Monday, September 29, 2008

Bailout Fails

Big fail on the Paulson Wall Street bailout. Lots of finger pointing going on. I am oddly relieved.

Yeah Wall Street is in full flame-out...and my portfolio (small as it is in the scheme of things) took a massive hit...most if not all of my stocks are Nasdaq type stocks.

This is what happens when the country has lost ALL TRUST in our president and financial leadership and congress in general. My dad just asked me if he should pull cash out of his savings account!

How do you restore trust? Not by asking people who weren't invited to the party to pay for the clean-up. Nuts to letting the principle take the kids lunch money to pay for the faculties' 3 martini lunch.

1) You restore trust by placing the burden of bailing out Wall Street back on WALL STREET!
Show us how those who will benefit from the bailout, will pay for it.

I don't mind providing a bridge-loan to Wall Street, but at least show me how Wall Street will pay it back.

How can you do this? Institute a small per share/transaction "trading tax" that will raise a few hundred million $ a day--billions of shares trade on each exchange every day, so it wouldn't be that much per share. You could also spread this over bond transactions as well to make sure it stays small. Write the tax so it disappears as soon as the $700B+ interest is payed back (subtracting any residual value Treasury gets from the mortgages it buys).

2) Write legislation that helps main street--directly. I would target a large sum to help struggling homeowners stay in their homes by restructuring their mortgages. Perhaps combine this with a broad fiscal stimulus package so even non struggling homeowners get a pick-me-up.

3) Overhaul the financial regulations. Put reasonable limits on leverage, or make institutions pay higher "insurance rates" based on risky/leveraged holdings. Charge a lot for incremental additional risk--double the risk, quadruple the fees. Place major margin requirements for any non-exchange traded derivities and swaps. If sensible regulation can't be decided on in a few days...make the last half of the bailout contingent on passing this improved regulatory framework.

At this point, Congress is no longer offering only cake to Wall Street, while taking bread off the table of constituents.

Wednesday, September 24, 2008

Is tihs really a crisis?

I feel conflicted. Just a week ago I was calling out for a massive bailout of the mortgage lending system. Within hours that was exactly what Treasury Secretary Paulson was calling for. And we needed to do it RIGHT AWAY! or our capital markets would collapse.

In a matter of days we went from “the fundamentals of our economy are sound” to we are facing the biggest crisis since the Great Depression. Then Paulson floats an absurd proposal that would give him constitutional shredding imperial powers, a $700 Billion blank check and complete secrecy for performing his magic. And congress has to enact this now, now, NOW!

Paulson and Bernanke say that this massive bailout is better than the alternative. The alternative: cue video of the Great Depression. And for it to work they need complete flexibility to act. And they need the largest number of institutions to participate, so no conditions should be tied to the banks participation in the mother of all bailouts, including foreign banks, and oh by the way the largest number of assets should be considered including not only residential mortgages but also commercial mortgage assets, credit card debt, and various derivatives of these. And this whole proposal is so very complex, that we (Paulson and Bernanke) don’t know that it will work or how it will work. In fact we will have to hire Wall Street experts to invent the most appropriate mechanisms for us to price these mortgage assets…yes those are the same experts who so mispriced these assets in the first place that got Wall Street into this mess, and are manifestly unable to settle on a reasonable valuation that would allow trading assets between banks today.

On the one hand, they want the most number of players involved to increase liquidity (of these illiquid assets-lol) including international banks and other market players involved to increase (?) competition in the price discovery side. But on the other hand they want to inject funds into the banking sector to keep it lending, which is why they need so MUCH money. They have intimated that with the $700B they intend to pay above market prices (or above distressed market prices) for the mortgages. They keep telling us that we need as many participants involved for this to work. And that it must work.

If we are giving bankers tens if not hundreds of billions in “free money” then you can bet your ass they will jump at it. But the moment congress suggests restrictions on CEO compensation or equity interest in return for the bailout, Paulson says that would limit the number of institutions that would participate. Which leads me to wonder: is this really a crisis?

1) Yes it is a crisis. We are looking at the end of the financial world as we know it unless the taxpayer rolls over. Without a bailout the economy comes to a screeching halt. Even knowing this fact Wall Street folks (who have enjoyed ALL the benefits of the last decades economic growth) have their heads so far up their butts that they cannot accept a $700,000,000,000 lifeline if it asks the slightest sacrifice of them.

2) No it is not a crisis. This is one last orgiastic money grab on behalf of Wall Street billionaires. (Given the original absurd Paulson proposal, the suddeness of the crisis, and the rush rush attitude of the executive branch, I'm very suspicious.)

If this request was coming from any administration but this one—which has taken every action to help the wealthiest, crammed deregulation down our collective throats and lied us into a made up war and has demonstrated manifest incompetence on virtually every front—I would be willing to give them the benefit of the doubt and take them at their word. BUT NOT THIS TIME! Their credibility is gone.

If our congress does anything we must insist that we have a much smaller, targeted bailout that addresses very specific pieces of the crisis with greater transparency.

My first advice is to limit this whole deal to residential mortgages, residential mortgage-backed-securities and potentially the very simplest derivatives of these. Second advice is to encourage the Wall Street banks that created these “toxic” overly complex securities to unscramble them. Set up the buyback such that it pays a modest premium for the simplest mortgage securities in each class, or only buys the simplest securities.

We need to stop throwing more stuff into the pot making it bigger and more complex and start simplifying. Stop trying to scare Americans into rapid unreasoned action—we are tired of it. If anything start trying to scare Wall Street into accepting a deal that saves their hides.

Sunday, September 21, 2008

"Absolute power corrupts absolutely."

Lord Acton's quote: "Power tends to corrupt; absolute power corrupts absolutely" seems timely and appropriate.

At this point I agree with Krugman: no deal!

I realize this is only a draft plan [or is it a dream?] and will (certainly??) be revised by congress. But the most important details are missing (how they plan to take all this bad debt off the banks books...i.e. how is it priced) and more than even this: I don't like what I do see.

At its essense this "plan" proposes giving "the Secretary" $700,000,000,000 unconditionally, w/o recourse and no questions asked. On its face, this is the greatest, non-military, power grab in history. I believe the Robber Barons of a century ago would blush at proposing such a plan.

Among the highlights [bold sections are my doing for emphasis]:

Authority to Purchase.--The Secretary is authorized to purchase, and to
make and fund commitments to purchase, on such terms and conditions as
determined by the Secretary, mortgage-related assets from any financial
institution having its headquarters in the United States.

Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation

In exercising the authorities granted in this Act, the Secretary shall take
into consideration
means for--
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.

Within three months of the first exercise of the authority...and semiannually thereafter, the Secretary shall report to [the relevant congressional committees]

For the purpose of the authorities granted in this Act, and for the costs
of administering those authorities, the Secretary may use the proceeds of the
sale of any include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

The term “mortgage-related assets” means residential or commercial
and any securities, obligations, or other instruments that are based
on or related to such mortgages

Read the whole thing here on the NYT website.

There is not even a pretense of "checks and balances" or constitutional oversight--indeed the judicial and executive branch are explicitly denied the right to review ANY decision! The only duty/obligation in the entire "plan" is for "the Secretary" to report to a few congressional committees every now and then. Unless you think "consider" protecting the taxpayer could somehow be construed as an obligation.

Saints alive! Hank Paulson, our (current) Treasury Secretary is not a bad man, but this is too much power (& MONEY!) to just give one guy and just hope that everything works out okay. "Trust me" just isn't going to cut it given the Bush Administration trackrecord.

I cannot allow my representatives to be stampeded into such a reckless "plan" without placing some SERIOUS safeguards and oversight and limitations on it. Quick action may sometimes be necessary, but reckless never is!

The last time we had such a sense of bipartisanship "urgency" in Washington we wound up in Iraq...

Friday, September 19, 2008

Addressing the actual problem

So...the government has finally decided to set up a fund to buy up the bad debt. Hurrah for common sense.

There are lots of questions but at least we are now looking at the problem which is the crack-up in the housing market and the related mortgage-backed-securities (MBS) gone bad.

I think this is what is driving the rally: that Paulson, the Fed, and Congress are now focused on the actual problem--rather than spending all day trying to save institutions that are failing as a result of the problem.

I'm hopeful that a well capitalized fund (at least $1 Trillion) is established that is able to buy housing debt and MBS limited to the housing stock in the US. Considering that it will be buying "toxic assets" on a "unimaginable scale" I'd call it a super-duper-fund(SDF).

I would suggest that there be a series of competitive bidding reverse auctions (like a government bond auction--but backwards) where market participants are allowed to submit a price and an amount of debt/MBS that they would sell at that price. I think a series of auctions would allow the SDF to buy different classes of debt (prime, alt-a, sub-prime and whatever else they come up with) at different prices.
The SDF can decide how much of each "asset" type it will buy (reserving the option to not spend everything its got).

I would insist that it buy every security at a steep discount to "face value" and pass along at least a fraction of the discount to the home-owner in reduced mortgage payments/restructured mortgage terms.

We shall any rate people are beginning to ask the right questions.

Wednesday, September 17, 2008

Bailouts, failures and my solution...

This week/month/year the financial dominos are falling.

Banks are failing, investment banks are failing, insurance companies are failing, quasi-government agencies are failing.

Secretary Paulson is running around trying to re-inforce the house of cards as hurricane force winds gust through. Bailouts left and right.

Its tragic for those whose livelihoods are being destroyed. Its shocking for those who deal with these institutions daily. It is especially disconcerting for "real" (i.e. non-financial) firms that are getting hurt by all this shenanaghans. It is anger inducing to the average Joe who wakes up each day and read about another multi-billion slug of taxpayer dollars being used to help the wealthiest individuals.

And not one whit of it is even addressing the problem. The problem is not the crisis of confidence in banks, investment banks, or insurance companies...the problem (now) is not too much regulation or the wrong kind of regulation...the problem is mortgages and mortgage backed securities!

1) The government needs to offer to buy back these toxic sub-prime and alt-A mortgages. But it should only pay pennies on the dollar for them. Putting in a floor on house prices (or perhaps more acurately a basement) will allow all the market participants to begin trading and valuing their mortgages. Also the offer should expire in 12-18 months time.

For example, set up an entity that buys toxic mortgages for 10 cents (or 5 cents or 25 cents) on the dollar. Maybe offer different prices for the different classifications of mortgages. Setting the right price is important, but I don't claim to know the right price. In essense this will allow Wall Street to begin unbundling all the mortgage pools that they've spent the last decade putting together. By putting in place a floor price (above zero) the mortgage brokers can trade the securities among themselves (if they think their MBS are worth more than the government offer) knowing that their downside is limited to the government offer.

2) Reset the subprime mortgages. This should depend in part on the price the government offers, but I'd suggest cutting the principle owed by 20-30%. In most cases, this reduced amount should be something the borrowers can repay. If they can't even manage this, then go ahead with the foreclosure since its clear that the borrower needs to find a home they can afford.

3) Set-up a sensible regulatory framework for generating mortgages going forward.

This plan gives the lenders a route to offload bad mortgages that nobody will (currently) touch. Yes it is a "bailout" but at 10 cents (or whatever price) on the dollar, it is more of a life preserver than a golden parachute.
This plan offers homeowners at risk a chance to keep their homes. It will reduce, substantially, the number of foreclosures going forward.
Finally it puts in place regulation that prevents this from happening again.

Yes taxpayers would be on the hook. Yes some people might game the system. But at least we would have a system and some certainty about the system going forward.

Monday, September 08, 2008

Freddie and Fannie RIP

This administration has had an ideological axe to grind against Fannie and Freddie from day one. They particularly didn't like the fact that they performed well as quasi-government entities for decades. But they are essential to the operation of the US home mortgage market (especially in times of crisis) and have been since they were created. The governments' steps to takeover Fannie Mae and Freddie Mac yesterday should be understood in this context. I wrote back in March (on the heels of the BearStearns blowup) that eventually the government would have to get involved.

Perhaps the administration also saw this, but waited for a chance to "get involved" in a way that fundamentally changes the nature of Fannie and Freddie. They found one. Hopefully it marks a big enough shift in the credit markets that the housing market can get back on its feet. The administration has committed to pumping a lot more liquidity into the mortgage market (up to $20 B/month if I read the plan right). That extra liquidity is one thing if the market bottoms out in the next few months, but what if this drags on for another year or two?

On the other hand they could have pulled the plug on Fannie 6 months or even 3 months what was gained by waiting?

Friday, September 05, 2008

Tax Policy graphic says it all

One of the best arguments in favor of Obama is contained in this Tax Policy comparison graphic.

This is a year when voting your own economic interest will benefit ~98 out of 100 of your fellow Americans.

Thursday, September 04, 2008

That's all McCain's got?

Holy Shit. Did I just watch John McCain for a full hour waiting for a kernel of substance?
They even brought back the green-screen! Woot! Was that for the comedians?

There was no substance. None! Poor Johnny (actually the entire republican convention) seems to think energy=oil=economy. While there are linkages between energy and the economy they are not the same. Did he spend all the time he was supposed to be vetting Sarah Palin linking together every trite meaningless statement that he could find? (aside from his POW story).

I guess when you have nothing new to simply repeat your lines.

Not Cuddly!

After watching the inspiring and uplifting Democratic convention in Denver last week, I determined to watch the John S. McSame convention in Minnesota this week. It’s not over yet, McCain still needs to do his stick, but baring a “St. Paul on the road to Damascus” conversion, I think we have a clear measure of the state of the republican base. Four more years of unapologetic subservience to Big Business and the Super Wealthy with a cherry on top.

And speaking of what the Republican base swoons over…Sarah Palin came out swinging. Nobody will accuse her of being cuddly, after her “conservative” debut last night. Advice to the Dems; put away the kid gloves and pull on a pair of rawhides. Considering the barrage of “inane” nattering in the main stream media about her family, it was refreshing to see her and hear her say a few supportive words about them. Then came a stretch of McCain Idol worship—did you know he was a POW? Niceties aside, Sarah Palin ridiculed her opponent for “community organizing” and every worn out canard about tax and spend Democrats to the ecstatic (or possibly intoxicated) cheers of the assembled Republican base. Nowhere is it ever noted that the Democrats actually pay for their spending by raising taxes, the Republicans—who spend much more—simply raise debt, inevitably weakening our economy in the long run.

She told how “despite fierce opposition from oil company lobbyists…we broke their monopoly on power and resources” by bringing “about the largest private-sector infrastructure project in North American history.” And in the very same breath “we began a nearly forty billion dollar natural gas pipeline to help lead America to energy independence”.

Now that is the way to stick it to the oil and gas companies…throw them a $40 billion bone! So Mavericky!!

And speaking of energy, with Alaska awash in petro-dollars (or “filled up the state treasury” as she put it) due to the high price of oil, it’s no surprise that Sarah Palin feels we need a lot more drilling. Did you hear that fiercely defiant cry of “drill baby drill” mixed in with “USA” and “Zero”? Good thing they keep the cheers simple. USA has 3% of world reserves, but uses 25% of world production…leaves me wondering “and then what”.

The only whiff of economic hardship was hinted to in the line “families cannot throw away more and more of their paychecks on gas and heating oil” which was squeezed in between a reference to gulf coast hurricanes necessitating drawing on our strategic petroleum reserve and Russian desire to wield “energy as a weapon” against Europe.

So welcome to the new republican party a.k.a. the old republican party with some lipstick.