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Tuesday, September 30, 2008

I'd rather eat dirt than ...

AS writes:

Bainbridge again:

Politicians, bloggers, and pundits celebrating the bill’s failure don’t seem to get just how much trouble we’re still in.

They do realize the trouble (I'd guess).

But this is what you get when the public keeps voting Rove-style for failed Executives, especially in 2004 for Bush (and GOP Senators and Congressmen and Governors): an electorate that would rather go down the tubes of hardship than accept the distrusted terms, un-argued dictates, and bottomless "trust me" statements of their Princely Officials ...

So, back to the barter system, and ... throw as many politicians overboard as possible, on the way over the rocks!

How the World Sees America

The trouble is that, now, Biden cannot "win", because Palin has already "lost".

At this point, all she has to do is talk about Jesus a little, avoid saying anything controversial, and it will be a drawn in the polls, right?

In Round Two, GOP Getting All They Want?


It appears that the GOP is closer to two of its goals: deposit insurance for the super-rich (paid for by everybody, i.e. socialism) and weakening investor protections.

The SEC reportedly is moving swiftly to can mark-to-market. This weakens the hands of investors, who will get even a worse picture of what is going on under the hood. It protects weak managements, etc.

One wishes that there were some liberal lions left in the Senate, who would filibuster the Bill, until there are some ... Democratic values attached, so long as the GOP is getting fed at the trough.


As for Deposit insurance, one has to wonder who the economist is who had Obama's ear on that one.

The idea that deposit insurance should be targeted to business and not to the average Joe with a savings account is ... repulsive. It's not good policy and it's not good for business.

What's more, these changes should require some study.

I cannot help but feel that the myths about the need for it will amount to the same urban legends variety that have been promulgated for years by the GOP about the "death tax" (and all those family businesses that it purportedly was bankrupting).

Why $100,000, adjusted by inflation?

Anyone with some sense, can think of some ways to tie a figure to some amount that isn't arbitrary.

As it is, the Obama campaign economist(s) just made it far, far easier for some super-rich guy with $1,000,000 in cash to insure at the cost of everyone else. They now only have to find four banks and split their money. Before, they had to find ten. Aren't you glad your Senate is about to make life easier for them?

McCain's Latest Faux Meme: "I suspended my campaign"

People want straight talk, not sloganeering (least of all, GOP sloganeering).

McCain changed his travel plans. He didn't "suspend his campaign". There was plenty of campaign activity going on. Indeed, even Sarah Palin, reportedly, has not "suspended" anything, right?

AS, unfortunately, is propagating a spin that doesn't bear up to the facts... Luckily, he's not missing the forest for the trees, however, because of it - not by a long stretch.

My next question is whether Bush will let McCain fly around in Air Force One, "if it'll do any good".

Just a Few More Votes It Will Get

Second, we need to protect taxpayers. There should be a path for taxpayers to recover their money, and to turn a profit if Wall Street prospers. - The Principles

I already suggested that principle might be a little out of reach for this crisis, but it has only taken a few days of Republican posturing to get everyone to throw their principles out the window.

Today we find out that upping FDIC deposit insurance is supported ... because it may mean a few more votes, or something.

Did either candidate say how we are going to pay for this, who will bear the cost, ultimately? And what assurances do we have the the FDIC insurance fund is sufficient to the day? Afterall, some have seen that developing into the next multi-billion dollar bailout (as in $150 billion).

People with large amounts of cash money to hold, by and large, should buy their own insurance or let the marketplace work, i.e. let them gravitate to the banks / institutions that are run well and conservatively. Offering insurance, beyond what is sensible and required to protect "small" depositors, is an unwanted market distortion.


Last, why hasn't anyone come out with some "principles" on what needs to be 're-regulated'? It seems that there are reporters who know more about what is on failing institution's balance sheets that do lawmakers. That's just lopsided, wrong, criminally negligent, and ... well, just make it stop, fast.

Inside Financial Crises

Two articles, worth the read.


Warren Buffett once said that you don't know who's swimming naked until the tide goes out. Right now, the tide is going out fast, and there are a lot of naked swimmers - Bear Stearns, Lehman Brothers, Merrill Lynch and AIG are just a few of them.

Until the tide begins to turn, we are in a race against time to reveal the extent of rot in the subprime loan market, before the crisis of confidence spills over into other markets and across the broader economy. Until then, keep your shorts on.


The lesson of previous credit crises is that the sooner new valuations are set for bank assets and liabilities, the sooner recovery begins.

The difficulty in establishing value suggests the need for more disclosure. ... Many of today's most mispriced financial instruments have no disclosure requirements.

More on Offering Insurance Just as the Storm Comes Ashore


I didn't think anyone could outdo Kudlow, but Larry Lindsey has lampooned himself on FDIC insurance.

Now, not many would be opposed to a study to see where the "right" limit is, but ... Larry thinks that lifting the limit from its current $100,000 will send a message to Main Street America that Congress is concerned about them.

Uh, which Main Streets in America have a slew of people with over $100K in their bank account, cash? Sheesh, most consumers aren't even making ends meet, with the credit card debt they have and the spike in energy, let alone having to worry about their cash balances over $100,000.

Ireland Monetizes

The more one looks at our pathetic government, the more it looks like Ireland are genius.

Monday, September 29, 2008

The Party of Hoover


We're not talking about an Obama win.

We're talking about the best crew to come by for liberalism since Herbert Hoover was in office.

Yes, a capital-gains tax-cut and a sudden, unpaid rise in FDIC contingent liabilities / costs is a sure way to make someone "pay" (rf. to the double-speak in the picture). You go girls!

When You Are a Banana, You Should Act Like One

Krugman-sensei says, in half jest, "Okay, We are a banana Republic, with nukes".

I say, when you are a banana Republic, you should act like one.

On that note, conspicuously missing from Krugman's list of options is this: monetize "the problem(s)". Bernanke is already close to being on the record that it will not be inflationary to do so. Who knows? With the pace of deleveraging in the private markets, he may be right!

Of course, the problem isn't just bad financial assets and poor financial risk management, leading to inadequate capital. It's falling house prices and defaults.

If the U.S. Government started in mitigating those last two risks, Wall Street would stabilize immediately, especially on the derivatives side of things.

Would Wall Street "reflate" as well as stabilize? Some, but there are still losses...prospectively and retrospectively. However, in crisis, stability is "purchased" through certainty, not by reserves, necessarily, or by recapitalization. Put another way, recapitalization is a fix for the bank credit squeeze, I'd hazard, but not for the uncertain outlook or assessments of the ability of the system to weather a continuation in the uncertain outlook.

Even the government cannot offer certainty, but it sure can cast a long shadow (at least it was long, until the GOP decided that debt-spending to win elections was the cost-free alternative to responsible fiscal management).

House GOP - Playing Politics ... Picture of McCain Presidency


Well, we got a picture of what a McCain Presidency would look like, today, with no one voting alongside him from his own party ...

It's hard for me to figure out what the House GOP want, except to play politics.

Fiscal Conservatism? Isn't it late and just the wrong time? Afterall, they've paid for Bush's Iraqi adventure with ... a tax cut. Go figure!

What else?

Mark-to-market? Suspending this will do very little to restore confidence and nothing whatsoever to improve the safety and soundness of the system, to mitigate the systemic risk(s). In an environment with investors scared and skittish, adding opacity to the accounting rules, wholesale, seems ... just plain dumb, unless it is part of your long-term political agenda. Done wrong, suspending mark-to-market just turns our banks into Japan-style banks of the 1990s...

A two-bit hold-up for more FDIC insurance? C'mon. I'd raise the limit overnight to $175K per depositor, say, pending a study. After that, wealthy people can buy their own insurance, right? Whatever the case, holding up legislation for something like this is not seeing the forest for the trees. Talk about loading up a bill.

Sinkhole Monday

Among the participants ....

In the U.S., Wachovia. In Germany, Hypo mortgage factory. In England, B&B Fantasy evaporates and Fortis Creamery goes sour. HK's third-largest bank ... Various others ...

Sunday, September 28, 2008

Canta y no Llores

Anyway, you know what comes next: an avalanche of TARP jokes. Say, throwing money into a TARP-pit.-Krugman Sensei


"Extra, extra!

Unable to actually come up with a real plan, Congress throws a TARP over Wall Street's Troubles!"

Overheard at a Bear, Stearns reunion:

"I agree. We wouldn't have been fossilized, had we lived in the TARP era. Uh, I bid one no-trumps ..."

TARP? It looks more like the Shroud of Turin, to me.

Only Wall Street can wear a TARP like a Easter Bonnet on Fifth Avenue.

The Bush-Cheney Legacy

Reporting to Congress on time and in full is now worth $100 billion. That's how much is held back in the Slush-fund Bailout Plan if the Executive feels it can thumb its nose at the Legislature.

How far we've come with eight years of Bush and more of the "Contract on America", that basic trust and accountability needs to be ... legislated to the tune of $100 billion.

Bernanke's Place in History Sealed with Fate of Slush-Fund Approach

In a weekend, they came up with this plan, Paulson and Bernanke.

It will be with them, long after they are not with us.

I wouldn't have gambled my legacy on this plan. Just saying.


Well, it's not robust, technically speaking. It may be enough to "work". Other approaches will work.

After that, they didn't get what they set out to achieve. They have not restored the safety and soundness of the system. They've treated symptoms. It's not clear that we have more transparency and a shored-up system that can provide both increased transparency alongside improvements in risk-bearing (including the careful elimination of "too big to fail"?).

I'd like a CBO estimate, please

... for this:

Section 109. Foreclosure Mitigation Efforts.
For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.

The AIG Story

A villain is now appointed.

Forbes has the dope.

The hidden risks always multiply...

Innovation? You make the call:

By AIG's own description, about $379 billion of the $527 billion in AIG's default swap portfolio "represents derivatives written for financial institutions, principally in Europe, for the purpose of providing them with regulatory capital relief rather than risk mitigation."

Regulatory capital relief? Ahhhh, the comedy!

[I didn't see anything about regulation of these contracts in the new Bill. One wonders if the Fed has sufficient authority ...]

Media Myth: Corporations Suddenly Short of Money

I keep hearing these tales of companies who suddenly don't have enough cash to make payroll or to finance inventory.

Anyone in the financial press care to back that up with a list?

What other area of reporting do you get such leeway to report ... theoretical possibility as fact? FOX "News"?

Other myths: the idea that credit is "freezing up" because swap spreads have risen ...

Some Bailout Provisions ...

With everyone having separate press conferences, it looks like a showdown is looming. Over what, is the question.


The SEC appears set to have the authority to suspend mark-to-market accounting requirements. So much for taking expert testimony. The question then becomes whether institutions will be required to say whether they are on "suspension", when, and how ...

The only rational, game-theory choice is for every institution to apply for suspension straight away, unless they intend to make non-suspension a competitive point in the marketplace. The SEC, being the industry push over during times of GOP administration and more, will likely oblige.

The numbers from banks and financial institutions will be LESS transparent, not more. I guess we didn't purchase "safety and soundness", if we are willing to have a "secret closet", still.

The problem here is that the Congress has given too much leeway. They might have specified what types of instruments (e.g. those that are now know to be distressed?), what types of circumstances, and limited the amount of time an organization can be on creative-accounting "workout". Such "workouts" are, of course, inherently anti-competitive and anti-free markets. In a way, they "protect" managements (some of whom are still paying out large dividends to shareholders during "system crisis") ...

Notice also that adding in the suspension of mark-to-market to the legislation is a direct repudiation of the central premise (or selling point...) of the Paulson-Benanke plan: liquidity and price discovery. We will have those, on their calculus, but we will suspend the accounting that goes along with that. Go figure.


The government is going to buy mortgages. The Bill says the government can modify the terms of the loans it buys. That will no doubt cause them to be worth a lot less, in the short run if not the long run, too.

Does the insurance and the lookback provision (to get repaid for losses after 5 years) cover that much risk? One doubts it. [Even the language of the bill calls them "projected losses", rather than "realized, recognized and projected" ...]

Why not have the Treasury make bids at or near only at the prices that it would observe IF the loan modifications were already made? Afterall, only an idealist would buy something they intended to modify so that it was worth ... less.


Only if you need mouth-to-mouth from the Treasury, do you have to abide by compensation limits. If you just sell your securities to the government, they are off your back. You can keep paying your shareholders huge sums in cash, and collecting it from Uncle Deep Pockets Sam. {Update: conflicting reads of the Bill make this inference tenuous. Stay tuned.}


If you are one of 1,000 small banks and you don't get "serviced" right away by Treasury, file a lawsuit.


Apologies to Barney Frank

This comment may have been off target, because it appears that "insurance" is being used to refer to different things.

I meant trying to share or insure against some of the home-price decline and the default / foreclosure risks.

It appears that what is being demanded is an "insurance fund" paid by industry to the government, to "protect" the assets that the government buys.

Off hand, the second one is silly, because what is the difference between a price of $10, say, and a price of $8, with a $2 insurance reserve add-on cost? By the way, the there is a post five-year true-up if the $2 wasn't "enough". In the rub, how many institutions-in-need are going to be around to pay, one wonders...).

Whatever the case, it makes the politics of it look nicer, somehow, yes?

Congress Doesn't Have Enough Bandwidth For America

Anyone trying to download the bailout details?

There is no server response from speaker.gov and financialservices.house.gov ..

What's in a Newt?

AS finds someone channeling Newt, the same Newt who referred to the House Republican plan as the one put forward by the "convservative wing" of the party (just savor that, for a moment, and its implications for a McCain Presidency...):

Newt Gingrich said voting for the bailout will break against candidates in 2010 and beyond when voters see how destructive it is to the economy. -AS, quoting Pethokoukis

Unless GOPsters are deliberately in the negotiations to put in provisions to make a "bail-out" fail, just recall that Newt and the Republican's yelling about bailouts has a really, really bad track record.

Check out how Newt felt about the fancy moves that the Democrats had to take to help our major trading partner to the South, Mexico, who are now ... investment grade, even!!!

Gingrich Assails Clinton on Mexico Bailout

No, Newt should do like the rest of the "leadership" from his party: stick to re-publishing recipes from the Food Network. (Was that over-the-top? It is silly season...).

Saturday, September 27, 2008

Money First, Re-regulation Later


So, this week, we had all these cutesie agreements on principles.

I wonder if there wasn't more that needed to be done on agreements on principles about re-regulation?

The willingness of the Democrats to hive-off the "bailout" from any type of other, fundamental changes may have been too swift.

It does seem that the Dems are caught a little flat-footed, not having a "wish list" to pull down from their think tanks ...

Friday, September 26, 2008

Worst Handled Question of the Night

Obama's open hand to McCain on torture made me cringe. I was rather hoping that Obama would run an ad in Florida saying that "McCain has already promised to pardon President George Bush, rather than put country first". With Bush polling at 18, that might just be the election in one ad.

Anyway, the question that both candidates handled extremely poorly was the one about whether the nation was likely to have another 9/11-type attack.

Obama failed to articulate a bold and new doctrine, a change that so many have been calling for. I'm talking about a change in mindset, a change in the understanding of all Americans, an escape from "fear" and from "terror" (and consequently from "overreaction", etc.).

Accordingly, the old motifs all came up and the same debate, on the terms that Bush-Cheney-Rumsfeld laid out, wrongly, so long ago, now. There was no clear indictment of them and their politics of fear, and there ought to have been.

Runner-up: The fact that Henry Kissenger somehow is still part of our national dialog had me reaching for the rummy bag.

McCain Exposed

When people review the transcript, more will be revealed about John McCain than about Obama.

McCain will come across as a guy with a basically incoherent set of ideas and passions (some of them uncontrolled). On the one hand, Georgia should be welcomed into NATO (which might have put us at war, just recently, right?). On the other hand, I'm pretty sure he suggested that they were a KGB satellite state. [Update: on review, he did not. Praise be.] See what I mean? Those two don't exactly square... He's a collection of "impressions" and silky exaggerations, a soppy milktoast composite of what he's heard said by his own party's fops.

Because it's oddball, people mistake this for "maverick" and for "speaking his mind" and for "straight talk".

The truth is, he is not an ideologue, not an idea person at all. This is why he bounces around and has so much flip-flop in even his basic policy stance. He's more of a people person and a total drama queen.

It's also why he's just as dangerous as King George "The Decider". He doesn't have an intellectual rigor, and he'll get thrown off by his own cultural bias in assessing comments like "stinking corps", sent into a tailspin, defining his own simplistic, hard-fast "axis of evil" in ways that are frankly dangerous.

Obama Campaign Themes Need Sharpening?

I cannot help but think that the Obama campaign strategists are paralyzed somewhat by the sudden change in tactic of the McCain campaign to match the Obama campaign themes, rather than contrast with them.

It started when McCain jettisoned "experience" in favor of "reform".

Obama, et. al., just don't seem to know what to do about that.

After at least two of McCain's faux tirades tonight, I couldn't help but think that Obama's riposte ought to have been, "Well, John, welcome to the Obama campaign, because I've been saying that for over a year now, including during a hard-fought primary in my own party."

Obama still has the momentum, for sure, after tonight, but he lacks a signature issue and he seems to be unable to have deepened and widened the basic and core themes of his campaign to the point that he is comfortable throwing punches, not just absorbing blows and deflecting criticisms.

He didn't tell the voters he wanted to win. He didn't ask for people's votes. He didn't raise the bar on McCain, in any confrontational or direct way.

We'll see if that soft-peddle works to his advantage (it certainly has so far), but the time to throw punches is when you are up in the polls. If you throw them later, if you are down, people will just say you are being scrappy, not doing it from a place of conviction, right?

For instance, I think Obama should have taken strong verbal offense at McCain directly saying that Obama wasn't ready to lead the country. He could have hit hard. He could have brought up McCain's choice of Palin, in a subtle way, right? Palin is McCain's self-indictment on national security. On another point, he could have popped in forcefully to say, I've got news for the Senator from Arizona, Hillary Clinton has wholeheartedly endorsed me, not him, not his campaign, not his party's policies, and not his choice for who might pick up a 3 a.m. call in his stead, a choice for Vice President that is his first national security duty to the nation.

Debate 1, in "Old Miss"

25 mins in, and I just can't watch any longer.

Obama ... just doesn't know how to "bring it". He's just too nice a guy, too used to Senate floor rules.

That's exactly why he'd be a breath of fresh air, no matter what his policies, perhaps.

Uh oh .... Earth to Barney Frank


Barney Frank just gave a press conference at which he said that "insurance" was an acceptable "option".

I hope that is just a phrase or a savvy political posture.

It's not an add-on "option", really. It's a fundamentally different approach, even if it is implemented alongside other approaches (like the slush fund).

It's a huge direct benefit, right away, to lenders on Wall Street, potentially, and a huge direct cost to taxpayers, potentially.

If the insurance offer from the government is strong enough, lenders may not bother with CEO pay limits or any other aspects linked to the modified Paulson plan...
I hope the "final" plan has some notice of that, either in limits, clever ways to protect the taxpayer from "over-insuring", and some way to have lenders share in the costs of providing this new "insurance"... (like insuring only 85-90% of loan value, or some figure just 10% better than what they would get through a lengthy foreclosure process and home price decline... What's more, the government may want to insist that lenders try a simple, prescribed set of loan modifications, before they collect on government insurance, including a period of interest-only, for example, ....).

They should bear in mind that the devil is in the details. If the insurance offer from the government is strong enough, lenders may not bother with CEO pay limits or any other aspects linked to the modified Paulson plan, including participating in reverse-auctions.

John "Drama Queen" McCain Channels Mighty Mouse

"Here I come to save the day!"

For all his bluster about "leadership", he hasn't even said what he wants to do, other than have people agree about what to do.

Sounds like the rear-guard to me ...

[I used to have a really good Mighty Mouse audio clip. If anyone has one, be sure to link it in the comments.]

Thought for the Day

Chase Bank is paying out over $5 billion in annual dividends, during the "greatest credit crunch" and "largest financial crisis" in the country's history, which Warren Buffet says is about to send the USA over a precipice, even, if not addressed by Congress.

As reported in the press, Chase (tic: JPM) continues to receive backstop from the Fed on their Bear, Stearns purchase. Perhaps the value of that $30 billion line could be made to amortize at the rate of, say, $5 billion annually?

GOP Fiddles While Rome Burns

So, the most deliberative body in the world is now ... deliberating.

How odd.

My initial take is that the two proposals are not in opposition. My guess is that they *both* could be needed.

To start, I'd like to understand Paulson's and Bernanke's opposition to a backstop scheme.

My hunch is that they would like to buy up stuff other than residential sub-prime and alt-a mortgages, like commercial mortgages and maybe even some prime. They may also want to help unwind some of the derivatives books, such as AIG's. Whatever the case, they could talk in some more detail, I think, without harming the prospects of their plan.

There is no reason not to seed their idea for reverse auctions. It might be a useful tool to have on hand. God knows, the constant appeal (over two administrations now) to the Exchange Stabilization Authority is ... wearing kinda thin, yes?

An insurance scheme could get out of control in risk to the taxpayer, quickly, if they aren't careful. Therefore, limiting it in important ways seems smart, if not simply a must-do (like to 90% of loan value, or by type of loan or borrower, etc.). Limits, of course, could leave gaps. Targeted assistance might be available in the form of a Paulson slush fund to fill those gaps (or even the Fed's own programs), especially if it comes with the kind of strings on exec comp and taxpayer protections that an insurance / guarantee scheme alone would not provide. The two approaches, done right, could complement each other.

An insurance scheme doesn't improve "regulatory leverage" or the regulatory picture. It's hard to craft in a way that helps taxpayers to participate in any "upside".


If taxpayers were your sole concern, the thing to do would be to do the Paulson plan first, then pass an insurance scheme to enhance the value of the assets and make them highly liquid. That would give the taxpayer a very handsome return... It would certainly be fast and easy to do, as well.

Thursday, September 25, 2008

The Great Seattle Bank Tumbles to Its Knees


Oh, man, I am so ready to read the Harvard Business School case study of this amazing story. (Not being sarcastic - my nose says there is a classic story in there).

BTW, I question the timing of this FDIC action. Please check Sheila's phone logs to the White House, okay? You can never be too sure with the Bush Administration. The spirit of Rove...lingers on.

Update: Check it out. For all those thinking that a "deposit base" is the answer. From Wamu's last reported liability structure:

Deposits (in $millions):

Noninterest-bearing deposits 31,341
Interest-bearing deposits 162,939
Total deposits

Federal funds purchased and commercial paper 2,482
Securities sold under agreements to repurchase 4,732
Advances from Federal Home Loan Banks 52,530
Other borrowings 40,887
Other liabilities 8,313
Minority interests 2,945
Total liabilities

(That's right, fully two-thirds of all liabilities were ... deposits)

Update2: Jamie got a really good deal (again). They left behind about $30 billion in unsecured debt holders, wiped 'em out, and used that gap to reserve for future losses on the loan portfolio (which includes home equity loans).

They are just about golden, on this one, I'd say ... The $8billion in new money they need to support the deposit base will be less than how the market will value the additional earnings: they will get a nice stock price pop, despite having to raise money to get the deal done "right". Nice.

Last, they are making so much money on trading, etc., that they will likely be able to absorb / amortize $3.5 billion in further markdowns on the merde in the portfolio.

Update3: Technically, it is the Office of Thrift Supervision, with the final call, not FDIC. The $30 billion equates to a 90-cents on the dollar writedown.

GOP's Market Ideology On The Ropes

After having their war ideology trashed and their fiscal and governance ideology ripped up, the GOP are now facing a full-scale meltdown of their market ideology.

I wish only that Milton Friedman had lived to see it all.

Why, even tonight, I heard an ardent GOP booster yelling - yelling - that rich people need to get more government insurance of their deposits. (That would be none other than slick professional wing-flapper for America's gentry, Larry Kudlow).

Now, I'd be for raising the FDIC deposit insurance limit, but the idea that people with huge deposits are entitled to a Federal guarantee... wowwee! It just shows how much the "free markets" stuff has been always just a "cover story"; a contrived, political Maypole; a lip-service ideology, right?

Why Democrats Should Give Up on "Fixing" Bush-Paulson Plan

Senator Chris Dodd:

"Dodd has received approximately $70,000 in campaign contributions from Bank of America in the last year-and-a-half." - National Examiner

Senator Charles Schumer:

Top 5 Industries, 2003-2008
Securities & Investment $1,370,339
Lawyers/Law Firms $1,204,868
Real Estate $751,551
Misc Finance $321,948
Commercial Banks $288,000

source: OpenSecrets.org

Top Banks Still Paying Huge Dividends


As the major banks cry they need a bailout and liquidity and tighten credit, take a scan of how much they are paying out in dividends.

Their stock price is over a cliff, presumably linked to distressed asset worries, and yet, as late as June of this year, they paid out over a billion dollars in dividends.

Did you know that Morgan Stanley is paying out just about as much as they were last year at this time (and the two years before that, as well)?

So how do you come begging for money from the Federal Reserve, the Treasury, and everyone else, when you are paying it out, willingly, instead of trying to rebuild your capital base with it?

Have a look at Wachovia. They seem to be among the worst (n.b. based on just a scan, not a comprehensive rank-listing). Their stock price is over a cliff, presumably linked to distressed asset worries, and yet, as late as June of this year, they paid out over a billion dollars in dividends.

Bank of America appears to have actually raised the amount of dividends it is paying for 2008, with over $6 billion paid already...

Why aren't they desperately preserving / building capital?

Why didn't Bush-Paulson call on them to be Patriotic, eh?

The Next Bailout


It looks like the Bush Administration will just miss out on yet another crowning achievement of the Reagan Devolution ("government is not the solution"): a bailout of the FDIC, which may run to $150 billion or more.

Great news that investments banks are now "backed" by insured depositors, eh? [Heck, you can even commit quasi insurance fraud on the FDIC, and the Congress doesn't appear to give a hoot, do they? Right out in the open, in the beltway, even.]

I mean seriously, given Merrill Lynch's history of screw-ups, would you put your deposit money with BOA? I'm not saying it certainly is more risky. I'm just saying that some consumers may ... not be asymmetrically informed. If Goldman buys a bank "for deposits", would that make you more or less likely to keep your deposits there?

As for the joys of "universal banking", how do you feel about consumer credit availability, now in the hands of three or four players in this country, largely, to be dictated by the ups and downs of the underwriting and M&A cycles?

Today, ordinary, work-a-day people who have had no change in their circumstances are having their credit terms changed, simply because of changes in their bank's balance sheet, ups and downs that are unrelated to changes in the real economy, for the most part.

More Unanswered Bailout Questions ... Have We Purchased Safety and Soundness, at Last?

If someone told you in January that the Bush Administration would push through another sweeping piece of legislation just before Congress adjourned, like it has for almost every Congress that one can remember during his two terms, would you have balked at the suggestion? If someone said it would put the taxpayers on the hook for several hundred billions and there would be no open hearings, other than a vague talky-talk about a 3-page proposal from the Administration?


So, $700 billion is the "bazooka" that will calm the markets? How did we get that number? Anyone do any analysis? We need a "big number" - how do we know that isn't too big? If so, who's making the choice of how much welfare to hand out and how?


Have we really purchased a restoration of safety and soundness of the system? If we cannot get above-board estimates of the true risk and full disclosure of what is out there, it looks like just another inning in the same game...
What do the taxpayers get for being "on the hook" involuntarily?

Now that the treasury has all that it needs, reportedly, with a $700 billion dollar slush fund, can we expect everyone to come clean about what is really going on, rather than having closed-door sessions, after which everyone is "afraid" to talk about it, lest it become a self-fulfilling round of fear / selling?

If not, then what did we really get for the Bush-Paulson plan?

Have we really purchased a restoration of safety and soundness of the system? If we cannot get above-board estimates of the true risk and full disclosure of what is out there, it looks like just another inning in the same game...

Wednesday, September 24, 2008

The Principles

From the joint-statement:

Second, we need to protect taxpayers. There should be a path for taxpayers to recover their money, and to turn a profit if Wall Street prospers.

Frankly, the chances for this are slim and the notion is fanciful, IMHO.

If you want to get at the root cause of the problem, foreclosures and house price declines and keeping people in their homes (and with jobs?), there is no way to address that without a cost.

If it is the case that distressed securities can or should be bought only at a price that discounts the worst of the worst case scenarios, in order to guarantee a profit for the Treasury, how is that not a "fire-sale price" that the Fed has said they would like to avoid?

If there exists a price, a cut-rate price, which makes it possible to satisfy all goals, i.e. one that is sufficient - not just necessary, but sufficient - to put all aspects of the banking mess / credit cycle completely behind us, satisfy taxpayers with upside, and boost credit availability immediately, that'd be news.

Last, the notion of sacrifice is totally absent. The GOP's notions of debt-spend, rather than face the music, are ingrained now in every legislative agenda. We have no collective sacrifice any longer for a common goal. Not even war ...

Biden should quit Palin debate

...until she meets with the press, levels with the American people.

You get the picture.

All due haste

So, Senator Dodd says he wants to get it right, more than he wants to get something done on a false timetable.

Well, has he taken / scheduled any public, expert testimony on the plan this week?

Are we supposed to just accept wholesale the Administrations' assessment of Saddam Hussein the need for an authorization for the use of unfettered financial force?

There are some interesting things that can be done with auctions (second-price auctions are amazing ways to get companies to reveal their cost structures, for instance). I'd like to hear what is proposed. It's not a trivial detail.

Why can't an auction process be set-up by the private sector? By one of the exchanges?

Paulson's Slush Fund - Unanswered Questions


Floyd Norris was spot on, long ago (before Rabouni?).

The corporate credit market is vastly larger than the subprime market, and there are plenty of dubious loans outstanding that probably could not be refinanced in the current market. If some of those companies run into problems, defaults could soar and fears about C.L.O. valuations and C.D.S. defaults could spread long before there are large actual losses on loans.

There are other areas of potential weakness in 2008. Commercial real estate is one area where some see disaster looming. Others worry that some emerging markets could run into big problems because many borrowers there have taken out loans denominated in foreign currency and could be devastated if local currencies lose value.

So, how exactly does Bush-Paulson plan address the problems with CDS and CLOs?

Do they intend to buy the credit-default contracts from AIG?

That is not a "complexity" that is too hard to explain or something we ought not to know in advance.

Don't believe me? What happens to the valuation on all the CDS, if mortgage defaults continue to rise, even though the Treasury is holding onto the securities? AIG is going to have another round of write-downs, right?

Does the Treasury intend to go into commercial real-estate? Whole loans?

Given that all these other problems are on the hopper, why would believe for a minute that banks would loosen consumer credit terms, once they get their taxpayer supported capital injection? Does someone honestly believe that Wamu and BOA and others are going to loosen credit standards, just as soon as Paulson get's his slush fund?

McCain Cuts-and-Runs


Rather than face-up to the fact that he should fire his campaign manager (AS has the dope), McCain is going for "duck and cover", wrapping himself in the flag and saving Wall Street and canceling a potentially embarrassing debate date.

Meanwhile, AS continues to be perplexed at how little democracy there really is in America (see here and other similar).

"You'll be a Rich Taxpayer" Fallacy

So, if there are such good deals for the Treasury to get, why aren't others picking up these fantastic assets?

Did you notice that Warren Buffet didn't buy up the same stuff that the Treasury is going to? He got preferred shares in a premier, diversified company, Goldman, ... with really exciting warrants.

If Bill Gross sees so much opportunity, why hasn't he opened up a massive fund to start buying up sub-prime debt and alt-a loans, foreclosed or otherwise?

How come everyone walked past Lehman Brothers, when it was available for ... nothing... for zero?

Fisking Bernanke

First, I think Ben should probably get the Medal of Freedom, when this is all over. He's certainly seems more on the job than Bush's CIA lacky, who got the award, at least...

Anyway, here's a stab at the spin going on to "get action" this week on a barely vetted or thought-through plan:

"First, banks will have a basis for valuing those assets and will not have to use fire sale prices.

Banks already have a basis for hold-to-maturity prices.

If the FED wants a public price, they can simply hire some valuation specialists and publish the prices they think are "right".

Just do it now: tell me the peak foreclosure rate, the time it will occur, and the peak-to-trough price fall overall for home prices... We can use those to determine a "hold-to-maturity" price.

Their capital will not be unreasonably marked down.

The accountants can be made to accept the FED's marks, if that is all he's after, right?

Afterall, the bids in a reverse auction with the Treasury will represent nothing more than where the Treasury Secretary chooses to mark his own book, right?

Second, liquidity should begin to come back to these markets.

Liquidity will not come back until there are willing buyers.

No one but the Fed/Treasury, right now, has the capital/capacity or willingness to buy up sub-prime assets.

The only way to get liquidity back immediately is to provide a backstop, as was done with the Brady plan in the 80s.

As long as the housing market is in a down spin, no one will bid these securities and, what's more, and no one will accept a credit-agency's rating of them. (Remember also that the rating on this stuff doesn't change because the price at which it is purchased is favorable - it's still rated junk).

Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks to attract new private capital.

That's true, but there is *more than one way* to do that. The Paulson plan is not the only one.

Fourth, credit markets should start to unfreeze. New credit will become available to support our economy.

True, but again, there are alternative plans that will do the same thing. Paulson's "plan" is not the only one.

And fifth, taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk.

No, the taxpayers should pay for a "bailout" using the power of the treasury to backstop at current interest rates (and get paid back for taking risks).

What's more, with the Bush-Paulson's "plan", the government remains out of control on important variables.

For one, there is no indication that the Treasury can hold an auction for one institution only. Thus, if you have a LOT of junk, then you are the LAST one completely satisfied, potentially (at least if the auction terms are fair).

There is still no way to give a capital infusion directly to AIG, for instance, unless the government gets involved in buying up derivatives.

Devoid of an implicit guarantee from the Treasury (a reverse-auction bid is not a guarantee), this plan "hopes" that the cleaned-up balance sheets will be enough to hold back the problems with CDS. As such, it does NOT address "root causes". It doesn't anticipate or plan for further deterioration of the mortgage markets, including in prime loans ...

Getting the Treasury involved in managing a giant portfolio of complex assets is ... crazy! They should stick to one kind of simple security, sub-prime and alt-a mortgages, to start!

If default rates continue to soar, then the Treasury is on the hook for the full amount of the price and distressed decline. In another plan, one that deals mainly with foreclosures and helping homeowners, the taxpayers can share those upcoming loses with the lenders, rather than absorb the entire risk of the market ...

Patriot Act Pressure Tactics - Bush to Scare the Pants off the Nation Tonight on TV

It looks like the GOP will pull out all the stops, letting our natural-born fearmonger go on National TV tonight to further scare the nation in to accepting the "only" plan available, a three-page power-grab from Paulson.

You watch. It could work. The media is pounding the drums again, just as they did before the Iraqi war ...

There are alternative plans. Paulson's is NOT the only approach.

Barney Frank May Need Reminding ...


Look, Hank Paulson is a nice guy, maybe has good relationships across the isle. Whatever.

Let's not forget that he works at the pleasure of George W. Bush and a political party power-structure that apparently embraces the "unitary Executive".

That means, if John Mack calls up Bush and says he wants a better price for his securities than is being bid by Treasury, Bush can make a call or remove the Treasury Secretary altogether.

Given how Bush just cut his own Secretary of Defense out of the loop in order to do something for Petreaus, as reported by Bob Woodward in just the past few weeks, we don't actually have to theorize or speculate about how this works in the Bush Administration.


No wonder Bush wants $700 billion "upfront". They can shoot the whole wad before he leaves office, at whatever price the White House says, maybe...

As proposed, there is no recourse to "reconsider" any decisions that are made, either. It's like a financial AUMF.

After the fact, Congress can be "outraged" about any choice made at Treasury, but that is all it will ever amount to ...

GOP Executes Dry-Run for Social Security Default "Plan"


The Paulson plan, impossibly "thin", expensive, and full of eye-popping "trust me", is vintage Bush.

The GOP will likely ram it through Congress, because Congressman are concerned about their upcoming adjournment (good grief) and likely to be seduced by how nice they are (wasn't Rumsfeld charming when he was promising to get $10 billion out of the Pentagon's budget, too?).

The Administration's effort to pressure legislators will only get stronger. Of course, there is a false trade off being peddled, that this is the only plan and that all alternatives are worse. There are other options, more Democratic options.


This may well be the dry run for what will happen for social security.

Some day down the road, possibly, the markets will "seize" or collapse, because the Treasury cannot fund the liabilities at one auction.

The GOP's Treasury Secretary will come up to the Hill and tell legislators that they have to cut all Social Security benefits, because the "alternative" is further erosion and "meltdown".

The Bush Administration has spent more of the current social security tax ("raided social security") than has any other President, by a long stretch. It is as if they are deliberately heading the ship for a wreck, to look something like this week's Paulson three-pager...

Palin Meets with World's War Criminals


Where is Hitchens when you need him?

I'd wager he popped a blood vessel when he saw that the GOP was relying on war criminals of the 70s for schooling the latest crop of swells, because this decade's crew were ... not publicly available.

(pic: Ray Abrams)

Tuesday, September 23, 2008

Bailout: Getting the Price of It Down


It just strikes one as a grim juxtaposition that those who ran around insisting that we wouldn't bail out borrowers who went beyond their means are now ready to give "theoretical pricing" to lenders, which is what hold-to-maturity amounts to.

Sure, it's easier to run an auction among highly paid professionals, but did it occur to anyone that you might achieve that same ends by giving new terms to borrowers to keep them in the houses for a while longer, yet? Is that too ... messy?


If someone came up with a scheme to "make good" on even 50% of the sub-prime loans going into default, that would reflate Wall Street, immediately.

What is the risk to the Treasury?

Well, I don't recall the exact figures, but total sub-prime lending was in the range of $700-$1,500 billiion.

Suppose the Treasury "absorbs" a 20% housing price decline, today. That would put them at risk for $140-$300 billion (assuming they took on the whole price-decline risk, not 95% of it, say). If they took an equity stake in a refinancing alongside the homeowner, they might get some fraction of that back over time, say $40 billion, for a net of $100-$260 billion. If it is true that 50% of the borrower credits for sub-prime are good enough for a conventional rate mortgage, that would even further limit their exposure under such a scheme.

For the subprime debt that the Treasury steps in on, they pay out to lenders at some rate (less a small fee), probably the rate at which the Treasury can get financing...

If the Treasury really wants to get exciting, they can give a direct cash infusion to the banking system, right to the places that are suffering the most. To do so, they can choose to pay off some of the foreclosed loans in full (or at some discount), rather than assume payments at a "government guaranteed rate", i.e. pre-pay the loans at 90% of face, say.

With some luck and foresight, the Federal Agencies will be able to package and sell the restructured loans that the government passes out as part of mitigating the impact of foreclosures. In other words, done right, the mess of restructured loans doesn't have to stay with the Fed/Treasury forever, because the borrower terms were so bleeding favorable there is no way to repacakge them for sale at market prices.


CDOs will continue to be risky assets, but they will have a theoretical floor value, because the government is backing up the foreclosure risk and providing a known, "workout" rate of interest to the lenders. There is no costly and lengthy bankruptcy process, either, for the private sector lenders, just the haircut(s) they take.

Will such a guarantee be enough, or will looming CDO/CMO write-downs still be crippling to "the system"? That depends on where the CDOs are marked now and what the new, government-backed valuations look like in comparison. If there is still not enough capital at the "banks", that would be the time for the Fed to lend its balance sheet. (Yes, it would be on both sides of the transaction, but we'd be monetizing less, hopefully, or some total amount that can be completely determined by the authorities, not by the beggars at the feast).

As for the CDS, taking out some of the foreclosure and interest-rate risk on the underlying securities will greatly improve spreads (they could be cut in half overnight, right?). This could cause a great mark-to-market boost. That itself may help some of the most troubled (reckless) institutions.

This "plan" has many advantages:

  • The authorities deal only with one type of security, sub-prime and alt-A mortgages (let the rest follow suit, plugging holes if necessary for individual institutions). It deals with a reasonably well known legal process, foreclosure and real-estate law in general.
  • Many people may get to stay in the their homes and the "welfare" goes to the borrowers, rather than the lenders on Wall Street (or at least in a more equitable proportion).
  • The government is on the hook for the value of home-price declines that may affect the subprime segment of the market, only, and that could be $300 billion, less whatever they can collect from
    • any long-term equity stake they take with the homeowner;
    • "savings" from any realized home-price declines not as bad as the 20% overall decline guesstimate or any haircut they pass on to the lender;
    • the haircut that banks/lenders are willing to take to get pre-paid by the Treasury (i.e., cash now) in order to rebuild their cash reserves;
    • and any spread the Treassury picks up between the rate they 'guarantee' to the original lenders of sub-prime and what they get from restructured sub-prime loans that keep people in their homes, for a while longer.


Diagnosis: The "Hope Now Alliance" - is it failing miserably?

src: WSJ (click pic)
After looking at this graph, I have to say that part of the problem has to be the apparent ineffectiveness of the "Hope Now Alliance".

Of course, just as with the Iraq war, the Bush Administration didn't take up any benchmarks for performance for this program (that I know). We again rely on Inspector General or something, in order to get any real information about what is going on.

So, how is the program working? How many people have found "new hope"? How much worse would these statistics be without it?

Given that we are now in "crisis management" mode, Hillary's idea of a six month moratorium on foreclosures doesn't look so bad, if it buys some time to figure out how to 'work out' some of the problem.

Best line so far - Humor in Uniform

Then on Sept. 19, Paulson, the former boss of Goldman Sachs Group Inc., unleashed the ultimate market manipulation -- the bailout, although this isn't really the right word. It's more like a needle-exchange program.

- J. Weil, writing for Bloomberg News

Too Broad for Bush Administration


It's impossible to support the Paulson proposal, as is, I think.


The appeal to complexity is unconvincing. If you cannot explain it, as you might to a six year old, you don't get money. Period.

Paulson's idea to hire 'the best and the brightest' to run a portfolio of this stuff ... isn't enough. The people at the top need to understand the plan and how it works. If they don't, how is that different than the route that got us into this mess?

At a minimum, they need to demonstrate that the plan (for reverse auctions) can "work", with a paper trial or something else. It may be that there is just "one auction, one time", as there don't appear to be investors with capital or authority to buy stuff that is rated so low and deemed so risky (certainly the big pools of capital will stay away, right?).

For each type of instrument, they need to lay out what they are going to do. Simply to request "flexibility" is not adequate.


As in the Great Depression, the Federal Government may yet need to get into the business of buying up foreclosures ...
They may be underestimating the magnitude of the upcoming problems due to the super-whammy hitting the U.S. economy, from the energy/oil shock, the unwind of home prices, the "double deleveraging" of the financial sector (both cash and derivatives), and Bush-McCain's 100 year "war on terror".

We could very well be in just the fifth inning of a slide that will last for at least another three...

The idea of helping a secondary market to develop is laudable, but that is not the "root cause" of the problem, except for derivatives trading.

The root cause of the problem continues to be defaults on mortgage loans, exacerbated by (a) falling home prices, (b) insufficient capital backing, (c) derivatives leverage, (d) increasingly restrictive credit, an (e) an energy price spike, and (d) a Treasury overstretched already by ... our Iraqi adventure / national security "needs".

Anyway, the upshot is that, if they are wrong, then I'm not sure that running reverse auctions is the best approach. That may have been a good thing to do last fall, alongside the half-measure called the "Hope Now Alliance", but now ...?

As in the Great Depression, the Federal Government may yet need to get into the business of buying up foreclosures ...

Monday, September 22, 2008

Better than a "bailout"

Well, Paulson's plan was so weak that it seems like a free-fire zone up on Capitol Hill, from all reports about "what to do now".


After a day's thought and listening to people wing-flap (always a good approach, even if we may poke fun), I've decided that divide and conquer is still the best strategy.

Divide the problem into two components, at least. The bad underlying mortgage securities and the bad derivatives on those securities.

  1. 1. The FED lends its balance sheet for the first part, for the bad underlying assets. These will eventually trade, at a price, once the depth of the downturn is known. Along the way, the institutions holding them will have the flexibility and imperative to "manage" the portfolio or, if they can, to sell it on, to a vulture specialist.

  2. 2. At least for the CDO part of the derivatives problem, I'd suggest something like a "Brady" restructuring of all CDO assets. This will allow these instruments to become tradable, quickly, at least as much as they can be (not too many people around to trade them, much, any longer). Mark-to-market can continue, as it should, with waivers granted for BIS capital requirements...

The third part would be the CDS, or credit-default swaps (at least as much as one can tell from a distance - there may be other moving parts).

At this time, I continue to believe that some type of forced netting is required to "unwind" these contracts. Not sure there is even an existing regulatory framework to make that doable or what the size of the problem is ...


The other approach is a bottom-up approach, with a fundamentally different tact.

You "reflate" the whole financial mess by going in and backstopping the "bad" mortgages that are being foreclosed on. The Treasury/Congress pass legislation capping step-up rates and putting a floor under certain loans that qualify as having been "sub-prime" or near-prime.

You don't stop foreclosures (because some *must* occur), but you go in and guarantee a minimum interest rate on sub-prime mortgages. The government starts buying up 'defaulted' loans (as it did during the Great Depression, as best I recall).

A minimum interest-rate guarantee will give people a "risk-free" assumption to use in valuing the securities (and the derivatives which are keyed to them). Once there is a floor and people can model a series of "known" or "guaranteed" cash flows, the house of cards will "reflate" rather quickly, I'd wager.

This option will cost "real money"...

Saturday, September 20, 2008

Monetizing the Merde


Now that they've scared the pants off of legislators, with few figures and facts (ahem!), Bush's GOP is moving in with a request for $700 billion in money for ... quasi corporate welfare.

They want authority to buy "mortgage-related assets". Well, that's impossibly broad. Does that mean that the treasury is going to lift some Credit Defualt Swaps from AIG?

I cannot help but think that 'buying them up' is the wrong approach. It may have worked for the S&L crisis, because, as I recall, a number of those small institutions were going broke.


Whatever the case, the proposal from the Bush Treasury is extremely thin, for a "crisis" that has been going on for over a year. It makes it look like they just missed a huge part of the systemic risk estimate, when they "got tough" last fall.


At a minimum, someone needs to explain why buying up everything is somehow better than what the Fed is currently doing, which is more-or-less extending its balance sheet to those institutions who have sludge in their portfolio.

If it is related to derivative contracts, including CDOs and CDS, then someone needs to spell out what the plan is for those particular "assets", right?

Friday, September 19, 2008

We should collect from the intransigents for these money market backstops

Well, the private market had its chance and failed. Terribly, we can now judge.

Remember the Superfund (circa fall 2007), that never came together because no one was around with enough clout to say, "do this, or perish"? Well, maybe not quite that severe, but still ...

Now, instead, the Federal Government is left holding the bag, faced with panic and systemic "unwind" effects that make it hard to keep orderly markets and threaten the general economic prosperity.

So ...

I'm asking whether these funding backstops, that help even Goldman who may have been one of the spoilers of a private deal early on, ought to be paid for, when the RTC gets set up (if not sooner).

It's only in that way can we give any real-world credence to Martin Feldstein's notion that firms can actually weigh their collective interest, when considering the profit motive, to re-inforce the urgency of doing that during times of financial "crisis".

Thursday, September 18, 2008

GOP Dream Ticket

Before she reels in a 'victimhood vote' and before she becomes potential "leader of the free world", perhaps someone - anyone - can find out if she can spell "potato".


Imagine what it would be like had we lived the past week, or even the past year, without an SEC, without public accounting, and without a Federal Reserve Bank (or any reserve bank).

That's what it was like in 1907...

Of course, the ardent free market mavens who casually believe in the end of all those things ... aren't so loud, today.

Jamie...Should have kept the powder dry?

With quality firms like Morgan Stanley, perhaps, on the chopping block, you have to think that Jamie Dimon is wishing he kept his powder dry, rather than oblige the authorities in absorbing Bear, Stearns...

At the 2-minute Warning, GOP Closes in on "Willie Horton Time"


How many days 'till Rezko and a Rev. Wright re-cap? Will it be abortion babies?

Joe notices that it's getting close to "Willy Horton time" for the G.O.P.

I agree.

You can only pretend you are a populist for so long, a champion of the people, when you are not. McCain's house of cards is still floating, as best as one can gauge it, but just barely.

If Palin's refusing to cooperate with an investigation isn't vintage Bush-era GOP, what is? if McCain casually dividing the world's leaders into "friends" and "foes" isn't vintage Bush-era twaddle (or even cold-war era throwback), what is?


It really is astounding that the race is as close as it is. One in two people *wants* to continue to be fed the GOP's ... brand of trickle-down 'democracy' and 'leadership'. The mind boggles. Remember the do-nothing Congress that the GOP served up? That was only two years ago...

The GOP's contempt for the electorate, which they dress up as being "non elitist", is very near to bread and circus.

Shorting, Part II

...instead of just focusing on the illegal *naked* shorts, the wave of "enthusiasm" is going too far, again, no doubt led by the crew that thinks there is never a reason to sell their beautiful company (and a weak Bush appointee to the SEC?) ...

Without moderation, its no wonder the "smart" option(s) seldom get adopted ...


Photographer Blake Little's edited take on Bears.

New Exhibit.

Wednesday, September 17, 2008

Naked Shorting

The SEC moves to quell "naked shorting". F-i-n-a-l-l-y.

As the number of brokers diminishes, it should be easier to enforce ...

Except that, the last time I looked at a case, it appeared that the Hedge Fund culprit in question was shorting the stock naked out of a Canadian broker.

Therefore, could be more work needed.

I'd say to wake up Bush, if I didn't think that was like loosing a cannon.

Unlike regular short-selling, which is just fine, naked short selling in any kind of quantity is seriously out of bounds.

Sytemically Yours, AIG


Well, it's not quite a debt-for-equity swap that Morgan Stanley had the Fed do for AIG, but it's close.

Here's the press release.

What's alarming is that no one is able to quantify the systemic risk.

Someone should know *precisely* what the impact of the failure of any one institution will be on every other one ...

Otherwise, everyone could buy "insurance contracts" from the same entity and imagine to themselves that they are 'protected', right?

p.s. you had to get a kick out of "Ace" Greenberg going on national television to call his company a "national treasure". Did your eyes tear up?

Vulture Capitalism


Easier to pick someone up off the floor, then help them up the stairs?

Barclays gets Lehman's ops for 1.75 billion. Just guessing, but that lowball offer *looks* about four times too low ...

Tuesday, September 16, 2008

I'll take AIG for ~$85 Billion, Alex

Okay, this is not a *liquidity* crisis, at levels of $85 billion possibly in 'special financing' ...

This is a solvency issue, right?

(AIG have only $89 billion in tangible assets reported and about the same in equity ...yes, that means that they bet the firm once over off balance sheet, at least, ).

The OFHEO Myth

Some of the conservative commentators on blogs are making the case that the GOP wanted more regulation, in particular of OFHEO.

I'm going to go out on a limb here, because I don't know the entire history of that push for a change in the regulator.

However, my guess is that the GOP wanted a stronger political/regulatory control for the purpose of limiting Freddie/Fannie, not making them more efficient regulators or better risk takers.

The ultimate failure at Freddie and Fannie appears - appears - to NOT be related to "bad loans", in the strict sense that performance on loans fell so far that the "bank" was "broke".

What appears to have happened to cause a failure is that (independent) management dabbled in off balance-sheet "excitement", in order to boost near-term earnings.

There is no indication that GOP regulatory schema would have shut that down (as it should have been, completely). Someone should look into how the decision to "approve" these instruments was made. It reeks of moral hazard.

Meanwhile, a well regulated Freddie/Fannie continue to have an important role, even moreso as we see the private sector meltdown, i.e. they have a "new" role as market stabilizers, not just facilitators.

Still, politicians cannot help themselves. The FHA was supposed to help first-time home buyers. Lifting the limits on FHA loan sizes, as Congress did recently, was ... misguided and opportunistic.

Moral Hazard, Fallacy Pertaining Thereto

So, does the failure of Lehman and the failure of Bear and the savvy sale of Merrill teach everyone a lesson and remove the hazard of allowing people to take risks that they aren't going to pay for?

I wouldn't bet on it.

Letting some firms fail near the turn of the century (2008) isn't going to change the short-term nature of the brokerage business or its culture (even American culture), is it?

No one is going to put liquidity managers and risk managers into positions with as much clout as "top producers", etc. No CEO is going to accept a smaller market-share, so that he can conservatively manage the firm's risks "in the long term".

I'm not saying that backstopping institutions is a sound policy or even a necessary adjunct to casino capitalism. I'm just saying that those "selling" "free markets" as a "get" are very, very much overstating the case. The odds-on bet is that the firms that grow in the wake of these failures will not be more risk-adverse. You don't get paid for that, on Wall Street, at least in that part of the business...

ISDA Juggles the Balls

Those parts of the Master Agreement that suddenly have "bite" to the tune of several billions ...

ISDA folks appear to be working overtime - there was an extradordinary session on the weekend to auction some of Lehman's derivative's risks.

My question is, who is left who bought any of the risks? Goldman? Morgan Stanley? Were there any bids?

As for seizing collateral, anyone want to guess how many cents on the dollar the collateral available amounts to on a pro-rata basis, even from AAA-rated subsidiaries?

Anyway, they leave the impression that the markets for this stuff are going to clear, without knock-on consequences.

That'd be bullish news, IF true.

Bad Marriages

Bank of America "absorbs" Merrill. Chase (the "JP" part is a convenient fiction) absorbs Bear.

Understandable. Yet, it looks like the wrong direction.

From today's perspective, how outdated does Glass-Steagall look? Not very. What if Merrill had millions of uninsured depositors, with their lifetime savings at risk?

Other countries, of course, never had Glass-Steagall-like separation. But, from today's perspective, how much of a "competitive disadvantage" is that separation, when owning a full-scale brokerage is a ticket to going out of business overnight, literally...

Oil "Crashes"

So, can we say it was a "bubble" now?

Did demand really change that much in the space of 4 months? Supply?

The idea that physical settlement is somehow limiting price moves seems ... under pressure.

Wall Street Lays an Egg

Books will be written about his all too human failure ...
Anyone know why investment banks are failing?

Scan the papers / journals and you'll not find out.

As Paul Krugman says, "And as the unknown unknowns have turned into known unknowns, the system has been experiencing postmodern bank runs."

I tend to concur, but there is more than just a run mentality at work. That's a symptom. What is the cause? If there is a list of causes, what are they and in what proportion? [There will be Congressional hearings ...]

One has to consider that the problems lay off balance-sheet, in the derivatives that have (a) soured or (b) turned into "loans", because there is no liquid market in the underlying.

On the other hand, CNBC is reporting that Lehman had marks on the "mortgage portfolio" way too high, even on the weekend. So, where was the SEC, then, over the past nine months? How much was that, in relation to their other problems. What's more, if that is all that was true, then truly the Fed should have considered a "portfolio workout" loan.


I cannot believe that AIG's book of derivatives could just be allowed to collapse. Those yelling "no taxpayer bailouts" have to consider that the reduced competition and the reduced ability to lay off and price risk has consequences too, that may or may not rival "moral hazard".

As for Fed action, their task is not to "save institutions" but, perhaps, to save those parts of institutions that are key to keep the markets orderly and functioning.

That means a very politically difficult decision, in the current politico-regulatory, ideologically-driven environment: they have to draw a line and it cannot be an "on" or "off", they may have to "partially save" some organizations. Since no one will agree just where or how to draw that line, it's a thankless task, as are most of the other regulatory aspects and last resort lender aspects of the Fed. What's worse, it may not be possible to "legally" pull off such a manoeuvre - it's like doing a collateral reorganization, perhaps, on the fly, rather than through a prolonged bankruptcy proceeding.


Following Krugman's comments, one has to wonder if post-modern tools aren't needed.

Rather than trying to run around finding additional capital, perhaps the "solution" is to do a complex, multi-party unwind/netting of derivatives trades, to the extent that those contracts are the "problem" (and again, it's hard to know what the real problems are...).

In other words, replensh capital (taxpayer supported, if needed) for the direct loans that went "bad", like straight subprime securities, and implement a "forced unwind" for various derivatives contracts, to prevent or secure "domino" problems associated with counterparty failure, if any.

Even if the derivatives risks are all concentrated with a few players who made bad bets, it may not be judged best let those institutions fail and draw as best a "firewall" around them as possible, rather than to force a systemic "solution" on all participating institutions. Of course, that might "reward" foolish and weak players, but that shortcoming might be easier to "manage" than the alternative, which is a total and prolongued restructuring of the financial sector, with higher long-term capital costs for the economy ...

Monday, September 15, 2008

McCain's "I'll Make Them Famous" Bluster


We've all heard this line from McCain several times now about ending earmarks. He promises to shine the light on the legislators who request and get them.

So my question is, why do we have to wait to hear from him about them until he is elected? Why can't he start "making famous" some of his Republican colleagues who 'worked the system' so well. How 'bout Trent Lott, Senate Captain and smooth-talker, and his $400-$600 million dollar railroad?

How 'bout McCain's bff, Joe Lieberman?

Let's hear it John. Now, if you mean it.

Bush Plan to Privatize Social Security Would Have Put Your $$ In Hands of Failed Banks...


It's worth pondering that, had it been enacted, the GOP's plan under Bush to privatize social security probably would have channeled retirement dollars right into the junk that has now sunk three Wall Street firms (and counting), two GSEs, and a slew of mortgage companies.

Of course, firms go out of business all the time. But this is unique. Only a week ago, everyone had the public financial statements (ahem!) of these companies and judged them to ... have some worth.

Remember that, next time the GOP comes peddling tales of glory for privately invested funds ...

Remember that, if you think eight more years of GOP irresponsible "rule" might not stretch the county to the breaking point, past the point of no return...

Thursday, September 11, 2008

Is 9/11 Best Forgotten?

As another year passes, I successfully avoided reliving the trauma of 9/11. CNN tried to show me the burning buildings and run a "recap" of what happened on that fateful day. Luckily, I was able to get out of earshot.

The truth is that, as much as the events of 9/11 ought to be recalled for the profound sacrifice and human tragedy that they engendered, they have also become a touchstone for a profoundly politicized and misconceptualized "war on terror".


And what is missing from so many of the missives, given today by political luminaries on both sides of the isle, is that Americans are still paying the price for that day. $12 billion dollars a month, with cumlative totals to likely to top $20-$25,000 for every household (or $9-10,000 per capita).

The GOP raises taxes all the time, by spending money. They just don't collect them.


And it is hard-to-say whether the nation as a whole is more prepared now than they were seven years ago for the challenge of global terror, despite being much poorer.

To be sure, we have specialists and technocrats and a cogniscenti who are now more able to grasp the dimensions of the real threat and even debate soundly the merits of alternative approaches.

But, within the nation at large, I'd say that the jury is out on whether the central, moral challenge of terrorism could be or has been aptly met. We continue to have poor leadership on the issue, clouded as it is in the militaristic morass that the present Administration served up to deal with it primarily and by their party, who now feel obligated to defend that sordid history (at least until it is "over").

Wednesday, September 10, 2008

McCain's Dishonor

For me, this surreal moment - like the entire surrealism ofthe past ten days - is not really about Sarah Palin or Barack Obama or pigs orfish or lipstick. It's about John McCain. The one thing I always thought I knewabout him is that he is a decent and honest person. When he knows, as every saneperson must, that Obama did not in any conceivable sense mean that Sarah Palinis a pig, what did he do? Did he come out and say so and end this charade? Ordid he acquiesce in and thereby enable the mindless Rovianism that is now thecore feature of his campaign? -Andrew Sullivan

Well, Andrew hits the nail on the head with something that a few of us, apparently, knew about John all along.

Have a look at how he ran the Florida campaign against Romney, in which he willfully used a set of mis-representations that reduced Romney to a stuttering fool, even though Romney arguably is one of the best communicators in the field...

"Country First"? The mind boggles with that, in McCain's mouth.

McCain believes, as did Bush & Cheney before him, that it is "okay" to "lie", if that is just a 'political distortion' or shading of the truth.

He has shown, recently (and continually), that he doesn't know the line any better than did Bush. His staffers are reportedly even in regular contact with Rove, who clearly understands that you don't have to be truthful, just believable, to win in "small town" America.

McCain's staffers are up in Alaska, "managing Justice" in the troopergate affair, just as the Bush administration did before them, in so many ways.

Palin is hardly a "country first" pick. She is immediately dividing the country into "small town" and "big town", using the other cultural dividing lines, just as quickly as she can. "Country first" from her is just another code-word for them.

So no, "integrity", "maverick", and "straight talk" are NOT apt words, when describing John McCain.

Monday, September 8, 2008


It's been quite a summer. A lot of milestones here, both glad and sad.

I don't expect to be back to blogging with regularity, however. For one thing, the summer reading list is not finished ... maybe not even heavily dented.


The summer's political infotainment, the conventions, lived up to their modern, self-referential character.

Despite fiery rhetoric on all sides, the whole lot came out sounding notably bland, especially in contrast to the Olympic forerunner.

Perhaps the strangest posture is Senator McCain's effort to position as a reformer of his own party. As if.

As if Ahab was finally going to catch the whale, or something. It was somehow fitting that Jack Abramoff was getting press over his indictments at about the same time as McCain was giving his "acceptance" speech.


Pity Mitt Romney and Rudy Giuliani. They poured huge amounts of time and money into the race, including endorsements and fund-raising for McCain. (Okay, maybe Rudy didn't, because he just camped out in Florida for most of it ...).

The GOP is so desperate to re-brand, that McCain has made a slap-dash decision to gamble that effort on a Governor who is going to need as much pre-schooling as did George W. Bush, who received GOP policy luminaries in Crawford during the campaign to help him appear knowledgeable...

We now know how badly that turned out (especially for those who excused him, by saying he would have good advisers around him).

Separated at Birth

The last enthusiastic GOPer to go to Washington, Laurita Doan, pictured on left, got swept into the Rovian milieu and ended up with ... let's just say it didn't beautify the Nation.