Dirty Little Secret

No, I'm not talking about the song by the All-American Rejects, though I must admit it's catchy and clever. I'm talking about Hank Paulson's latest about-face. Before, I've always thought his deft reversals of direction were born of mere confusion as to the appropriate policy actions.

This latest one, though, appears to have been very well-planned, and most sinister.

I've complained before about the lack of checks and balances in all this bailout mania, and this latest move is just one more example of the abuse of power by Paulson.

Early last week, Paulson told Bubblevision that he didn't plan to request the second half of the TARP money, saying, "We've got what we need right now." He said this even as his boss was working on plans to give the last $14 billion of the $350 billion first tranche to Chrysler and GM, in the form of bridge loans to get them through the first quarter of next year, when they will become the next administration's problem.

(As an aside, the $9 billion of those loans that GM will get is only sufficient to cover the company's $67 million daily cash burn for 134 days, assuming it doesn't get worse.)

So, knowing the administration's plan to spend the last of the first round of TARP money, Paulson told America, via CNBC, that Treasury didn't need the remaining $350 billion.

On Friday, however, he reversed course - surprising no one who's been paying attention to his antics since September - saying, "It is clear ... that Congress will need to release the remainder of the TARP to support financial market stability."

Most observers took this as yet another signal of Paulson's indecision and lack of clarity regarding just what is required to salvage the US financial system. Former FDIC Chairman William Isaac, who gave us the FICO scoring system that helped create the housing melt-down, said, "My conclusion is that they don't have a long-term strategy, and they're bouncing along from crisis to crisis."

On that, you'll get no argument from me. But it doesn't take a rocket scientist to figure out what Paulson was doing.

Congress was still in session as late as December 10, when they voted down the proposed bailout of the automakers. But by last week US senators and representatives were in recess for the holidays. Paulson waited until they were unlikely to return, then called for the money on Friday.

According to the terms of the TARP, Paulson had free rein (reign?) over the first $350 billion, but then had to ask Congress for the second half. But the request requires only negative consent; if Congress doesn't decline the request within 15 days after it's formally made, Paulson automatically gets the money.

Paulson could be reasonably certain, as of Friday, that Congress wouldn't re-convene - yet again - to consider the request, so he would have only to wait until the first week of the New Year to get the funds.

Fortunately, it now appears that the administration won't push for the money. An article today in American Banker reports that fears of political backlash have the Bush camp shortening Paulson's leash. So now it will be up to Tim Geithner, the Obama administration, and the new Congress to deal with.

One thing is certain: Paulson's request on Friday raises serious questions as to the true health of the US financial system. It also offers some insight into how the remainder of the TARP funds will be used, as everyone from states reeling from huge budget shortfalls to commercial real estate developers have their hands out for a piece of the second tranche. And with some of the first tranche being given to Detroit - after Paulson staunchly state that the money was reserved for the financial sector - who can blame them?

One last point, somewhat related to the TARP. The Obama administration's proposed stimulus package, which the President-elect hopes to have ready for his signature when he's sworn in on January 20, is now $775 billion. Why that number?

Well, it's been reported in the Washington Post that he'd like $850 billion. But fears of resistance from the few fiscal conservatives in Congress have pared back the number: "An Obama adviser said the team has settled for now on $775 billion as the highest figure likely to win congressional approval."

Remember when I reported that a Treasury official said the TARP figure was set at $700 billion, not because there was any calculated basis for that amount, but that Treasury just wanted to "throw out a really big number?" This smacks of the same.

Change we can believe in?

Fiscal Bulimia, and Other Rants

Lots to talk about, so let's get to it. First, the Fed's unprecedented rate cut - unprecedented in that they cut the funds target to the lowest level in history, and unprecedented in that they targeted a range, from zero to a quarter of a point, rather than a specific rate.

An unintended consequence is that, in an environment where financials are struggling to price assets they own, now they're in a quandary over how to price loans based on Fed funds. Price it off zero? Off a quarter-point? Off something in between? Can we charge a range of interest?

Another unintended consequence is that the dollar is now tanking again, just when we were beginning to see some relief. The Fed is creating inflation once again. So much for that trip to Europe. But the dollar's now rebounding vs. the euro, since the ECB cut its rates today. So there's still hope.

The intended consequence - the stated one, anyway - was to spur borrowing. Indeed, mortgage rates fell, and people are looking to refi in droves, reportedly.

Here's the problem: what our government wants is to stimulate buying - houses, cars, Christmas presents, you name it. And that ain't happening.

Why? It's simple. We were a bulimic nation, binging on credit. And now we want to purge. At all levels: corporations, households ... well, okay, maybe not at the federal level (more on that later). We don't want to buy cars - sorry, Chrysler and GM. We don't want to buy houses - sorry, builders (by the way, did anyone notice that housing starts and building permits fell to the lowest levels in at least 50 years last month? The Dow apparently didn't). We don't want to go hog-wild this Christmas - sorry, Macy's and Best Buy (but maybe we'll be a little more mindful of the reason for the season).

And banks don't want to lend. They want to purge themselves of all the bad credit they've already got, not take on more. They don't want to feed the gluttonous pigs anymore.

As I've said before, that's all good. We need to purge, and get back to living within our means.

************

On to the federal debt. Ecuador recently defaulted on its government bonds, but that was political. Its extreme leftist president decided that, even though the government has the cash to make the next coupon payment, the interest on the bonds - which were issued under the previous regime - is illegal.

But, the consequence was the same as if Ecuador was out of cash: its borrowing rates skyrocketed. There's a lesson in that, but let's go a step further before we present it.

Italy could be facing the same peril. Its public debt - third-largest in the world - amounts to 104% of its output. Italy's finance minister is proposing heavy stimulus spending, but the nation's welfare minister dug in his heels, saying, "I am too constrained by public debt. And I too am worried by the risk of default. There is something worse than recession, and that's state bankruptcy: an improbable, but nevertheless possible, hypothesis."

US public debt is currently 91% of GDP. GDP is expected to contract 4-6% in the current quarter, and about 2.5% in the first quarter of 2009. Holding public debt constant, we'll be at 98% of GDP. But does anyone really believe we'll hold public debt constant? If so, I've got some Alt-A mortgage-backed bonds to sell you, at par.

President-elect Obama wants to spend $850 billion to stimulate the economy. Add that to the debt load, and we're at 106% of GDP. Granted, he wants to do it over two years, but even the first half of that will take us to 102% of GDP. Goodbye, low interest rates. Obama and incoming Treasury chief Geithner would do well to heed the cautions of the Italian welfare minister.

As for the current Treasury Secretary, Paulson has done yet another about-face (nimble little minx, isn't he?). Just days ago he said he wouldn't ask Congress for the second $350 billion of TARP money. Now, he's said to be ready to request it. Why?

I suspect it's to prop up the stock market. There seems to be a lot of that these days. About a month ago, Bernanke, wanting to keep some arrows in the quiver, subtly warned the markets that he preferred a smaller rate cut than was being priced in, saying there were other things the Fed could do besides a big rate cut. Then, on Tuesday, with a hopeful rally already underway, he capitulated. I had read an article suggesting that he might stand up to the markets, but I knew he didn't have the resolve. He never has.

I think Washington really wants to prevent a test of the recent market lows, and they're doing everything they can to effect that. Even Bush has been hinting that he'd bail out Detroit, but now it sounds like a managed bankruptcy is in the cards. He says he doesn't want to throw bad money after good. Should've thought about that before he pushed for the TARP's passage.

************

On to Bernie Madoff-with-your-money. I won't elaborate on how despicable is the man who bilked charitable trusts and retirees (and big banks like HSBC) out of billions. Others have covered that quite well.

I will, however, identify his accomplice in this scheme: the SEC. Chairman Chris Cox should share a cell with Bernie. How, in more than a decade of examining Bernie's firm, did the SEC miss this one? I'll bet I could have uncovered his little scheme.

But the SEC doesn't look into things like that, except after the fact. They primarily concern themselves with whether the I's are dotted and the T's crossed. They sent three examiners for a week-long visit to my little 13-employee firm this year, and what were their findings?

We don't keep a stock record book, a manual record of all transactions. But see, we don't sell stocks - just bonds. And every transaction is recorded electronically, and archived forever. Gee, it would seem that manual records could be doctored. Hmmm ...

And second, we claimed on our website to be "a leading provider of financial services to credit unions nationwide." We based that on a broad survey of credit unions that we commissioned in 2003. Yes, that was five years ago, but there have been no meaningful new entrants into this market space in that span. And yes, we paid for the survey, but we didn't pay people to say they use our firm. The results showed that more credit unions use our brokerage services than any other firm, and more credit unions use our advisory services than any other firm but one. Sounds like a "leading provider" to me. But the SEC would only let us make the claims if we disclosed that we paid for the survey, and that it was five years old. Not wanting a two-page disclaimer to accompany a one-line statement, we opted to scratch it altogether.

Don't get me wrong, I don't begrudge the findings. We now keep a securities record book manually, and we changed the website hype.

What galls me is that the SEC comes in and burdens us with this trivial crap while a Bernie Madoff makes off with his investors' money, to the tune of $50 billion, and three of the five largest securities firms on Wall Street go belly-up (with the other two not far behind).

Nero fiddles while Rome burns.

************

Want a peek at how the Fed is being a responsible steward of your money? From Bloomberg:

"Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities."

That's right, boys and girls, the Fed is relying on Fitch, Moody's and S&P, the same clowns that brought us the subprime and Alt-A meltdown. Bloomberg goes on:

"The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion under eight credit programs, most of which require appraisals of short-term debt and loan collateral by 'major nationally recognized statistical ratings organizations.'" Bloomberg tried to get a list of whom the Fed has lent to, and the collateral for the borrowings, even going so far as to sue the Fed under the Freedom of Information Act. But the Fed is hiding behind the "trade secrets" barrier.

************

Here's my take on Obama's appointment of FINRA head Mary Schapiro to be the next SEC chair.

Here's her resume:

1988: appointed by Reagan as a commissioner of the SEC, re-appointed by Bush I, named acting chair by Clinton
1994: appointed to the Commodity Futures Trading Commission by Clinton.
1996: appointed to the National Association of Securities Dealers - Regulation by Clinton
2006: became chair and CEO of NASD, which merged with the NY Stock Exchange to become FINRA

During her tenure in these roles, we had the explosive growth of unregulated and impossible to value financial derivatives; the dot-com bubble and the housing bubble; the financial accounting scandals of the dot-com era (think Enron, WorldCom, et al), and the nightmare of the last year or so. And, like the SEC, FINRA waltzes into our firm looking for the most trivial arcane silliness, while Wall Street melts down.

Just another more-of-the-same selection. Old-school politics as usual inside the beltway. We are doomed.

PS. She's also a lifetime bureaucrat, like most of the other cabinet picks. She has a law degree, for pity's sake. For this role you need finance guy, not a lawyer.

************

Finally, I'll weigh in on Caroline Kennedy vying for Hillary Clinton's Senate seat.

I'm growing weary of the same names in seats of power in Washington: Clinton, Kennedy, Bush ... where has it all gotten us? We need change - meaningful change. We need some true representatives of the people, not old-school power-mongers. Let's have term limits and campaign finance reform, and bring in some new blood.

The Weather Report

There's a storm brewing.

Next week, Morgan Stanley and Goldman will be the first of the financials to post fourth-quarter earnings. And it will not be pretty.

Big banks' problem assets mushroomed to more than $600 billion in the third quarter, a 15.5% quarter-on-quarter increase. And the change in direction of the TARP (which was passed after the third quarter ended) means the value of those assets is sharply lower this quarter. For some financials that report monthly, we saw massive losses in October. So the fourth-quarter results for the firms whose fiscal year ended last month should be particularly bleak. And that will bring fresh concerns in the markets.

The other front that's building is a new wave of foreclosures. I've talked before about option ARMs, and how the resets have accelerated due to the negative amortization caps being reached. We'll see those build in earnest beginning in the first quarter, with the peak coming in late 2009 to early 2010. By early next year, banks will own more than one million properties nationwide. The foreclosure sales will depress home prices further, more borrowers will find themselves upside down, and the "jingle mail" will continue, in an ugly death spiral.

Also, historically, the single biggest factor driving mortgage defaults is loss of a job. With joblessness poised to reach the highest level in decades next year, that also bodes ill for foreclosures.

The good news is that if you're in the market for a house in a year or two, it'll be the best buyer's market in US history. And - with Nevada leading the nation in foreclosure filings for a full two years now - those trips to Vegas are going to be much cheaper.

See? I don't just spread doom and gloom. There's a silver lining to every dark cloud.

What's In The Cabinet?

At long last, Hank Paulson and the Bailout Mania crew give me a respite to address President-elect Obama's cabinet picks. Straight to it, then.

Secretary of State: Hillary Clinton
Yes, she's high-profile, but a statesperson? Hillary can be far from diplomatic at times, to the point of downright abrasiveness. She also has a habit of pursuing her own agenda, and she surely sees herself as Obama's equal, if not superior. So she may turn out to be a bit of a loose cannon. Then there's that bundle of testosterone-charged, loose-lipped baggage she carries around. I'm also a tad uncomfortable with her ties to Palestine.

On the flip side, I acknowledge that I'm no Hillary fan, and thus probably biased. And, there could have been far worse picks. I'll give this one a B-, with benefit of the doubt factored in.

Secretary of Defense: Robert Gates
This one frankly puzzles me. Yes, continuity's a good thing (sometimes). And yes, this provides the token Republican appointee that makes Obama look like a moderate. And yes, Gates is no Rummy. He also has a solid pedigree: USAF, CIA, NSC. But for a President who opposed the Iraq War from the very beginning, it still puzzles me. Yet, I can't argue with his qualifications, so I'll give this one an A.

National Security Advisor: Gen. James Jones
Another solid pedigree, and a more logical pick for Obama's cabinet, as he's been critical of the current administration's handling of the Iraq War. With his resume, this is an easy A.

Attorney General: Eric Holder
A Clinton administration holdover, which smacks of more-of-the-same, Washington insider politics. Instrumental in Clinton's 11th-hour pardon of Marc Rich. That gets him a C.

Secretary of Homeland Security: Janet Napolitano
She was Anita Hill's attorney in the Clarence Thomas case, and she led the investigation of Michael Fortier in the Oklahoma City bombing case. She's also one of the most highly-regarded governors in the US. But what does she know about homeland security? I'd rather see an ex-military or intelligence pick here. C.

Treasury Secretary: Tim Geithner
Career bureaucrat that lacks the Street experience or financial education for this post, and instrumental in every bad deal Hank Paulson's made this year. He's a Paulson clone. This warrants an F, especially given the economic maelstrom we're in.

National Economic Council: Larry Summers
Treasury Secretary under Clinton. Essentially fired as President of Harvard. A social economist in the Rubin mold. Would probably support nationalization of everything, a new New Deal, and trade limits. I'll upgrade him to a D because he's at least an educated economist who has a reasonable body of research work, even if the conclusions are misguided.

Commerce Secretary: Bill Richardson
I like the guy, but he should head Energy again, not Commerce. A career bureaucrat who has zero experience in the private sector. A business leader should head Commerce. C-, just because he's smart and I like him.

Health & Human Services: Tom Daschle
I never did like him, and this is another old-school Washington insider pick. And close ties to the health care lobby help to earn him a D for this role.

Chief of Staff: Rahm Emanuel
Another Washington insider, career bureaucrat pick, though he did spend a couple years in investment banking with Wasserstein Perella. Far left, and known for being a caustic pit bull. I don't like this pick, but I honestly don't know enough about the guy to offer lower than a neutral C.

Press Secretary: Robert Gibbs
From what little I know of the guy, he favors censorship of media outlets that might criticize his guy. Serving a President who seems to embrace a thought police type of strategy, that's a bit worrisome. Another C, in part due to how little is known of him and in part because he's just the press secretary, for crying out loud.

Overall
That Obama's opponent in the general election was derisively referred to as "McSame" is bitterly ironic, given that Obama's picks - including his veep - smack of old-school, business-as-usual, Washington politics. There is no doubt that McCain would have brought more outsiders in, including business leaders and people with more knowledge of things like health care and homeland security.

There are also deep ties to the Clinton administration throughout Obama's cabinet, which may be a play to the former Clinton base to shore up a run for a second term, which history tells us Obama will launch by February. But for a guy who ran on "Change," a continuation of inside-the-Beltway log-jam inertia politics is apparent evidence that he doesn't really know what change is. And this cabinet won't bring it.

The bottom line? I looked in the cabinet, and found nothing but stale leftovers.

I'll Give Hank This - He's Nimble

Once again, I had intended today to address President-elect Obama's cabinet picks, but Hank Paulson's keeping me busy. The former All-American offensive lineman for Dartmouth must have been one heck of a lead blocker in his day, given his ability to reverse direction.

Not long ago, Hank said he wouldn't be asking Congress for the second $350 billion tranche of the TARP money. Now, apparently he's considering doing just that. For what, you may ask?

Apparently encouraged by the surge of mortgage applications last week after rates fell more than a half-point, Hank wants to subsidize mortgage rates through Fannie and Freddie to bring rates down to 4.50%, effectively returning us to the days before the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).

Prior to DIDMCA, savings and mortgage rates were fixed. Then came the hyperinflation of the 1970s, brought on by one oil shock after another. So President Carter appointed Paul Volcker, a monetarist, to chair the Fed. Prior to Volcker, the Fed had primarily used the money supply as its primary policy tool. Volcker changed that, using the Fed funds target and the discount rate to shape policy.

To combat inflation, Volcker jacked up the Funds target into the high teens. Using interest rates in this way wreaked havoc on fixed savings and lending rates, so DIDMCA was passed, to allow those rates to float freely. One result of that was the S&L crisis, but it was the right move; we just exacerbated that crisis with one government invervention bungle after another, rather than just letting the free market work its Darwinian magic (sound familiar?).

So now Hank wants to fix mortgage rates at 4.50%, figuring that will solve the housing crisis once and for all by making mortgages more affordable. First, if this fix could really solve the housing crisis, why didn't Hank and Ben do it last spring, when they first reluctantly acknowledged that there was a crisis?

And second, does anyone really think it'll work? Not me.

The problem with housing is not affordability, it's simple supply and demand, those oft-overlooked but omnipresent forces that shape all things economic. I'll say this slowly, in case anyone in Washington is reading these words:

The ... problem ... is ... that ... we ... built ... way ... too ... many ... houses.

Given projected demographic and immigration trends at the beginning of this decade - both of which can be reliably predicted - we needed to build on the order of 1.5-1.6 million new homes a year throughout the decade. Housing starts were above that trend from 2002 to 2006, reaching as high as 2.3 million, and averaging about 1.9 million.

The result? An oversupply of housing stock on the order of about 1.7 million homes by the end of 2006. In other words, builders could have sat completely idle for an entire year before supply and demand returned to equilibrium.

Of course, they haven't, though they've slowed the pace considerably. But that slower pace has only served to work off a little less than half the glut thus far, which is why home prices keep falling. Add to that the huge increase in foreclosures, resulting in empty houses, and you begin to understand why we are where we are today.

Lower mortgage rates will not entice buyers into a market where home prices continue to fall. And the most recent price data suggest a re-acceleration of the pace of decline in home prices. By some reports, houses are undervalued in certain markets. But those markets aren't the problem. In the worst bubble areas, home prices still have further to fall.

The only way to entice people into those homes is to provide an incentive for people who couldn't otherwise afford a home - in other words, couldn't qualify for a mortgage at any rate of interest other than zero - to buy. The way to do that is to relax lending standards.

Again - sound familiar? That's how the bubble was formed in the first place. Lending standards have now returned to sanity, and there they should stay. We cannot afford another asset bubble of any kind in this economy.

Now, one could argue that lower rates mean more people facing foreclosure can afford to refinance. Again, lending standards come into play. The only thing lower rates will do is help those with good credit to be able to refinance into a lower-cost mortgage - folks like you and me, who bought no more house than they could afford, put up a reasonable down payment, and pay our bills on time.

We're not the problem. We're not facing foreclosure. And those that are cannot - and should not - be able to qualify for a mortgage. Besides, even if they get a new loan at a lower rate, said loan should be no more than the value of the home it's financing. Given the number of homes whose value is lower than the current mortgage balance, that won't fix the problem; you can't pay off the original mortgage with the refi.

Unfortunately, what's called for is a draconian and Darwinian response: let the people who can't afford to be homeowners stop being homeowners through the sadly painful foreclosure process. Shoe-horning those people into homes they couldn't afford to begin with sounded like a noble cause when the Barney Franks of the world pushed it back in the mid-'90s, but it was a gross disservice to those poor folks now facing eviction. And to the US taxpayer and the poor saps who bought the crap bonds backed by those loans.

More Bailout News

I had meant to turn my attention to my take on President-elect Obama's cabinet picks today, but that will have to wait. In addition to today's "Realized Losses" post, I have a few more bail-out comments.

The Detroit Three have upped the ante. Now, they want $34 billion, not $25 billion. As with the TARP, each mounting request grows.

Yesterday, it was reported that vehicle sales in the US hit a 26-year low. Given population growth since 1982, that is sobering. This morning, one of the talking heads on Bubblevision actually blamed Congress for the weak sales, arguing that would-be buyers stayed out of the market in November, fearing one or more US automakers would file bankruptcy. His point was that if Congress had bailed out the auto industry at their first request, sales would have jumped.

Balderdash.

Toyota isn't asking for a handout, and its year-over-year sales decline in November was worse than Ford's. Do you suppose that perhaps consumers are scared to buy a big-ticket item because they're facing the worst economic downturn since the Great Depression? Or that none but the most stellar credits can obtain financing? To paraphrase George Stephanopolous, it's the fundamentals, stupid.

The GAO has added its concerns over the TARP to those of the oversight panel appointed to review the bail-out (wait - wasn't that the GAO's job to begin with?). Specific criticisms included lack of a plan to ensure the TARP meets its goals. Heck, other than the rather fuzzy goal of "increasing lending," I'm not sure the TARP actually has any goals. The GAO also found that Treasury needs to roughly quadruple the staff assigned to adminstering the fail-out. Oh goody, more government spending on bureaucrats' salaries.

The TARP was intended to improve banks' access to capital, among other things. Well, it's having quite the opposite effect. China's sovereign wealth fund, the China Investment Corp., is done with investing in US financials. Having already lost $6 billion on investments in Morgan Stanley and Blackstone Group, the CIC's chairman said, "The policies of the developed nations on these institutions are not clear. Until they are clear, I don't dare to invest in them."

Gee, thanks, Hank. Your waffling has inspired the same confidence among the Chinese as it has here at home.

One other tidbit on Bubblevision this morning came from a guy on the floor of the Exchange, who was commenting on this morning's numbers. Among them was the fact that US productivity grew more than expected in the third quarter. But he failed to point out that it grew at its slowest pace thus far this year, in spite of much leaner payrolls. Why? Because output is leaner still.

But his most outrageous comment was that the better-than-expected result "demonstrates that companies are being proactive and getting out in front of this crisis."

Ahem. This was a third-quarter number, and we've been in recession since last December - a recession that some of us predicted many months earlier. If that's "getting out in front of it," I'm all the more glad I'm short those companies.

Realized Losses

Much has been made about the accounting distinction between "realized" and "unrealized" losses during the current financial crisis, particularly in how it relates to the holdings of US financial institutions. Today, I will digress to talk about a couple of truly realized losses this world has recently experienced.

Al Ortolani was the head trainer at Pittsburg State University, my alma mater. While I was in college, one of my many majors was health and recreation, and that afforded me the opportunity to take Al's training class. The man was a perfectionist, but always available to his students, and he had a quick wit. He was old-school, something I've grown to admire.

So good at his craft was Al that he was selected to be the trainer for the US Olympic swim team on several occasions, and also worked with the Pan Am games and other international events. He even had a gold medal to show for his Olympic efforts.

Al was also PSU's first baseball coach, and his teams won two conference titles. The PSU baseball field is named for him, and Al coached the team's present coach. As recently as last year, at a spry 79 years of age, Al would sit in the dugout with the team, regaling the lads with stories of games and seasons past.

Al also roamed the sidelines of PSU football games, walking up and down the field to follow the action, carrying one of those little can/stool combinations, and unfolding it to have a seat and watch the game. Last year, my daughter and I had were on the sidelines, and my daughter was snapping pictures for her high school photography class. We were near the south goal line, watching the action come our way, when up walked Al. He unfolded his stool and sat nearby.

He then struck up a conversation with my daughter, as though he'd known her all her life. He talked about what a great day it was, and how if she positioned herself just so she could get a great shot of the unfolding play. After he walked away, I told her who he was, and she realized that his son, Al Jr., is an English teacher at her high school. He's one of the best-liked teachers there - no surprise, given the tree that apple fell from. Al's friendliness was among the many little things that has made my daughter so comfortable with the PSU environment that she's decided to follow her old man's footsteps next year and attend there.

Al passed from this world last week, at the age of 80. He was loved by all who knew him, and he'll be missed. But if an angel sprains an ankle in heaven, he or she will be well taken care of.

John Dallam was a member of my church. After retiring from a career in engineering and construction, John began our Habitat for Humanity ministry. He's responsible for some 90 or so homes that have been built in the Kansas City metro. He also served as an usher and a greeter, and counted the weekly offering.

After John's health prevented him from continuing to lead the Habitat effort, he awakened early one morning, convinced he heard God speak to him. What did God say to this tireless one-man mission team?

"John, you're not doing enough."

So John developed a program to teach teens in the church the construction trade, a program that came to be known as Body Builders. Through it, he created dozens of young John Dallams to go out and do Kingdom work here on earth, making their community a better place for those less fortunate.

John will also be missed by those of us who knew him, as he passed last Sunday. But as one of our pastors noted, in John 14 Jesus says, "In my Father's house there are many rooms ... I go to prepare a place for you." Now, He has plenty of help in doing so.

Rest in peace, Al and John.

More Bailout Mania

Just when you thought it was safe to go back into the water ... Even as I was writing yesterday's post, House Speaker Pelosi and a group of US governors were meeting to hammer out details (read: pork) of a $500 billion stimulus package. Early hints are that it'll include extension of unemployment benefits (read: incentive to remain unemployed instead of taking a job now, which seems counter to the package's stated intent of creating jobs, but just as there's no "I" in "team," there's no "logic" in "legislation"); money for road and infrastructure construction (hopefully those jobs pay well enough to entice people off the unemployment rolls); money for the states to spend as they see fit (pork); a middle-class tax cut (define "middle-class," please); and "investments in renewable energy" (the benefits of which we'll hopefully see in our lifetimes).

I'll bet the OMB is having a devil of a time keeping up with their budget deficit projections. I hope they're using pencil.

After the TARP was passed, Congress created a panel to oversee its deployment (gee, wonder what that cost?). The head of the panel, in an early report, has concluded that "the government does not seem to have a coherent strategy for easing the financial crisis," according to the New York Times, which went on to report that "the government instead [seems] to be lurching from one tactic to the next without clarifying how each step fits into an overall plan."

Really? We had to create an oversight panel to reach that conclusion? I think the markets have already figured that out, and publish their own "report" with every 500-point drop in the Dow.

The panel's chairwoman also said that while giving banks money to lend appears to be a good idea assuming the problem is a lack of said funds, if the problem is really that borrowers' creditworthiness is deteriorating along with the economy, "pouring money into banks isn't going to fix that problem."

Again, we had to create an oversight panel to figure that out? Not to pat myself on the back, but Congress could save a lot of taxpayer money by just reading this blog.

The Detroit Three are back in Washington today, as this is the deadline for them to offer up a plan that will convince Congress that it's worth giving them a pile of bail-out money. I'm betting they get it. Merry Christmas, Mr. Taxpayer.

A final whimsical note: Fannie Mae and Freddie Mac announced on November 20 that they will temporarily halt foreclosure actions on occupied homes while they work on a mortgage modification program. The suspension will last through the holidays (Merry Christmas, Mr. Deadbeat Homeowner), and will affect about 16,000 borrowers.

Gee, that'll help tons. Total foreclosure filings in the US in October alone were about 280,000.

On a related note, B of A's aggressive plan to modify about 400,000 mortgages has hit a snag: bondholders have filed a class-action suit against the bank to kill the plan, which would place the financial burden of the modifications on bondholders. The suit calls for B of A to buy back the securitized loans before they can modify them, which would place the estimated $8.4 billion cost of restructuring the mortgages back on B of A. The CEO of the firm that brought the suit to court correctly noted, "Until we talk about protecting investors, desperately needed capital will not flow back to this market."

Bailout Mania

Okay, it took me a little longer to get to this post than I thought. And yes, I was wrong about the sustainability of the dead-cat response to the massive two-day sell-off of a couple weeks ago. But the cat's headed back to earth today.

First, I'll talk about Bailout Mania, the newest game in Washington. It's like Monopoly, but you get to print money when you run out. Then, I'll offer my take on Obama's financial/economic "dream team" - in essence, letting you know whether the team's a nightmare.

Bailout Mania kicked into overdrive last week. Let's see if we can follow the logic. Paulson, after rushing the TARP through Congress, then reversing course on how to deploy the funds, invests the first round of $125 billion in several big banks that say they don't need the capital. But Paulson shoves it down their throats anyway, to prove the markets won't punish those banks for taking it, and thus encourage other banks that DO need the capital to step up to the window.

The market punished them anyway. In the first three weeks after the intial investment, the seven largest recipients saw their share prices decline by anywhere from 32% to 71%.

The biggest loser was Citigroup, the largest bank holding company in the US, whose share price went to less than $4 - Bear Stearns territory, in other words.

So last Monday, Treasury announced it would pump another $20 billion into Citi, on top of the $25 billion injected in the first round. Hey, why not? It worked so well the first time, let's see what it can do this time. What's a 71% loss off a share price of $3.77?

Citi's market value fell $49.8 billion from the first-round TARP announcement through the Friday before Treasury announced it would pony up the next $20 billion - in other words, its value declined more than the combined infusion from the taxpayer. True, it's rebounded since then, to about $7 a share as of this writing. But that's still a loss of more than $30 billion.

And more importantly, Citi's written off $60 billion over the last four quarters, averaging about $15 billion a quarter. So the capital infusion's only going to be good for about another year or so, at best, before Citi has its hand out again.

What's even more sinister about the Citi bailout, though, is the heretofore unprecedented move of backstopping losses on some $306 billion of Citi's bad investments and loans. So those losses will accrue directly to the US taxpayer.

What? Where are the checks and balances here? This is outside the TARP, as the amount of those losses is unknown at this point. CreditSights reported the deal was "structured in a way that existing debt holders are not impaired and equity investors are not overly diluted." But the taxpayer is screwed.

The very next day, the Fed announced it would buy $800 billion in mortgage-backed bonds and consumer loan-backed bonds, in an effort to add liquidity to those markets.

Wait a minute - wasn't that the original intent of the TARP? And again, where are the checks and balances?

Let's follow the Paulson daisy-chain here:

1. Paulson asks Congress to whisk through a $700 billion financial bail-out plan, and after some initial resistance, Congress agrees, but only after adding $100 billion or so of pork. A Treasury official acknowledges that the number was pulled out of thin air, and there is no "plan" regarding what will be done with the money.

2. Paulson announces that he'll use the money to buy crap bonds from banks, improving liquidity and hopefully shoring up valuations.

3. The UK announces a plan of their own, but says they'll use the money to take equity stakes in banks.

4. Paulson decides he likes the UK plan better, and reverses course, saying Treasury will inject equity into US banks.

5. Sensing reluctance on the part of US banks to ask for the money, lest the market punish them for being the weak sisters they are, Paulson forces the first round of money on nine banks that say they don't need it.

6. The market punishes said nine banks.

7. Paulson spends the entire first round of TARP money.

8. The Fed - with no Congressional approval - commits $800 billion to do what the TARP was intended to do to begin with. (Note that the Fed is already broke and borrowing money.)

Does this make sense? More importantly, does it inspire confidence that our Treasury Secretary knows what he's doing?

No, and no.

Total Fed and Treasury commitments to bail-outs to date are more than $7 trillion, or half of GDP. And, as one Congressman said, "Whether it's lending or spending, it's tax dollars that are going out the window and we end up holding collateral we don't know anything about. The time has come that we consider what sort of limitations we should be placing on the Fed ..."

No, that time was several trillion dollars ago.

A Financial Times article today raised the question that I, and others like me, have been asking for months now: are governments around the globe going to be able to fund these commitments? More than $2.5 billion of bonds are going to have to be issued next year alone to fund this mess. And who's going to buy them? Wall Street? Nope. China? Maybe, maybe not. But if they do, they're going to want astronomical interest rates on them.

At least Congress turned down Detroit - or did they? They sent the execs back to Michigan, chastised for flying into Washington on private jets (memo: next time take Amtrak, a la Joe Biden), and told them to come back when they have a plan. So now they're talking about car-pooling.

I will die of terminal mirth if the car breaks down.

So they'll come up with a plan, Congress will add some pork to it, and Bailout Mania will continue. I'm sure of it.

On to Obama's financial team. In brief, I'm underwhelmed.

Volcker, I like. But he should be Fed Chairman. He'd know what to do, and he's tough enough to do it. I think. I mean, he used to be, but he may be going soft in the noggin, considering that he's hitched his wagon to somebody who likes bail-outs. Instead, Volcker will chair a new group called the Economic Advisory Board.

Just what we need, a new economic advisory group. Guess the Council of Economic Advisors and the National Bureau of Economic Research weren't enough (both of these will get further mention below).

As for the former, it will be headed by former Clinton Treasury Secretary Larry Summers. Summers is a very smart guy (as is Volcker). But not a great forecaster. (Does that description remind you of anyone? Hint: his initials are Ben Bernanke. Or Alan Greenspan.) Summers advocates another big stimulus package, which will only add to the effects of Bailout Mania.

But the appointment with the most teeth is Treasury Secretary, for that role - as we've seen only too clearly - carries significant power. Power enough to bankrupt the nation.

Obama's pick for that spot is current New York Fed Bank President Tim Geithner. Wall Street lauded the pick.

Anything Wall Street lauds should scare the bejeebers out of you and me these days.

Geithner is the consummate deal-maker, a guy who can bring banking and investment bank (an entity that now has gone the way of the dodo bird) heads together in a smoke-filled back room and get them to agree to anything. But the deals he brokers are of questionable value. To wit: he's had a hand in everything from the Bear bail-out to the Lehman non-bail-out to the AIG deal.

My problem with Geithner is that he's a career bureaucrat. He's got degrees in government, Asian studies and international economics. That last one is okay, but what did he do with it?

He started his career with Kissinger and Associates in DC. Then, he went on to the Treasury, where he was Undersecretary for International Affairs under Bob Rubin and Summers. After that, he went to work for the Council on Foreign Relations, then the IMF, before heading the New York Fed, where he's also vice-chair of the Federal Open Market Committee. Sounds like he'd have made a better Secretary of State, with all that foreign affairs experience.

My concern is that he doesn't understand some of the more arcane nuances of Wall Street. And even if he does, his involvement in the Bear, Lehman and AIG deals - all of which were bad deals in my view - make him a questionable pick. But he's been described as a "very unusually talented young man ... [who] understands government and understands markets."

Of course, that description came from Hank Paulson. And, like Paulson, Geithner thinks Treasury should have expanded authority. Yikes.

In closing, here's my reference to the National Bureau of Economic Research. The NBER is the official proclaimer of recessions. Today, they announced that the US economy officially entered recession last December.

In so doing, they proved my predictions of April and May of 2007 correct. Back then, I was about the only guy making those predictions, when I said we'd enter recession by the beginning of 2008. So thank you, NBER. You are now on my Christmas card list.