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.
Thursday, September 18, 2008
(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."
Saturday, September 13, 2008
Rope-a-Dope
One of the presidential campaigns looks to be on the ropes. Any guesses whose?
Normally I don't pay much attention to the Hollywood-celebrity-cum-political-pundit crowd. If I want to hear what they have to say, I'll buy a movie ticket, and they can do their job and entertain me. I pay their salary, after all.
But since they're crawling out of the woodwork on the left at such an alarming rate that I see them everywhere I turn - like so many cockroaches - I figured I'd give a listen to at least one from the right. After all, they're so scarce, they need the love.
So here it is. Dennis Miller said it best:
"I don't know what it is about Sarah Palin, but she is in Obama's melon in a big way."
No kidding. The once-articulate (and don't forget "bright" and "clean," according to his running mate) former community organizer, serial campaigner and "present" voter has been fumbling and bumbling and hemming and hawing and pausing and scrambling like ... well, like Joe Biden trying to cover his "Stand up, Chuck!" gaffe.
The Obama camp has no idea what to do about Palin. Apparently, they clearly saw that, finally, we were getting a candidate for high office who is of the people, by the people and for the people. And that resonated with the people. All along, Obama's been chirping about "hope" and "change." Along comes Palin. She radiates hope, and she's brought change. Hard, fast and uncomfortable change.
And Obama doesn't know what to do, other than cry, "Gimme back my slogan!" like a petulant child who won't share his toys.
So the spin machine started, at a dizzying pace. There have been so many smears on Palin that I can't keep up with them. "Trooper-gate?" Come on, at least be original. (That one has "disgruntled former employee" written all over it, by the way. Except he's not a former employee, he's still got his job.) The "bridge to nowhere" flap? Much ado about nothing. I'll even give the Dems that one. She still fought earmarks, and she's still done wonders for the people of Alaska.
And they, her constituents, love her. That's the real litmus test. What do the people of Illinois say about Obama?
Chirp chirp ... chirp chirp ...
As for the other attacks, the "it's not her baby," "lipstick on a pig," "bikini-clad gun-toter," etc., I won't dignify them with discussion.
Neither would she, which is why she's been kept away from the press. Let the crap die down, let some semblance of civility return to the discourse (if that's even a remote possibility these days), and she'll talk to the propaganda machine's puppets. But the left hooted that this was just another example of her inexperience, that she had to be coached.
Of course, they're not talking about the fact that the wizened old vet, Joe Biden, is being coached for his debate with her. (Given his recent public comments, though, that's probably a really good idea.)
She did do the interview with Charlie Gibson, who was as disrespectful as I've seen a journalist be. (God, how I miss Tim Russert.) Really, his body language, his demeanor, his style of questioning - would he have seriously perched his little reading glasses halfway down his patrician nose and looked down it at John McCain?
McCain would have smiled at him and said, "My friend, let me help you adjust your glasses," then popped Charlie in the forehead hard enough to put him on his pompous backside.
It was disrespectful. And not to play the gender card, but I don't think Chuckles would have acted that way toward a male candidate.
I thought she held her own, especially given that ABC rolled out a clearly biased interviewer with an obvious agenda, who was out to get her. Well, he didn't. She wasn't flawless, but she did fine, especially against an adversarial interviewer.
Of course, the left doesn't think that way. But I've traded a lot of e-mails and message board posts and had several conversations about this. And early on, I observed this truth, and stated it for the record:
Those predisposed to believe she'd do poorly, believe she did poorly. Those predisposed to believe she'd do well, believe she did well.
And that truth has been upheld by every discussion, verbal or electronic, that I've had or seen since.
By the way, nobody's talking anymore about how Obama did with O'Reilly. Maybe that's what's got the Obama camp's knickers in such a twist - their guy takes on Bill O'Reilly, which is supposed to be big news, but once again gets upstaged by the upstart from Alaska.
What's next? Blaming the McCain campaign for Hurricane Ike, because it caused Obama to cancel his Saturday Night Live appearance?
No, the day after 9/11, Obama said, "Okay, the gloves are off now." And launched an attack ad - or, should I say, yet another attack ad, because since the conventions I have not seen one ad talking about Obama himself - going after McCain. I shuddered before I watched it. I thought, "Oh, no, given how vicious and nasty these people have been thus far, I can't imagine what they'll say about McCain now that "the gloves are off." So what did they lead with?
"John McCain doesn't even know how to use a computer."
Seriously - is that your best shot? The political equivalent of "nanny, nanny, boo-boo?"
What a mismatch. War hero McCain doesn't even have to get into the fray. Obama's getting pummeled by the second string, a "hockey mom and first-term governor of one of the least-populated states in the country who before that was mayor of a town of 9,000," as the mantra goes.
Yep, the Obama campaign's on the ropes. It has become ugly.
And there's no putting lipstick on that pig.
************
I leave you with these words from fellow blogger Greg Gutfeld, who succinctly explains the anti-Palin sentiment from the left:
"According to many in the media, we truly have discovered someone worse than Hitler — and it's Sarah Palin.
Head to any left-wing blog or even CNN for that matter and you'll find the zaniest of conspiracies -- froth that even a dude with rabies would find unseemly.
So how can one person create so much bile among folks who claim to be the most tolerant in the universe? I mean, liberals are the good people: They're open-minded, caring and of course, fair.
But somehow, a Republican lady in her 40s is exempt from this treatment. Perhaps, she truly is the devil in a dress, a ghoul that eats children and pollutes the planet and possibly beats Barack Obama, the patron saint of every customer buying wheat germ in bulk at GNC.
But I know the real reason why every single elitist media type is terrified of her. They've never met her. And by 'her,' I don't mean Sarah Palin. I mean 'her,' an actual normal woman with a bunch of kids, an average husband and no desire to watch 'The L Word.'
She's scary to these folks the way Wal-Mart is scary to them: Both are alien to someone who blogs about their chakras. They won't go there, because they've never been there.
To them, hating Sarah Palin is a symptom of larger bigotry against the rest of us, the normal. If they saw her at a party, they would wonder how she got in. She's the anti-Obama, the anti-New York Times, the anti-everything that Tim Robbins loves, which is why I love her — and you should too."
Normally I don't pay much attention to the Hollywood-celebrity-cum-political-pundit crowd. If I want to hear what they have to say, I'll buy a movie ticket, and they can do their job and entertain me. I pay their salary, after all.
But since they're crawling out of the woodwork on the left at such an alarming rate that I see them everywhere I turn - like so many cockroaches - I figured I'd give a listen to at least one from the right. After all, they're so scarce, they need the love.
So here it is. Dennis Miller said it best:
"I don't know what it is about Sarah Palin, but she is in Obama's melon in a big way."
No kidding. The once-articulate (and don't forget "bright" and "clean," according to his running mate) former community organizer, serial campaigner and "present" voter has been fumbling and bumbling and hemming and hawing and pausing and scrambling like ... well, like Joe Biden trying to cover his "Stand up, Chuck!" gaffe.
The Obama camp has no idea what to do about Palin. Apparently, they clearly saw that, finally, we were getting a candidate for high office who is of the people, by the people and for the people. And that resonated with the people. All along, Obama's been chirping about "hope" and "change." Along comes Palin. She radiates hope, and she's brought change. Hard, fast and uncomfortable change.
And Obama doesn't know what to do, other than cry, "Gimme back my slogan!" like a petulant child who won't share his toys.
So the spin machine started, at a dizzying pace. There have been so many smears on Palin that I can't keep up with them. "Trooper-gate?" Come on, at least be original. (That one has "disgruntled former employee" written all over it, by the way. Except he's not a former employee, he's still got his job.) The "bridge to nowhere" flap? Much ado about nothing. I'll even give the Dems that one. She still fought earmarks, and she's still done wonders for the people of Alaska.
And they, her constituents, love her. That's the real litmus test. What do the people of Illinois say about Obama?
Chirp chirp ... chirp chirp ...
As for the other attacks, the "it's not her baby," "lipstick on a pig," "bikini-clad gun-toter," etc., I won't dignify them with discussion.
Neither would she, which is why she's been kept away from the press. Let the crap die down, let some semblance of civility return to the discourse (if that's even a remote possibility these days), and she'll talk to the propaganda machine's puppets. But the left hooted that this was just another example of her inexperience, that she had to be coached.
Of course, they're not talking about the fact that the wizened old vet, Joe Biden, is being coached for his debate with her. (Given his recent public comments, though, that's probably a really good idea.)
She did do the interview with Charlie Gibson, who was as disrespectful as I've seen a journalist be. (God, how I miss Tim Russert.) Really, his body language, his demeanor, his style of questioning - would he have seriously perched his little reading glasses halfway down his patrician nose and looked down it at John McCain?
McCain would have smiled at him and said, "My friend, let me help you adjust your glasses," then popped Charlie in the forehead hard enough to put him on his pompous backside.
It was disrespectful. And not to play the gender card, but I don't think Chuckles would have acted that way toward a male candidate.
I thought she held her own, especially given that ABC rolled out a clearly biased interviewer with an obvious agenda, who was out to get her. Well, he didn't. She wasn't flawless, but she did fine, especially against an adversarial interviewer.
Of course, the left doesn't think that way. But I've traded a lot of e-mails and message board posts and had several conversations about this. And early on, I observed this truth, and stated it for the record:
Those predisposed to believe she'd do poorly, believe she did poorly. Those predisposed to believe she'd do well, believe she did well.
And that truth has been upheld by every discussion, verbal or electronic, that I've had or seen since.
By the way, nobody's talking anymore about how Obama did with O'Reilly. Maybe that's what's got the Obama camp's knickers in such a twist - their guy takes on Bill O'Reilly, which is supposed to be big news, but once again gets upstaged by the upstart from Alaska.
What's next? Blaming the McCain campaign for Hurricane Ike, because it caused Obama to cancel his Saturday Night Live appearance?
No, the day after 9/11, Obama said, "Okay, the gloves are off now." And launched an attack ad - or, should I say, yet another attack ad, because since the conventions I have not seen one ad talking about Obama himself - going after McCain. I shuddered before I watched it. I thought, "Oh, no, given how vicious and nasty these people have been thus far, I can't imagine what they'll say about McCain now that "the gloves are off." So what did they lead with?
"John McCain doesn't even know how to use a computer."
Seriously - is that your best shot? The political equivalent of "nanny, nanny, boo-boo?"
What a mismatch. War hero McCain doesn't even have to get into the fray. Obama's getting pummeled by the second string, a "hockey mom and first-term governor of one of the least-populated states in the country who before that was mayor of a town of 9,000," as the mantra goes.
Yep, the Obama campaign's on the ropes. It has become ugly.
And there's no putting lipstick on that pig.
************
I leave you with these words from fellow blogger Greg Gutfeld, who succinctly explains the anti-Palin sentiment from the left:
"According to many in the media, we truly have discovered someone worse than Hitler — and it's Sarah Palin.
Head to any left-wing blog or even CNN for that matter and you'll find the zaniest of conspiracies -- froth that even a dude with rabies would find unseemly.
So how can one person create so much bile among folks who claim to be the most tolerant in the universe? I mean, liberals are the good people: They're open-minded, caring and of course, fair.
But somehow, a Republican lady in her 40s is exempt from this treatment. Perhaps, she truly is the devil in a dress, a ghoul that eats children and pollutes the planet and possibly beats Barack Obama, the patron saint of every customer buying wheat germ in bulk at GNC.
But I know the real reason why every single elitist media type is terrified of her. They've never met her. And by 'her,' I don't mean Sarah Palin. I mean 'her,' an actual normal woman with a bunch of kids, an average husband and no desire to watch 'The L Word.'
She's scary to these folks the way Wal-Mart is scary to them: Both are alien to someone who blogs about their chakras. They won't go there, because they've never been there.
To them, hating Sarah Palin is a symptom of larger bigotry against the rest of us, the normal. If they saw her at a party, they would wonder how she got in. She's the anti-Obama, the anti-New York Times, the anti-everything that Tim Robbins loves, which is why I love her — and you should too."
Tuesday, September 9, 2008
The Morning After
Having had a day to digest the Fannie/Freddie bailout, let's take a fresh look.
Apparently I'm not the only one with indigestion. A Credit Union Times article bore the headline, "Bush Administration Defends Fannie and Freddie Action."
If it was such a great idea, why does it need to be defended?
A taped interview with the President intended to do just that will bear this unbelievable gem:
"I wouldn't call it a bailout, I'd call it a stabilization."
Well, the stabilization has cause credit default swap spreads on US Treasury debt to widen to record highs. Those swaps are a market bet on the likelihood a debt issuer will default. The wider the spread, the greater the chance of default. And they've been an uncannily accurate predictor of corporate defaults, much better than credit ratings.
Of course, a blind truffle-sniffing pig could do a better job than the ratings agencies.
Now, the spreads aren't nearly wide enough - yet - to suggest the Treasury will default. But it could get the attention of the ratings agencies, resulted in a downgrade or negative watch. That would cause Treasury borrowing costs - and hence mortgage rates - to rise.
Even if the ratings agencies don't take any action, foreign investors watch the swap spreads, and will almost certainly start demanding higher yields - with the same impact on mortgage rates.
How's that for stabilization?
The administration will blame Congress' long resistance to action for the need to bail out Fannie and Freddie. While I still don't believe an outright bailout was the right thing to do, the administration is correct in its fault assessment.
A Wall Street Journal op-ed piece this morning quoted another of my favorite targets, Barney Frank, as suggesting that Paulson's plan to begin reducing the size of Fannie and Freddie's MBS portfolios beginning in 2010 - after they're increased through the end of next year - won't happen. "Good luck on that," he said.
Beginning in 1992, some legislators and regulators have recognized the flawed structure and inherent risks in Fannie and Freddie, and Frank has fought tooth and nail against a fix. In 2000, he said concerns were "overblown," and made the statement that there was "no federal liability there whatsoever," according to the Journal.
In 2002, he said, "I do not regard Fannie Mae and Freddie Mac as problems ... I regard them as great assets." A year later, he said "there is no federal guarantee" of their debt. Well, there is now. Shortly after that, Freddie's now-infamous accounting fraud was exposed, and Frank said, "I do not think we are facing any kind of a crisis," and that there was no "threat to the Treasury."
Fast-forward to last year, by which time Barney chaired the House Financial Services Committee. Now, he was claiming he'd always been a proponent of reforming the GSEs. He blamed the lack of action on conservatives that "don't think there should be a Fannie Mae or a Freddie Mac."
The WSJ article goes on: "In January of last year, Mr. Frank also noted one reason he liked Fannie and Freddie so much: They were subject to his political direction. Contrasting Fan and Fred with private-sector mortgage financers, he noted, 'I can ask Fannie Mae and Freddie Mac to show forbearance' in a housing crisis ... And this is exactly what Mr. Frank attempted to prove when the housing market started to go south. He encouraged the companies to guarantee more 'affordable' mortgages, thus abetting their disastrous plunge into subprime and Alt-A loans. He also pushed for, and got, an increase in the conforming-loan limits to allow Fan and Fred to securitize and guarantee larger mortgages. And he pressured regulators to ease up on their capital requirements -- which now means taxpayers will have to make up that capital shortfall."
So Barney, as much as Alan Greenspan, fathered the housing bubble. In his zeal for every American to be a homeowner - whether or not they could afford the mortgages - he used taxpayer money to fuel the bubble, fought protections that could have prevented this mess, and now says it's somebody else's fault. He's more culpable than Paulson.
So why does he oppose reducing the MBS portfolios in 2010? At first blush, one would assume that now that he's got the taxpayer on the hook, he has no problem with siphoning off our money to fund even more homeowners who can't otherwise afford a home.
But the Journal piece points to an even more sinister reason:
"The biggest payoff for Mr. Frank is the 'affordable housing' trust fund he managed to push through as one political price for the recent Fannie reform bill. This fund siphons off a portion of Fannie and Freddie profits -- as much as $500 million a year each -- to a fund that politicians can then disburse to their favorite special interests. This is also why Mr. Frank won't tolerate cutting the companies' MBS portfolios. He knows those portfolios (bought with debt borrowed at taxpayer-subsidized rates) were a main source of Fannie's profits before the housing crash, and he figures that once this crisis passes they can do it again. And this time, his fund will get part of the loot."
I swear, I need to find a nice ex-pat community someplace warm.
************
Besides widening default swap spreads on Treasuries, the bailout also triggered the unwinding of credit default swaps on Fannie and Freddie debt. This will be ugly.
No one knows the exact amount of credit default swaps outstanding on the pair's debt, given the lack of transparency in that market. But it's a lot. Nobody knows how the unwinding will take place. But my guess is it could bring down another Wall Street firm.
************
Want to know the real reason Hank bailed out Fannie and Freddie?
Foreign pressure.
Foreign central banks had increasingly leaned on Bungalow Bill, as I now like to call him, because institutions in their own countries had been heavy investors in Fannie and Freddie debt, and they were fearful of a global ripple effect if the two went under. At the time of the Bear bailout in March, foreign central banks themselves bought about as much agency debt as Treasury debt. Since then, there's been a massive flight to quality, as they were net sellers of agencies in July, switching their money into Treasuries.
But declining values of Fannie/Freddie debt made unloading the stuff costly. And the more they sold, the more they put further pressure on the prices. So, instead of incurring the losses that naturally come with taking risk in the markets, they leaned on Hank, who, with his pal Helicopter Ben, has proven all too willing to throw US taxpayer money at anybody who whines loud enough. So we're taking their losses for them.
I should at least get a free vacation each year in the country of my choice for my largesse.
This is a wealth transfer of unprecedented proportions. All the bitching and moaning about the US shipping jobs overseas is misplaced; that pales in comparison to this. My office is still on US soil, but a third of every paycheck now goes abroad.
I seriously, seriously need to find that ex-pat community.
Apparently I'm not the only one with indigestion. A Credit Union Times article bore the headline, "Bush Administration Defends Fannie and Freddie Action."
If it was such a great idea, why does it need to be defended?
A taped interview with the President intended to do just that will bear this unbelievable gem:
"I wouldn't call it a bailout, I'd call it a stabilization."
Well, the stabilization has cause credit default swap spreads on US Treasury debt to widen to record highs. Those swaps are a market bet on the likelihood a debt issuer will default. The wider the spread, the greater the chance of default. And they've been an uncannily accurate predictor of corporate defaults, much better than credit ratings.
Of course, a blind truffle-sniffing pig could do a better job than the ratings agencies.
Now, the spreads aren't nearly wide enough - yet - to suggest the Treasury will default. But it could get the attention of the ratings agencies, resulted in a downgrade or negative watch. That would cause Treasury borrowing costs - and hence mortgage rates - to rise.
Even if the ratings agencies don't take any action, foreign investors watch the swap spreads, and will almost certainly start demanding higher yields - with the same impact on mortgage rates.
How's that for stabilization?
The administration will blame Congress' long resistance to action for the need to bail out Fannie and Freddie. While I still don't believe an outright bailout was the right thing to do, the administration is correct in its fault assessment.
A Wall Street Journal op-ed piece this morning quoted another of my favorite targets, Barney Frank, as suggesting that Paulson's plan to begin reducing the size of Fannie and Freddie's MBS portfolios beginning in 2010 - after they're increased through the end of next year - won't happen. "Good luck on that," he said.
Beginning in 1992, some legislators and regulators have recognized the flawed structure and inherent risks in Fannie and Freddie, and Frank has fought tooth and nail against a fix. In 2000, he said concerns were "overblown," and made the statement that there was "no federal liability there whatsoever," according to the Journal.
In 2002, he said, "I do not regard Fannie Mae and Freddie Mac as problems ... I regard them as great assets." A year later, he said "there is no federal guarantee" of their debt. Well, there is now. Shortly after that, Freddie's now-infamous accounting fraud was exposed, and Frank said, "I do not think we are facing any kind of a crisis," and that there was no "threat to the Treasury."
Fast-forward to last year, by which time Barney chaired the House Financial Services Committee. Now, he was claiming he'd always been a proponent of reforming the GSEs. He blamed the lack of action on conservatives that "don't think there should be a Fannie Mae or a Freddie Mac."
The WSJ article goes on: "In January of last year, Mr. Frank also noted one reason he liked Fannie and Freddie so much: They were subject to his political direction. Contrasting Fan and Fred with private-sector mortgage financers, he noted, 'I can ask Fannie Mae and Freddie Mac to show forbearance' in a housing crisis ... And this is exactly what Mr. Frank attempted to prove when the housing market started to go south. He encouraged the companies to guarantee more 'affordable' mortgages, thus abetting their disastrous plunge into subprime and Alt-A loans. He also pushed for, and got, an increase in the conforming-loan limits to allow Fan and Fred to securitize and guarantee larger mortgages. And he pressured regulators to ease up on their capital requirements -- which now means taxpayers will have to make up that capital shortfall."
So Barney, as much as Alan Greenspan, fathered the housing bubble. In his zeal for every American to be a homeowner - whether or not they could afford the mortgages - he used taxpayer money to fuel the bubble, fought protections that could have prevented this mess, and now says it's somebody else's fault. He's more culpable than Paulson.
So why does he oppose reducing the MBS portfolios in 2010? At first blush, one would assume that now that he's got the taxpayer on the hook, he has no problem with siphoning off our money to fund even more homeowners who can't otherwise afford a home.
But the Journal piece points to an even more sinister reason:
"The biggest payoff for Mr. Frank is the 'affordable housing' trust fund he managed to push through as one political price for the recent Fannie reform bill. This fund siphons off a portion of Fannie and Freddie profits -- as much as $500 million a year each -- to a fund that politicians can then disburse to their favorite special interests. This is also why Mr. Frank won't tolerate cutting the companies' MBS portfolios. He knows those portfolios (bought with debt borrowed at taxpayer-subsidized rates) were a main source of Fannie's profits before the housing crash, and he figures that once this crisis passes they can do it again. And this time, his fund will get part of the loot."
I swear, I need to find a nice ex-pat community someplace warm.
************
Besides widening default swap spreads on Treasuries, the bailout also triggered the unwinding of credit default swaps on Fannie and Freddie debt. This will be ugly.
No one knows the exact amount of credit default swaps outstanding on the pair's debt, given the lack of transparency in that market. But it's a lot. Nobody knows how the unwinding will take place. But my guess is it could bring down another Wall Street firm.
************
Want to know the real reason Hank bailed out Fannie and Freddie?
Foreign pressure.
Foreign central banks had increasingly leaned on Bungalow Bill, as I now like to call him, because institutions in their own countries had been heavy investors in Fannie and Freddie debt, and they were fearful of a global ripple effect if the two went under. At the time of the Bear bailout in March, foreign central banks themselves bought about as much agency debt as Treasury debt. Since then, there's been a massive flight to quality, as they were net sellers of agencies in July, switching their money into Treasuries.
But declining values of Fannie/Freddie debt made unloading the stuff costly. And the more they sold, the more they put further pressure on the prices. So, instead of incurring the losses that naturally come with taking risk in the markets, they leaned on Hank, who, with his pal Helicopter Ben, has proven all too willing to throw US taxpayer money at anybody who whines loud enough. So we're taking their losses for them.
I should at least get a free vacation each year in the country of my choice for my largesse.
This is a wealth transfer of unprecedented proportions. All the bitching and moaning about the US shipping jobs overseas is misplaced; that pales in comparison to this. My office is still on US soil, but a third of every paycheck now goes abroad.
I seriously, seriously need to find that ex-pat community.
Monday, September 8, 2008
Of Sarah Palin, and Other Political Ramblings
I like Sarah Palin. I told someone before the GOP veep announcement she'd be a good pick.
I'm not going to defend her against the many attacks that have been tossed her way, for two reasons. First, by the time I finished, there'd be five new ones. I could never keep up. Second, most of those attacks aren't worth dignifying with a defense.
I will, however, caution those who attack her - I won't say the left, because I have too much respect for my good friends who are on the left to think they'd stoop to that level, plus I consider myself more middle than right - that they only do their cause and their candidate harm.
For a group that complained loud and long about the "swift-boating" of John Kerry, they are subjecting her to far worse, far more vile, far less fair attacks.
I'll just point out one thing, since I've already weighed in on the ridiculous "experience" question. Oh, alright, I'll add a few more things to the "experience" argument first.
She has used the veto. She has fought a legislature, and worked with them as well.
She's been decried as having been governor of one of the least populous states in the nation.
Well, governors aren't just charged with governing the people, any more than CEOs are just HR managers.
Her state is the largest in terms of land mass in the US. The richest in terms of natural resources. The greatest in terms of ecological importance. And the nearest in proximity to Russia.
That means she's had to marshal more in resources, balance more environmentally sensitive issues, and negotiate more with a hostile nation than any chief executive except the President.
And she's done it all very well, if her approval ratings are any indication.
Hillary Clinton won popular praise for proposing to "take the profits" from the oil companies and give them to the people in subsidies.
Sarah Palin has actually done it, and done it the right way.
As for the notion that she only appeals to small-town America, the knock on McCain - as well as that on Obama and Biden from the right - is that they're "out of touch with America" - McCain because he owns several homes, Obama because he's viewed as an elitist who looks down on middle Americans as "bitter people clinging to their guns and their God." Biden is supposed to balance that, but please - he's a Washington institution who lives in a compound and spends $4,000 a month on train fare.
Sarah Palin is in touch with America. And that's refreshing.
On to my main point. I heard a pundit say the other night that she either puts her family first or her job first - she can't do both.
Women everywhere should be outraged. That comment sets women's rights back 100 years.
What that statement basically charges is that if you work, you're not putting your family first. And that's pure, unadulterated BS. Just think if we applied that standard to men. No one could work. We'd go back to being hunter-gatherers, except we couldn't leave the cave to hunt or gather without neglecting the little Neanderthals.
Please.
I have to think that even Hillary would bristle at that one.
************
I know conventions are all about hype. But man, I respect Cindy McCain.
I want to be like her.
Yeah, she's rich. But first of all, her father came by those riches honestly. He grew up poor, the son of an alcoholic, and his first job was as a paper salesman. A working-class guy who took advantage of the opportunities America offered, worked hard, pulled himself up by his own bootstraps (after serving his country in World War II as a bombardier, during which time his planes were shot down several times - for which he'll no doubt catch grief, as his son-in-law has), lived the American dream and became wealthy.
Sound familiar? It should - it's virtually Barack Obama's story. Except the serving his country part.
Second, she shares those riches generously. That's my dream. I want to be wealthy. Not to have more, but to give more. She's done a considerable amount of mission work. She's committed to using her wealth and influence - and America's abundance and influence in the world - to make this country, this world, a better place for all those who don't have the opportunities and blessings she's enjoyed.
A guy like Chris Gardner gets praise heaped on him for that, as well he should. Will Smith makes a movie about him.
Cindy McCain? All she gets is sneers about how many houses she owns.
Maybe that's because she - like Sarah Palin - is a woman. Maybe if she'd just stayed home and made babies, and daddy had left his money to a son instead (though he didn't have a son to leave it to), people would be more approving of her.
************
The theme here has essentially been gender discrimination. So let me turn my attention to discrimination of another stripe.
Age discrimination.
It is as real, and as prevalent, and as recognized by our laws, as age or race discrimination.
And it's being applied to John McCain.
If I were 72 years of age or older, I'd be outraged. Who says people that age can't be chief executives?
Ronald Reagan was a pretty effective president, though there are some who disparage his record. But history pretty much speaks for itself. Hey, maybe he did sleep through some cabinet meetings. But heck, I would, too.
Jacob Javits, despite his debilitating bout with Lou Gehrig's disease, was sharp as a tack right up until his death at the age of 82. Oh, he also supported labor unions and civil rights, and sponsored the first African-American page and the first female page in the US Senate.
And he was a Republican - a maverick, as it were.
My Dad was also sharp as a tack, right up until the night four and a half years ago when he dropped dead, about 15 years before we all thought he would, based on the longevity of his mother, who lived to be 98, and two of his uncles, one of whom celebrated his 100th birthday, and one of whom missed doing so by two weeks. Dad was 82. Had he been elected president at 72, he could have served two full terms and still enjoyed two years of life in retirement.
And McCain's own mother is 96, suggesting that perhaps the gene pool in that family is also slanted toward longevity. And she's certainly sharp.
But hey, as my Dad proved, some people defy the gene pool. So McCain may not reach 96.
But here's the thing: I'm 49, and I may not reach 50. "No one knows the hour," as the Good Book says.
My daughter came home from high school and said they'd been discussing the election, and that someone had said McCain was too old, because he might die before he served out his term (the same was said of Reagan, and of Cheney as VP).
I told her I had three words for those people.
J. F. K.
************
A final thought. The US population is aging. I don't know the demographics of each party in detail, but I'd have to venture a guess that the parties are relatively equally distributed across the demographic lines, with some notable exceptions.
So I assume that there are a fair number of elderly Democrats. And female Democrats.
To wit, the two oldest people that I know very well are both life-long Democrats. And they're both women.
So my question is this: to what extent do these certain factions within the Democratic party risk alienating a good chunk of their base by decrying one candidate as too old to govern, and by stating that his female running mate should be home tending her babies instead of working?
I don't hear anybody on the right publicly saying that Barack Obama is too black to govern. Discrimination is discrimination. And regardless of its target, it's ugly.
I'm not going to defend her against the many attacks that have been tossed her way, for two reasons. First, by the time I finished, there'd be five new ones. I could never keep up. Second, most of those attacks aren't worth dignifying with a defense.
I will, however, caution those who attack her - I won't say the left, because I have too much respect for my good friends who are on the left to think they'd stoop to that level, plus I consider myself more middle than right - that they only do their cause and their candidate harm.
For a group that complained loud and long about the "swift-boating" of John Kerry, they are subjecting her to far worse, far more vile, far less fair attacks.
I'll just point out one thing, since I've already weighed in on the ridiculous "experience" question. Oh, alright, I'll add a few more things to the "experience" argument first.
She has used the veto. She has fought a legislature, and worked with them as well.
She's been decried as having been governor of one of the least populous states in the nation.
Well, governors aren't just charged with governing the people, any more than CEOs are just HR managers.
Her state is the largest in terms of land mass in the US. The richest in terms of natural resources. The greatest in terms of ecological importance. And the nearest in proximity to Russia.
That means she's had to marshal more in resources, balance more environmentally sensitive issues, and negotiate more with a hostile nation than any chief executive except the President.
And she's done it all very well, if her approval ratings are any indication.
Hillary Clinton won popular praise for proposing to "take the profits" from the oil companies and give them to the people in subsidies.
Sarah Palin has actually done it, and done it the right way.
As for the notion that she only appeals to small-town America, the knock on McCain - as well as that on Obama and Biden from the right - is that they're "out of touch with America" - McCain because he owns several homes, Obama because he's viewed as an elitist who looks down on middle Americans as "bitter people clinging to their guns and their God." Biden is supposed to balance that, but please - he's a Washington institution who lives in a compound and spends $4,000 a month on train fare.
Sarah Palin is in touch with America. And that's refreshing.
On to my main point. I heard a pundit say the other night that she either puts her family first or her job first - she can't do both.
Women everywhere should be outraged. That comment sets women's rights back 100 years.
What that statement basically charges is that if you work, you're not putting your family first. And that's pure, unadulterated BS. Just think if we applied that standard to men. No one could work. We'd go back to being hunter-gatherers, except we couldn't leave the cave to hunt or gather without neglecting the little Neanderthals.
Please.
I have to think that even Hillary would bristle at that one.
************
I know conventions are all about hype. But man, I respect Cindy McCain.
I want to be like her.
Yeah, she's rich. But first of all, her father came by those riches honestly. He grew up poor, the son of an alcoholic, and his first job was as a paper salesman. A working-class guy who took advantage of the opportunities America offered, worked hard, pulled himself up by his own bootstraps (after serving his country in World War II as a bombardier, during which time his planes were shot down several times - for which he'll no doubt catch grief, as his son-in-law has), lived the American dream and became wealthy.
Sound familiar? It should - it's virtually Barack Obama's story. Except the serving his country part.
Second, she shares those riches generously. That's my dream. I want to be wealthy. Not to have more, but to give more. She's done a considerable amount of mission work. She's committed to using her wealth and influence - and America's abundance and influence in the world - to make this country, this world, a better place for all those who don't have the opportunities and blessings she's enjoyed.
A guy like Chris Gardner gets praise heaped on him for that, as well he should. Will Smith makes a movie about him.
Cindy McCain? All she gets is sneers about how many houses she owns.
Maybe that's because she - like Sarah Palin - is a woman. Maybe if she'd just stayed home and made babies, and daddy had left his money to a son instead (though he didn't have a son to leave it to), people would be more approving of her.
************
The theme here has essentially been gender discrimination. So let me turn my attention to discrimination of another stripe.
Age discrimination.
It is as real, and as prevalent, and as recognized by our laws, as age or race discrimination.
And it's being applied to John McCain.
If I were 72 years of age or older, I'd be outraged. Who says people that age can't be chief executives?
Ronald Reagan was a pretty effective president, though there are some who disparage his record. But history pretty much speaks for itself. Hey, maybe he did sleep through some cabinet meetings. But heck, I would, too.
Jacob Javits, despite his debilitating bout with Lou Gehrig's disease, was sharp as a tack right up until his death at the age of 82. Oh, he also supported labor unions and civil rights, and sponsored the first African-American page and the first female page in the US Senate.
And he was a Republican - a maverick, as it were.
My Dad was also sharp as a tack, right up until the night four and a half years ago when he dropped dead, about 15 years before we all thought he would, based on the longevity of his mother, who lived to be 98, and two of his uncles, one of whom celebrated his 100th birthday, and one of whom missed doing so by two weeks. Dad was 82. Had he been elected president at 72, he could have served two full terms and still enjoyed two years of life in retirement.
And McCain's own mother is 96, suggesting that perhaps the gene pool in that family is also slanted toward longevity. And she's certainly sharp.
But hey, as my Dad proved, some people defy the gene pool. So McCain may not reach 96.
But here's the thing: I'm 49, and I may not reach 50. "No one knows the hour," as the Good Book says.
My daughter came home from high school and said they'd been discussing the election, and that someone had said McCain was too old, because he might die before he served out his term (the same was said of Reagan, and of Cheney as VP).
I told her I had three words for those people.
J. F. K.
************
A final thought. The US population is aging. I don't know the demographics of each party in detail, but I'd have to venture a guess that the parties are relatively equally distributed across the demographic lines, with some notable exceptions.
So I assume that there are a fair number of elderly Democrats. And female Democrats.
To wit, the two oldest people that I know very well are both life-long Democrats. And they're both women.
So my question is this: to what extent do these certain factions within the Democratic party risk alienating a good chunk of their base by decrying one candidate as too old to govern, and by stating that his female running mate should be home tending her babies instead of working?
I don't hear anybody on the right publicly saying that Barack Obama is too black to govern. Discrimination is discrimination. And regardless of its target, it's ugly.
A Day Late and a Dollar Short
That's me, today. I meant to post this over the weekend, but I didn't get to it. So now you'll just have to take my word regarding my predictions. (My wife could vouch for me, but she's biased.) I'm also probably quite a few dollars short after this weekend, in part because I'm short the stock market.
And in part because I'm a taxpayer.
I predicted a couple of weeks ago that Paulson would bail out Fannie Mae and Freddie Mac by Labor Day. Missed it by a week.
Yesterday, when the bailout was announced, I read the details - and in this case, the devil is truly in there. I also predicted the Dow would rally 300 points today, then ultimately come to its senses.
See, the whole notion of a stock market rally on a deal that screws stockholders and taxpayers, let alone the idea of a rally on two quasi-government agencies failing, is pretty silly.
But this is the same market that rallied more than 200 points on August 28th because last quarter's GDP number was revised up. So much for the market being forward-looking. Never mind that the revision was built on trade, and the rapid slowing of the British, southern Eurozone, and some Asian economies is piddling that pillar of support away. Or that the original decent Q2 number was built on a one-time economic stimulus - which was largely spent on gasoline - and an unwanted bulge in inventories. Or that Q3 growth is almost undoubtedly in the crapper.
That's okay though. I'm on this train (wreck) for the long haul. My shorts will pay off. I've seen several articles this morning noting that the market has rallied on each government intervention since this debacle began, and that each rally has been shorter and weaker.
On to the Fannie/Freddie bailout. This is a bad idea, and it won't work. To some, it's the only thing to do, though. Here's why.
Fannie and Freddie guarantee about half of the $11 trillion US mortgage market. They buy primarily long-term, fixed-rate loans from banks and brokers who can't take the risk of holding them on their own books. Banks' primary source of funds - your deposit dollars (assuming you're an atypical American and actually have a savings account) - are short-term. You probably don't have many 30-year CDs. So when rates go up, you roll your short CDs and demand higher rates. But banks are still earning the earlier, lower rate on the mortgages they hold, if they hold them. So they'd prefer to sell them. If they can, they're willing to make more loans, and thus more people have access to housing credit, and therefore housing. (The mismatch between short funding and long-term fixed-rate assets spawned the S&L crisis, by the way.)
So if Fannie and Freddie are allowed to simply fail, they go away, and so does the conduit for about $5 trillion in home loans. The implications for housing are dire. Credit becomes uber-scarce. Homeownership plummets. Mortgage rates also go up, because banks will now have to hold the bulk of their loans on their books, and they're going to want to get paid for that. So there will be a higher risk premium, no matter what the underlying Treasury rates do (30-year mortgages are priced at a spread - reflecting the credit risk of the loan - above the ten-year Treasury yield).
And, as we've seen, as housing goes, so goes the economy. Fewer builders building, providing well-paying construction jobs. Fewer people buying houses, filling them up with "stuff," so the people that make and sell the "stuff" make less money - again fewer jobs of all kinds.
So, Hank Paulson - who's apparently forgotten everything he learned on Wall Street - believed the only thing to do was bail Fannie and Freddie out. He cited "three critical objectives":
1. "Providing stability to financial markets." No argument here. But I'd rather see short-term instability that leads to long-term stability, than vice versa, which is what Paulson's given us.
2. "Supporting the availability of mortgage finance." It was the too-easy availability of mortgage finance that got us into this predicament in the first place, Henry.
3. "Protecting taxpayers by both minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure" (GSE stands for government-sponsored enterprise, which is what Fannie and Freddie are - chartered by the government, back by its once-implicit, now explicit full faith and credit, but with private equity holders).
Okay, that last point begs four questions. Four absolutely, jaw-dropping-bug-eyed-incredulous questions.
First - Hank, is it wise to "minimize the near term costs to the taxpayer" with a plan that will maximize both the long-term costs and their duration?
Second - since when has unleashing policymakers on a problem protected the taxpayer? Holy smokes, Henry - do you not recall the S&L crisis?
Third - if you recognized the systemic risks inherent in the GSE structure when you landed this gig back in July 2006, why on earth didn't you start work on fixing it then, before it was too late?
And fourth - just who in hell are you trying to kid here, anyway?
Okay, so much for his rationale. Here's his plan:
1. Place Fannie and Freddie in conservatorship. Conservatorship is supposed to be a temporary parking spot for a company deemed insolvent until it can return to solvency. Instead, it is the purgatory to receivership's hell. I worked for an S&L that was placed in conservatorship. At the time the government took over, it had more than $300 million in capital. Three years later, it had gone the way of the dodo bird, and at a total loss to the stockholders (myself included) and a net cost to taxpayers (myself again included).
2. Replace management. No more can I make jokes about how Fannie's CEO's name is actually Mudd. He's been replaced by a former Merrill Lynch vice-chairman.
Yes, Virginia, the same Merrill Lynch that has lost $51.8B over the course of the credit crisis. The same Merrill Lynch that ranks #2 on the loss leader board. The same Merrill Lynch whose stockholders have lost 70% of their investment over the last 15 months. The same Merrill Lynch that is vying with Lehman Brothers to be the next Bear Stearns.
Oh boy. I like this pick.
Freddie's boss will be replaced by the former CFO of US Bancorp, which has been relatively unscathed in this imbroglio. One out of two ain't bad, I guess.
Both of the new guys' "compensation will be significantly lower than the outgoing CEOs." Good thing, since an estimated two out of every three dollars of Fannie and Freddie's subsidies from the government went to its executives and stockholders, not to promoting homeownership.
3. The Treasury Department will become a senior preferred stockholder in Fannie and Freddie, in exchange for - get this - "ensur(ing) that each company maintains a positive net worth."
Wow. What's key in that phrase?
First, he didn't say Treasury would maintain adequate capital for Fannie and Freddie, just "positive net worth." They already had that, although not for long. But wasn't their issue capital adequacy? Paulson himself said yesterday, "Their statutory capital requirements are thin and poorly defined as compared to other institutions."
Well, thanks, Hank. They're certainly well-defined now: anything above zero. But that's still a tad thin, don'tcha think?
Second, Treasury will ensure - for as long as need be, up until its blank-check authority expires at the end of next year - that Fannie and Freddie have positive net worth. So, if the new guys continue to screw the pooch and the losses continue to mount and the net worth goes below zero, Treasury will keep flushing money down that toilet.
Our money.
Hank said, "It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set."
I wish I'd seen his speech, because if he actually said that with a straight face, I have to believe that when he was an All-American O-lineman at Dartmouth, they didn't use helmets.
Are you flipping kidding me? "More efficient than a one-time equity injection?" Folks, what he's saying is, "We'll be paying on this ugly pig for most of your lifetimes."
4. Fannie and Freddie will have two "primary mission(s)":
a) "To proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability."
Let me tranlsate. Fannie and Freddie charge a fee to guarantee the mortgages they buy and securitize. For years now, that fee has been too low to cover the true underlying risk of the mortgages, as credit standards have loosened and Alan "Mr. Bubble" Greenspan kept rates too low for too long. So recently - also too late and many dollars short - Fannie and Freddie have upped their fees, which has made mortgages more expensive than they were, but once again as expensive as they should be.
Sounds like Hank wants to lower those fees, back to sub-market risk levels. Not a wise move. Just when you thought it was safe to go back in the water ...
b) To "modestly increase their MBS portfolios through the end of 2009. Then to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10% per year ... eventually stabilizing at a lower, less risky size.
Let's read between the lines here. Hank acknowledges that increasing the size of their portfolios - even into 2010 - increases "systemic risk," and he also acknowledges that shrinking their portfolios to a "lower, less risky size" would reduce risk.
So he proposes increasing their portfolios in the short run. Great. More losses. More risk that the losses reach the taxpayer.
Also, the housing crisis isn't expected to be over until the end of 2009 anyway. So just when the party could be getting started, they're going to take away the punch bowl. That should bring a fresh wave of stagnation in the housing market.
To be fair, Hank admits that this step is designed to "promote liquidity in the secondary mortgage market and lower the cost of funding," which it should do. But it won't stimulate housing demand.
Let's put that last point in perspective. The Fed and the Treasury have been intervening in the credit markets since last summer - cutting interest rates, opening up the discount window to everybody but the payday loan shop junkies, and bailing out Bear Stearns and now the GSEs. Not to mention the brilliant and highly effective "Project Hope" and other such initiatives.
What has the effect on housing and mortgage affordability been?
Home prices have continued to fall, reaching fresh year-over-year records every month. Delinquencies and foreclosures have continued to rise, doing the same. And mortgage rates - which were about 6.50-6.60% for a Fannie- or Freddie-conforming, 30-year fixed-rate loan in June 2007, before the Bear Stearns hedge fund collapse that triggered the credit melt-down - were at 6.55% last week. Now, after the bailout, they're running around 6.20%.
Great news! Mortgage rates are down 35 basis points!
Time to sober up. They were as low as 5.50% in January. At the time, purchase mortgage application volume was down about 4% from where it was the previous summer, when rates were a full point higher (and those levels were already down 10% from the bubble's peak). Why? Falling home prices. Today, the 13-week moving average of the weekly volume index is at a six-year low.
Also, it's hard to get excited about mortgage rates finally coming down 35 basis points when the Fed funds target has been cut by almost ten times that amount. Mortgages are priced off the ten-year Treasury yield, which is only down about a percentage point - or a third of the Fed's rate-cutting - since September. And it won't come down much further, with inflation expectations still high. So the bailout-induced reduction in mortgage rates is a function of perceptions of future liquidity. That may play out, and it may not.
The last linchpin in Paulson's scheme is that Treasury will start buying mortgage-backed securities from Fannie and Freddie - a rather incestuous support system - which is also designed to boost liquidity and increase mortgage finance availability.
The downside is that if losses in the MBS market continue, Treasury will take a hit.
Who is "Treasury?"
You, me and China. And China can stop funding anytime it wants. Not so, you and me.
So, what will the actual effects of Paulson's plan be?
1. Fannie and Freddie's stockholders will get nada. That's as it should be. When you buy stocks, you risk losing all your money. Oh, they'll ask for a bailout. If they get it, I'll defect.
2. Mortgage rates will not go down meaningfully enough to stimulate housing demand. The weakness in demand is a function of still-bulging inventories of housing stock, producing still-falling prices. And no one wants to jump on a sinking ship. Until prices bottom out, we won't see recovery in housing.
3. Furthermore, this will not meaningfully increase mortgage credit issuance. Lending standards have tightened - a most appropriate and long-overdue response to rampant speculation. So even if rates cheapen up enough to make a house affordable, and even if would-be buyers are willing to take the plunge - literally - in a falling-price market, many of them will not qualify. Or be able to come up with the reasonable 20% down payments that are now once again, and reasonably, being required.
4. The taxpayer is screwed. This year's budget deficit is already at $370 billion, and it's expected to grow by $105 billion with this week's report for August. The all-time record is $411 billion in 2004. This bailout will cost an estimated $300 billion to the taxpayer.
Let's put that in perspective. The S&L bailout ultimately cost the taxpayer about $125 billion. According to Wikipedia, it "contributed to the large budget deficits of the early 1990s" (which ran around half to two-thirds this year's projected shortfall) and "ended up being even larger than it would have been because moral hazard and adverse selection incentives compounded the system's losses."
If you think there's no moral hazard or adverse selection incentive in this bailout, here's a useful website for you: www.dictionary.com.
There may be another cost. When Paulson was first proposing asking for this blank-check authority to bail out Fannie and Freddie - all the while lying through his teeth, saying he didn't expect to actually have to use it - S&P came out and said that if Treasury bailed out the mortgage giants, the ratings on US Treasury debt might have to be reviewed.
I was stunned. Never in my 20+ years of following this stuff have I ever heard the sanctity of US sovereign debt's rating threatened.
The implications are huge. Higher borrowing costs, leading to higher mortgage rates anyway. And even if the debt weren't downgraded, that will happen: how do you think China and Japan feel about buying US Treasuries now - once they realize how much we've jacked up the national debt? They'll demand higher yields, and get them. And up go mortgage rates.
I have to give Hank credit for having the cojones to actually admit that this is a stop-gap measure and that it'll be up to the next administration and Congress to determine the ultimate resolution of Fannie Mae and Freddie Mac.
To which I'm sure Barack Obama and John McCain say a hearty thank-you.
What Hank is essentially saying is this: "We're going to put an incredibly expensive band-aid on a huge, life-threatening wound, and then let the next doctor on call figure out how to cure the patient."
Unbelievable.
But the best quote comes from New York Senator Chuck Schumer, who said that "avoiding a decision on the issue enhances the likelihood of congressional backing" for the plan.
Even more unbelievable. I thought we elected officials to make decisions, not avoid them. Maybe Chuck's constituents should take the same approach regarding their decision to re-elect the schmuck (the same schmuck who triggered the IndyMac failure, I might add).
Everyone from Alan Greenspan to Obama and McCain to Warren Buffett is saying that this just had to be done - Hank had no choice.
Wrong. There was a better solution: let them fail.
Pony up enough money to protect the bondholders, because the credit markets would truly collapse if the bonds defaulted. But let the stockholders lose their money (which will happen anyway).
And as for the availability and cost of mortgage credit - let the market determine that, as it should. Let private insurers step up to the plate and insure mortgages, based on their inherent risk. So what if homeownership winds up only being affordable for those who demonstrate financial responsibility by saving up a reasonable down payment and paying their bills on time, and can actually repay the mortgages?
Every time I look at Hank's stoic, Anglican face and his polished pate, I think of the old Beatles tune, "The Continuing Story of Bungalow Bill." It describes Bill as "the all-American bullet-headed Saxon mother's son." And the chorus asks, "Hey, Bungalow Bill - what did you kill?"
Oh, not much - just Fannie and Freddie's investors and the US taxpayer. Not bad for a day's hunting.
And in part because I'm a taxpayer.
I predicted a couple of weeks ago that Paulson would bail out Fannie Mae and Freddie Mac by Labor Day. Missed it by a week.
Yesterday, when the bailout was announced, I read the details - and in this case, the devil is truly in there. I also predicted the Dow would rally 300 points today, then ultimately come to its senses.
See, the whole notion of a stock market rally on a deal that screws stockholders and taxpayers, let alone the idea of a rally on two quasi-government agencies failing, is pretty silly.
But this is the same market that rallied more than 200 points on August 28th because last quarter's GDP number was revised up. So much for the market being forward-looking. Never mind that the revision was built on trade, and the rapid slowing of the British, southern Eurozone, and some Asian economies is piddling that pillar of support away. Or that the original decent Q2 number was built on a one-time economic stimulus - which was largely spent on gasoline - and an unwanted bulge in inventories. Or that Q3 growth is almost undoubtedly in the crapper.
That's okay though. I'm on this train (wreck) for the long haul. My shorts will pay off. I've seen several articles this morning noting that the market has rallied on each government intervention since this debacle began, and that each rally has been shorter and weaker.
On to the Fannie/Freddie bailout. This is a bad idea, and it won't work. To some, it's the only thing to do, though. Here's why.
Fannie and Freddie guarantee about half of the $11 trillion US mortgage market. They buy primarily long-term, fixed-rate loans from banks and brokers who can't take the risk of holding them on their own books. Banks' primary source of funds - your deposit dollars (assuming you're an atypical American and actually have a savings account) - are short-term. You probably don't have many 30-year CDs. So when rates go up, you roll your short CDs and demand higher rates. But banks are still earning the earlier, lower rate on the mortgages they hold, if they hold them. So they'd prefer to sell them. If they can, they're willing to make more loans, and thus more people have access to housing credit, and therefore housing. (The mismatch between short funding and long-term fixed-rate assets spawned the S&L crisis, by the way.)
So if Fannie and Freddie are allowed to simply fail, they go away, and so does the conduit for about $5 trillion in home loans. The implications for housing are dire. Credit becomes uber-scarce. Homeownership plummets. Mortgage rates also go up, because banks will now have to hold the bulk of their loans on their books, and they're going to want to get paid for that. So there will be a higher risk premium, no matter what the underlying Treasury rates do (30-year mortgages are priced at a spread - reflecting the credit risk of the loan - above the ten-year Treasury yield).
And, as we've seen, as housing goes, so goes the economy. Fewer builders building, providing well-paying construction jobs. Fewer people buying houses, filling them up with "stuff," so the people that make and sell the "stuff" make less money - again fewer jobs of all kinds.
So, Hank Paulson - who's apparently forgotten everything he learned on Wall Street - believed the only thing to do was bail Fannie and Freddie out. He cited "three critical objectives":
1. "Providing stability to financial markets." No argument here. But I'd rather see short-term instability that leads to long-term stability, than vice versa, which is what Paulson's given us.
2. "Supporting the availability of mortgage finance." It was the too-easy availability of mortgage finance that got us into this predicament in the first place, Henry.
3. "Protecting taxpayers by both minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure" (GSE stands for government-sponsored enterprise, which is what Fannie and Freddie are - chartered by the government, back by its once-implicit, now explicit full faith and credit, but with private equity holders).
Okay, that last point begs four questions. Four absolutely, jaw-dropping-bug-eyed-incredulous questions.
First - Hank, is it wise to "minimize the near term costs to the taxpayer" with a plan that will maximize both the long-term costs and their duration?
Second - since when has unleashing policymakers on a problem protected the taxpayer? Holy smokes, Henry - do you not recall the S&L crisis?
Third - if you recognized the systemic risks inherent in the GSE structure when you landed this gig back in July 2006, why on earth didn't you start work on fixing it then, before it was too late?
And fourth - just who in hell are you trying to kid here, anyway?
Okay, so much for his rationale. Here's his plan:
1. Place Fannie and Freddie in conservatorship. Conservatorship is supposed to be a temporary parking spot for a company deemed insolvent until it can return to solvency. Instead, it is the purgatory to receivership's hell. I worked for an S&L that was placed in conservatorship. At the time the government took over, it had more than $300 million in capital. Three years later, it had gone the way of the dodo bird, and at a total loss to the stockholders (myself included) and a net cost to taxpayers (myself again included).
2. Replace management. No more can I make jokes about how Fannie's CEO's name is actually Mudd. He's been replaced by a former Merrill Lynch vice-chairman.
Yes, Virginia, the same Merrill Lynch that has lost $51.8B over the course of the credit crisis. The same Merrill Lynch that ranks #2 on the loss leader board. The same Merrill Lynch whose stockholders have lost 70% of their investment over the last 15 months. The same Merrill Lynch that is vying with Lehman Brothers to be the next Bear Stearns.
Oh boy. I like this pick.
Freddie's boss will be replaced by the former CFO of US Bancorp, which has been relatively unscathed in this imbroglio. One out of two ain't bad, I guess.
Both of the new guys' "compensation will be significantly lower than the outgoing CEOs." Good thing, since an estimated two out of every three dollars of Fannie and Freddie's subsidies from the government went to its executives and stockholders, not to promoting homeownership.
3. The Treasury Department will become a senior preferred stockholder in Fannie and Freddie, in exchange for - get this - "ensur(ing) that each company maintains a positive net worth."
Wow. What's key in that phrase?
First, he didn't say Treasury would maintain adequate capital for Fannie and Freddie, just "positive net worth." They already had that, although not for long. But wasn't their issue capital adequacy? Paulson himself said yesterday, "Their statutory capital requirements are thin and poorly defined as compared to other institutions."
Well, thanks, Hank. They're certainly well-defined now: anything above zero. But that's still a tad thin, don'tcha think?
Second, Treasury will ensure - for as long as need be, up until its blank-check authority expires at the end of next year - that Fannie and Freddie have positive net worth. So, if the new guys continue to screw the pooch and the losses continue to mount and the net worth goes below zero, Treasury will keep flushing money down that toilet.
Our money.
Hank said, "It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set."
I wish I'd seen his speech, because if he actually said that with a straight face, I have to believe that when he was an All-American O-lineman at Dartmouth, they didn't use helmets.
Are you flipping kidding me? "More efficient than a one-time equity injection?" Folks, what he's saying is, "We'll be paying on this ugly pig for most of your lifetimes."
4. Fannie and Freddie will have two "primary mission(s)":
a) "To proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability."
Let me tranlsate. Fannie and Freddie charge a fee to guarantee the mortgages they buy and securitize. For years now, that fee has been too low to cover the true underlying risk of the mortgages, as credit standards have loosened and Alan "Mr. Bubble" Greenspan kept rates too low for too long. So recently - also too late and many dollars short - Fannie and Freddie have upped their fees, which has made mortgages more expensive than they were, but once again as expensive as they should be.
Sounds like Hank wants to lower those fees, back to sub-market risk levels. Not a wise move. Just when you thought it was safe to go back in the water ...
b) To "modestly increase their MBS portfolios through the end of 2009. Then to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10% per year ... eventually stabilizing at a lower, less risky size.
Let's read between the lines here. Hank acknowledges that increasing the size of their portfolios - even into 2010 - increases "systemic risk," and he also acknowledges that shrinking their portfolios to a "lower, less risky size" would reduce risk.
So he proposes increasing their portfolios in the short run. Great. More losses. More risk that the losses reach the taxpayer.
Also, the housing crisis isn't expected to be over until the end of 2009 anyway. So just when the party could be getting started, they're going to take away the punch bowl. That should bring a fresh wave of stagnation in the housing market.
To be fair, Hank admits that this step is designed to "promote liquidity in the secondary mortgage market and lower the cost of funding," which it should do. But it won't stimulate housing demand.
Let's put that last point in perspective. The Fed and the Treasury have been intervening in the credit markets since last summer - cutting interest rates, opening up the discount window to everybody but the payday loan shop junkies, and bailing out Bear Stearns and now the GSEs. Not to mention the brilliant and highly effective "Project Hope" and other such initiatives.
What has the effect on housing and mortgage affordability been?
Home prices have continued to fall, reaching fresh year-over-year records every month. Delinquencies and foreclosures have continued to rise, doing the same. And mortgage rates - which were about 6.50-6.60% for a Fannie- or Freddie-conforming, 30-year fixed-rate loan in June 2007, before the Bear Stearns hedge fund collapse that triggered the credit melt-down - were at 6.55% last week. Now, after the bailout, they're running around 6.20%.
Great news! Mortgage rates are down 35 basis points!
Time to sober up. They were as low as 5.50% in January. At the time, purchase mortgage application volume was down about 4% from where it was the previous summer, when rates were a full point higher (and those levels were already down 10% from the bubble's peak). Why? Falling home prices. Today, the 13-week moving average of the weekly volume index is at a six-year low.
Also, it's hard to get excited about mortgage rates finally coming down 35 basis points when the Fed funds target has been cut by almost ten times that amount. Mortgages are priced off the ten-year Treasury yield, which is only down about a percentage point - or a third of the Fed's rate-cutting - since September. And it won't come down much further, with inflation expectations still high. So the bailout-induced reduction in mortgage rates is a function of perceptions of future liquidity. That may play out, and it may not.
The last linchpin in Paulson's scheme is that Treasury will start buying mortgage-backed securities from Fannie and Freddie - a rather incestuous support system - which is also designed to boost liquidity and increase mortgage finance availability.
The downside is that if losses in the MBS market continue, Treasury will take a hit.
Who is "Treasury?"
You, me and China. And China can stop funding anytime it wants. Not so, you and me.
So, what will the actual effects of Paulson's plan be?
1. Fannie and Freddie's stockholders will get nada. That's as it should be. When you buy stocks, you risk losing all your money. Oh, they'll ask for a bailout. If they get it, I'll defect.
2. Mortgage rates will not go down meaningfully enough to stimulate housing demand. The weakness in demand is a function of still-bulging inventories of housing stock, producing still-falling prices. And no one wants to jump on a sinking ship. Until prices bottom out, we won't see recovery in housing.
3. Furthermore, this will not meaningfully increase mortgage credit issuance. Lending standards have tightened - a most appropriate and long-overdue response to rampant speculation. So even if rates cheapen up enough to make a house affordable, and even if would-be buyers are willing to take the plunge - literally - in a falling-price market, many of them will not qualify. Or be able to come up with the reasonable 20% down payments that are now once again, and reasonably, being required.
4. The taxpayer is screwed. This year's budget deficit is already at $370 billion, and it's expected to grow by $105 billion with this week's report for August. The all-time record is $411 billion in 2004. This bailout will cost an estimated $300 billion to the taxpayer.
Let's put that in perspective. The S&L bailout ultimately cost the taxpayer about $125 billion. According to Wikipedia, it "contributed to the large budget deficits of the early 1990s" (which ran around half to two-thirds this year's projected shortfall) and "ended up being even larger than it would have been because moral hazard and adverse selection incentives compounded the system's losses."
If you think there's no moral hazard or adverse selection incentive in this bailout, here's a useful website for you: www.dictionary.com.
There may be another cost. When Paulson was first proposing asking for this blank-check authority to bail out Fannie and Freddie - all the while lying through his teeth, saying he didn't expect to actually have to use it - S&P came out and said that if Treasury bailed out the mortgage giants, the ratings on US Treasury debt might have to be reviewed.
I was stunned. Never in my 20+ years of following this stuff have I ever heard the sanctity of US sovereign debt's rating threatened.
The implications are huge. Higher borrowing costs, leading to higher mortgage rates anyway. And even if the debt weren't downgraded, that will happen: how do you think China and Japan feel about buying US Treasuries now - once they realize how much we've jacked up the national debt? They'll demand higher yields, and get them. And up go mortgage rates.
I have to give Hank credit for having the cojones to actually admit that this is a stop-gap measure and that it'll be up to the next administration and Congress to determine the ultimate resolution of Fannie Mae and Freddie Mac.
To which I'm sure Barack Obama and John McCain say a hearty thank-you.
What Hank is essentially saying is this: "We're going to put an incredibly expensive band-aid on a huge, life-threatening wound, and then let the next doctor on call figure out how to cure the patient."
Unbelievable.
But the best quote comes from New York Senator Chuck Schumer, who said that "avoiding a decision on the issue enhances the likelihood of congressional backing" for the plan.
Even more unbelievable. I thought we elected officials to make decisions, not avoid them. Maybe Chuck's constituents should take the same approach regarding their decision to re-elect the schmuck (the same schmuck who triggered the IndyMac failure, I might add).
Everyone from Alan Greenspan to Obama and McCain to Warren Buffett is saying that this just had to be done - Hank had no choice.
Wrong. There was a better solution: let them fail.
Pony up enough money to protect the bondholders, because the credit markets would truly collapse if the bonds defaulted. But let the stockholders lose their money (which will happen anyway).
And as for the availability and cost of mortgage credit - let the market determine that, as it should. Let private insurers step up to the plate and insure mortgages, based on their inherent risk. So what if homeownership winds up only being affordable for those who demonstrate financial responsibility by saving up a reasonable down payment and paying their bills on time, and can actually repay the mortgages?
Every time I look at Hank's stoic, Anglican face and his polished pate, I think of the old Beatles tune, "The Continuing Story of Bungalow Bill." It describes Bill as "the all-American bullet-headed Saxon mother's son." And the chorus asks, "Hey, Bungalow Bill - what did you kill?"
Oh, not much - just Fannie and Freddie's investors and the US taxpayer. Not bad for a day's hunting.
Sunday, September 7, 2008
A Perfect Storm
There's a storm brewing.
No, I don't mean Hanna, or Ike. (And as an aside, the title and topic of this thread is meant in no way to downplay the havoc wreaked by those and other storms. Having spent a week of each of the last two summers in the Gulf, helping to rebuild homes that were damaged or destroyed by Katrina, I have nothing but respect for the forces of a hurricane, and for those whose lives are affected tragically.)
This storm has dollar signs attached to it. A "financial tsunami," as Bill Gross put it. But while I agree with the sage of PIMCO on what's to come, we part company on the proposed solution. He wants to throw money at it.
Why? Because he makes it up in spades if the credit markets get fixed.
Me, I want the powers that be - Congress, the President, the Fed, and especially the Treasury Secretary - who's done enough harm trying to help already - to leave things be. Let nature run its ugly and painful course, and then we can get back to the business of saving, then spending. And our economy will once again be strong. Sustainably strong.
Greenspan intervened in the wake of the dot-com bubble, made money too cheap, too long, and fueled the speculative housing bubble, which is even worse. (Oh, and Greenspan fathered the dot-com bubble too, again with cheap money.) If we try to shore this thing up, I don't think we pull out of the next catastrophe to which the "fix" gives way.
Here are the weather conditions that lead me to predict this perfect storm.
1. The Fannie/Freddie bailout, on which topic I've already ranted. But let me add another couple of points.
First, my fellow bloggers don't seem to like this any more than I do:
"This maneuver is 100% consistent with the government grand plan to boil us like frogs in a pot of debt since, in the govie's estimation, it appears that too many people have suddenly decided not to jump in the cauldron of their own volition." - Fil Zucchi, Minyanville.com
"A strong rally lasts for a while, but it eventually fades and makes a new lower low; each 'rescue rally' has been shorter in duration and weaker in intensity than the immediately prior one." - Barry Ritholtz, The Big Picture
"The Treasury said it will appoint two independent asset managers as financial agents of the US government to manage a government portfolio of MBS ... which means that the US government could become akin to the single largest hedge fund on the planet." Paul Jackson, Housingwire.com
"For housing, this doesn't change anything. Housing fundamentals remain the same: excess supply (especially distressed supply), tighter lending standards, and prices are still too high compared to incomes and rents. The possible slightly lower mortgage rates are almost inconsequential compared to supply and price issues. And the economy is still in recession that will linger for some time." - Calculated Risk
Second, another of my favorite guys, Alan "Mr. Bubble" Greenspan, argued last week that "we need laws that specify and limit the conditions for bailouts - laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than through the central bank as was done during the blowup of Bear Stearns." He added that the Fed should not be viewed as a "magical piggy bank."
Hey, Al - neither should I.
He advocated the creation of an agency like the old RTC of thrift crisis days, arguing that "as with the RTC, the public cost could be minimized," according to Report on Business.
Excuse me? I lived under the RTC for two years. The RTC dramatically increased the public cost of the S&L crisis. By more than $300 million in the case of one thrift alone.
2. Overlooked in the bailout was the fact that Paulson extended the same secured credit lines Fannie and Freddie got to the Federal Home Loan Banks.
The FHLBs are the largest US borrowers after the federal government, according to Bloomberg.
If they're not in trouble, why extend the same credit lines to them? Guess where the next shoe might drop?
3. Lehman is going to fail. They can't find a buyer, and not for lack of trying.
4. The next round of earnings reports from the financials are going to be ugly.
5. Option ARM negative-am triggers will start being hit soon, and continue through 2010.
6. I saw a news clip that showed people facing foreclosure are putting the house in their spouse's name, buying a new, cheaper house with a fixed-rate mortgage, and walking away from the first house. They say they'll repair their credit later. This will only exacerbate the problem.
Credit card companies are jacking up rates for the slightest decline in creditworthiness, and cutting limits, too. When these clowns are foreclosed on, their card rates will double. Borrowers of their ilk have already demonstrated they'd rather default on the mortgage than give up the plastic, since that's how they fund their monthly necessities. So the debacle will continue.
Oh - and the new mortgages will be among those guaranteed by the "new and improved" Fannie and Freddie. And the MBS will be bought by the Treasury. Cool.
7. As for credit cards, we're going to start seeing financial institutions fail due to credit card, HELOC and auto loan losses. Look for the first one following third quarter results.
8. Guess what the latest credit "innovations" are? 401(k) and reverse mortgage debit cards. Honest.
The lunacy continues.
No, I don't mean Hanna, or Ike. (And as an aside, the title and topic of this thread is meant in no way to downplay the havoc wreaked by those and other storms. Having spent a week of each of the last two summers in the Gulf, helping to rebuild homes that were damaged or destroyed by Katrina, I have nothing but respect for the forces of a hurricane, and for those whose lives are affected tragically.)
This storm has dollar signs attached to it. A "financial tsunami," as Bill Gross put it. But while I agree with the sage of PIMCO on what's to come, we part company on the proposed solution. He wants to throw money at it.
Why? Because he makes it up in spades if the credit markets get fixed.
Me, I want the powers that be - Congress, the President, the Fed, and especially the Treasury Secretary - who's done enough harm trying to help already - to leave things be. Let nature run its ugly and painful course, and then we can get back to the business of saving, then spending. And our economy will once again be strong. Sustainably strong.
Greenspan intervened in the wake of the dot-com bubble, made money too cheap, too long, and fueled the speculative housing bubble, which is even worse. (Oh, and Greenspan fathered the dot-com bubble too, again with cheap money.) If we try to shore this thing up, I don't think we pull out of the next catastrophe to which the "fix" gives way.
Here are the weather conditions that lead me to predict this perfect storm.
1. The Fannie/Freddie bailout, on which topic I've already ranted. But let me add another couple of points.
First, my fellow bloggers don't seem to like this any more than I do:
"This maneuver is 100% consistent with the government grand plan to boil us like frogs in a pot of debt since, in the govie's estimation, it appears that too many people have suddenly decided not to jump in the cauldron of their own volition." - Fil Zucchi, Minyanville.com
"A strong rally lasts for a while, but it eventually fades and makes a new lower low; each 'rescue rally' has been shorter in duration and weaker in intensity than the immediately prior one." - Barry Ritholtz, The Big Picture
"The Treasury said it will appoint two independent asset managers as financial agents of the US government to manage a government portfolio of MBS ... which means that the US government could become akin to the single largest hedge fund on the planet." Paul Jackson, Housingwire.com
"For housing, this doesn't change anything. Housing fundamentals remain the same: excess supply (especially distressed supply), tighter lending standards, and prices are still too high compared to incomes and rents. The possible slightly lower mortgage rates are almost inconsequential compared to supply and price issues. And the economy is still in recession that will linger for some time." - Calculated Risk
Second, another of my favorite guys, Alan "Mr. Bubble" Greenspan, argued last week that "we need laws that specify and limit the conditions for bailouts - laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than through the central bank as was done during the blowup of Bear Stearns." He added that the Fed should not be viewed as a "magical piggy bank."
Hey, Al - neither should I.
He advocated the creation of an agency like the old RTC of thrift crisis days, arguing that "as with the RTC, the public cost could be minimized," according to Report on Business.
Excuse me? I lived under the RTC for two years. The RTC dramatically increased the public cost of the S&L crisis. By more than $300 million in the case of one thrift alone.
2. Overlooked in the bailout was the fact that Paulson extended the same secured credit lines Fannie and Freddie got to the Federal Home Loan Banks.
The FHLBs are the largest US borrowers after the federal government, according to Bloomberg.
If they're not in trouble, why extend the same credit lines to them? Guess where the next shoe might drop?
3. Lehman is going to fail. They can't find a buyer, and not for lack of trying.
4. The next round of earnings reports from the financials are going to be ugly.
5. Option ARM negative-am triggers will start being hit soon, and continue through 2010.
6. I saw a news clip that showed people facing foreclosure are putting the house in their spouse's name, buying a new, cheaper house with a fixed-rate mortgage, and walking away from the first house. They say they'll repair their credit later. This will only exacerbate the problem.
Credit card companies are jacking up rates for the slightest decline in creditworthiness, and cutting limits, too. When these clowns are foreclosed on, their card rates will double. Borrowers of their ilk have already demonstrated they'd rather default on the mortgage than give up the plastic, since that's how they fund their monthly necessities. So the debacle will continue.
Oh - and the new mortgages will be among those guaranteed by the "new and improved" Fannie and Freddie. And the MBS will be bought by the Treasury. Cool.
7. As for credit cards, we're going to start seeing financial institutions fail due to credit card, HELOC and auto loan losses. Look for the first one following third quarter results.
8. Guess what the latest credit "innovations" are? 401(k) and reverse mortgage debit cards. Honest.
The lunacy continues.
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