Wednesday, December 31, 2008

Wall Street Was Ponzi Scheme

Both Paul Krugman and Tom Friedman have written columns along the lines that the whole Wall Street bubble over subprime mortgages, derivatives, credit default swaps, etc., was just like Bernie Madoff's Ponzi scheme. There was no "there" there. It was all smoke and mirrors. The money went to the people who came up with the schemes to sell worthless paper; they did not create any productive activity. The salesmen just got their commissions up front, before people realized that they were selling worthless paper, illustrated by this Washington Post article about AIG's descent into chaos.

Gaza Strip War with Israel

I think it's likely that Israel invaded Gaza now because it wanted to do so while Bush was still President. In a few weeks, Obama will be President, and although he has talked a good game in support of Israel, the Jews may be worried that he will not be as supportive as Bush. Bush as clearly given them the green light to do whatever they want. Hence the Israeli decision to invade while Bush is still in office.

Monday, December 22, 2008

Idiots in Charge of America and the World

The Financial Times columnist Munchau is right when he says, "I am sceptical of the Fed's new policy of quantitative easing. We do not have a liquidity crisis, but a solvency crisis...." There have been a lot of complaints from bankers about the "mark to market" requirement, which means they should carry assets on their books at the price at which they could be sold in the market. The problem is that their assets are junk, similar to but much worse than Michael Milken's "junk bonds."

What we have is a bunch of huge banks who went out to talk to the day laborers in front of Home Depot and said, "How would you like to buy a 5,000 square foot house? We'll give you a mortgage at 1% or even a negative percent, if you can't afford 1%." So, a lot of the day laborers and their friends took the banks up on their offer. They could buy a 5,000 sq. ft. house cheaper than they could rent a 1,000 sq. ft. apartment on a monthly basis. In theory they signed away their lives when then completed all the mortgage paperwork at the mortgage broker's office, but in fact because they put nothing down on the house and were not held to any standard of honesty for the background information on income, etc., that they gave; they incurred no obligation when they signed the documents. In essence what the banks got in return for lending trillions of dollars in such transactions were bunches of worthless IOUs for which there was no enforceability other than possibly getting the house back some day. The banks want these IOUs to be carried on the books at face value, but it fact they are worth only a few cents on the dollar. Because they are not negotiable in normal, open markets, nobody really knows exactly how much they are worth. Why are they not negotiable? Because they are a bunch of almost worthless IOUs with little legal enforceability. So, when the bank threatens to foreclose and take back the house, the day laborer says, "Fine, take it; I didn't like the color of the media room anyway."

But Washington is all upset that their goal of getting everyone living in America, citizen or not, into a new, expensive house is threatened by the foreclosures. So, Ben Bernanke at the Fed says, "What do I have to do to get you back into this luxurious house? I'll push mortgage interest rates to zero. I'll forgive any negative equity that you have; we'll reduce your mortgage to whatever value an honest appraiser (who was missing in the original transaction) says it's worth, and we'll reimburse the banks for any loss they incur as a result."

So, Munchau is right when he says the problem is not liquidity (banks' unwillingness to lend) but insolvency (banks' lacking money to lend). Their assets are worth far less than the loans that they already are committed to; the banks have no assets to draw on to make additional loans. The Fed says, "No problem, we'll buy the worthless assets from Fannie Mae and Freddy Mac, so that they have real, Fed supplied assets to make new loans from." This is in essence what Hank Paulson originally proposed to use his $700 billion for. But then he followed Britain's example of just giving the money to the banks to shore up their balance sheets, leaving them their unmarketable toxic assets plus whatever additional capital the government gave them to make new loans from.

It's a house of cards, but Bernanke and Paulson are running around trying to close all the doors and windows to keep drafts from blowing all the cards down. I wish them luck, but why did the future of the United States come to depend on a house of cards? In the old days, they used to talk about investment bankers being the "smartest guys in the room." Now they look like the dumbest. On the other hand, they all became millionaires; they just did it by sucking the blood out of hard-working, ordinary Americans. Wall Street is the vampire capital of the world. Maybe that's why vampires are so trendy now.

Friday, December 12, 2008

Repercussions for Republicans?

Will there be any repercussions for Senate Republicans who blocked passage of the interim auto bailout bill two weeks before Christmas?  They basically said to America, we don't like you; so, we are going to put coal in your stocking for Christmas.  The White House, Treasury and the Fed may save the day for average Americans, or maybe not.  The Republicans apparently don't care if GM goes bankrupt on Christmas Eve.  Scrooge would be proud!  Mitch McConnell, Richard Shelby, and company plan to take Tiny Tim's crutch and beat him over the head with it.  Merry Christmas!

Monday, December 08, 2008

Auto Bankruptcy

The auto bankruptcy is too big just to use the regular bankruptcy law. These are not just any companies. The auto industry is the foundation of American industry. So why shouldn't Congress pass an industry specific bailout law that would contain many provisions of ordinary bankruptcy, which could also have specific requirements for executives' and workers' salaries, hybrid mileage requirements, etc. In addition, some people say the credit crisis will prevent normal bankruptcy from functioning as it should because there will not be sufficient credit available to allow the companies to operate under Chapter 11.

Thursday, December 04, 2008

Idiots on Wall Street

The Financial Times reports that the price of credit default swaps, insurance for corporate debt, has been going up again.  The FT interprets this as meaning that the credit crisis is worsening.  I interpret it as meaning that Wall Street, London's City, and the other financial markets are finally learning what they are doing when they make credit default swaps.  They are insuring that a company will pay its debts, and they are saying, "If that company doesn't pay, we will."  For years they have been blithely issuing these swaps as if they were just cheap ways to make money with no consequences.  The horrendous failure of AIG due to the issuance of these CDS's shows that they do have consequences.  Finally, after years of failing to understand the business model for CDS's, Wall Street is learning.  As a result, CDS's are becoming more expensive as they should have been for the last decade, or however long they have been around.  The markets may be bad, but for years the CDS's were priced incorrectly by idiots who did not know what they were doing.  The whole credit crisis was created not so much by the sub-prime mortgages, but by the ridiculously under priced CDS's sold to cover them, which now have the issuing institutions on the hook for trillions of dollars.  The banks don't have enough capital to stand behind these promises; so, the Federal Government has had to step in to prop them up.