesse. I'd better get a Christmas card.
The AIG bailout was supposed to be the end-all fix. But the market kept tanking.
So on the afternoon of Thursday, September 18, as the market was once again in free-fall, New York Senator Chuck Schumer - the same Chuck Schumer who said IndyMac was going to fail, then absolved himself of all responsibility when the ensuing run on the bank caused it to do just that - announced to the press that "the Fed and Treasury were planning a 'comprehensive solution' to the financial crisis," according to Bloomberg.
Oh, really? That was news to Paulson and Bernanke. But Schumer's announcement caused the Dow to recover, staging a 400+-point rally. Hmmmm ... maybe there was something to this "comprehensive solution" idea after all. (It's not lost on me, by the way, that this was the second of Schumer's public comments to significantly affect the markets during this credit imbroglio. And he's the Senator from New York, you know, where Wall Street is. His top nine campaign contributors are financial institutions.)
House Majority Leader Nancy Pelosi called Paulson for an update on what was happening, and they agreed on a briefing of legislators that evening that would also be attended by the usual voice of calm reason, Ben Bernanke.
Ben said, "The credit lines in the American financial system, the lifeblood of the economy, are completely frozen. You could have massive failures within days," going beyond Wall Street and banks to "large brand-name companies," according to sources attending the meeting and quoted by Bloomberg.
So much for the voice of calm reason.
So, to recap our timeline, on September 12 Paulson and Bernanke stoically tell Lehman to go jump off a cliff, which it did. Less than a week later, AIG scares them so bad they do an about face. Two days later, they're ready to give the keys to Ft. Knox to China.
I also suspect that a big catalyst for the plan was pressure from foreign central banks, given that Paulson has since announced that foreign banks could participate in the US taxpayer-funded bailout, and that pressure from foreign central banks is what what precipitated the Fannie/Freddie bailout.
Speaking of which, it was reported this morning that it looks as if that bailout's price tag is going to be closer to $300 billion than the originally reported $200 billion - something I predicted two weeks ago, when Fan and Fred were propped up. Like I said, I see dead people. Why the higher cost? It appears the pair were overstating the value of their subprime holdings.
Are you beginning to see a pattern here? I hope so; the pattern is an important part of my criticism of the latest bailout plan.
And that leads me to my third problem with the plan. The price tag will ultimately be much, much higher once all this crap's valued, and the impact on things like credit default swaps is understood.
Fourth, many financials may not even want the government to buy their toxic waste. Why? Because too many of them are already overstating the value of the garbage, and if the government pays a market price, it'll reveal the true value of their holdings, and many of them will be proven to have been insolvent for some time now. That would be an unintended consequence, and is certainly something those institutions don't want.
Moreover, through the miracle of modern accounting, many of them are carrying those distressed securities on their books at "unrealized losses," meaning what mark-downs they have taken affect capital, but not earnings. But once they sell, the loss is "realized," and both capital and earnings are affected.
Exacerbating this problem is the accounting chicanery that some institutions have employed. The above accounting treatment only applies if the investment is classified as "available for sale," meaning the institution can sell the investment at any time. Bonds classified "held to maturity" don't have to be marked to market at all. But the institution has to demonstrate "the positive intent and ability" to hold them on their books until they mature, and if they sell bonds out of their "held to maturity" portfolio, they may have to mark their entire portfolio to market.
Some institutions, seeking to mask the true market values of their holdings, have been using an accounting gimmick that allows them to move bonds from available-for-sale to held-to-maturity, so they no longer have to show market values, thus masking their unrealized losses. They won't want to sell those bonds and expose the true valuations, thus booking realized losses that, again, could prove them insolvent.
So the bonds will stay on many institutions' books. They'll keep declining in value - especially once the Treasury's proposed reverse auction ensues - until eventually the losses wipe out their capital, and those institutions fail anyway.
Democrats in Washington are balking at the plan, but only because they want to add to its size. They want provisions that will help homeowners and other "little guys" affected by the credit collapse. That's noble - but expensive.
Speaking of the "little guy," how does this affect him? Bankrate.com, which is a consumer finance website that publishes loan and savings rates, has a little FAQ section on its website titled "What does the Treasury bailout mean for mortgages?", which I present in abbreviated form below.
"Q: What is the Treasury asking for?
A: The Treasury is asking for $700 billion to buy, own and sell mortgages and mortgage-backed securities.
Q: Will I still be able to get a mortgage?
A: It depends upon what type of loan you want. Mortgages are likely to remain available for qualified borrowers who get conforming loans, as long as they have sufficient equity. People who need to refinance, but owe more than their houses are worth, will not be helped. Jumbo loans might become more available and affordable. There's no guarantee of that, though. FHA loans remain available for purchasers and refinancers who can jump through multiple qualifying hoops.
Q: Help! I've fallen behind on my mortgage and I can't get up! Is the Treasury going to help me?
A: No. The Treasury plan is a bailout for financial institutions, not for homeowners who are in danger of losing their homes in foreclosure.
Q: My house has been falling in value for more than two years. Will this action reverse that decline?
A: No, and it's not designed to."
Great plan, huh?
Another reason I don't like it is that I'm suspicious of the prices Treasury will pay. As can be inferred from what I noted above, the only way they ensure more institutions don't fail is to pay above-market prices for the bonds. But when they then have to sell those bonds at their true market values - or hang on to them until they ultimately default because the underlying mortgages, the borrowers on which weren't helped by the plan, went into foreclosure - the taxpayer will take a hit. And there's a hold-harmless provision in the deal that says Treasury can't be sued for any of its decisions.
I'm also generally suspicious of any government intervention. (On that topic, my lovely wife had the line of the weekend. McCain was laying out his plan for a new super-regulator, the "Mortgage and Financial Institutions Trust," which he called the MFI. My wife said, "MFI - sounds like More Frigging Intervention to me.")
The government intervened in the natural course of free markets in 1932, with the New Deal. The result: a longer and more pronounced economic downturn, which required a global war to recover from, and long-lasting effects that are contributing to bubbles and recessions even today.
The government intervened in the natural course of free markets during the S&L crisis. The result: a longer crisis and more costly burden to the US taxpayer.
The government again intervened in the wake of the Long-Term Capital Management hedge fund collapse in 1998, by cutting the Fed funds target by three-quarters of a point in six weeks, from already-inflationary levels. The result: the dot-com bubble.
This time, the government intervention could spell the end of our economic and political independence. (I told you, I see dead people.) In focusing on this $700 billion (plus) albatross, we're forgetting the $800 billion the government authorized in July for the housing bill. Remember that?
Since that time, we've authorized (not we the people, we our socialist leadership) a $1.5 trillion increase in the limit on the national debt. That limit is now $11.3 trillion. Second-quarter GDP was $11.7 trillion. The actual national debt, as of last week, was $9.7 trillion. Add next year's projected deficit, the true cost of the Fan/Fred bailout, the AIG bailout, and this bloated hog of a bailout plan - even at just the $700 billion pitched thus far - and assume output growth will be flat, which is looking more optimistic all the time, and we're facing a national debt that's 95% of GDP by the end of the next fiscal year (September 2009).
You think China's going to want to buy Treasuries when the United States is teetering on the brink of insolvency, and may get its own debt downgraded? Not without much higher rates, they're not. And much higher rates mean higher mortgage rates, which means prolonging the housing melt-down, which means more bonds default, which means .... I see dead people.
But don't take my word for it. How did the markets like the way the plan's shaping up?
The Dow fell 370 points. The trade-weighted dollar index posted its largest one-day drop in a very long time, maybe ever - I was too depressed to look. Oil posted its biggest one-day jump ever. (Great - not only can the subprime borrowers not get a refi, they can't fill their gas tank, either.) Interest rates went up.
I think it's only appropriate that the acronym for this plan - Washington just loves a good acronym - is TARP, for Troubled Asset Relief Program. A tarp is something you throw on a destroyed home after a hurricane, as I've learned on my mission trips to the Gulf.
Or something you throw over a compost heap between turnings.
Hey, if my government is going to be socialist, I may as well move to France. It's a very pretty country, they've got the Riviera and that cool film festival, and the food and wine are better. Besides, I'm already minimally conversant in the language. And I'd get the whole month of July off to watch my former-fellow Americans whip the French's tails in their own bike race.
If this thing passes, I'm going to start getting seriously worried about the fact that I get paid in US dollars. I may pull a Gisele and ask to be paid in euros - since we're going to transfer US taxpayer wealth to foreign banks, that seems like a reasonable hedge. And I increasingly feel the need for a hedge. Because in the long run ...
I see dead people.
Friday, September 19, 2008
What's in a Name?
Plenty, unfortunately.
I've been struck by all the labeling and name-calling that's going on. It's really quite appalling, especially when you consider that people from their twenties to their eighties can't just call George Bush, Sarah Palin, Barack Obama or John McCain by their own names.
"Shrub." "Obama-yo-mama." "McSame." "Caribou Barbie." And on, and on. Are these adults, or kids on the playground?
Sadly enough, they vote, whatever they are.
I frequent a message board for fans of NCAA Division II football programs, of which my beloved alma mater - the Pittsburg State University Gorillas - are a member. There's a dearth of D2 information out there, so this site is a God-send for us DII fans (it's www.d2football.com - a shameless plug for the site owner, who's a good friend of mine).
There's an off-topic section of the board, and during the off-season we D2 fans talk about anything and everything. This summer, for some odd reason, the topics tended to lean toward politics.
At some point, I made a post indicating that I'm a follower of Christ - you know, that guy who lived 2,000 years ago who cared about social justice, the poor, the children, the lost? That liberal-sounding dude?
And some guy who's never even met me, who has no idea what I believe in, immediately started calling me "neo-con."
First, there's nothing "neo" about me. My political leanings were formed more than 20 years ago - when this guy was still probably wearing pull-ups. Second, I'm not really all that "con," but more on that later.
He said I don't care about those less fortunate than me. Let's see - I probably give more to charity than he pays in taxes. I have spent a week of each of my last two summers doing hurricane relief work in the Gulf, driving my own car at my own expense to rebuild poor people's homes. I can't pass a homeless guy on the street without giving him money - whether he asks or not. I played a concert with my praise band this summer at the state prison, and we're going back in October.
But I'm a neo-con, who doesn't care about those less fortunate than me, because I'm a bible-thumper who looks down his nose at the little guy.
What a disconnect. How ignorant. How sad.
A reader of this blog recently encouraged me to "have an open mind." Attached to the message was a New York Times article blasting Sarah Palin, presumably intended to help "open my mind," since I had said I liked her. Now, the Times isn't exactly geared toward the open-minded, any more than Fox News is.
But, here's the deal: I already read the New York Times online every morning. And the Financial Times. And the UK Telegraph. And the Wall Street Journal. And Bloomberg. And the London Times. And Reuters, and an Asian newspaper or two, and an Aussie paper, and der Spiegel. Even a Russian paper once in a while. I watch Fox News, but I also watch CNN, MSNBC, C-SPAN, and the networks.
I read and listen to those sources, taking everything with a healthy dose of salt, weigh all sides of the issue against the backdrop of my own world view, and form an opinion. Is that not open-minded?
But I get labeled "closed-minded" (and I'm not indicating this reader labeled me as such, but others have) by people who only read left-leaning papers and liberal blogs, and proudly state that they refuse to watch Fox News.
Why? What are they afraid of? To be open-minded, mustn't one hear both sides of every story?
Apparently, some people don't think there is more than one side to the story. The funny thing is, I'm not one of them. But those that are in that camp, accuse me of being in it. Again, so much for logic.
So, I decided to do a little informal research, and then to lay out my own beliefs. You decide for yourself whether I'm "open-minded."
I did an informal poll of my D2 football buddies, and this is what I found.
I asked the following questions:
1. What is your current voter registration?
2. What was your mother's? Your father's? (Note: this question in part was prompted by a comment from an elderly relative, who stated, "I was born a Democrat.")
3. If you're a registered Independent, how did you vote in the last three presidential elections?
4. If you're a registered Democrat or Republican, have you ever voted for someone from outside your own party? From the opposition party?
5. For whom do you plan to vote in the coming election?
Here's what I found.
Among the Independents, who made up the majority of respondents, most of their parents were either Democrats or Republicans, with a handful of them coming from Independent households (about 30%). About a third are undecided, and more than half plan to vote Democrat in the coming election, with just 10% or so planning to vote Republican. In the past three elections (not all of them are old enough to have voted in all three), they've voted one-sixth for third-party candidates, with the remainder almost evenly split between Dems and the GOP.
Among the Republicans, which made up the second-largest cohort, almost half of them had parents who were Democrats. A fourth had voted for someone outside their own party, and half of those had voted for the opposition. A fourth of them are also undecided as to who they'll vote for in the next election, with almost all the rest planning to vote the party line, with one dissenter.
Now, to the Democrats, who were in the minority. About half of them had parents who were Republicans, the other half, Democrats. A third had voted outside their own party, and the same number for the opposition. All of them plan to toe the party line come November.
What does this tell us? Well, it tells me that the Republican voters are more likely to cross party lines than the Democrats. Sounds pretty open-minded to me. One Democrat even said "I would never commit the crime of voting Republican." That doesn't sound quite so open-minded, does it?
Now, on to my own experience.
I grew up in a household where, I guess my parents would say that they were born Democrats. I thought I was, too. We were blue collar all the way. Dad was a union member, and we lived near the poverty line.
I worked my tail off for two years after high school, sold my car, and borrowed money to go to college. For one of my summer jobs in college, I literally walked three miles to work each way. It wasn't uphill or in the snow, but it was hot as the dickens. I got my degree, then stuck around to get my MBA, working two to three jobs at a time, and borrowing still more money, which I repaid in full - even without a bailout.
On to my voting record and political leanings. I missed voting in the 1976 election by less than a week, due to my November 8 birthday. Had I been able to, I'd have voted for Carter. In 1980, I did vote for Carter.
Then, while I was a senior in college, a guy I worked for explained to me that the basic foundation of the Republican party was smaller government, and rewarding the little guy for pulling himself up by his own bootstraps, and keeping what he earned - or as much of it as possible - as opposed to being forced to share it all with a bunch of bureaucrats, who would ostensibly direct it to those less fortunate, but more likely would just line their own pockets with it.
That guy he described was my Dad, the Democrat. And my Granddad. And my great-Granddad. And Barack Obama, for that matter. So the story resonated with me. And I changed my registration to Republican, not because I believe in oppressing the downtrodden or because I grew up with a silver spoon in my mouth. Quite the opposite.
In 1984, I voted for Reagan. In 1988, I swallowed hard. I was a Kemp guy. I didn't like Bush I. He smacked of big government, to me. But Dukakis was even bigger government, in my opinion, so I held my nose and voted for Bush.
In 1992, I voted for Perot. I'd have voted for Clinton if Perot hadn't run. After Perot went conspiracy theorist and I'd witnessed four years of Clinton, I voted for Dole in '96.
In 2000, thinking that Gore would be a disaster, I voted for yet another Bush I wasn't a fan of. In 2004, I did the same thing, not wanting to see Kerry at the helm. But I was pining for a good third-party candidate, believe me.
This year, I'm undecided. I'm leaning toward writing in Ron Paul, especially now that the rest of Washington has gone socialist, which seems to appeal to so many Americans, who are sadly so ignorant of economics that they don't have the first clue what's going on.
But I may not even vote, as I may have defected by then. Besides, as I learned voting for Perot, a vote for Paul would be a wasted vote. I might as well vote for Obama, who wants to expand the great wealth transfer of 2008. Though if he promised to replace Bernanke with Volcker, he might sway me (but I'd want that in writing).
So I've voted Democrat, Republican, and third party. And I don't ever just plan to toe the party line. Every election, I weigh the candidates and their positions on the issues, taking information from every possible source, pro and con. Sometimes it comes down to a lesser-of-two-evils thing. Sometimes I have to hold my nose when I vote.
Now, as for my ideology. I remain a registered Republican, only as a position statement. Because I still believe the words of Gerald Ford: "If the government is big enough to give you everything you want, it is big enough to take away everything you have." And I don't want a big, socialist government. Which is why I'm so pissed off right now.
But for the record, I do believe that most of the Republicans in the White House, the House and the Senate have abandoned the core belief in less government. I just happen to be an idealist who hangs on to the ideal, even if everyone else has abandoned it. Regardless of my registration, I'm more likely to vote like an Independent. I'd re-register that way, but I want to make the statement that I believe in less government intervention. Until the Republican party officially and publicly abandons that plank of the platform, I'll stay put.
I also believe in a flat tax, and/or a consumption tax, which would impose fiscal responsibility, but nobody wants that anymore. Handouts and bailouts are the watch-word of the day.
I believe we were right to go into Iraq, given that we had bad intel that told us Hussein had WMDs (which he may well have, but moved into Syria, and in any event, no one would have been surprised had he had them, despot that he was, so it seemed plausible). Hey, I'm a CEO, and I've made bad business decisions on the basis of bad intel from senior managers to whom I delegated according to their purported expertise, who then proceeded to sell me a bill of goods.
Those senior managers are no longer in my employ. And that, above all else, was W's downfall regarding going into Iraq. He should have fired Rumsfeld and Cheney right away, but he's too loyal, like his Dad.
I'm glad we took out Hussein. But the management of the war effort was flawed. However, the surge worked, as Obama noted, "beyond our wildest dreams." Will we ever bring peace to Iraq? Heck, no. They've been killing each other over there since Abraham kicked Ishmael out of the tent. We're not going to change that. But let's make an orderly withdrawal, and not just be stupid about it for the sake of political expediency. Two wrongs don't make a right.
I believe in equal opportunity for all, but I don't believe in affirmative action or quotas.
I believe in some form of gun control. I'm not sure just what, because it's not an issue that's near and dear to my heart. But I believe it's too easy to get a gun these days.
I believe in a woman's right to choose what procedures are done on her body. Unfortunately, an abortion is not performed on a woman's body, but on an unborn infant's. It takes place IN a woman's body, but it murders the unborn infant. Murder is against the law in every state. Let's just enforce those laws, and leave the federal government out of it.
I understand the strong feelings that some people - especially victims and their families - have about the death penalty. But I'm increasingly convinced that it's not man's place to play God in that regard. In the apparently dichotomous position that exists with pro-lifers who also support the death penalty, I understand their distinction about innocent vs. not-so-innocent life. (This distinction - so often pointed out by their detractors - is no different from those on the other side who believe it's wrong to kill a convicted murderer because that's "playing God," yet fine to kill the unborn.) I understand both views, I just happen to have mine.
I don't believe in government-provided welfare. I'd rather get a nice tax break for contributing to charity, as I do, so that I can direct my own money to do the greatest good possible, for the people that need it most. I'm a heck of a lot smarter than most of our elected officials, apparently, and I'm certainly a better steward of money than they are. I trust myself to make those decisions far more than I trust them. If Washington must get involved, set a minimum charitable contribution level, and if I don't meet it, tax the bejeebers out of me. (Hint: I give a significant multiple of what Joe Biden does, and he's worth considerably more than me.)
I also give freely of my time, efforts and talents, like playing prison concerts and doing hurricane relief work. Do my "open-your-mind" detractors do those things? When I ask that question, they accuse me of only doing those things to be able to brag about it. Really? What do I supposedly get out of such boasting? If they'd do those things themselves once in a while, they'd understand what one truly does get from such experiences: greater blessings than those whom you're there to bless.
And, that accusation also assumes I'm clairvoyant, and can predict that well after I've made my contributions and given of my time, I will be accused of not caring about others, and will then have my charitable efforts conveniently in my hip pocket, ready to whip them out in my defense. Once again, so much for logic.
So, where do I fit on the political spectrum? Well, it would appear I'm clearly a fiscal conservative, though in "tests" I've taken I fall just barely to the right of center in that respect. On social issues, I come in centrist - left on social justice, right on some moral issues. In fact, on the Moral Matrix test, I identified with "Liberalism" and "Capital Democratism," and the party assigned me was the Democratic party. Those respondents more conservative than me numbered more than four times those more liberal.
In practice - where it matters most - I'm sure I'm more liberal than those who cry "care for the less fortunate" but spend all their time talking about how much money they have/make, and spend all their energy hanging onto as much of it as they can for themselves, while calling on "soak-the-rich" taxes to pay for the handouts they support. Seems rather hypocritical to me, but what do I know, desperately clinging to logic as I do?
The bottom line is this: we do way too much labeling and name-calling, and not enough frank and honest self-evaluation. And that is the root of our great divide. And, it comes every bit as much from the left as from the right. So to say that George Bush, or Karl Rove, or some other right-wing target has divided us, is an absolution of personal responsibility.
But that's what too many of us want.
When it comes to our division, as Pogo said, "We have met the enemy, and he is us." So I'll close by quoting a Vietnam War-era folk-song lyric - as liberal a source as one could ask for:
"When will they ever learn? When will they ever learn?"
I've been struck by all the labeling and name-calling that's going on. It's really quite appalling, especially when you consider that people from their twenties to their eighties can't just call George Bush, Sarah Palin, Barack Obama or John McCain by their own names.
"Shrub." "Obama-yo-mama." "McSame." "Caribou Barbie." And on, and on. Are these adults, or kids on the playground?
Sadly enough, they vote, whatever they are.
I frequent a message board for fans of NCAA Division II football programs, of which my beloved alma mater - the Pittsburg State University Gorillas - are a member. There's a dearth of D2 information out there, so this site is a God-send for us DII fans (it's www.d2football.com - a shameless plug for the site owner, who's a good friend of mine).
There's an off-topic section of the board, and during the off-season we D2 fans talk about anything and everything. This summer, for some odd reason, the topics tended to lean toward politics.
At some point, I made a post indicating that I'm a follower of Christ - you know, that guy who lived 2,000 years ago who cared about social justice, the poor, the children, the lost? That liberal-sounding dude?
And some guy who's never even met me, who has no idea what I believe in, immediately started calling me "neo-con."
First, there's nothing "neo" about me. My political leanings were formed more than 20 years ago - when this guy was still probably wearing pull-ups. Second, I'm not really all that "con," but more on that later.
He said I don't care about those less fortunate than me. Let's see - I probably give more to charity than he pays in taxes. I have spent a week of each of my last two summers doing hurricane relief work in the Gulf, driving my own car at my own expense to rebuild poor people's homes. I can't pass a homeless guy on the street without giving him money - whether he asks or not. I played a concert with my praise band this summer at the state prison, and we're going back in October.
But I'm a neo-con, who doesn't care about those less fortunate than me, because I'm a bible-thumper who looks down his nose at the little guy.
What a disconnect. How ignorant. How sad.
A reader of this blog recently encouraged me to "have an open mind." Attached to the message was a New York Times article blasting Sarah Palin, presumably intended to help "open my mind," since I had said I liked her. Now, the Times isn't exactly geared toward the open-minded, any more than Fox News is.
But, here's the deal: I already read the New York Times online every morning. And the Financial Times. And the UK Telegraph. And the Wall Street Journal. And Bloomberg. And the London Times. And Reuters, and an Asian newspaper or two, and an Aussie paper, and der Spiegel. Even a Russian paper once in a while. I watch Fox News, but I also watch CNN, MSNBC, C-SPAN, and the networks.
I read and listen to those sources, taking everything with a healthy dose of salt, weigh all sides of the issue against the backdrop of my own world view, and form an opinion. Is that not open-minded?
But I get labeled "closed-minded" (and I'm not indicating this reader labeled me as such, but others have) by people who only read left-leaning papers and liberal blogs, and proudly state that they refuse to watch Fox News.
Why? What are they afraid of? To be open-minded, mustn't one hear both sides of every story?
Apparently, some people don't think there is more than one side to the story. The funny thing is, I'm not one of them. But those that are in that camp, accuse me of being in it. Again, so much for logic.
So, I decided to do a little informal research, and then to lay out my own beliefs. You decide for yourself whether I'm "open-minded."
I did an informal poll of my D2 football buddies, and this is what I found.
I asked the following questions:
1. What is your current voter registration?
2. What was your mother's? Your father's? (Note: this question in part was prompted by a comment from an elderly relative, who stated, "I was born a Democrat.")
3. If you're a registered Independent, how did you vote in the last three presidential elections?
4. If you're a registered Democrat or Republican, have you ever voted for someone from outside your own party? From the opposition party?
5. For whom do you plan to vote in the coming election?
Here's what I found.
Among the Independents, who made up the majority of respondents, most of their parents were either Democrats or Republicans, with a handful of them coming from Independent households (about 30%). About a third are undecided, and more than half plan to vote Democrat in the coming election, with just 10% or so planning to vote Republican. In the past three elections (not all of them are old enough to have voted in all three), they've voted one-sixth for third-party candidates, with the remainder almost evenly split between Dems and the GOP.
Among the Republicans, which made up the second-largest cohort, almost half of them had parents who were Democrats. A fourth had voted for someone outside their own party, and half of those had voted for the opposition. A fourth of them are also undecided as to who they'll vote for in the next election, with almost all the rest planning to vote the party line, with one dissenter.
Now, to the Democrats, who were in the minority. About half of them had parents who were Republicans, the other half, Democrats. A third had voted outside their own party, and the same number for the opposition. All of them plan to toe the party line come November.
What does this tell us? Well, it tells me that the Republican voters are more likely to cross party lines than the Democrats. Sounds pretty open-minded to me. One Democrat even said "I would never commit the crime of voting Republican." That doesn't sound quite so open-minded, does it?
Now, on to my own experience.
I grew up in a household where, I guess my parents would say that they were born Democrats. I thought I was, too. We were blue collar all the way. Dad was a union member, and we lived near the poverty line.
I worked my tail off for two years after high school, sold my car, and borrowed money to go to college. For one of my summer jobs in college, I literally walked three miles to work each way. It wasn't uphill or in the snow, but it was hot as the dickens. I got my degree, then stuck around to get my MBA, working two to three jobs at a time, and borrowing still more money, which I repaid in full - even without a bailout.
On to my voting record and political leanings. I missed voting in the 1976 election by less than a week, due to my November 8 birthday. Had I been able to, I'd have voted for Carter. In 1980, I did vote for Carter.
Then, while I was a senior in college, a guy I worked for explained to me that the basic foundation of the Republican party was smaller government, and rewarding the little guy for pulling himself up by his own bootstraps, and keeping what he earned - or as much of it as possible - as opposed to being forced to share it all with a bunch of bureaucrats, who would ostensibly direct it to those less fortunate, but more likely would just line their own pockets with it.
That guy he described was my Dad, the Democrat. And my Granddad. And my great-Granddad. And Barack Obama, for that matter. So the story resonated with me. And I changed my registration to Republican, not because I believe in oppressing the downtrodden or because I grew up with a silver spoon in my mouth. Quite the opposite.
In 1984, I voted for Reagan. In 1988, I swallowed hard. I was a Kemp guy. I didn't like Bush I. He smacked of big government, to me. But Dukakis was even bigger government, in my opinion, so I held my nose and voted for Bush.
In 1992, I voted for Perot. I'd have voted for Clinton if Perot hadn't run. After Perot went conspiracy theorist and I'd witnessed four years of Clinton, I voted for Dole in '96.
In 2000, thinking that Gore would be a disaster, I voted for yet another Bush I wasn't a fan of. In 2004, I did the same thing, not wanting to see Kerry at the helm. But I was pining for a good third-party candidate, believe me.
This year, I'm undecided. I'm leaning toward writing in Ron Paul, especially now that the rest of Washington has gone socialist, which seems to appeal to so many Americans, who are sadly so ignorant of economics that they don't have the first clue what's going on.
But I may not even vote, as I may have defected by then. Besides, as I learned voting for Perot, a vote for Paul would be a wasted vote. I might as well vote for Obama, who wants to expand the great wealth transfer of 2008. Though if he promised to replace Bernanke with Volcker, he might sway me (but I'd want that in writing).
So I've voted Democrat, Republican, and third party. And I don't ever just plan to toe the party line. Every election, I weigh the candidates and their positions on the issues, taking information from every possible source, pro and con. Sometimes it comes down to a lesser-of-two-evils thing. Sometimes I have to hold my nose when I vote.
Now, as for my ideology. I remain a registered Republican, only as a position statement. Because I still believe the words of Gerald Ford: "If the government is big enough to give you everything you want, it is big enough to take away everything you have." And I don't want a big, socialist government. Which is why I'm so pissed off right now.
But for the record, I do believe that most of the Republicans in the White House, the House and the Senate have abandoned the core belief in less government. I just happen to be an idealist who hangs on to the ideal, even if everyone else has abandoned it. Regardless of my registration, I'm more likely to vote like an Independent. I'd re-register that way, but I want to make the statement that I believe in less government intervention. Until the Republican party officially and publicly abandons that plank of the platform, I'll stay put.
I also believe in a flat tax, and/or a consumption tax, which would impose fiscal responsibility, but nobody wants that anymore. Handouts and bailouts are the watch-word of the day.
I believe we were right to go into Iraq, given that we had bad intel that told us Hussein had WMDs (which he may well have, but moved into Syria, and in any event, no one would have been surprised had he had them, despot that he was, so it seemed plausible). Hey, I'm a CEO, and I've made bad business decisions on the basis of bad intel from senior managers to whom I delegated according to their purported expertise, who then proceeded to sell me a bill of goods.
Those senior managers are no longer in my employ. And that, above all else, was W's downfall regarding going into Iraq. He should have fired Rumsfeld and Cheney right away, but he's too loyal, like his Dad.
I'm glad we took out Hussein. But the management of the war effort was flawed. However, the surge worked, as Obama noted, "beyond our wildest dreams." Will we ever bring peace to Iraq? Heck, no. They've been killing each other over there since Abraham kicked Ishmael out of the tent. We're not going to change that. But let's make an orderly withdrawal, and not just be stupid about it for the sake of political expediency. Two wrongs don't make a right.
I believe in equal opportunity for all, but I don't believe in affirmative action or quotas.
I believe in some form of gun control. I'm not sure just what, because it's not an issue that's near and dear to my heart. But I believe it's too easy to get a gun these days.
I believe in a woman's right to choose what procedures are done on her body. Unfortunately, an abortion is not performed on a woman's body, but on an unborn infant's. It takes place IN a woman's body, but it murders the unborn infant. Murder is against the law in every state. Let's just enforce those laws, and leave the federal government out of it.
I understand the strong feelings that some people - especially victims and their families - have about the death penalty. But I'm increasingly convinced that it's not man's place to play God in that regard. In the apparently dichotomous position that exists with pro-lifers who also support the death penalty, I understand their distinction about innocent vs. not-so-innocent life. (This distinction - so often pointed out by their detractors - is no different from those on the other side who believe it's wrong to kill a convicted murderer because that's "playing God," yet fine to kill the unborn.) I understand both views, I just happen to have mine.
I don't believe in government-provided welfare. I'd rather get a nice tax break for contributing to charity, as I do, so that I can direct my own money to do the greatest good possible, for the people that need it most. I'm a heck of a lot smarter than most of our elected officials, apparently, and I'm certainly a better steward of money than they are. I trust myself to make those decisions far more than I trust them. If Washington must get involved, set a minimum charitable contribution level, and if I don't meet it, tax the bejeebers out of me. (Hint: I give a significant multiple of what Joe Biden does, and he's worth considerably more than me.)
I also give freely of my time, efforts and talents, like playing prison concerts and doing hurricane relief work. Do my "open-your-mind" detractors do those things? When I ask that question, they accuse me of only doing those things to be able to brag about it. Really? What do I supposedly get out of such boasting? If they'd do those things themselves once in a while, they'd understand what one truly does get from such experiences: greater blessings than those whom you're there to bless.
And, that accusation also assumes I'm clairvoyant, and can predict that well after I've made my contributions and given of my time, I will be accused of not caring about others, and will then have my charitable efforts conveniently in my hip pocket, ready to whip them out in my defense. Once again, so much for logic.
So, where do I fit on the political spectrum? Well, it would appear I'm clearly a fiscal conservative, though in "tests" I've taken I fall just barely to the right of center in that respect. On social issues, I come in centrist - left on social justice, right on some moral issues. In fact, on the Moral Matrix test, I identified with "Liberalism" and "Capital Democratism," and the party assigned me was the Democratic party. Those respondents more conservative than me numbered more than four times those more liberal.
In practice - where it matters most - I'm sure I'm more liberal than those who cry "care for the less fortunate" but spend all their time talking about how much money they have/make, and spend all their energy hanging onto as much of it as they can for themselves, while calling on "soak-the-rich" taxes to pay for the handouts they support. Seems rather hypocritical to me, but what do I know, desperately clinging to logic as I do?
The bottom line is this: we do way too much labeling and name-calling, and not enough frank and honest self-evaluation. And that is the root of our great divide. And, it comes every bit as much from the left as from the right. So to say that George Bush, or Karl Rove, or some other right-wing target has divided us, is an absolution of personal responsibility.
But that's what too many of us want.
When it comes to our division, as Pogo said, "We have met the enemy, and he is us." So I'll close by quoting a Vietnam War-era folk-song lyric - as liberal a source as one could ask for:
"When will they ever learn? When will they ever learn?"
I'M MAD AS HELL, AND I'M NOT GOING TO TAKE IT ANYMORE!!
I'd like to type this entire post in all caps, but for the sake of my readers, I'll refrain. But I am mad - hoppin' mad!
Today, my nation's government went socialist. We trumped the New Deal. I can only hope that when they start to try to put this absolutely ridiculously untenable idea down on paper, they realize the futility, and it falls apart. Actually, I think that'll happen.
We spent all $50 billion of the Exchange Stabilization Fund - created during the failed New Deal to shore up the shaky US dollar - to guarantee money market mutual funds.
That's right, folks - mutual funds, in which investors, taking risks they should understand, put their money because they're too freaking greedy to settle for the safe haven of insured bank deposits, and want the higher yields offered by riskier money market funds. They're supposed to be doing that with full knowledge that, unlike an insured bank or thrift or credit union deposit, they could lose their investment.
Well, after one money fund "broke the buck" this week (that is, traded at a Net Asset Value below $1, which money funds strive to maintain), for only the second time in 35 years, and another fund announced it would self-liquidate, the Socialists stepped in and committed the entire ESF to bailing those losers out - never mind that the ESF wasn't intended for that. I'm not even sure these clowns have the authority to spend the ESF for this purpose, though I don't think they really care at this point. We're in a financial police state.
Why did they take this action? Money funds total about $3 trillion, and they feared a run. Money funds invest in asset-backed commercial paper (ABCP), a market that's already been decimated by reckless, excessive risk taking. A run would result in forced liquidations, which would further depress ABCP prices, resulting in global portfolio devaluations. Money funds also invest heavily in government-sponsored enterprise (read: Fannie and Freddie) discount notes, and now that we own Fannie and Freddie, we can't have our friends overseas losing money on their crap, now can we? So again, we have a massive wealth transfer from the US taxpayer to investors, including a large number of foreign investors.
They tried to pitch this as not being a burden on the taxpayer, since the ESF was already funded. Well, guess what? It was funded by taxpayer dollars. So while it didn't "cost" this generation of taxpayers - yet - it'll have to be replenished if Washington wants to keep it alive. And with the current New Deal-happy crowd inside the Beltway, they probably want to make it even bigger. So the current herd of taxpayers - you and me - are indeed on the hook. Add at least $50 billion to the $500 billion deficit we'll be funding next year.
What else did they do? Well, not much at this point, because for the rest of it, they need Congressional approval. Every American should write their Congressman/woman and Senator and scream:
"IF YOU DARE VOTE FOR THIS STUPID THING, YOUR ARSE IS COMING HOME!! NOW!!"
But we don't have the fortitude - we're lemmings, and we'll eat what we're fed. We'll keep nursing at the New Deal teat, too ignorant to recognize that it is not, in fact, the only alternative, nor even the best of unpalatable alternatives.
Not this dude, though. I'm not voting this year, unless I vote for Ron Paul, who seemed to get this. McCain doesn't. Obama certainly doesn't - heck, he went so far as to say, "Let's not just bail out Wall Street - let's bail out the taxpayer, too." Does this idiot not get that a bailout is paid for by taxpayers? Why would I want to be forced by my government to bail out ... myself? Oh yeah, now I remember - he wants me, who sits in the top bracket, to bail out the rest of the taxpayers! So in his world, this isn't a taxpayer problem, it's just a top-bracket problem. Palin doesn't get this either, I'm sure, and Biden couldn't spell ESF if you spotted him the E.
Furthermore, I think I'll quit paying on my mortgage, and I'll be damned if I ever file another tax return. Do you hear me, IRS? Come and get me. I don't care anymore.
See, they want to buy up all the bad mortgage debt held by all the irresponsible greedy morons who made bad investment decisions to build up their fat bonuses. While guys like me played it on the up-and-up, and were happy with what we got. And, they want to bail out the irresponsible borrowers who over-leveraged themselves into McMansions, too. While I bought a house I could afford, after saving a big enough down payment to not have to pay mortgage insurance, and took a fixed-rate loan even though an ARM would have been cheaper, let alone an option ARM.
So where's my bailout?
If they do pass this ugly monster, our deficit will more than double in three years - it'll be over a trillion dollars. Does anybody out there get that? China will not touch our debt at current yields, so rates will have to go up - way up - if we're going to fund this debacle. Nobody thinks about that, except me.
On that topic, two people that follow my stuff have told me in the last two days, "You predicted all this." And, to pat myself on the back a bit, I'm giving an economic presentation in Arizona next week, and to supplement the handouts (in the spirit of supplementing handouts, which is all the rage in Washington these days), I included a presentation I made in 2001 where I predicted much of what's happening right now.
But, when my friends pointed out that I've gotten this right, I told them, "I feel like the 'I see dead people' kid - I don't know if this is a gift, or a curse."
Back on topic, though, interest rates will go up. They'll have to go up - a lot. That'll price millions more Americans out of the housing market, and jack up their credit card rates. So the house of cards will crumble anyway.
But you know what? I won't care. This thing comes at a perfect time for me. I'm three years away from early retirement (though my biggest concern is that I'll be paid out in US dollars - maybe I need to pull a Gisele and re-negotiate my contract to get paid in euros - or bullion). Real estate is going to underperform for a long time, due to us boomers retiring and needing less in the way of housing. My daughter is off to college next year, so why do we need 3,000 square feet of house?
I've been thinking about mission work anyway. Africa's cheap - heck, Grandma Obama lives on a buck and a half a day. I could live like a king there, and do some real good for humanity. I'm sure my dogs would love running around in Africa. And they've got some great beaches there.
So, sayonara, suckers (actually, I should be speaking Chinese, not Japanese). You all can pay for this if you want to. Color me gone, though. I didn't sign on to be a socialist.
Today, my nation's government went socialist. We trumped the New Deal. I can only hope that when they start to try to put this absolutely ridiculously untenable idea down on paper, they realize the futility, and it falls apart. Actually, I think that'll happen.
We spent all $50 billion of the Exchange Stabilization Fund - created during the failed New Deal to shore up the shaky US dollar - to guarantee money market mutual funds.
That's right, folks - mutual funds, in which investors, taking risks they should understand, put their money because they're too freaking greedy to settle for the safe haven of insured bank deposits, and want the higher yields offered by riskier money market funds. They're supposed to be doing that with full knowledge that, unlike an insured bank or thrift or credit union deposit, they could lose their investment.
Well, after one money fund "broke the buck" this week (that is, traded at a Net Asset Value below $1, which money funds strive to maintain), for only the second time in 35 years, and another fund announced it would self-liquidate, the Socialists stepped in and committed the entire ESF to bailing those losers out - never mind that the ESF wasn't intended for that. I'm not even sure these clowns have the authority to spend the ESF for this purpose, though I don't think they really care at this point. We're in a financial police state.
Why did they take this action? Money funds total about $3 trillion, and they feared a run. Money funds invest in asset-backed commercial paper (ABCP), a market that's already been decimated by reckless, excessive risk taking. A run would result in forced liquidations, which would further depress ABCP prices, resulting in global portfolio devaluations. Money funds also invest heavily in government-sponsored enterprise (read: Fannie and Freddie) discount notes, and now that we own Fannie and Freddie, we can't have our friends overseas losing money on their crap, now can we? So again, we have a massive wealth transfer from the US taxpayer to investors, including a large number of foreign investors.
They tried to pitch this as not being a burden on the taxpayer, since the ESF was already funded. Well, guess what? It was funded by taxpayer dollars. So while it didn't "cost" this generation of taxpayers - yet - it'll have to be replenished if Washington wants to keep it alive. And with the current New Deal-happy crowd inside the Beltway, they probably want to make it even bigger. So the current herd of taxpayers - you and me - are indeed on the hook. Add at least $50 billion to the $500 billion deficit we'll be funding next year.
What else did they do? Well, not much at this point, because for the rest of it, they need Congressional approval. Every American should write their Congressman/woman and Senator and scream:
"IF YOU DARE VOTE FOR THIS STUPID THING, YOUR ARSE IS COMING HOME!! NOW!!"
But we don't have the fortitude - we're lemmings, and we'll eat what we're fed. We'll keep nursing at the New Deal teat, too ignorant to recognize that it is not, in fact, the only alternative, nor even the best of unpalatable alternatives.
Not this dude, though. I'm not voting this year, unless I vote for Ron Paul, who seemed to get this. McCain doesn't. Obama certainly doesn't - heck, he went so far as to say, "Let's not just bail out Wall Street - let's bail out the taxpayer, too." Does this idiot not get that a bailout is paid for by taxpayers? Why would I want to be forced by my government to bail out ... myself? Oh yeah, now I remember - he wants me, who sits in the top bracket, to bail out the rest of the taxpayers! So in his world, this isn't a taxpayer problem, it's just a top-bracket problem. Palin doesn't get this either, I'm sure, and Biden couldn't spell ESF if you spotted him the E.
Furthermore, I think I'll quit paying on my mortgage, and I'll be damned if I ever file another tax return. Do you hear me, IRS? Come and get me. I don't care anymore.
See, they want to buy up all the bad mortgage debt held by all the irresponsible greedy morons who made bad investment decisions to build up their fat bonuses. While guys like me played it on the up-and-up, and were happy with what we got. And, they want to bail out the irresponsible borrowers who over-leveraged themselves into McMansions, too. While I bought a house I could afford, after saving a big enough down payment to not have to pay mortgage insurance, and took a fixed-rate loan even though an ARM would have been cheaper, let alone an option ARM.
So where's my bailout?
If they do pass this ugly monster, our deficit will more than double in three years - it'll be over a trillion dollars. Does anybody out there get that? China will not touch our debt at current yields, so rates will have to go up - way up - if we're going to fund this debacle. Nobody thinks about that, except me.
On that topic, two people that follow my stuff have told me in the last two days, "You predicted all this." And, to pat myself on the back a bit, I'm giving an economic presentation in Arizona next week, and to supplement the handouts (in the spirit of supplementing handouts, which is all the rage in Washington these days), I included a presentation I made in 2001 where I predicted much of what's happening right now.
But, when my friends pointed out that I've gotten this right, I told them, "I feel like the 'I see dead people' kid - I don't know if this is a gift, or a curse."
Back on topic, though, interest rates will go up. They'll have to go up - a lot. That'll price millions more Americans out of the housing market, and jack up their credit card rates. So the house of cards will crumble anyway.
But you know what? I won't care. This thing comes at a perfect time for me. I'm three years away from early retirement (though my biggest concern is that I'll be paid out in US dollars - maybe I need to pull a Gisele and re-negotiate my contract to get paid in euros - or bullion). Real estate is going to underperform for a long time, due to us boomers retiring and needing less in the way of housing. My daughter is off to college next year, so why do we need 3,000 square feet of house?
I've been thinking about mission work anyway. Africa's cheap - heck, Grandma Obama lives on a buck and a half a day. I could live like a king there, and do some real good for humanity. I'm sure my dogs would love running around in Africa. And they've got some great beaches there.
So, sayonara, suckers (actually, I should be speaking Chinese, not Japanese). You all can pay for this if you want to. Color me gone, though. I didn't sign on to be a socialist.
Thursday, September 18, 2008
The Great Wealth Transfer of 2008
Q: Why did the government bail out Fannie Mae and Freddie Mac?
A: Foreign governments held a poo-pot full of their debt, and were taking massive losses as the two careened toward failure. Foreign central banks began pressuring Hank Paulson, and he bailed them out. Not just Fannie and Freddie, but the foreign central banks. On the backs of the US taxpayer. Thus transferring our wealth to foreign central banks.
Q: Why did the government bail out AIG?
A: AIG had its tentacles in numerous other financial institutions abroad, many of them overseas. Foreign investors brought considerable pressure on Hank and his buddy Helicopter Ben, and they once again capitulated. Once again transferring wealth from the US taxpayer abroad.
This is akin to the bailout of the Long-Term Capital Management hedge fund in 1998. The US economy was headed into recession that year. Then, in late summer, LTCM began to unwind. Foreign investors were into LTCM in a big way. They persuaded then-Fed chair Alan "Mr. Bubble" Greenspan to bail them out. So he did, cutting the Fed funds target by 75 basis points in six weeks, in an already accommodative monetary policy environment.
The result was the dot-com bubble. Money was so cheap that banks were giving it out like candy at a parade to every venture capital firm out there. They in turn handed it over to every dot-com guru who had a cute sock puppet for a mascot, but no earnings projections. Mr. Bubble himself greased the wheels for this "irrational exuberance," by saying that technology-led productivity advances would naturally contain inflation in this "new economy." Of course, he was wrong, though he won't admit it now.
The melt-down from the dot-com collapse led Mr. Bubble to slash interest rates to ridiculously low levels, and to hold them there for too daggone long. Which created the housing bubble.
Which is now responsible for the global financial hell that we're on the brink of.
Just give the the addresses of the central banks in question, and I'll eliminate the middle man and write them the check myself.
A: Foreign governments held a poo-pot full of their debt, and were taking massive losses as the two careened toward failure. Foreign central banks began pressuring Hank Paulson, and he bailed them out. Not just Fannie and Freddie, but the foreign central banks. On the backs of the US taxpayer. Thus transferring our wealth to foreign central banks.
Q: Why did the government bail out AIG?
A: AIG had its tentacles in numerous other financial institutions abroad, many of them overseas. Foreign investors brought considerable pressure on Hank and his buddy Helicopter Ben, and they once again capitulated. Once again transferring wealth from the US taxpayer abroad.
This is akin to the bailout of the Long-Term Capital Management hedge fund in 1998. The US economy was headed into recession that year. Then, in late summer, LTCM began to unwind. Foreign investors were into LTCM in a big way. They persuaded then-Fed chair Alan "Mr. Bubble" Greenspan to bail them out. So he did, cutting the Fed funds target by 75 basis points in six weeks, in an already accommodative monetary policy environment.
The result was the dot-com bubble. Money was so cheap that banks were giving it out like candy at a parade to every venture capital firm out there. They in turn handed it over to every dot-com guru who had a cute sock puppet for a mascot, but no earnings projections. Mr. Bubble himself greased the wheels for this "irrational exuberance," by saying that technology-led productivity advances would naturally contain inflation in this "new economy." Of course, he was wrong, though he won't admit it now.
The melt-down from the dot-com collapse led Mr. Bubble to slash interest rates to ridiculously low levels, and to hold them there for too daggone long. Which created the housing bubble.
Which is now responsible for the global financial hell that we're on the brink of.
Just give the the addresses of the central banks in question, and I'll eliminate the middle man and write them the check myself.
(New) Deal, or No Deal?
NO DEAL!!!
I am hopping mad, and scared as heck. I am ready to cash out my 401(k), take the IRS hit, convert it to a relatively safe currency, like ... gold bullion, move to Africa where I can live out the rest of my life on my current kitty, and do mission work.
This year thus far, we've bailed out Bear Stearns ($29B), Fannie/Freddie ($200-300B), and now AIG ($85B). Plus, we've shored up the FHA's lending powers to the tune of some $300B, and now we're going to give interest-free loans to Detroit automakers to re-tool their plants to build the fuel-efficient cars they should have been building in the first place, and for which they'll take their subsidy, build the cars, and charge you and me sticker-plus for them when gas hits $4/gallon again.
And the Fed - which has opened its coffers to anybody and everybody like a Bunny Ranch hooker at Christmas - is now accepting stocks and junk bonds as collateral from banks feeding at the TAF trough. What happens if they can't pay back the loans? The Fed owns stocks and junk bonds. What happens when the Fed takes losses on that crap?
You guessed it - we cover. The taxpayer.
Yesterday, the Fed - for the first time ever - basically had to borrow money. Do you get that? The Federal Reserve is tapped out. Helicopter Ben had to ask his pal Hank "Bungalow Bill" Paulson to hold not one, but two (thus far) special Treasury auctions, just to raise money for the Fed. (Too bad they can't get Barbra Streisand to do a concert.)
Do you know how serious this is? The Fed is borrowing money to bail out insurance companies and brokerage firms.
The projected 2009 fiscal year deficit is already $482B, and that doesn't include the Fan/Fred or AIG bailouts, nor the automakers' corporate welfare initiative.
Now, Chuck Schumer wants the equivalent of the New Deal-era Reconstruction Finance Company, and his cross-state pal Hillary wants the equivalent of the New Deal's Home Owners' Loan Corporation.
Folks, the New Deal was a bad deal. It exacerbated the Great Depression. The only thing that brought our economy from the brink of permanent disaster was World War II. Do we really want policy that will require another world war to revive us from?
Worse, some of the New Deal's programs were the earliest seeds of the current housing crisis, exacerbated along the way by other legislation that paved the way for rampant speculation in lending and securitization, including the Depository Institution Deregulation and Monetary Control Act of 1980 and the Tax Reform Act of 1986 - both generally okay pieces of legislation that contained components which have proven disastrous.
Others have called for something akin to the Resolution Trust Corporation "solution." I lived through that "solution," having worked for a solvent S&L that was taken over by the RTC as a "pre-emptive strike" (can you say "takings clause"?), then run into the ground, eroding nearly $400 million of positive net worth, and ultimately costing taxpayers millions.
I worked with these RTC idiots. The guy placed in charge of the thrift sat in a meeting for an hour, talking about defeasing some zero-coupon bonds we'd issued, to which we kept referring as "the zeroes." At that point, the new head honcho asked, "So what's the coupon on these bonds?" Talk about zeroes.
The RTC ultimately prolonged and exacerbated the S&L crisis - much as the New Deal did the Great Depression - and ultimately jacked up the cost to taxpayers tremendously, adding to the then-record deficits of the early 1990s, which more than doubled from pre-RTC levels.
Well, people, if we add the current and planned bailouts to the projected '09 deficit, we're pushing three-quarters of a trillion dollars. Double that, and, guess what?
You'd better know more Chinese than "moo goo gai pan."
************
A few other tidbits:
1. Nobody knows what the exposure to Fannie/Freddie credit default swaps (CDS) is. The takeover was a credit event, meaning the swaps now have to be unwound. Whoever's on the wrong side of the trade loses. We don't know who that is. But it's likely the same big banks and investment firms that are already posting record losses. The result will be more failures.
2. Ditto AIG, but the CDS exposure there is even greater. And both are global.
3. We don't know yet the full extent of exposure of other financials to Lehman bonds. But we know that at Wells Fargo, it's big. And others will report additional exposure. And they'll take more write-downs.
4. Alt-A mortgages are the next shoe to drop, and the exposures are huge. Fan/Fred cover about half the Alt-A loans in the US, so those losses will accrue to the taxpayer. Alt-A delinquencies are running close to subprime delinquencies. As the foreclosures mount, home prices will fall further.
5. Traditional mom-and-pop financial institutions are starting to buckle under the strain of defaults on other types of credit - cards, home equity lines and car loans. Mergers are increasing, and failures will too.
6. Fewer remaining institutions mean fewer lenders. Fewer lenders mean fewer loans. Fewer loans mean fewer refinancing opportunities for subprime, option ARM, and Alt-A borrowers facing resets. Which means more defaults. Which means lower home prices. Which means more defaults. Which means lower home prices. Which means more ...
7. More defaults means more credit card, HELOC and auto loan defaults. Which means more bank failures. Which means fewer lenders. Which means - ah, just re-read #6, then loop it and #7 over again and again until you throw up on your keyboard.
************
I leave you with this sign of the times. A friend of mine who's a private wealth manager called me a couple weeks ago to ask if I thought Fannie preferred stock was a decent gamble. Seems he had a few clients thinking about taking a flier with some "play money."
I told him, as long as the play money clearly says "Monopoly" on it, they'd be fine. I explained that everyone fully expects the taxpayer to take it in the shorts on this deal, and the common shareholders will bear the first loss, with the preferred holders close behind.
If John Q. Public takes a hickey, that means that the common and preferred shareholders both got wiped out. It's like Hurricane Katrina hitting Bay St. Louis. The common holders had the beachfront homes, and the preferred holders were one lot back. The taxpayer was five miles inland.
So the taxpayer will take on water, and have to muck out and rebuild. The common and preferred holders got swamped, and are left with firewood.
(Self-congratulatory note: today I read that the market for preferred stock issued by financials - once a key funding source for them - has dried up in the Fannie/Freddie aftermath. I give good advice, huh? Oh, by the way, given that yet another funding source for banks has petered out, and given how bad they need funding, add this point to my list of armageddon indicators above.)
Back to the story. My friend (who, by the way, is an astute money manager and didn't come up with the idea for his clients, they pitched it to him, he was skeptical and called me to affirm what he already suspected) then gave me this sign of the times:
"Some of our clients are basically looking at four or five bad ideas to throw money at and see if one of them pans out."
This is what we've come to in the investment world: nothing but bad ideas to throw money at, hoping one of them pays off.
Hey, guys, you want to throw some money at a bad idea? I'm brimming with them. Some worse than others. Actually, with all the infrastructure investment that the Middle East and guys like Chris Gardner are throwing at resource-rich Africa, that's not a bad play. And I'm wanting to head over there and teach orphan kids, so why not fund me?
************
Okay, so I'm not quite ready to leave you yet. I made a funny, I have to share.
After the news came out that KKR and some other buyout firms had shunned Lehman before it collapsed, I made the following observation:
There's no money left for those firms to play with - they can't borrow any more to fund their acquisitions, a key reason why M&A activity has ground to a ghost-town-like halt (which will crimp Wall Street revenues further - add another item to the hit list above). So there's no leverage left in the leveraged buy out game.
And if you take the "L" out of "LBO," you're left with nothing but "BO."
I am hopping mad, and scared as heck. I am ready to cash out my 401(k), take the IRS hit, convert it to a relatively safe currency, like ... gold bullion, move to Africa where I can live out the rest of my life on my current kitty, and do mission work.
This year thus far, we've bailed out Bear Stearns ($29B), Fannie/Freddie ($200-300B), and now AIG ($85B). Plus, we've shored up the FHA's lending powers to the tune of some $300B, and now we're going to give interest-free loans to Detroit automakers to re-tool their plants to build the fuel-efficient cars they should have been building in the first place, and for which they'll take their subsidy, build the cars, and charge you and me sticker-plus for them when gas hits $4/gallon again.
And the Fed - which has opened its coffers to anybody and everybody like a Bunny Ranch hooker at Christmas - is now accepting stocks and junk bonds as collateral from banks feeding at the TAF trough. What happens if they can't pay back the loans? The Fed owns stocks and junk bonds. What happens when the Fed takes losses on that crap?
You guessed it - we cover. The taxpayer.
Yesterday, the Fed - for the first time ever - basically had to borrow money. Do you get that? The Federal Reserve is tapped out. Helicopter Ben had to ask his pal Hank "Bungalow Bill" Paulson to hold not one, but two (thus far) special Treasury auctions, just to raise money for the Fed. (Too bad they can't get Barbra Streisand to do a concert.)
Do you know how serious this is? The Fed is borrowing money to bail out insurance companies and brokerage firms.
The projected 2009 fiscal year deficit is already $482B, and that doesn't include the Fan/Fred or AIG bailouts, nor the automakers' corporate welfare initiative.
Now, Chuck Schumer wants the equivalent of the New Deal-era Reconstruction Finance Company, and his cross-state pal Hillary wants the equivalent of the New Deal's Home Owners' Loan Corporation.
Folks, the New Deal was a bad deal. It exacerbated the Great Depression. The only thing that brought our economy from the brink of permanent disaster was World War II. Do we really want policy that will require another world war to revive us from?
Worse, some of the New Deal's programs were the earliest seeds of the current housing crisis, exacerbated along the way by other legislation that paved the way for rampant speculation in lending and securitization, including the Depository Institution Deregulation and Monetary Control Act of 1980 and the Tax Reform Act of 1986 - both generally okay pieces of legislation that contained components which have proven disastrous.
Others have called for something akin to the Resolution Trust Corporation "solution." I lived through that "solution," having worked for a solvent S&L that was taken over by the RTC as a "pre-emptive strike" (can you say "takings clause"?), then run into the ground, eroding nearly $400 million of positive net worth, and ultimately costing taxpayers millions.
I worked with these RTC idiots. The guy placed in charge of the thrift sat in a meeting for an hour, talking about defeasing some zero-coupon bonds we'd issued, to which we kept referring as "the zeroes." At that point, the new head honcho asked, "So what's the coupon on these bonds?" Talk about zeroes.
The RTC ultimately prolonged and exacerbated the S&L crisis - much as the New Deal did the Great Depression - and ultimately jacked up the cost to taxpayers tremendously, adding to the then-record deficits of the early 1990s, which more than doubled from pre-RTC levels.
Well, people, if we add the current and planned bailouts to the projected '09 deficit, we're pushing three-quarters of a trillion dollars. Double that, and, guess what?
You'd better know more Chinese than "moo goo gai pan."
************
A few other tidbits:
1. Nobody knows what the exposure to Fannie/Freddie credit default swaps (CDS) is. The takeover was a credit event, meaning the swaps now have to be unwound. Whoever's on the wrong side of the trade loses. We don't know who that is. But it's likely the same big banks and investment firms that are already posting record losses. The result will be more failures.
2. Ditto AIG, but the CDS exposure there is even greater. And both are global.
3. We don't know yet the full extent of exposure of other financials to Lehman bonds. But we know that at Wells Fargo, it's big. And others will report additional exposure. And they'll take more write-downs.
4. Alt-A mortgages are the next shoe to drop, and the exposures are huge. Fan/Fred cover about half the Alt-A loans in the US, so those losses will accrue to the taxpayer. Alt-A delinquencies are running close to subprime delinquencies. As the foreclosures mount, home prices will fall further.
5. Traditional mom-and-pop financial institutions are starting to buckle under the strain of defaults on other types of credit - cards, home equity lines and car loans. Mergers are increasing, and failures will too.
6. Fewer remaining institutions mean fewer lenders. Fewer lenders mean fewer loans. Fewer loans mean fewer refinancing opportunities for subprime, option ARM, and Alt-A borrowers facing resets. Which means more defaults. Which means lower home prices. Which means more defaults. Which means lower home prices. Which means more ...
7. More defaults means more credit card, HELOC and auto loan defaults. Which means more bank failures. Which means fewer lenders. Which means - ah, just re-read #6, then loop it and #7 over again and again until you throw up on your keyboard.
************
I leave you with this sign of the times. A friend of mine who's a private wealth manager called me a couple weeks ago to ask if I thought Fannie preferred stock was a decent gamble. Seems he had a few clients thinking about taking a flier with some "play money."
I told him, as long as the play money clearly says "Monopoly" on it, they'd be fine. I explained that everyone fully expects the taxpayer to take it in the shorts on this deal, and the common shareholders will bear the first loss, with the preferred holders close behind.
If John Q. Public takes a hickey, that means that the common and preferred shareholders both got wiped out. It's like Hurricane Katrina hitting Bay St. Louis. The common holders had the beachfront homes, and the preferred holders were one lot back. The taxpayer was five miles inland.
So the taxpayer will take on water, and have to muck out and rebuild. The common and preferred holders got swamped, and are left with firewood.
(Self-congratulatory note: today I read that the market for preferred stock issued by financials - once a key funding source for them - has dried up in the Fannie/Freddie aftermath. I give good advice, huh? Oh, by the way, given that yet another funding source for banks has petered out, and given how bad they need funding, add this point to my list of armageddon indicators above.)
Back to the story. My friend (who, by the way, is an astute money manager and didn't come up with the idea for his clients, they pitched it to him, he was skeptical and called me to affirm what he already suspected) then gave me this sign of the times:
"Some of our clients are basically looking at four or five bad ideas to throw money at and see if one of them pans out."
This is what we've come to in the investment world: nothing but bad ideas to throw money at, hoping one of them pays off.
Hey, guys, you want to throw some money at a bad idea? I'm brimming with them. Some worse than others. Actually, with all the infrastructure investment that the Middle East and guys like Chris Gardner are throwing at resource-rich Africa, that's not a bad play. And I'm wanting to head over there and teach orphan kids, so why not fund me?
************
Okay, so I'm not quite ready to leave you yet. I made a funny, I have to share.
After the news came out that KKR and some other buyout firms had shunned Lehman before it collapsed, I made the following observation:
There's no money left for those firms to play with - they can't borrow any more to fund their acquisitions, a key reason why M&A activity has ground to a ghost-town-like halt (which will crimp Wall Street revenues further - add another item to the hit list above). So there's no leverage left in the leveraged buy out game.
And if you take the "L" out of "LBO," you're left with nothing but "BO."
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