I’ve avoided blogging on the latest iteration of the financial market meltdown because, frankly, I don’t pretend to understand it. I mean, yeah: I get the part where traders desperate to sweep up the last few crumbs from the playing table in order to afford the last unsold house in the Hamptons deliriously undervalued risk, and no one was really paying close enough attention to the problem to understand its implications, and that structurally we’d set ourselves up to sell a bunch of mortgages to folks who probably couldn’t afford them because owning a house is part of the American dream and a Social Good In Itself, and that some folks had been systematically priced out – and after all, they meant only for the best! – I get all that.
What I don’t understand, frankly, is what we ought to do about it. Because it frankly beats the shit out of me. I’ve been trained more in the “take stuff apart” line of work than the “patch stuff back together” department. I don’t know if the Paulson plan will work – although $700 billion sounds like a Very Great Deal of money to me, to not know. Nor even if it makes practical sense to deliberately purchase out bad debt from banks that haven’t, as of yet, actually demonstrated their insolvency. I know it doesn’t make any kind of moral sense.
Still, even a bad plan executed violently in the now has advantages over a perfect plan executed even a second too late. Because at this point, the real issue seems to be that there’s too much uncertainty, everybody’s frightened and no one in the financial market wants to be the last guy caught out of his chair lending out cash when the music stops. So here we are now with all those Wall Street types peeking out from under their desks looking at that great big huge pile o’ cash and maybe – just maybe – breathing a sigh of relief and putting the revolver back in the desk drawer.
In times of crisis (hint: this is one of those times) I’ve never been a particular fan of the “Who shot John?” brand of deconstructionism. When the water’s coming up on the inside of the rowboat, the question about who left the drain plug out is not nearly so compelling as the fierce urgency of manning the pumps. There will be time for blame casting later, maybe.
So I’ve been largely silent on the issue, mostly because making sweeping pronouncements about things you fundamentally don’t understand very well is a pretty good way to highlight yourself in the weekly “spot the idiot” competition, while hyperventilating into the blame game megaphone while everyone else is making themselves busy doing something practical might paint you as, well: Unserious.
Not everybody can avoid that kind of temptation, unfortunately:
Let me first point you to the Bush administration’s so-called Wall Street bailout bill, here, so that you can see for yourself that this treachery is being conducted in the light of day. Fascism is finally and formally out of the right-wing closet even if the F word is not yet openly being used (although it should be, and often).
Now, if you do not yet understand that the Wall Street crisis is a man-made disaster done through intentional deregulation and corruption, I have a bridge in Alaska to sell to you (or Sara Palin does anyway). This manufactured crisis is now to be remedied, if the fiscal fascists get their way, with the total transfer of Congressional powers (the few that still remain) to the Executive Branch and the total transfer of public funds into corporate (via government as intermediary) hands…
As I see it now, we have but two options and I have long alluded to hoping against hope that one of these options would not be the only one left to a peaceful people. The first and frankly most preferable option is for Congress to immediately begin impeachment proceedings against the members of this latest Business Plot…
The other option, the one I have long prayed we would never need to even consider, is a total revolution. But, If Congress won’t act in its own self-defense, in the defense of democracy, in defense of us – the people who have elected them to protect us from this very danger – then what is left for us to do?
“What is to be done?” Now where have I heard those words before?
Golly. Not the kind of guy to prescribe from a distance, but it certainly seems possible that someone needs to either up their dosage or change their meds. Because whatever you’re on now?
So not working. Sweetie.
–
Jeff Goldstein has more:
(What) I take away from such proclamations is a reinforcement of the idea that, to the progressive mind, those in their herd really are the only ones fit to govern — and that one more electoral loss means it’s time to rid ourselves of this pesky democratic republic and just smash the whole system so we can replace it with a system where those fit to rule have been bred that way, that we as a country be forced to recognize that the useful fictions we’ve been telling ourselves about citizen leaders will only suffice so long as it remains theoretical. For people to actually begin believing such nonsense — for them to vote in the wrong types of people and presume that progressives will simply accept that outcome — is simply too much to bear…
If Larisa and her fellow travelers were half as clever and talented as they imagined themselves to be, we’d all be wearing big fur hats and standing in line for potatoes and toilet paper.
Goldstein’s last line got me…..I spent time in the Russian ‘worker’s paradise’ in 1973, and I’ll tell you that you got splinters from the toilet paper if there was any (….you didn’t find it in the squat-to-hit-the-hole places which were Very Foul). And lines….they invented lines. People truly would stand in line for hours not even knowing what the line was for just because they either needed what it was or could trade or sell what they might get for something they needed. Lovely place. There is a definite reason that people spontaneously cheer when going wheels up from such places.
Anyway: If you want to understand more about the housing finance system, and everyone really needs to understand more about it, you should listen to the Mark Levin Show from Friday or Thursday (The Mark Levin Show #09192008). He goes through it from the birth of the CRA (the Community Reinvestment Act) under Carter, which required lenders to not ‘redline’ against people who might not be good credit candidates. And it has gone downhill since. He names names, gives some great information that is useful in responding to the know very little zealots such as the lovely, I’m sure, Ms. Alexandrovna, and her buddies out there who are hardwired to the hate conservatives position. The true fascists calling their enemies names. Gotta have a sense of humor and history.
It used to be that the Russkies had their useful idiots with American names and identities to spread their lies and misrepresentations. Now they just trot out their agents in full feather since the left no longer, it seems, worries about having their prime supporter found out.
I see Lex is channeling Patton today: “Even a bad plan executing violently in the now………” The actual quote as best I remember is: “A good plan executed today with great violence is better than the perfect plan executed six months from now.” Or at least that’s what’s in my memory bank.
Lex, at least you honest enough to write it. How about some of these, so called, “experts”? Have we improved everything to death?
Replace that ‘m’ with a ‘b’ … second paragraph/sentence for the enormity of the amount.
Dern, I meant “billion” – fingers must’ve balked, thanks for the catch.
Perhaps I am just a semi-nuanced simpleton, but I cannot see the problem with letting the institutions fail. Without risk, there will be no advances, no far-thinking entrepenours to take us to tomorrow.
Rather, we will be stuck in an endless today.
I also cannot fathom allowing the taxes I pay on the small amount I earn to be used to bail out institutions from which the top officers will still collect millions upon millions of dollars.
I cannot see why my own money heeds to be taken from me as taxes and given to foreign banks to help them out in this mess.
The money-grubbing robber-barons who have brought us to this point, assisted by the criminally-myopic, wink wink nudge nudge leftists in Congress need to be reduced to sack cloths, tin cups and standing in a soup kitchen line begging for crumbs before they will get so much as a bucket of warm spit from me in assistance.
These financial hooligans took the money from honest people and played the ponies with it, and now are terrified of the knock on the door from the owners of that money, and are clawing at any line to save their butts. Scr@w them. Let them face their clients in court, wearing orange jumpsuits and shackles.
Yes, there are good and honest, hard-working investors out there, and I will cut them a lot of slack. However, those who willingly brought us to this point need to pay a terrible price. A price so hard that it will be generations before we need to worry about such men infecting our economy again.
No more bailouts. No more Treasury interventions. Let the institutions fail and start over again.
Hyperventilating alright…
Hank Paulson’s being called a superhero this week at Newsweek, and if markets stabilize further, and economic crisis recedes in the remaining weeks of the election, the Dems will be wishing the Wall Street Crash was the GOP’s Halloween nightmare.
Meanwhile, the lefty freaks are left to the same old BDS cries of “FASCISM”!!
@SteveC, who said: I spent time in the Russian ‘worker’s paradise’ in 1973…
I was there for a few months as well, albeit about 20 years behind ya. And while the lines were largely gone, it was without a doubt the scariest place I ever did bid’niz… period, end of report. A Brit businessman was stabbed to death in his hotel room, just down the block from where I stayed, while I was there. I was also there when the White House was shelled and there were tanks in the street. There wasn’t any spontaneous applause when we went wheels-up out of Sheremetyevo, but the cabin pressure went up, and considerably so, with the combined sighs of relief.
Which is to say: yeah… Ms. Alexandrovna and her pals just don’t have a frickin’ clue. Even today.
Well, to be fair, government intervention/control of the economy while maintaining a facade of a “free market” is one of the major tenets of fascism…I’d say we’ve been lurching towards that direction for the past 75 years or so (here’s a hint to where I started my count).
Of course, that certainly isn’t what the idiot over at the HuffPo was talking about. Insert reference to a broken clock being right twice a day or some such.
I wonder if some people will give McCain a bit of a pass on the Campaign Finance Reform thing now. All that Free Speechin’ as the players give huge money to the oversight folks.
Why no, that wasn’t part of the problem. Give now, give large, and you get yer bailout. In the, ahem, public interest.
I’m with AW1Tim on this one. And it may be due to my admitted ignorance on this topic but I, too, fail to see the problem with letting these failures happen.
Isn’t that the nature of a free market? Isn’t that the point of ‘minimal government involvement’?
Then again, I’m one of the heartless that really feels no sympathy for those who bought more house than they could conceivably afford, using adjustable rate mortgages at a time when interest rates were at their lowest in decades. Where did people think those rates were going to GO? And why is it MY problem?
You know where you can find ’sympathy’ in the dictionary…it’s in between sh!t and syphilis.
The worst of all is that the Government in its infinite wisdom, will be picking up ONLY the bad debt. I wonder if that California Congress Woman who was defaulting on three mortgages will get her buyout? And that is what I fear the most here is the awful redistribution of this “wealth” in a way that rewards mostly those who should have been BURNED.
The natural process should have been left to run its course. The “system” can’t correct itself, flush out the bad actors and then re-correct if it gets the universal inoculation – the U.S. Taxpayer.
By my calculations this 700 billion is a debt only the few of us actually paying taxes will have to guarantee. That bill: over $9,000.00 for each of us that actually pays taxes (given there are only 75 million of us and this may be high).
I say let it collapse and make us all work in trade for thinks like sea shells or polished rocks. Better than rewarding the many robber barons put on the payroll by their bought and paid-for Congress.
BT: Jimmy T sends.
Lex;
Here’s my take…. (for what it worth)
The congress wrote the rules and Wall Street played by them. Played right up to the edge to be sure, but played by them. Congress created Fanny and Freddy who didn’t play by any rules except those of a greedy beast and political piggy bank. Some banks went over the line to be sure, like Countrywide and made lots of money some of which they could contribute to their favorite congress persons, (Let’s keep good times rolling). In truth, we are all to blame, as we succumbed to the temptation of “Leverage”. (Buying a candy bar with a Visa card? Buying groceries at the quickie mark with plastic? Buying a house with nothing down? Buying a second and third house with “re-financed” money hoping to “flip” them in a year or less?) It’s easy to polish up a finger, all the better to point with, but we have to shoulder most of the blame. And, why not, are we not going to shoulder all of the cost?
Oh, and why is it always the facist, (or nazi, or progressive for that matter), the first to call any opposition to them a facist?
Duh, evil sees what evil does?
I see that it’s past the time for my two fingers of Jack Daniels.
Good luck to us all.
I think those who advocate “letting the market take its course” should look at the 2003 Northeast blackout.
A complex system with a minor flaw (a few trees that were a bit too high) is subjected to a major shock (a power plant forced offline for maintenance) and the result is a cascading failure that propagates until it runs into natural (and completely accidental) firebreaks.
Now the financial markets are nothing like the power grid, they’re far more complex. At least in the power grid you know that power in will equal power out. You may not like how the two are balanced, but you know they will balance. Financial systems have no guarantee. Fortunately we don’t have much real-world data about how people respond to total systemic failure. How major shocks to the financial system will effect people’s desires to keep their money in the system is largely unknown, and I for one would like to keep it that way.
In my non-economist opinion the problem is nobody know how much of this bad debt is out there. The solution would be for some entity with very, very deep pockets and a guaranteed income stream (basically, the government unless someone has a better idea) to buy up all the debt, look it over and sell back the good debt. What to do with the sub-prime mortgages is something I’m not sure about, the ones that keep up with their payments (remember just because it’s sub-prime doesn’t mean it will default, it just has an unacceptably high probability) can be an income source to offset the cost of this exercise, but what to do when someone defaults is well above my paygrade (I’m just an E-6).
Finally I don’t think this should be consequence-free for the people who screwed the pooch. As satisfying as it would be to see them reduced to sackcloth and tin cups it’s not going to happen, they’ll tear the whole system down to prevent it and they have the leverage to do so. Let’s give them their golden parachutes and make sure they never get into a position of such power again. And if they did break any laws fine the #$%^ out of them.
Well, opinions are like a$$holes…..
ya, I got one, uninformed as it may be.
Pixel and DBlueshirt are close to mine.
But I disagree on who the bad guys are here. I lay the blame squarely on …..CONGRESS and the thiefocrats who ran these institutions (can you say Jamie Garelick?).
As Pixel said, they made the rules. They also had the responsibility of OVERSIGHT which they, in my opinion, purposely failed to do in order to line their pockets and peddle political influence, both at our expense.
I’ll be paying for my failed small business for the next 30 years, no one was there to bail my ass out. I took my chances and lost, I am ok with that. I’ll try again I hope.
Revolution? Ya, I want one. It’s called an election and I say FIRE the lot of them, hire new ones who will put this wreck of a government back together, clean out the corruption, clarify the laws, simplify the bureaucracy, and then vote them out and bring in a new batch to keep it going. Political office shouldn’t be an occupation. Make them return to private life and and live with the consequences of their actions like the rest of us.
/overboard vent light out
Sorry to comment twice but just found this comment by the man with his hands in the till himself, Chris Dodd
“We need to offer some assurance to the American taxpayer that Congress is watching,” Senator Christopher Dodd, Democrat of Connecticut and chairman of the banking committee, told reporters on Sunday. “One of the things that got us into this mess was the lack of accountability and the lack of oversight that was occurring, and I don’t think we want to repeat those mistakes with a program of this magnitude.”
If that doesn’t tell you something, you aren’t listening. They had oversight in the first place!
Scary shit, that.
I wonder about the OCI issues with these congress critters providing oversite on their own portfolios and bailing them out willy-nilly.
I made comments last year eluding that we were on this path, and was eviscerated soundly by all (save for one commenter) for spewing such blasphemy. This is only one of several big financial elephants in the room, and the only reason we noticed this one, is because he shat in our dinner salad. Some of us would be wise to listen to those travelling around the country telling us what’s next. I.O.U.S.A… David M. Walker, et al. Listen to them.
This bailout is no surprise (frequent WSJ articles since 1999), nor is it a Dem or Repub issue. Both sides are doing what they have always done; borrow money to fund pork in order to get re-elected. “W” has been spending faster than anyone, e.g. Medicare Part D, ear marks, etc., which have cost more than the bailout will. Covering these “securities” is no different than paying Section 8 vouchers, Medicaid, Medicare without age indexing, etc. The Politicians will continue to conjure ways to spend borrowed money which our nation of Oprah watchers will not notice, until the wheels come off (dollar collapse, massive inflation). Then things get really interesting. When panicked, the herd ain’t so smart.
We have become such a nation of can kickers, I have a complete lack of confidence in our leaders’ willingness to tackle any problem whose resolution involves a modicum of pain, unless it is pain among a group on the other side of the political spectrum. Micheal Bloomberg was on MTP yesterday, and he laid all of the issues on the table — failed education system, unfunded Social Security and Medicare obligations, too much dependence on foreign energy sources, unaffordable health care, crumbling infrastructure, failed transportation system — and pointed out there is no indication that anything will happen, other than kicking the can down the road. Flight lead and I are already making plans to spend at least part of our post retirement years OCONUS. Not trying to run away from our tax obligations, but instead seeking communities that work. There are damned few of them in the US, and I don’t see anyone tackling even one of the above big problems. We’d rather talk about the candidates churches, or their kids or spouses, or an ocean of miniscule issues — I haven’t heard a one take on one of the serious problems above, with anything approaching a comprehensive solution with shared sacrifice on everyone’s part.
I dunno, if they do this right it could work out well. Buy those “bad assets” for, say, 2% of face value to take the uncertainty out of the market right now. Hold on for a while until things calm down, sell them when the market is less pessimistic and the Gov’t could make a tidy profit. There have been several bailouts in the past that turned a profit. Not to say it’ll happen this time, but it would be nice.
But they should still find all the banking and mortgage executives that made a lot of money doing stupid things and have them pony up too. Maybe change the executive compensation rules to have a minimum vesting schedule of 10 years.
So, Lee, was that when most everyone here was saying “Recession? What recession?? It’s all good”?
Cuz, if so, I was thinking ablong the same lines … just not brave enough to mention it.
Tim, HF6: the problem with letting the troubled companies fail is that damn bloody near the whole structure of American business is impacted by “the troubled companies.” When all is said and done, the list of “troubled companies” includes … well, not quite everybody, but certainly an awful lot of important somebodies. Basically, if you were involved in the stock market at all, you were exposed to damage from the mortgage disaster. When the market panics, the tide of selling takes a lot of solvent companies out along with the bad ones. Which can ruin both the companies that go bankrupt and the people who held stock in those companies.
Right now, a lot of big banks won’t loan money because they’re scared of getting hit with any more bad debts. If banks won’t loan, then companies and people can’t borrow. If companies and people can’t borrow, even for short terms, then they can’t buy the kind of things you can only buy with loans. Things like houses, cars, business supplies, new equipment, raw materials …
So until the mortgage crisis is fixed, the financial system is nearly paralyzed. Without the financial system, American business can’t operate. That just can’t be allowed to happen. So, we all wind up paying the price for the stupid political decisions and stupid financial decisions of the past ten years.
Wolfwalker,
Past ten years? The stupid decisions surrounding the mortgage crisis have been going on longer than that. It started with a law passed by the Carter administration, and was ramped up in 1995 by the Clinton administration, and has only gotten worse since then. Although FWIW, I agree, something has to be done to right the ship. To do otherwise would cost far more in the long run.
Jim C
Traders and brokers made millions trading things that had no real value. Anybody could see it coming years ago. It was the same as the tech bubble when they were pushing shares that were sold at a thousand times their earnings value. “Gee, never made a profit in the last 4 years and has consistently lost money in every quarter and you’re offering it to me for $239/share! Sign me up for 10,000 shares!” By the way, who buys airline stocks? Oh, I know, they’re so shiny. Ooh, ah, that’s pretty cool. “just one of the many great lines from ‘Triple Espresso’.
It is a problem with many fathers. And it did begin in the Carter years. Time to lay blame later – after this situation has been handled.
Many people do not understand what has been happening. Our economy is dominated by financial companies. Banks, investment banks, insurance companies, finance companies, mortgage brokers, auto lenders, leasing companies, credit card companies, pension funds, hedge funds, etc, etc.
Money and credit has become the lifeblood of our system. The so-called sub-prime crisis is actually a liquidity crisis that has been compounded by heavy duty, naked shorting of financial stocks by hedge funds and others.
Without ample liquidity in the system, the system becomes like a plugged pipe. The commerce which flows through the pipe quits flowing. This could lead to the same thing that caused the Depression – deflation, which, once it gets established, is much harder to stop than inflation.
As the value of CMOs, CDOs, and real property decline, billions in capital is erased from the books. Banks and lenders must have reserve capital to lend money. With no reserves there is no lending.
The problem as I see it is a structural issue. Many financial companies bought collateralized mortgage obligations (CMOs) or collateralized debt oblogations (CDOs). Normally these are bought as long term investments to be held for the income stream until the mortgages are paid off. The companies count these instruments as reserve capital.
What caused the problem? Two things. Some of the mortgages in these were sub-prime. Some of these started defaulting in 2006. Deutsche Bank (DB) tried to foreclose on 14 of these mortgages that were in a CMO they held. They were unable to proceed because some judge, in his infinite wisdom, decided that they did not own the mortgages; only the stream of income attached to the mortgages. That was a shocking revelation because the security for the debt was supposed to be real property. Suddenly the security of CMOs, which were AAA rated debt, was called into question. Also the value was called into question. Most companies carried these things on their books at cost until some solid proof arose that they were worth more or less. However, two years ago the SEC and FASB decided they had to mark them to market. IMO a very stupid ruling. There has never been, and is not presently, an auction market for these securities. So, a few companies tried to “test the market” by selling some. They found the well had been poisoned because no one wanted to buy an income stream that might be filled with an unknown number of sub-primes and no property as security. The best offers were around 20 cents on the dollar.
This led to all firms that held these instruments having to estimate some very low value for their CMOs and CDOs. They had to take huge write downs, which then necessitated their having to raise more capital by selling stock or debt. This became more difficult and as the shorts pounced it became even more difficult.
That resulted in a near lock up of the financial system. Enter the Fed and Treasury. Something had to be done to reliquify these companies. Otherwise 25% of our economy goes away. The jobless rate goes through the roof, tax receipts drop, and the USA would be a country deep in trouble. The value of everything except money falls. Except that the dollar won’t buy as much from China as it did, unless……China follows us down. Anyway, it’s not a pretty picture.
I don’t like the rescue plan, but, as they say, it is better than nothing. What I would like to see is a suspension of the mark to market rule for CMOs/CDOs for a period of up to two years. I would also like to see a ruling that the CMO owners also own the mortgages. Allow companies to value them at cost until a true value is established. During that period all the holders would have to work through the instruments to determine, as near as possible, their real value. This would require government supervision and frequent reports to insure openness and prevent cooking the books. IMO it is probable that 80-90% of the mortgages in these CMOs are performing and well supported. Write downs would only come on a rational valuation not the wild-ass guesses that prevail now. Doing this would allow a workout without the tax payer being put at risk. In addition, I would allow a FED line of short term credit to these firms for temporary shoring up of their balance sheets as needed during this period. Doing all this would reliquify the markets overnight. Some companies might fail, but they could be merged into other sound companies to preserve the remaining assets.
The Dems want to punish the CEOs of the companies but I think the Congress along with the SEC and FASB should share the blame. Time for that after the reliquification plan is in place.
Anyway, that’s MHO.
Good explanation, Jimmy J. That pretty much matches what I’ve been reading at a number of places, and what I know about the banking system from other sources.
About the only thing I would add is in response to this:
They were unable to proceed because some judge, in his infinite wisdom, decided that they did not own the mortgages; only the stream of income attached to the mortgages. That was a shocking revelation because the security for the debt was supposed to be real property.
I wouldn’t blame the judge for this. He can, after all, only rule on the law and the facts in front of him. Only the holder of the deed for a property can foreclose on that property. If the asset transfer agreement for those CMOs was written so that it didn’t include the deed, then the judge had no choice but to rule the way he did.
I also wonder if there were CMOs written in ways that split up the income stream from the mortgages: 1/2 to this buyer, 1/3 to that buyer, the remainder to a third buyer. If that was going on, then which part of the income stream should the deed go with? The majority buyer? What if three buyers all took 1/3 share of the income stream? If the majority shareholder holds the deed but a minority shareholder initiates foreclosure, should the foreclosure be allowed? If there is no majority shareholder, who has the power to foreclose?
These damn stupid CMOs raised a lot of questions that had no settled answers. But our business system and our legal system need those answers.
Michelle,
Yes and no. I never used the “R” word myself. Mostly I harp on how so 1929 this country is looking these days. I personally subscribe to the David M. Walker theory of our future. Blame enough to go around on both sides of the aisle, yet too obtuse or blind or selfish or greedy to care about their constituencies. Seems people mostly still don’t quite get it… they will though. R/Lee