Monday, September 29, 2008

D.C. To The U.S. Economy: Drop Dead 
Congress just fucked up. Big time.

No surprise, though. Congress could fuck up a wet dream.

Here's what's happening: Your average Congressman is a backslapping idiot. You don't make it to Congress understanding the machinations of the world of finance and credit. You make it to Congress by reading the will of the people and surfing that wave. The "bailout" package is unpopular with Americans because few Americans understand where a dollar comes from.

Phone lines have been lighting up with popular opposition to a Wall Street bailout from conservative and liberal populists alike. None of these yokels understand that even in good times, a dollar in deposits is perched precariously on an upside-down pyramid point of four to six cents in actual liquidable assets.

Fewer still understand that the reason their employer didn't send them home today is because the company they work at, or the city or state office they work at, is able to make their payroll because they are able to float commercial and high-grade short-term paper on the money markets for a 1-day to 90-day loan. That is why they have spending money now, and why they had it last week. Americans take it for granted that that is going to be the case next week. (If your employer doesn't borrow in the money markets, you can be assured that your customers do, or the employers of your customers do, somewhere upstream from you!)

Few Congressmen understand that there is no law of nature that says that Microsoft and the City of Fontana, California and the Broward County School District have a God-given right to a buyer who will front them the money to make their payroll until the next big check comes in. There is no hard-written rule that those with capital will choose to lend it out at a pittance just for the convenience of city mayors and struggling companies around the country. But last week, the money markets that support these crucial operating loans and keep Americans employed began to creak under the strain. Capital is draining out of the system, fleeing to Treasuries on the secondary markets at ridiculously low yields, rather than to working Americans in the form of short-term credit so employers can make their payroll.

Americans have no idea where their paycheck comes from and why it comes. All they know is they don't want to bail out rich Wall Street fat cats.

They are wrong.

First of all, the real fat cats will be fine, regardless. They don't need a bailout. They will muddle through. The people who REALLY get hurt by economic dislocations are not fat cats, and they NEVER are. The people who get hurt by economic dislocations and credit crunches are workers. Blue collar factory and construction workers. And their families.

These people rely on the credit markets for their paychecks. They rely on the credit markets for their cars, and even their household appliances. This isn't optimal. This is just the way shit works. They live paycheck to paycheck, and rely on credit to stitch paychecks across the seams of months.

If there is a severe contraction as a result of Congress's stupidity, it is going to be these people who pay the price first.

Next are entrepreneurs. Small business owners who rely on their American Express Business Card and a line of credit to keep the lights on while they work their accounts receivables to pay off last month. Many small businesses are highly leveraged -- especially in the start-up phase. Without liquidity in the financial markets - without easily locateable financial institutions willing to lend, this isn't the difference between eating steak and hamburger. For many businesses, this is the end of the business.

Most people on main street barely know how to balance a checkbook. Financial literacy in the population at large is terrible.

Naturally, Congress was listening to the more financially illiterate among us over the weekend. Rebublicans especially.


I hope I've got good street cred among most of my conservative readers. I'm a conservative. Almost libertarian (though I'm personally not comfortable with abortion, and dislike the isolationist kook fringe of the libertarian party as well as the Ron Paul morons). Look, I grok the small government idea. I'm down with the right on that.

But the time to be sticking to those principles was a decade ago. Small government studs should have deflated Fannie and Freddie 10 years ago, when we could have done so without causing a major dislocation. If we were serious about small government, as conservatives, we should have been manning the barricades when regulators pushed banks into making more questionable loans. There were a few voices in the wilderness. But the Denny Hastert Congress went along to get along.

The time for small government idealism is in preventing the need for a large bailout package. But having winked and nodded at the "implicit" (?!?!?!?!) backing of Fannie and Freddie for a generation, even as warning signs piled up, now we find ourselves in the position where the U.S. Treasury is the ONLY player left in the marketplace who can function as a marketmaker for very foundational assets.... assets which actually have an intrinsic value, unlike those stupid internet stocks in the last bubble... and these Republican retards who all wax rhapsodic about the benefits of a free and fluid market at all other times, decide to throw a crowbar in the spokes out of a mistimed adherence to a free market principle which they don't really understand. Not like they should.

Few people understand what is going on. The people who simultaneously possess the theoretical intellectual framework to grasp what is going on AND have real-time access to information were pounding the table for this to go through, and go through fast.

The Secretary of the Treasury, the Chairman of the Federal Reserve, and the President were warning of the need for quick, decisive action. The Speaker of the House was (mostly) on board, as was Charles "gulp" Schumer. How often does that happen?

The leadership that got the "no shit" briefing from Bernanke and Treasury were on board. Barney Frank were on board with the President. I wish I were at that briefing. And maybe it's time that briefing were made public. Because the leadership utterly failed to sell the idea to the backbenchers.

Time is of the essence. Credit windows are snapping shut already. If Congress does not act, then they will shortly be providing massive supplemental funding to shore up FDIC. Only this time there will be no underlying assets the government can take over in exchange for the payments to depositors.

Buying mortgages at fire sale prices, given the liquidity (which we have, as taxpayers) is smart. Throwing money down the FDIC well when the banks don't HAVE to fail is folly.

Sure, the bill was cobbled together quickly. It's going to be ugly. It's going to have some rough edges. The perfect, though, is the mortal enemy of the good enough. Or as Megan McArdle puts it: anyone who tanks a bank bailout they think might be needed, in order to get a cut in the capital gains tax, deserves to be tried for treason.

And to blame that stupid Pelosi speech for Republican intransigence? Asinine.

And now the baying hyenas on the Democrat side of the aisle will craft a bill that will include every stupid libtard giveaway in the book, and pass it over a bunch of Republican dead bodies in a party line vote, and DARE Bush to veto it.

But unlike the dumbass Republican congressmen, Bush knows what's at stake, and he can't. He'll make a deal with the devil, made possible by the dumbest Republicans in history.

To hell with you, Congressional Republicans. I'll vote for McCain. But if you're that stupid, you're not worthy of his coat-tails. If you haven't already blown his chances with your obtuseness.

Splash, out


Labels: , , ,

Can you explain why the goverment has to be the buyer? If the banks need cash, why can't they just auction off the crappy mortgages to whoever wants them?
I agree with Josh's comment. Also, why was the only solution offered the one that required the American taxpayers to pony up $700 BILLION? I've heard suggestions of eliminating the mark-to-market requirement of Sarbanes-Oxley, along with offering the financial companies that need the liquidity extremely low interest rate loans. So far as I know, these options were never even allowed to be up for discussion.

That, and, if we bail out the the financial sector, where does it end?
"Why can't the banks auction off the crappy mortgages off to whomever wants them?"

Like whom? Who's got 700 billion? Don't you understand that that's what they've BEEN doing for years? No one has the cash anymore to make a dent. The cash has been lent out to homeowners. They are the only people with the cash to do the deal and put some velocity back into the money supply. Please note that as a practical matter, homeowners = taxpayers.

"Also, why was the only solution offered the one that required the American taxpayers to pony up $700 BILLION?"

Again, who else even HAS $700 billion?

I've heard suggestions of eliminating the mark-to-market requirement of Sarbanes-Oxley,

Mark-to-market is not a terrible thing. Eliminating that requirement would do NOTHING to create a market for these assets. The only thing it would do would be to allow the financial community to create an Enron-like fiction, inflate the value of these underlying assets beyond reason, and allow banks to leverage themselves to the hilt all over again. And to what end? They'll loan out the money they raise against the fictional value of assets that eliminating M2M rules allows, but there STILL won't be a market for these assets, and they'll be in an even BIGGER mess.

along with offering the financial companies that need the liquidity extremely low interest rate loans

We do that. It's called the discount window at the Federal Reserve. But if it's a loan, it has to be loaned against some expectation that it will be paid back. If there is no market for bank assets (CMOs, etc.), then how will banks pay back these loans? And how can the loan be for a rate any lower than the cost of funds to the Treasury? And what about institutions that fail anyway...what is the security to the Treasury that the money lent will be paid back? Answer: Ownership of the securities you don't want the government to buy anyway.

It is much better for the tax payer to have the opportunity to buy a trillion dollars worth of CMOs at a 30% discount and push some much needed liquidity and velocity into the system NOW than for the taxpayer to experience a severe recession, pay the FULL COST of the reduction in GDP and have nothing to show for it while the construction and manufacturing industries, and any industry that relies on financed purchasing, directly or indirectly, shrivel away.
In your post, you say "Buying mortgages at fire sale prices, given the liquidity (which we have, as taxpayers) is smart.". Given that that's true, wouldn't the mortgages have value in an open auction?

I had thought most of the problem was that the mortgages become unsellable because their value wasn't known. The auction was supposed to reset their values. I just don't understand why the government has to be the only bidder.

BTW, 700 billion is apparently just a made up number. What I'd like to know is how much the collateral is worth and how much they would make if the borrowers continue to pay the entire loan. That would establish the minimum and maximum possible values.
I thought part of the problem was that no one seems to really know the true value of the assets. Most of these "sub-prime" loans aren't currently in default - at least that's my understanding, so they would have better than zero value. Jack Welch (or is it Warren Buffet?) has privately put a very large sum of money into these mortgages because he thinks he can make money off of them.

And, I'd heard the same thing as Josh re: where the $700 billion figure came from. It was not calculated on anything; it was selected as a huge figure to scare the $hit out of people.

And, who says there can only be one buyer? The US government might be the only one to make that kind of "single buyer" purchase, but why does it have to work that way?
"wouldn't the mortgages have value in an open auction?"

Sure, Josh. Given a free and liquid market, they would indeed have value. So who do you suppose would make an able, qualified buyer with the capital available and liquid enough to act as the counterparty?

Be specific.

Wishing for a buyer will not make a buyer appear. Ask anyone trying to sell a house right now!

"Most of these "sub-prime" loans aren't currently in default."


"so they would have better than zero value. "

If they are secured by a lien on the underlying property, they would still have significant value even if they are in default.

"Who says there can be only one buyer? "

Nobody. Feel free to put together a consortium of investors to raise 2-5 hundred billion if you like. Got any ideas for partners at the moment?

Be specific.
Jason -

Disagree with you big time on this one - here is one of the solutions floating around that I think fits well with little risk for the Taxpayer -
The solution is simple, it is elegant, and it will work.

1. Force all off-balance sheet "assets" back onto the balance sheet, and force the
valuation models and identification of individual assets out of Level 3 and into 10Qs and
10Ks. Do it now.
2. Force all OTC derivatives onto a regulated exchange similar to that used by listed
options in the equity markets. This permanently defuses the derivatives time bomb. Give
market participants 90 days; any that are not listed in 90 days are declared void; let the
participants sue each other if they can't prove capital adequacy.
3. Force leverage by all institutions to no more than 12:1. The SEC intentionally
dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit.
Every firm that has failed had double or more the leverage of that former 12:1 limit.
Enact this with a six month time limit and require 1/6th of the excess taken down

Once 1-3 are put in place then send in the OTS and OCC examiners and look at every
financial institution in the United States. All who are insolvent and unable to raise
private capital immediately are forced through receivership where the debt is converted to
equity and existing equity is wiped out. With the CDS monster caged the systemic risk is
removed, the bondholders provide the cushion for recapitalization (as it should be) and
the restructured firm emerges with no debt while the former bondholders are now the
owners (of the equity) in the resulting firm.

With a clean balance sheet the restructured firms remain in business and open the next
morning able to raise and attract capital.

For the few firms that have an insufficient debtholder capital cushion to successfully
complete this process, they are liquidated instead. There will be few of these and in fact
each of those firms is a regulatory failure, as we should have never permitted a firm to
become so far "underwater" that the bondholder's capital is insufficient to capitalize a

Finally, drop the silly shorting restrictions. Liquidity in the market right now stinks and
this is a big part of why. Start prosecuting aggressively the rumors and other
manipulation that leads to stocks both rising and falling.

This plan will work, it will instantaneously stabilize the credit markets as balance sheets
will be transparent, the CDS monster will be permanently de-fanged, leverage will be
returned to reasonable levels and the forcibly restructured firms will have no debt on their
balance sheets and be able to immediately access the capital markets.

Best of all, it will require exactly zero taxpayer dollars.

Pretty much stolen from
I don't run in those kinds of circles, Jason. But I'm sure that there are those who do, though. I don't think it could hurt for the Treasury to encourage private investors to step up to the plate for something like this.

When they bundle these mortgages into securities, what is the typical pricing per bundle? I honestly have no idea.

And, when I said "better than zero", I was just trying to say they DO have value, but I wouldn't know what it is. Now, I do realize that the mortgage holder can still get screwed when the mortgagee defaults and the current value of the home is less than the balance on the mortgage.
Oh, and we need the government to get the he|| out when it comes to basically forcing lenders to originate sub-prime loans. That's how this whole thing got started. Yes, we need to fix the liquidity problem, but it won't do much good in the long run if the cause hasn't been dealt with. That would be like sucking on cough drops all day long and not dealing with the case of bronchitis...
"So who do you suppose would make an able, qualified buyer with the capital available and liquid enough to act as the counterparty?"

China? :P

Seriously, isn't the point of an auction to find a buyer for the best possible price right now? Are you saying there wouldn't be any bidders and I could show up with $1 and buy a $500,000 mortgage?
Anonymous 1:08,

That's a pretty good solution to a different problem. However, it does NOT provide liquidity or encourage the velocity of money in the short-term, which is what is needed.

"I don't run in those kinds of circles, Jason. But I'm sure that there are those who do, though."

Hope is not a course of action. Those who do run in those circles do exist. And they have stopped engaging in those transactions. Instead, they are buying Treasuries. They're even fleeing the commercial paper market to buy Treasuries. The Treasury is the only security out there at the moment that has any kind of demand pull. The further down this road we go, the higher Treasuries get bid up, and the lower the yield. Therefore, the Federal Government is the only entity out there that can raise enough capital to make a dent.

(Meanwhile, the cost of raising money for the Treasury is at a record low. If we inflate our way out of this mess, the government actually gets PAID to borrow money!)

"Are you saying there wouldn't be any bidders and I could show up with $1 dollar and buy a $500,000 mortgage?"

No. If you had a 500,000 mortgage and you weren't under duress, would you sell it for a dollar? No. So don't be ridiculous.

Any security has an intrinsic value equal to the discounted present value of its future cash flows. Now, there's disagreement as to what that figure will be because default rates are a future unknown. But that NPV is going to be rather more than a dollar.

The difficulty is in finding someone who can take on those mortgages in sufficient quantity to make a dent, and who has the ability to pay. Until that happens, the entity that owns the mortgages has nothing to lend. It has to wait until its payments come in.

Nothing to lend = car loans denied, mortgages declined, credit card limits lowered, financing DOA. School loans down the drain.

Well, they can loan out one payment's worth a month. And that's it.

You guys keep pretending that there's this pool of able and willing buyers out there. There ISN'T!!!! That's the problem!!!! Those who would otherwise be interested cannot raise sufficient capital to do this!
Added: China will buy? Are you on crack? Stop looking in the rear view mirror! If the US catches cold, Emerging Markets like China catch pneumonia.

What happens to China if the US goes into recession and stops importing? Where will China raise the cash to buy these mortgages?

If the US acts to prevent a worldwide contraction, China has a chance to play a while. IF the US doesn't act, China will be no help. Indeed, China may well dump Treasuries in order to raise cash of their own and be a hindrance.
Remember the problem isn't liquidity, it is solvency. Until banks trust one another again this isn't going to go away. The Fed has injected liquidity into the system 15 times since late last year with over 600 Billion being injected this morning. It isn't working. Trust is the issue.

The current Bill does not address that issue at all. It throws more good money at bad.

Oh, and how can we trust the Fed and Treasury when this has been building for years under their watch, and they have been wrong at every step? How many times did we hear "subprime was contained" that the banking system was "healthy" and the economy "robust"? Why, suddenly do we have to give unprecedented powers to the Treasury?
The China thing was a joke. I even put a :P in there to tip you off...

"No. If you had a 500,000 mortgage and you weren't under duress, would you sell it for a dollar? No. So don't be ridiculous."

So you're saying my $1 would be the top bid? I would have expected that for a $500,000 mortgage on a house that is now worth $300,000 you would get higher bids than that. Probably under $300,000 but way more than nothing.

Looking at the daily volume numbers for a few different things, I see that there are hundreds of billions of dollars being invested every day. Why wouldn't those investors buy if they're getting fire sale prices?

(I'm not arguing with you btw, I'm just trying to understand this.)
Can't go with you on this one Jason. While you are right about the need to do something, any something won't do. This package is of the "hair of the dog that bit me" variety of "cure" and there is no reason to suspect that it will provide any long-term solution to what is essentially a structural issue in the international financial community (witness the bank failures in Europe and the endemic bank failures in China). Take a few weeks to work out a long-term plan rather than throwing 300 large into the gaping pit of a dysfunctional system. We have the resources to hold the line until then - the discount window, the FDIC, etc.

The urgency here created a self-fulfilling prophecy that CREATED the latest round of lunacy in the markets. Take a little more time, get with our financial partners abroad, and then re-convene the Congress to pass this later in October.

Act in haste - repent at leisure

By and large, what you've said here makes sense. But one person's comment also rings true, which is this:

Unless we severely limit the Community Redevelopment Act (i.e., pull the teeth that it was given in 1995), how do we avoid going down this road again?

I don't think I can - in good conscience - support ANY bailout that does not put a very tight leash on FNMA and FDMC, as well as rope in the CRA. Without these, it's all pearls before swine.
Substitute insanely high margin lending into a real estate bubble for insanely high margin lending into a stock market bubble and this thing is a dead ringer for the Crash of 1929. Bernanke is a life-long student of that Crash and the Great Depression that followed - whether I understand his reasoning or not I figure he's the best Scout to follow right now.
Post a Comment

This page is powered by Blogger. Isn't yours?

Site Meter

Prev | List | Random | Next
Powered by RingSurf!

Prev | List | Random | Next
Powered by RingSurf!