Wall Street's "Uncontained Failure"

Qantas' Pilots vs. Wall Street's

Here's a thought, apropos of (almost) nothing:

The cure to our economic woes has nothing to do with finding exactly the right monetary policy, or getting the Chinese to price the Yuan "fairly," or bridging today's yawning political chasms to reach necessary compromises.

The first step is to seriously and completely address the mess (still) left over from the Crash of '08.

(Sorry, I'm not going for "The Great Recession" sobriquet. Recessions happen, like the weather; crashes have man-made causes.)

Which men? (and almost all of them were).

There's really not much mystery at this point.

"Uncontained Failure"

For those not up to speed, here's the basic narrative to date:

Wall Street's largest firms created an esoteric, unaccountable financial monster -- the likes exceeding even the excesses of the 1920's -- that made their executives (if not their shareholders) rich beyond belief.

It grew and grew and grew . . . and then it exploded.

Unfortunately, just like the A380 Qantas jet whose engine blew apart on departure from Singapore, the economy's "financial engine" explosion was an uncontained failure.

And still is.

Which means the explosion fragments and debris escaped the engine casing and compromised the rest of the structure (economy).

Wall Street Accountability

Like the exceptional Qantas pilots, this country's economic pilots now face a three-fold task:

Step 1: Assess the damage

Which instruments are still working?

Which electrical and hydraulic lines have been severed?

Does the landing gear still work?

Etc., etc.

Only once a proper inventory of the damage has been done, however hastily, can efforts turn towards devising an appropriate response.

In the case of the banks -- "stress test(s)" or not -- step #1 has yet to be tackled seriously and honestly.

Step 2: Isolate the damage

The Qantas pilots quickly shut down the exploded engine and transferred (as best they could) precious power and fuel to the remaining, viable ones.

So far, this country's leaders have done the exact opposite: focused all their attention on the doomed engine, and diverted crucial resources from the functioning engines towards the destroyed one.

Even after the travails of the last few years, the U.S. banking system numbers something like 7,000-plus banks.

The idea that there is no banking system without the Too Big To Fail Behemoths is arrogant, insulting, and blatantly wrong.

Step 3: (Re)gain control of the craft

Fortunately, the Qantas flight had two additional senior pilots on board.

We have access (still) to old hands like Paul Volcker, plus an entire, new generation of financial experts, academics, and civil servants -- just as talented and public-spirited as Volcker was when he was appointed.

Who don't work for Wall Street, and don't want to.

Put them in charge. Then listen to them. (Here's my list of luminaries, for starters: "Nine Better Choices to Investigate Wall Street").

Where the Qantas-Wall Street parallel . . . um . . . breaks down is that Wall Street's "pilots" also owned and (shoddily) ran the airline; designed the jet's defective engines (and the rest of the craft as well); and, just for insurance, paid off the safety inspectors and government regulators who oversaw them.

That nothing has happened to them -- that they remain at liberty, rich, and -- incredibly -- still in charge, suggests not just that our financial and political systems are broken, but that our legal system may be as well.

Are Title Insurance Companies Bracing for a Tidal Wave of Claims? Nah.

National Moratorium
on Foreclosures

Surprise, Surprise . . . the same banking behemoths that recklessly originated trillions in dubious mortgages -- fuel for Wall Street's securitization juggernaut -- are apparently now running roughshod over the rights of delinquent borrowers as they seek to foreclose on their homes.

How big a problem is this?

And who's going to pay for it?

Background

To investigate (a little), I checked the stocks of three, large publicly-traded title insurance companies.

My theory is that if hundreds of thousands (millions?) of homes were wrongfully foreclosed on, there is going to be a tsunami of title insurance claims in the offing, brought by Buyers of those homes who in fact . . . may own nothing.

So, is the stock market clobbering the largest, publicly traded title insurance companies, in anticipation of all those pending claims?

Claims? What Claims?

Hardly.

Three of the biggest, publicly traded title insurance companies -- Fidelity National, First American Financial, and Old Republic -- are all trading in the middle of (or above) their 52 week price ranges.

Which is certainly curious, given their presumed exposure to this brewing mess.

I don't have a ready explanation, but my guesses are: 1) the companies somehow don't do much business in the markets (FL, CA, Las Vegas) where the problem is greatest; 2) they've already reinsured or otherwise laid off the risk of those claims (or think they have -- can you say, "insolvent counter-party?"); and/or 3) the title insurance companies -- and their investors -- figure that the banks, not they, will ultimately bear responsibility.

And by "the banks," I mean "us" -- the taxpayers now standing behind those too-big-to-fail entities.

P.S.: maybe "tidal wave" should be "title wave."

The Wall Street Journal Whiffs on Warren

Protecting Consumers From Banks

It turns out that Harvard Professor Elizabeth Warren will head the new Consumer Protection Financial Bureau, after all.

The Bureau, which Warren proposed creating, is charged with ensuring that "consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination."

Seeing as how millions of consumers are routinely deceived, abused, and dealt with unfairly by the nation's biggest banks, that would seem to be a good start.

So, what exactly is the Wall Street Journal up in arms about ("Elizabeth III")?

Here is their case against her, followed by my rebuttals in italics:

WSJ: [Senate leaders] have warned the White House that Warren probably isn't confirmable. A President with more political and Constitutional scruple would have nominated someone else.

Ross Kaplan: Most of the Senate's senior leaders depend on Wall Street cash to fund their election campaigns. The surprise would be if someone hostile to Wall Street's interests was confirmable.

WSJ: Ms. Warren was a vociferous opponent of allowing regulators charged with maintaining the safety and soundness of banks to control this new bureau.

Ross Kaplan: Regulators just presided over the biggest financial debacle since The Great Depression, and did nothing to stop it -- in fact, they facilitated it. Why should Warren answer to them??

WSJ: The new bureau [is] destined to be a bureaucratic rogue, inside an agency (the Fed) that it doesn't report to, with a budget not subject to Congressional control.

Ross Kaplan: And exactly who are the too-big-to-fail banks accountable to? Yes, there are "rogues" running amok and threatening the Republic . . . but it's not Warren and her tiny, new federal agency.

In truth, installing Warren by Presidential appointment instead of Senate confirmation -- what the Journal is putatively upset about -- could very well be a tactical blunder.

That's because a Senate confirmation hearing would shine a huge, public spotlight on a dysfunctional U.S. Senate, and the interests it truly serves.

Attacking Wall Street's Attackers

"But isn't that . . . 'Socialism'??"

He who frames the question wins the debate.

I've been struck in recent months, talking to various people about the economy, by two things:

One. The generally limited vocabulary people have when it comes to understanding all things financial -- even people who are otherwise very sophisticated, well-educated, etc.; and

Two. The tendency -- again, amongst otherwise sophisticated people -- to somehow equate outrage about Wall Street misconduct and calls for genuine, structural reform with a "fringe" political agenda.

The "S Word"

So, what do you call someone who thinks:

--Hedge fund managers should pay a higher tax rate than teachers or firemen? (They don't; thanks to an especially sleazy tax break, their compensation -- called "carried interest" -- is taxed at 15%).

--CEO's shouldn't make literally *400 times what the janitor makes -- up from the 30x-40x that prevailed for almost half a century (roughly from the '30's to the '80's).

--Having half a dozen monster financial institutions -- whose balance sheets can literally be measured as a % of U.S. GDP -- is bad for our economy and political system.

Apparently . . . . "a socialist."

Sorry, folks, but we already have a socialist economy.

Except that it's socialism at the very top . . . and capitalism for everyone else.

*The 400 times is merely an estimate; the truth is, no one really knows, because executive compensation disclosure rules are exceptionally murky and porous.

It's also the case that CEO compensation is not set by the market; it's determined by captive boards of directors -- which is to say, the CEO's themselves.

Michael Lewis' The Big Short: Diabolical Castles in the Sky

Voiding Credit Default Swaps

In a book stuffed with scathing insights and blockbuster revelations, here's perhaps the biggest one (courtesy of Michael Lewis, writing in The Big Short):

The reason Citigroup (amongst others) is considered "Too Big Too Fail" isn't because it holds over $1 trillion in ordinary Americans' savings in their vaults.

It's not because inflicting billions of dollars of losses on Citigroup's creditors and shareholders would jeopardize other financial institutions -- and by extension, the U.S. financial system and economy (domestic and global).

And it's not even because the U.S. would then have to step up and make good on its guaranties of hundreds of billions of Citigroup's crappy mortgages and other collateral.

The Real Reason Citigroup is TBTF

No, the real reason that Citigroup is considered to be TBTF is that it may be the object of billions -- maybe trillions -- in Wall Street bets, just like the housing market was before:

Citigroup's failure . . . would trigger the payoff of a massive bet of unknown dimensions: from people who had sold credit default swaps on it to those who had bought them. This is yet another consequence of turning Wall Street partnerships into public corporations: It turns them into objects of speculation. It [is] no longer the social and economic relevance of a bank that renders it too big too fail, but the number of side bets that have been made upon it.

--Michael Lewis, The Big Short (p. 263)

What to Do

If Lewis is right -- and I have no reason to think he isn't -- the appropriate policy response couldn't be more obvious, or necessary.

Step One: the federal government should void all such credit default swaps, immediately.

Aren't those private contracts?

So what?

So were millions of contracts (presumably unwritten) making human beings owners of other human beings.

What do you think happened to all those contracts on January 2, 1863? (the day after The Emancipation Proclamation).

Step Two. Break up the monster banks that ushered in this toxic, dysfunctional and highly combustible state of affairs (cue Warren Buffett's line about "financial weapons of mass destruction").

Step Three. Hold their leaders accountable for their epic greed, negligence and corruption* (vs. giving them, collectively, ongoing billions in bonuses).

No, that hasn't happened yet.

In fact, it hasn't even started.

*Let the courts figure out the proper weighting; mine would be 50% greed, 30% corruption, 20% negligence.

Benjamin Franklin, Strategic Default, and Economic Recovery

Strategic Defaults Driving Retail Sales?

A penny saved is a penny earned.

--Benjamin Franklin, circa 1780

A penny defaulted on is a penny earned.

--Benjamin Franklin, 2010??

No, I have no way of knowing whether a modern-day Benjamin Franklin would have uttered the second quote. In fact, he didn't even say the first one (that hasn't stopped him getting credit for it, though!).

But the sentiment is well-placed.

More and more economists now see a connection between rising strategic defaults -- the term for owners who walk away from their underwater homes to preserve their cash flow -- and recovering retail sales.

That link helps explain a conundrum -- namely, why are retail sales improving when hiring is anemic and unemployment is still high?

Strategic Default Economics

The (partial) answer appears to be that people who've ditched their expensive mortgages have more disposable income to spend at Target, Bed Bath & Beyond, restaurants, etc.

Sometimes, A LOT more.

So, somebody who bought a home at the peak in Las Vegas (or Southern Florida, or Phoenix) for, say, $600k and has seen prices subsequently drop 40% could easily rent for $2,500 a month, instead of paying their $4,500 monthly mortgage. And live in just as nice a place.

Voila! An extra $2,000 in monthly disposable income.

Multiply that phenomenon by a couple hundred thousand people, and suddenly it's no surprise to see retail sales pick up.

Here's what David Rosenberg, former chief economist at Merrill Lynch and now playing the same role at Canadian firm Gluskin Sheff, says in today's edition of his daily market analysis ("Breakfast with Dave"):

Speaking of the U.S. housing market, we are convinced that strategic defaults by various homeowners, along with double-digit growth in tax refunds, have spurred the jump in retail sales (Easter timing helped too) of late. The economy is growing, the bulls are in a great mood, apparently we are into a new phase of job creation, and yet somehow 320,000 mortgage loans that were current when 2010 began were at least 60 days past due in March. Interesting.

--David Rosenberg, "Breakfast with Dave" (4/19/2010)

Of course, more borrower defaults ultimately means more foreclosures, which translates into more housing market supply -- and more bank write-off's.

But thanks to the Federal Reserve's policy of zero percent interest rates, banks are now booking huge profits to help offset their mortgage and housing-related losses ("Citigroup Posts $4.4 Billion Profit" -- WSJ).

They also continue to benefit from the government's unofficial policy of "too big to fail," with the implicit promise of future bailouts, if and when needed.

It all sort of recalls the chorus from a classic rock 'n roll song:

Take a load off Annie, take a load for free;
Take a load off Annie, And (and) (and) you put the load right on me

--The Band; lyrics, "The Weight"

The (financial) weight, indeed.

Sen. Ted Kaufman: 'Break 'em Up!'

An Independent Voice on Financial Reform
(Hmm, I wonder why . . .?)

Senator Ted Kaufman, Joe Biden's replacement in the Senate, has rapidly emerged as perhaps the leading Congressional advocate for real financial reform (Chris Dodd's version doesn't come close).

Not a few people have noted that Kaufman's path to the Senate -- he was appointed -- insulated him from the soul-rotting temptations of Wall Street campaign cash.

Here's Kaufman's latest:

Letting giant institutions fall into bankruptcy is not the answer to "too big to fail." When Treasury Secretary Hank Paulson decided to let Lehman Brothers fail, the credit markets immediately froze and the worldwide financial system was on the brink of collapse. If we do nothing about these megabanks and wait for another crisis, future presidents—whether Republican or Democrat—will face the same choices as President Bush: whether to let spiraling, interconnected TBTF institutions, like AIG, Citigroup and others, collapse in a contagion, sending the economy into a depression, or step in ahead of bankruptcy and save them with taxpayer money.

The answer instead is to break up these megabanks. As even Alan Greenspan has realized about our current predicament: "If they're too big to fail, they're too big."

--Letter to Editor, The Wall Street Journal (4/14/2010)

And the arguments against this are??

Is the Fed Really Done?

Testing "the Bernanke Put"

So, the Federal Reserve’s $1.25 trillion program to buy mortgage-backed securities officially ended yesterday.

Next up: home buyer tax credits, scheduled to expire at the end of the month.

But are the Fed -- and U.S. Treasury -- really done?

In an era of too-big-too-fail, "the Bernanke put" (preceded by "the Greenspan put"), and continued federal stimulus, it certainly seems more like an interlude than the end of an era.

If the housing market reacts badly, it's not to hard imagine further aid efforts materializing (no doubt in different guises).

Senator Ted Kaufman on Wall Street Reform

"Hard Lines, Not Regulatory Discretion"

Senator Ted Kaufman (D-Del) has a SUPERB analysis, titled "Wall Street Reform That Will Prevent The Next Financial Crisis," detailing exactly what caused the financial system to melt down in 2008 -- and what should be done about it.

Even better: he actually has a say in deciding the latter.

Here's a quick summary of the highlights:

--"Too Big to Fail": too big to fail equals too big to exist. Period.

As Sen. Kaufman notes, dismantling trillion-dollar behemoths is difficult in the best of times -- and impossible in a crisis.

So much for relying on a to-be-created "resolution authority" to step into the breach the next time there is a systemic crisis.

--The "more and better regulation" myth: the financial system melted down not because regulators lacked power, but because they didn't use the power they had. Ergo, giving them more power, now, isn't the solution.

Here is Sen. Kaufman's especially damning indictment of regulators:

The regulators sat idly by as our financial institutions bulked up on short-term debt to finance large inventories of collateralized debt obligations backed by subprime loans and leveraged loans that financed speculative buyouts in the corporate sector.

They could have sounded the alarm bells and restricted this behavior, but they did not. They could have raised capital requirements, but instead farmed out this function to credit rating agencies and the banks themselves. They could have imposed consumer-related protections sooner and to a greater degree, but they did not. The sad reality is that regulators had substantial powers, but chose to abdicate their responsibilities.

What is more, regulators are almost completely dependent on the information, analysis and evidence as presented to them by those with whom they are charged with regulating. Last year, former Federal Reserve Chairman Alan Greenspan, once the paragon of laissez faire capitalism, stated that “it is clear that the levels of complexity to which market practitioners, at the height of their euphoria, carried risk management techniques and risk-product design were too much for even the most sophisticated market players to handle properly and prudently.”

I submit that if these institutions that employ such techniques are too complex to manage, then they are surely too complex to regulate.

--Sen. Ted Kaufman

Add Senator Kaufman to the (short) list of public officials -- led by Paul Volcker -- who "get it" when it comes to reforming Wall Street and the financial system.

How Peter Lynch Would Reform Wall Street

Too Big to Fail? Try, Too Complex to Reform

Banks are like the heart that pumps blood — credit — to our country’s corporate muscles. If that heart is malfunctioning, any recovery will be anemic. But heart surgery is a very complex thing. You wouldn’t want yours done by a plumber or a politician.

--Thomas L. Friedman, "When Economics Meets Politics"; The New York
Times (2/3/10)

Of all the canards Wall Street has sold to would-be reformers, regulators, and at least one NY Times columnist, the biggest (and most self-serving) is that it is . . . inherently complex --"a beating heart," if you will.

Because Wall Street finance is so complicated, you need a Wall Street financier to oversee it. Or lots of them.

Eventually, *Wall Street insiders (vs. public-spirited civil servants, in the Paul Volcker mold) are running the Treasury Department, policing the securities markets, and serving as senior advisors to the President.

Sound familiar?

"The Complexity Canard"

The solution to Wall Street excess only partially lies in making too-big-to-fail firms smaller.

The other piece is to make the financial system simpler ("boring," if you prefer Paul Krugman's term).

Famed investor Peter Lynch famously advised, "invest in a business that any idiot can run -- because sooner or later, any idiot probably is going to run it."

My corollary for reforming Wall Street would be:

"Design a financial system that any idiot can regulate -- because sooner or later, any idiot is probably going to regulate it."

*Of course, FDR appointed a quintessential Wall Street insider, Joseph Kennedy, to head the newly created Securities and Exchange Commission. But Kennedy wielded his power on behalf of investors, not Wall Street. Imagine that . . .

Paul Volcker: 'No Substitute for Structural Change'

Volcker's Clarion Call

Imagine being able to consult Albert Einstein about a physics conundrum, or FDR or Lincoln about an existential national emergency (like the one we're facing now, perhaps).

Having Paul Volcker, the 82 year-old former Fed Chairman, still on the scene and available to advise and guide is truly a stroke of good luck.

So what is he prescribing?

Basically, the same thing he's been saying for over two years, only now with a little more traction:

I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.

--Paul Volcker, "How to Reform Our Financial System"; The New York Times (1/30/2010)

Let's see . . . as a nation, we can heed the distilled wisdom of one of the country's wisest, most successful financial stewards and public servants . . . ever.

Or, we can do what Wall Street wants (basically, nothing -- but keep the government backstops and free money flowing, thanks very much).

Not much of a choice.

P.S.: If you read the entirety of Volcker's piece, you'll note that he demurs -- because of space limitations -- on a number of thorny issues, including revamping how U.S. home purchases are financed:

We also face a large challenge in rebuilding an efficient, competitive private mortgage market, an area in which commercial bank participation is needed. Those are matters for another day.

Let me translate the above: 'Fannie Mae and Freddie Mac are toast. Time to start over' (as even Barney Frank now admits).

Giving Populism a Bad Name

"Random Attacks on Enterprise & Capital"

You know that Wall Street is feeling at least a little heat right now because the Op-Ed pages and blogs (at least certain ones) are ramping up their attacks on what they take to be misguided "populist fervor."

Typical on this score is David Brooks, The New York Times' "house conservative":

The rich and powerful do rig the game in their own favor [but] simply bashing them will still not solve the country's problems. Political populists never . . . seem to grasp that a politics based on punishing the elites won’t produce a better-educated work force, more investment, more innovation or any of the other things required for progress and growth.

--David Brooks, "The Populist Addiction"; The New York Times (1/26/2010)

Brooks goes on to vaguely warn that "if populists continue their random attacks on enterprise and capital, they will only increase the pervasive feeling of uncertainty, which is now the single biggest factor in holding back investment, job creation, and growth."

So, Mr. Brooks, when disgusted taxpayers finally begin to insist that their government protect them from (still more) Wall Street looting, they're . . . "populists?!?"

And when they demand that a broken, dysfunctional financial system be reformed, they're engaging in mob rule?

And when voters demand that Wall Street lawbreakers be held accountable and the nation's laws enforced, they're guilty of . . . "bashing?"

Not So Random

Actually, what Brooks labels "random attacks on enterprise and capital" are anything but; they're aimed at specific companies, like Goldman Sachs, and have a specific, core agenda.

Namely, that too-big-to-fail -- not to mention anti-competitive -- financial institutions be . . shrunk.

That savers' deposits not become chips for Wall Street gamblers.

That epic Wall Street leverage -- as high as 40:1 -- be curtailed (that means not being able to buy $1 of assets with 2 pennies of your own -- and 98 cents of debt).

And that the nation's financial laws be drafted and enforced by someone other than . . . Wall Street.

Far from being a radical agenda, the foregoing principles have been enshrined as the law of the land for much of the last century.

Indeed, when it comes to what Mr. Brooks calls "attacks on enterprise and capital," it would be hard to top Wall Street's recent record.

Paralysis by (Financial) Analysis

Instant Amnesia -- Or Something Worse?

If it exists, it's possible.

--unknown

Believe me, it's not what it is.

--caption, New Yorker cartoon (what husband caught in bed with another woman says to his wife, standing in the doorway).

Let's see: as every investor, saver, employed person and sentient being knows, the U.S. financial system -- indeed, the global financial system -- effectively crashed in mid-September, 2008.

The proximate cause was the failure of Lehman Brothers, which set off a horrific series of financial dominoes that threatened virtually every major global financial institution.

To stem the panic, sovereign governments around the world, led by the U.S., intervened with an unprecedented series of financial injections, guarantees, bailouts, etc.

Those actions appear to have stabilized the (economic) patient, but the prognosis -- not to mention the staggering costs of said intervention(s) -- have yet to be sorted out.

So, what are the defenders of the status quo, opposed to breaking up so-called "Too Big to Fail" financial institutions, calling for?

More study (just like global warming skeptics).

Consider this op-ed, from Friday's Wall Street Journal:

Congress, as part of its reform legislation, should mandate the creation of a new expert commission designed to fully investigate the extent and consequences of interconnectedness before any new regulation of systemically important institutions is actually adopted.

--Hal Scott, "Do We Really Need a Systemic Risk Regulator?"; The Wall Street Journal (12/11/09)

Do we really need a "new expert commission" to tell us, years from now in mind-numbing jargon, what we just collectively witnessed?

Does this guy live in the real world??

Actually, he doesn't: he's a Harvard Law School Professor.

Global Glass Steagall

Canadian De Tocqueville Does Finance

The world's concentrated financial sector has been grabbing more than its fair share of wealth because it has been able to and this must stop.

"This is like looting," said outspoken Boston money manager Jeremy Grantham. "This industry can grow to gobble up all the benefits of the real economy if allowed to. It is trying to grab our cash. It's obscene."

--Diane Francis, "Time to Bust Up the World's Banking Giants"; National Post (10/24/09)

The above quote is just one of the highlights from Diane Francis' SUPERB piece in Canada's National Post yesterday.

What makes the piece especially worthwhile are: 1) her sweeping, historical take, alighting on everything from Standard Oil more than a century ago to the Microsoft anti-trust saga in the '90's; and 2) her non-U.S. perspective (think of her as "de Tocqueville does finance").

Here's one of Francis' milder indictments of the financial status quo: 'Excessively large banks destroy democracies, like the United States, through inordinate influence on policy, politicians and regulators.'

Her prescription -- and one endorsed by such luminaries as Paul Volcker and Bank of England Governor Mervyn King:

Enact a "global Glass Steagall on steroids" -- making sure that investment banks can't make bets with savers' insured deposits -- and break up the too-big-to fail banks, starting with Goldman Sachs.

Not just great, timely ideas -- but, in Glass Steagall's case, the law of the land for 67 out of the last 76 years.

Devastating arguments, and a truly great read.

P.S.: So is Jeremy Grantham a bomb-throwing Commie? Hardly. More like a Boston Brahmin-type, very Establishment, who runs an $87 billion investment fund.

Housing Market Subsidies: 'Sauce for the Gander'?

"Buying Too Many Votes -- er, Mortgages?"

Dear Jack: Don't buy a single vote more than necessary. I'll be damned if I am going to pay for a landslide."

--JFK quoting a made-up telegram from his father, Joseph Kennedy

What recalls the above anecdote is Ben Bernanke's so-far successful efforts to keep mortgage rates low -- now under 5% again -- and therefore provide support to the embattled housing market.

But in committing $1.25 trillion to the effort -- apparently, the Fed has already deployed more than two-thirds of that -- is Bernanke guilty of "buying too many votes?"

If low mortgage rates help the housing market, and a strong housing is good for the economy, what's the harm?

Three Problems

In fact, I see three problems with such heavy, government intervention.

One. It's expensive.

The cost of a $1.25 trillion program to buy up mortgages is, well . . $1.25 trillion. Even that understates the cost of government housing subsidies today.

Throw in the tens of billions pumped into Fannie Mae and Freddie Mac, the cost to the Treasury of the $8,000 tax credit to first-time home buyers, the billions being lined up now to replenish a depleted FHA . . . and the total cost is truly staggering.

Two. Scaling back long-established government subsidies is economically -- not to mention politically -- tricky.

One of the "lessons" supposedly learned from The Great Depression is that withdrawing government help prematurely caused the economy to relapse in 1937.

So too, today's Op-Ed pages are full of competing arguments that even more must be done to nurse the economy back to health, vs. those arguing that the government has already massively overreacted.

Three. Slippery Slope (or, "Target Levels for . . . Everything?")

Philosophically, what's the difference between the government buying up mortgages to support the housing market . . . and buying up equities to support the stock market?

Or, say the government wanted to knock down the price of gold. Why not just start selling from U.S. stockpiles (or announce that it intended to)?

Would we even know if that was happening?

In my experience, markets are messy, constantly gyrating as they absorb new information.

Now consider all the "un-messy" century marks currently on display: S&P 500: 1,000; Dow Jones Industrial Average: 10,000; Nasdaq: 2,000; gold: $1,000/oz.

Technical analysts no doubt can explain the foregoing simply as evidence of the market's affinity for round numbers, both as "support levels" and ceilings.

Still, it gives you pause.

Housing Market Subsidies: "Sauce for the Gander?"

So, do I have any brilliant recommendations?

I wish.

In a perfect world, the housing market would function with few or no government subsidies.

However, in a perfect world, the financial system would never melt down, nor would the government throw ten trillion (!) or so into recapitalizing the institutions that crashed it.

In an environment where so-called Too Big to Fail financial institutions are getting trillions, I have no problem with billions in housing subsidies.

There's no doubt in my mind that the latter is a better investment.

Deconstructing AIG: define, 'Almost'

"It Depends on What the Definition of 'Is,' Is"

Too much risk is just as bad [as too little]. Just ask the financial wizards at American International Group who ended up on the wrong side of tens of billions of dollars in financial contracts, almost bringing down the world’s biggest insurer.

--Andrew Ross Sorkin, "Taking a Chance on Risk, Again"; The NY Times (9/17/09)

Here's a thought: when a rogue subsidiary blows a hole the size of Singapore's economy -- $175 billion, to be exact -- in your company's balance sheet, you're way past "almost" bringing down the company.

You're not "almost down." You're very down.

In fact, in the history of capitalism, it really doesn't get much "downer" than that, at least for an individual company.

AIG exists today only because it received a $175 billion infusion (so far).

It got that money from the U.S. government -- which means us, which means our kids -- for exactly one reason: it owed it to so-called Too Big to Fail institutions like Goldman Sachs.

Banks on the Take

"Assisted Living"

Are the too-big-to-fail banks suddenly healthy? Call me skeptical, for all the reasons listed below:

Take any industry you like, eliminate half of the combatants, and give the remainder fat government guarantees, free money and relaxed accounting standards, and JPMorgan Chase & Co’s second-quarter profit of $2.7 billion doesn’t look so remarkable. Even a U.S. automaker could make a buck or three under those conditions.

Mark Gilbert, "Goldman Toaster Alone Can't Re-Heat Global Economy"; Bloomberg (8/13/09)

Modifying Mortgages -- Why So Few?

Greedy, Stubborn & Stupid? No, Just Greedy

I'm sure like a lot of people (and almost all *Realtors), I assumed that banks' unwillingness to modify underwater mortgages en masse was due to greed, stubbornness, or stupidity -- or a combination of all three.

And while I think that there's plenty of evidence to support that view, at least there's now a wisp of a counter-argument, made by The New Yorker's James Surowiecki ("Not Home Yet").

According to Surowiecki, banks don't modify mortgages because -- surprise -- it's not in their self-interest to:

Foreclosing is often more profitable for lenders than renegotiating is. There are two reasons for this. First, about thirty per cent of delinquent borrowers “self-cure” after missing a payment or two, they get back on track without any help from the bank. Second, between thirty and forty-five per cent of people who do have their mortgages modified end up defaulting eventually anyway.

Don't worry, there are still plenty of reasons to hate the banks (at least the too-big-to-fail ones).

*Like many Realtors, I'm personally aware of hundreds of short sales that languished for lack of bank approval, only to re-appear on the market at some later date -- significantly the worse for wear -- as foreclosures.