Irish Austerity: "Crimes and Mistakes"

(Modern) History Quiz

"You have to wonder what it will take for serious people to realize that punishing the populace for the bankers' sins is worse than a crime; it's a mistake."

Who said the above, about what?

A. President Obama, about TARP, zero percent interest rates, and other Wall Street bailouts.
B. FDR about investment bankers, circa 1933.
C. Paul Krugman, about the so-called IMF bailout of Ireland.
D. William Jennings Bryan, about the Gilded Age bankers.

Answer: C. (See, 'Eating the Irish" in today's NYT).

"A." is just wishful thinking; "B." and "D." never happened -- but could have.

Financial e.coli

Laws, Sausages -- & Securitized Mortgages

Laws are like sausages — it is best not to see them being made.

--Otto Von Bismarck

To "laws" and "sausages," now add "securitized debt," circa 2004-2008.

It turns out that Wall Street's financial sausage factory was even more toxic and laxly run than previously thought.

The latest chapter is apparently a breakdown in the very essence of what makes a securitized mortgage, securitized: the link between the mortgage, and the property securing it.

Due to sloppy or non-existent documentation, investors in such paper may not have rights to the collateral -- millions of homes -- after all; if that's correct, "fasten your seat belts, it's going to be a bumpy night," as Bette Davis might put it.

Financial e.coli Outbreak

As the daily headlines (continue to) make clear, the financial e.coli outbreak traceable to Wall Street has sickened not just the U.S. economy, but a good portion of the world economy.

If a real sausage factory caused 1/1,000 of the harm, it would be shut down, fined into oblivion, and its operators jailed.

Much the same fate would befall the government inspectors responsible for overseeing the factory; the private company that put its Good Housekeeping seal of approval on the factory's output; and any other actors associated with the shameful enterprise.

How shameful?

Imagine the uproar if a corrupt food inspector -- charged with abetting food poisoning -- defended itself by claiming that its bogus ratings were "protected free speech," as the credit ratings agencies are now risibly arguing.

Calling Upton Sinclair

So, what's happened to Wall Street and its enablers, post-crash?

And exactly what is their defense to the foregoing?

In the hope that doing so would somehow revive the economy Wall Street wrecked, the Federal Reserve and Congress have actually showered Wall Street with more money since 2008 (courtesy of quantitative easing and TARP, respectively).

Meanwhile, Wall Street has escaped responsibility of any sort by arguing -- try to keep this straight -- that: a) the financial sausages it sold were not tainted with e.coli; but b) if they were, it was because investors wanted to buy tainted sausages; and c) should have known the sausages were tainted; because d) Wall Street told them they were.

Or not (see, SEC v. Goldman Sachs).

And "a." through "d." don't really matter, anyways, because of "e.": selling tainted financial sausages . . . was all perfectly legal.

Any political commercials out there discussing this??

I didn't think so.

P.S.: What do you do with an e. coli -tainted batch of (financial) sausage? Recall it.

King Derwin's Magicians -- and Ours

Waiting on Economists'
"Chants and Charms?"

"A mighty good chant," said the King, looking very pleased. Are you sure it will work?"

All the magicians nodded together.

"But," said the King, looking puzzled, "How long will it take?"

"Be calm, oh, Sire, and have no fears," chanted the magicians.

"Our charm will work in ten short years."

--"The 500 Hats of Bartholomew Cubbins," by Dr. Seuss

Watching an inspired production of the famous Dr. Seuss story by The Children's Theatre yesterday, I couldn't help noting the parallels between King Derwin's magicians, and Barack Obama's economic magicians.

Just like Dr. Seuss' magicians, our government magicians profess confidence that their "spell" -- TARP, zero percent interest rates, quantitative easing, etc. -- will have the desired effect.

King Derwin pronounces the magicians "fools," and promptly dismisses them.

Meanwhile, in the real world, we are giving our latter-day magicians more power, and waiting for their chants and charms to work.

P.S.: How do you say "economist" in Japanese?

(Corporate) Waste Not, Want Not

Corporate Campaign Contributions

In Citizens United v. Federal Election Commission, the Supreme Court decided that corporations could spend as much as they wished at any time, assuming there was no direct coordination with the candidate. In doing so, the court overturned its own precedents and refused to distinguish the free speech rights of corporations and unions in any way from those of actual people.

The problem with this logic is that corporations have a legal duty not to spend money unless it is likely to improve profits. Unions, too, are expected to make only contributions that will benefit members.

--Scott Turow, "Blagojevich and Legal Bribery"; The New York Times (8/18/2010)

Turow provides the ultimate rebuttal to those who would argue that allowing corporations to spend unlimited amounts on campaign contributions -- now the law of the land -- has no corrupting effect on democracy.

The argument is based on a legal term called "corporate waste."

Just as former attorney Turow notes -- there are a lot of us former attorneys out there -- corporate waste forbades companies from spending money on anything that doesn't further their profit-seeking agenda (sidebar: profits are good -- it's when they come from political suasion that they become bad).

No shareholder, to my knowledge, has ever brought suit against a company arguing that its campaign contributions were frivolously spent.

Ergo, campaign contributions are money well-spent.

Return on Investment

How well?

Staggeringly well.

To pick just one example, the $500 million or so that big Wall Street firms have given both parties the last decade or so loosened something like $2 trillion in U.S. aid and financial subsidies, both direct and indirect (TARP, ZIRP, guaranteed loans, AIG-style infusions, etc.).

And that's just since 2008!

If you do the math, that's a 40,000% return on investment.

Makes you wonder what business Wall Street's really in . . . .

P.S.: Did you know that, according to the Supreme Court, companies like Goldman Sachs, AIG, and BP are "legal persons" just like you or me?

Funny, I don't recall ever attending a wedding, going to a funeral, or having a farewell office party for someone named "Goldman Sachs."

"Lost in America," Wall Street version: We're the Schmucks

Refunds at the Casino, Courtesy of Taxpayers

In my favorite scene in one of my favorite movies, "Lost in America," a distraught couple makes an impassioned plea to the casino manager to return all the money that the gambling-addict wife has just lost.

The LA-based couple, played by Albert Brooks and Julie Hagerty, had just decided to drop out of the rat race, sell all their belongings, and use the proceeds to travel cross country (in a mobile home, yet).

They make it as far as Las Vegas before Hagerty's' character blows their (sizable) nest egg playing craps.

Broke and desperate, Brooks' character, a marketing guy, has a brainstorm: the casino should give them all their money back as a public relations stunt!

He pitches the casino manager:

What about a billboard with my wife and I on it and we would be smiling and there would be a saying, something like, "These people . . . lost their nest egg at The Desert Inn, but The Desert Inn gave it back." And maybe there could be some kind of a visual with you handing us an egg or something. Now I mean, I'm just formulating this now, as I'm talking, but you can imagine, when it's worked out how effective it could be.

Picture this: maybe, my wife and I will do a television commercial for you and there could be a jingle and it could go: (begins to sing) "The Desert Inn has heart! The Desert Inn has heart! The Desert Inn has heart!" Something like that. See what I mean?

Here's how the casino manager, played by a pitch-perfect Gary Marshall, responds:

I gotta tell you, this is one of the best things I've ever heard. What's the board gonna say again? "Gamblers, come and get your money back." Great. That's great.

He continues:

Let's assume you're serious here. What if this caught on? Could you imagine what would happen? Why, we would have to return everybody's losses. The casino would just crumble. We couldn't pay our bills. You know the casino accounts for a great deal of our profits.

Albert Brooks then tries to explain that the casino wouldn't make everyone whole:

I understand. Of course, you don't pay back everybody's losses. You make a distinct division between the bold, who are out there searching, and all the other schmucks, who come here to see Wayne Newton.

No go (it turns out Gary Marshall's character is a Newton fan).

Here's how things conclude:

Brooks: And just so I understand, we can't get any of our money back, right?

Marshall: Well, not today, no. But if the policy ever changes, we'll write you. (still chuckling as he goes back into his office) That's wonderful. Very good.

If only this scenario had played out in real life.

Imagine, when Henry Paulson had gone to Congress with his request for $700 billion in TARP money, he'd been told: 'good luck to you and stay away from the tables next time.'

Instead, when Wall Street asked government for its money back, it -- us -- gave it to them!

Lost, indeed.

P.S.: guess who the "schmucks" are?

TARP as Ultimate Sting?

TARP Mystery . . . Solved!

OK, it's taken me almost a year to puzzle out, but I think I've finally got it:

Superficially, the hundreds of billions in TARP money handed over to the financial sector's worst actors only looks like a stupendous reward for failure -- and not a little like ransom money, paid to keep the rest of the economy from cratering.

Ah, but that's only appearances.

What the TARP money really is . . . shhh! . . . is a super-sophisticated government sting, brilliantly designed to smoke out and then nab society's greediest and sneakiest operators.

Follow the Money

Think of the TARP money as bait.

Sort of like what banks do when they put invisible dye on cash in tellers' drawers, so that they can catch robbers red-handed after-the-fact (actually, blue-handed). Or, if you want a more graphic (but apt) analogy, like the dye you ingest as part of a colonoscopy.

Once the plan is put in motion, you wait, and watch; then, as the malefactors convert the cash to their own, private benefit . . . you pounce! You confiscate the ill-gotten plunder, return it to its rightful owners (taxpayers), and apprehend the perpetrators.

Memo to government "handlers": any time now, guys . . .

P.S.: of course, even if all this were true, you'd expect Wall Street to beat the charges. Their likely defense? Entrapment. (EnTARPment?)

How Many Parachutes?

Pick Your (Economic) Metaphor

The real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along.

--Andy Kessler, "The Bernanke Market"; The Wall Street Journal (7/15/09)

Kessler's is one of the better takes I've seen recently on "where we're at now" (a rapidly growing genre of Op-Ed pieces lately).

Here's my, somewhat starker take:

Parachute #1, monetary policy -- the Fed's control of (short-term, wholesale) interest rates -- has been fully deployed for quite some time. Once rates are zero, you're done. (Eventually, so-called "quantitative easing" ignites inflation fears.)

Parachute #2, fiscal policy -- also known as government spending -- has now been deployed in the form of what I'll call "TARP, SCHMARP, and GARP" (sorry, lost of track of all the ad hoc acronyms some time ago -- maybe that was the point).

The economy's rate of descent now seems to be slowing.

How far away is the ground? Do we have any more parachutes?

Stay tuned . .

P.S.: if you're new to all this economic metaphor-stuff, "soft landing" seems to get recycled every 10 years or so.

"Bank Runs," Circa 2009

No "Run on the Banks?" Define, "Run"

It's true that depositors haven't raced to withdraw their money from the nation's -- indeed, the world's -- largest, so-called "money-center" banks the last 18 months or so (basically, the ones considered "too-big-to-fail"). That's largely a credit, literally, to deposit insurance -- administered in the U.S. by the FDIC.

However, that doesn't mean there hasn't been a run . . . in the world's stock markets, by (and on) their shareholders.

In a devastating post, "Bank Market Caps, Then & Now," financial blog The Big Picture graphically depicts the collapse in value of the world's 18 largest banks since the second quarter of 2007. The list includes not only such storied names as Citigroup and Bank of America, but the "Citigroup's" and "Bank of America's" of the U.K, Germany, France, and Spain -- international entities such as HSBC, Santander, BNP Paribas, and Credit Suisse.

To date, the average drop in value exceeds 80%. And that excludes the fate that befell shareholders at AIG, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc., whose drops ranged from 95% to 99%-plus.

All this is against the backdrop of an historic stock market rout, and increasing speculation that the new Obama administration is close to embracing the "Swedish model," or temporary nationalization, to deal with the ongoing financial crisis.

Until now, the U.S. has been focused on preserving some semblance of private ownership through the various, tortured iterations of bank bailouts, debt guaranties, TARP, etc.

Judging by the leading banks' rapidly shriveling market cap's, the equity markets clearly anticipate full-blown nationalization . . . soon.

Birds and Dinosaurs

Credit Crunch Casualties:
Publicly-Traded Builders

While Washington is focused on rescuing the financial dinosaurs, outside of Wall Street, the future appears to belong to much smaller, sleeker, and more mobile organisms. Specifically . . . birds.

Take the home construction industry.

For the last 20 years or so, size conferred a huge advantage. Big, publicly-traded builders like Toll Bros., Pulte and Lennar all enjoyed practically unlimited access to healthy (if not hyperactive) financial markets. Like REIT's ("Real Estate Investment Trusts"), they used that access to raise capital and debt (especially debt), which let them muscle out (or acquire) smaller, local competitors.

Now, size is a distinct liability, for three reasons.

One. Short-term debt isn't available from the credit markets anymore. That's why all the investment banks -- plus entities like American Express and GMAC -- have rushed to turn themselves into bank holding companies (that, and to be eligible for government bailouts).

If you can't tap the credit markets, you either have to find another way to access capital (from depositors, operations, etc.) -- or go on a diet, quick.

Two. Highly-leveraged builders are poor credit risks.

Eventually, the credit markets will thaw. But that still doesn't make the national builders a good credit risk.

Their assets -- raw land and unsold, finished new homes -- are declining in value; their cash flow is dropping; and they have crushing debt service, courtesy of their long, expansionary period. Not a very promising business model!

Three. In a lean environment, small is more nimble and sustainable.

Small, local builders ("birds") don't need tons of fresh meat or vegetation every day to live. They can subsist on worms -- and go to wherever they are. With the inventory of unsold homes at record highs, "worms" may be all there is to eat for awhile in many beleaguered housing markets.

Fortunately, there is ample evidence that decentralized industries not only may be more efficient, but are healthier for the economy (and less expensive to taxpayers).

They could hardly be more expensive. Fannie Mae, Freddie Mac, AIG, Citigroup, Goldman Sachs, the "Big Three" automakers -- the complete list is quite a bit longer and growing -- have cost taxpayers more than $1 trillion just to date because they were all putatively "too-big-to-fail."

Far from realizing economies of scale or "operational synergies," they appear to have been bloated, oblivious to risk, and, at least in retrospect, shockingly fragile.

"Small is beautiful" -- again.