Critical Nation

Is Mary Schapiro Qualified to Chair The SEC?

2009-08-05T12:57:00.000-07:00

CNBC, clearly understanding the significant implications of a proposed changes to high frequency trading rules brought SEC Chair Mary Schapiro on to get an idea of what she's thinking.

Please understand that I am by no means an expert on market trading practices and rules. However watching this interview it comes across as if our SEC chair understands less.

HT ZERO HEDGE

SEC May Ban Unethical Flash Trading

2009-08-04T09:30:00.000-07:00

Up until recently certain companies had advanced access to the orders other investors made, ahead of the transaction. Today it looks like the SEC may be making a move to ban the practices.

By placing servers with special detection and fast trade programs on them next to the computers that run exchanges like the New York Stock Exchange, companies like Goldman Sachs could determine very quickly what orders were coming through the system.

Taking an advantage of a delay from when an order is entered by someone like me and when it hits the market, the company could read order and then go in and buy the equity themselves just in time to mark it up a very small amount to then sell it me for a guaranteed, albeit small profit.

This is one form of computerized flash trading. Very recently one company, Goldman Sachs accounted for about 48% of all trade volume on the market through these types of trades, and flash trading in general. The practice allowed the company, to rack up billions in profits that many in the market feel are unethical and against the general principals of free market exchange in that it grants specific players an unfair advantage.

Read More Here
More from Bloomberg News

A Kid in Guantanamo

2009-07-31T00:42:00.000-07:00

I heard a snippet of a story today on NPR that I thought I must not have heard right because it sounded too outrageous to be true. I looked into it further only to find my fears realized.

A young Afghani, Mohammed Jawad, has grown up in our custody a the Guantanamo Bay Detention Facility since 2002, almost 7 years now. The story of Guantanamo is not new, and the controversy surrounding it has been in the National Debate for some time now, but what shocked me was to hear that this particular kid may have been as young as 12 years old when he was captured by Northern Alliance Officials. (It's my understanding that at that time The Northern Alliance was being paid a bounty for handing over prisoners who were militants working in support of Taliban, or Al Qaeda.)

While tortured by members of the Northern Alliance it is alleged that Jawad admitted to throwing a hand grenade at a U.S. military Jeep injuring 2 soldiers and their interpreter. Jawad was then handed over to the U.S. and he was transfered to Guantanamo where he recanted those statements.

According to the Christian Science Monitor the interrogations continued while the kid was in our custody.

"Jawad's files show extensive efforts to obtain more detailed information through repeated interrogations at Guantánamo. Records show that Jawad was subject to a sleep deprivation technique called the "frequent flyer program." At one point Guantánamo guards moved him from cell to cell 112 times within a two-week period. This regime required him to be shackled, moved, and unshackled on average once every two hours and 50 minutes."

If the facts of the story are as I have come to understand them then I view this as a terrible violation of at the very least the spirit of this nations highest values and laws.

As citizens we cannot just allow these things slip by. Allowing our representatives to miscarry justice in such a manner is a threat to all of our security.

"You Cannot Any Longer Suggest That President Obama Is Advancing Civil Liberties"

2009-04-08T10:22:00.000-07:00

The above quote is from GWU Law Professor Jonathan Turley in this interview with Keith Olberman.

Visit msnbc.com for Breaking News, World News, and News about the Economy

VIA Eff.org

On Inflation

2009-03-20T11:27:00.000-07:00

The Feds recent proposal has many people concerned about inflation. While for others it just revives the debate of hyper inflation vs deflation. Minyanville brought about some greater perspective for me however this quote:

Inflation, like other economic entities, is controlled by supply and demand. The velocity of money is one way to represent the demand for “stuff” - when it goes up, prices tend to follow.

From Minyanville

I'm not sure this plays out in the real world but the idea makes sense. We're already maxed out and over leveraged. That's why the global economy is contracting. So it's only producers that can borrow, not spenders, not the banks.

Our American Challenge

2009-01-20T14:57:00.000-08:00

Today we witnessed the inauguration of our nation's 44th president and yesterday we honored someone who helped make that possible.

Dr. Martin Luther King Jr. was a citizen who worked against powerful forces to expand liberty, justice and equality. When my grandfather fought in the second world war, and when this nation's founders fought the British in The American Revolution, it was those same ideals that stood at the forefront of our national consciousness.

We enjoy the hard fought gifts of liberty,and justice, for all as a result of the sacrifices of many. With that freedom comes our own individual burden of responsibility for the condition of our democracy.

And while we vote in an exercise of our democratic ideals, that act alone does not satisfy our democratic obligations.

In the aftermath of the September 11th attacks, our nation was asked to open up our wallets and spend for the sake of the economy. Consumerism became synonymous with patriotism.

It is a popular idea, that the economic decisions we make, can be a force for good in this world. Undoubtedly the tactic of "voting with your dollar" can effect change, but it still cannot satisfy our obligations as citizens.

Today this country faces tremendous challenges. In the face of these challenges we must bring individuals to account for their actions, however we must not be victims.

Consumerism cannot be allowed to replace citizenship. Our responsibility to does not end once our representatives are in office. And we must not simply surrender our freedom to victimhood. As citizens of this democracy we are responsible for our own fates and the fate of this nation. Our biggest challenges are not terrorism, or economic calamity, rather they are apathy and dogmatism.

Yesterdays celebration of Dr. King and today's presidential inauguration serve as inspiration, as we each take up action defending against the apathetic and dogmatic tendencies within ourselves.

It is on each of us to take up a cause. It is on each of us to improve our communities. It is on each of us to listen with humility and empathy to those with whom we disagree. It is on each of us to be critical and to petition our media and our elected representatives on a frequent basis. It is on each of us to accept the responsibility of our freedom and to take on the task of making this nation better.

Yes We Can.

Porn Industry Bailout: A line in the sand?

2009-01-08T00:37:00.001-08:00

Excellent publicity play:

The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Owen Moogan speaking for Hustler Publisher Larry Flynt. CNN

As Mish Shedlock points out "once you cross the line and start picking favorites, it is hard to stop."

CNN Political Ticker via Mish's Global Economic Trend Analysis.

It's Simple Economics.

2009-01-08T00:15:00.000-08:00

Matt Bors @ Comics.com Via Campaign for Liberty Blog

Cameras At War

2009-01-08T00:05:00.000-08:00

Korean TV via RFK Action Front

Kroszner: "It's not the CRA."

2008-12-03T09:50:00.000-08:00

"we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA."

I've seen quite a bit of writing in the blogosphere, pointing to the Community Reinvestment Act (CRA) as the, if not one of the, causes of our current financial crisis. Ridiculous as it may seem, some are very adamant about the impacts of the CRA. Fed Govenor Randall Kroszner, today, spoke on the results of a study by the fed to investigate those allegations.

The findings clearly show that the CRA could not have had a significant impact.

"First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken..."

Given the stories about lenders giving loans to whom ever they could without regard to standards, affirmed in my personal experience in mortgage origination, it's hard to see how anyone could blame a program like the CRA as been the root of the problem.

Our nation has been experiencing an economic decline since some time in 2002. We've shipped many of our jobs over seas to locations with lower, if non existent, labor and environmental quality practices. An expansion of credit made possible through accelerated regulatory liberalization in our financial industry masked a decline. We've now reached a point where the benefits of industry and production are exceeded by the levels of debt we've incurred.

This strong debt contraction is a necessary reaction to correct potentially 30 years of financial abuse. The idea that bailing out lending institutions so they can continue lending in the face of an already over leveraged economy makes little or no sense.

Given this idea, that we are facing the consequences of over-leveraging (or that we're just bankrupt) it seems impossible to point to something the size of the CRA, especially in light of the comparison of CRA eligible loans in default to non CRA loans, as the source of our current financial troubles.

[Kroszner's Speech]

Palin Bashing From Republican Insiders

2008-11-06T14:07:00.000-08:00

From the Financial Times

even as the Alaska governor tried to keep her options open, some allies of Mr McCain were busy trying to trash her reputation with a series of allegations about her conduct during the campaign.

Perhaps the most startling involved fresh claims about Ms Palin’s shaky grasp of geography, with unnamed McCain aides telling Fox News that during preparations for the vice-presidential debate, it emerged that she did not know Africa was a continent rather than a country.

This is a very interesting turn of events. It seems as if there is some feeling that she seriously pulled the campaign down in the end. Palin still has strong support from a part of the party.

It's become clear that Palin has the potential to continue to be a phenomenon to follow, on the other hand she may not be able to garner support beyond some of the more diehard social conservatives.

President Elect Transitional Website

2008-11-06T13:51:00.000-08:00

Check out Change.gov. A website for the president elect.

It's important to remember that government is not going to "fix things" or take care of us. We've got to continue to pressure our representatives and work to fix things ourselves. Get moving.

Hat tip Jessica Lee

Seattle Shouts.

2008-11-05T00:08:00.000-08:00

From the Seattle Stranger.

Well Said

2008-10-20T09:20:00.000-07:00

A Hedge Fund Manager Says Goodbye.

2008-10-17T16:45:00.000-07:00

Andrew Ladhe Goes out in style.

I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

Capitalism worked for two hundred years, but times change, and systems become corrupt. ...My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles.

From the Financial Times Hat tip Matt

?

2008-10-17T00:38:00.000-07:00

"Housing has always lifted the economy out of downturns, and it is imperative to get the housing market moving forward as quickly as possible," NAR President Richard F. Gaylord said in a press statement.

Via Inman News

The People You Should Vote For.

2008-10-16T14:23:00.000-07:00

I couldn't resist. Brought to you by Willamette Week.
(hat tip Miranda)

The Shorts Are Comming

2008-10-15T23:17:00.001-07:00

A different kind of short. (Hat tip Matt) As reported earlier tightening credit markets threaten to wreak havoc on on world trade. Bloomberg's Chan Sue Ling reports that Hong Kongs biggest try bulk carrier Pacific Basin Shipping Ltd. is having trouble moving it's shipments due to lack of credit availablility.

The Baltic Dry Index dropped 8.5 percent to 1,809 points yesterday, the lowest since August 2005. Pacific Basin dropped 6.5 percent to HK$4.75 in Hong Kong and Precious Shipping declined 5.5 percent to 12.1 baht in Bangkok.

Banks worldwide have curbed lending because of increased concerns about getting their money back. Shipowners are already struggling to obtain funding for new vessels. Precious Shipping took as long as 15 months to secure financing for 18 vessels it has on order, Hashim said.

Why is this important?

This is important because it could mean significant shortages of imported goods. Areas that rely on a significant amount of food imports could see strong price increases as supplies are depleted.

It will bring about a significant slow down in international trade. Goods traveling over-seas won't make it here, or anywhere. This will mean a reduction in the supply of available imports.

Retailers in this country could see this affecting their ability to provide products for sale during the holiday season.

As Matt pointed out to me the effects won't be noticed for some time, as things slow down and as it takes some time for the consumer at the end of the chain to notice a problem in a supply chain.

It could be weeks before we see a problem in our local supermarkets and stores if it comes to that.

I would assume eventually demand would go up enough that someone would work to finance the shipments, but in the meant time this could have many troubling effects.

Set for Failure.

2008-10-13T15:33:00.000-07:00

Trouble Ahead; Not Enough Cash To Cover...

2008-10-09T23:19:00.001-07:00

Consider the following:

The Dow Jones is now down 40% from it's peak. In the last 7 trading days it's dropped 20%.
Those declines will mean a significant drop in tax revenues as tax revenue will not the same as it was during years of market growth when market players took profits. Their losses will now be written off for years to come. That tax revenue will not be there for some time.
While trillions in investments have been lost, many soon to be retired Baby Boomers have lost money from their retirement accounts.
With anticipation of greater and greater job lay-offs the tax roles will be further depleted by the lack of payee's into the payroll tax system will mean great deficits in the social security system.
Great declines in housing markets are shrinking tax revenues for states and local governments throughout the country.
We've committed over a trillion dollars so far to a bailout into failed tactics that will lead to greater losses, and further depletion of government accounts.
The FDIC does not have enough money to cover the bank defaults to come, and will need to be recapitalized.
Were currently devoting trillions of dollars to fight wars in Afghanistan and Iraq.

A glimps of the problems we are facing. (seizure)

2008-10-09T22:54:00.001-07:00

The Financial Post today has an example for us of how we are being affected by tightening credit markets. Short term lending makes the world go round. And right now with the lack of transparency between banks, many business activities are not able to take place on a bank.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

Financial Post, [Via: Naked Capitalism]

Changes and Not

2008-10-07T11:38:00.001-07:00

From the Chicago Tribune, Via Transparent Real Estate

Leading up to the bailout

2008-10-07T10:14:00.000-07:00

This is a pretty good story of what's happened with the bailout and Paulson's relationship to it. It goes into some of Paulson's more ambitious possibilities for the TARP as well.

'Paulson's new 'Global Banking Corp.'
Federal ethics laws let him sell $484 million in Goldman stock tax-free when he left. Net worth, about $700 million...

First Goldman pays Paulson megabucks, then "lends" him to Bush, a virtual Trojan Horse. Now Paulson's preparing the way for his grand march back into private life by throwing billions of taxpayer dollars to his old buddies. So Goldman gets billions, and taxpayers get a pile of illiquid junk. Scam? Yes, and a classic case of moral hazard: Freed of risky liabilities, Wall Street dances off into the sunset, laughing at the stupidity of the American taxpayer. If Paulson did return to Goldman, his future bonuses would likely more than double his net worth. In short, his 30 months in government will undoubtedly make him a billionaire while costing taxpayers a trillion in new debt as a result of his inaction and incompetence.

This is not about keeping people in their homes.

2008-09-30T23:04:00.000-07:00

I hear the call from so many to prop up housing and "keep homeowners in their homes." I see the goal however, as a dangerous one. The consequence of trying to do that would be to continue to artificially inflate home prices, preventing new buyers from entering the market. It would prevent housing from reaching a price that is commensurate with median incomes. This is dangerous for the housing market and will leave it stagnant. Propping up home prices is harming prudent people who chose to wait until home prices came back down to a level that is more historically consistent with incomes.

This would likely also harm many of those who are "kept" in their homes, as they may have been better off financially speaking defaulting from their debt and getting out from underneath a massive burden.

Mortgages are not the problem in this financial crisis. The problem is leverage. The institutions in question have over leveraged themselves so that the amount of credit they have outstanding far outstrips their asset base. They cannot afford to support even the smallest of losses.

It is unfortunate that we are faced with this now, but being that the core production of our economy cannot now sustain the levels of credit we have created, a credit contraction must take place.

Doing anything keep the credit party going will only serve to harm us further. We're maxed out congressman, it's time to stop preventing a debt default with more debt.

These companies have to deleverage, and our economy has to adjust. That's the fundamental truth to this.

Congress can work to reinforce time tested regulations. Enforce reasonable capital and leverage requirements. Enforce transparency and accounting principles. Prosecute false and misleading information used to manipulate stock price. Eliminate insider trading (it's happening now and it's troubling). None of this is new, but it's not being done. The opposite is occurring, and it's the opposite that brought about this financial crisis. The measures being taken thus far continue and encourage that troubling behavior.

Extraordinary measures that must be taken will include regulating the derivatives markets, and creating a program that facilitates expedited chapter 11 bankruptcy protection for insolvent financial institutions. Lastly Congress must act to fund the FDIC. The insurance program does not have the money to handle the bailouts that are coming, and congress must demonstrate it's commitment to shoring up the program. These things are new, but they must be done in order to wind things down in a more moderate fashion.

We're in trouble. No matter what is done our economy must undergo a major shift. The Bush/Paulson/Dodd plan makes it much worse. But these measures I've mentioned will help bring up investor confidence, and bring in billions of dollars that is sitting on the sidelines (including my own), and aid in a speedier recovery.

Mortgage Failures are a Symptom, not the Disease.

2008-09-29T00:28:00.001-07:00

In numerous places now, most notably the president's speech on behalf of his bank bailout, mortgage failures are being used as the scapegoat for a declining economy.

This is, the way I see it, at very incorrect and dangerous assumption. Mortgage failures are an indicator that something is not well in the system. The resulting impacts of the failures point to the heart of the issue.

Institutions that have been funding the debt have levered themselves to the point that they could not even withstand modest losses. And further more, not unlike some addicts, some of the financial institutions on Wall Street could not sustain any longer if they could not produce more and more mortgages.

Wall Street's financial institutions have over leveraged themselves. This country has over leveraged itself. Investment needs to be made into non-financial productive work.

These mortgage failures are indicators, margin calls. And instead of settling our debts, we're creating a $700 billion dollar bailout that threatens to continue the problem.

UPDATE: Finally here's an article on just this subject from the Financial Times via Naket Captialsim.

Letter to My Congressman. NO Bailouts

2008-09-25T00:10:00.000-07:00

Congressman Inslee,

I'm writing you today on an issue that I feel is a part of a defining moment in this country's history.

There are massive shifts occurring in credit markets right now and those shifts are going to have a significant impact on our ways of life.

The Administration via Secretary Paulson has submitted a ridiculous bailout legislation plan that it appears many in congress are taking seriously. Senator Dodd has even crafted legislation that, while significantly cleaning up Paulson's proposal, still follows in lock step.

I've heard members of congress in hearings talking about how it's up to the administration to explain why this bailout is necessary, as if the throngs of angry constituents don't understand.

I want you to know, Congressman, that I do understand. I understand and I am angry. I am angry as I was when we launched the Iraq war, when we passed the patriot act, and when I saw that FEMA had almost no plan or competence to handle the aftermath of Hurricane Katrina.

I understand that our economy is in deep trouble. That a massive deleveraging event is taking place. I understand that this means we will be facing a lot of hardship in the years to come.

But I also can see that there is nothing that can, or should be done about his deleveraging, other than to take measures to make it orderly and to work to support our fellow citizens when the time comes.

Paulson's plan is flawed in so many despicable and obvious ways. But in one core way it is flawed that should stand out.

The plan is guilty of trying to keep "the debt party" going, when there is no reasonable cause to assume that it should.

The debt bubble has eroded much of our economy. While we enjoyed the temporary benefits of massive leverage much of our industry was displaced through movements to other labor markets. We've been lax in exploring new technologies in energy production, and energy efficiency. But it is that very sort of productivity that we find ourselves desperately in need of now.

We are in trouble, and there is a way to deal with the trouble that helps us begin growing new and better institutions that can help us rise out of this decline. But the bailout proposal is not only thievery and economic terrorism on the Administration's part, it is also a denial on the part of others who would like to keep us in the dysfunctional state we've been in.

Congressman, I don't think I'm the only constituent who understands.

Please filibuster any bailout proposal.

Thank you,

Caleb Mardini

contact your senator now.

contact your representative now.

Dodd Amends Paulson's Plan...Still Headed For a Bailout.

2008-09-24T12:12:00.000-07:00

Dodd has proposed an alternative, or should I say amended Paulson plan. I've only breezed through it. It looks better but it's still a bailout.

That Hurts prudent investors.

Hurts existing homeowners by keeping them in a negative equity situation.

Hurts home owners waiting for a more affordable market to jump in.

Hurts investors, and institutions who avoided entering into this mess.

And most importantly, staves off a de-leveraging event, which must occur in order for our economy to start growing again.

Economists Launch Protest

2008-09-23T17:14:00.001-07:00

To the Speaker of the House of Representatives and the President pro tempore of the Senate:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
Signed

(list)

The letter was signed by over 100 (and growing!) of the leading economists I know — including folks who have very different views about just what got us here.

Via [Freakonomics Blog]

Prescient

2008-09-23T15:39:00.001-07:00

U.S. House 1999

"[W]what we are creating now is a group of institutions which are too big to fail. Not only are they going to be big banks, but they are going to be big everything, because they are going to be in securities and insurance, in issuance of stocks and bonds and underwriting, and they are also going to be in banks. And under this legislation, the whole of the regulatory structure is so obfuscated and so confused that liability in one area is going to fall over into liability in the next. Taxpayers are going to be called upon to cure the failures we are creating tonight, and it is going to cost a lot of money, and it is coming. Just be prepared for those events."

Representative John Dingell (D -Michigan) Regarding the repeal of the Glass-Steagall Act of 1999

Via [The Crypt]

And another hopeful sign today from the House and Representative Marcy Kaptur (D-Ohio)

Not a Dime! Stop the Bailout

2008-09-21T18:25:00.001-07:00

There is currently a horrifying proposal being fast tracked through congress by the President and Treasury Secretary Henry Paulson. Many members of congress have openly admitted they don't understand the situation and they aren't sure what to do.

I've called my senators offices and I was asked to organize people in a calling campaign. They want to hear what we have to say.

What's happening right now in our financial markets is a major event, regardless of what the government does, I feel it's going to have a major impact on us all. However I believe the proposal being fast tracked threatens to make things much, much worse.

I ask that you read the proposal yourself. It is very short. You can also read the analysis I've posted here.

The chances of preventing this are very limited . But after reading the proposal, please call and email your senator, NOT JUST ONCE, BUT A COUPLE OF TIMES A DAY, for all of this week.

Ask them to block or filibuster any bailout legislation.
Ask them to vote no.
Tell them you don't want to pay for a bailout.

Here's a link to the text of the plan.
Click here for contact information for the Senate.

The Foxes are in the henhouse.
Prior to becoming the treasury secretary in 2006 Henry Paulson ran Goldman Sachs bringing the company to the position it is in now. Goldman Sachs stands to benefit a great deal from this bailout.
Furthermore there is a tremendous conflict of interest as Paulson seeks to hire those who helped create this mess to help decide how to use the public's money.
From the proposal:
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
The budget is unlimited.

Sec. 6. Maximum Amount of Authorized Purchases. The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

700 billion is greater than the Pentagon’s budget for 2009 which was record breaking. And that’s just the amount of purchases that can be held on the balance sheet at any moment.
It doesn’t represent the tax payers. This deal is, in many respects, open ended with no safeguards for taxpayers. While the bill gives lip service to the idea of protecting tax payers it specifically avoids accountability and transparency.

Sec. 3. Considerations. 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.
Completely dubious. While granting extreme powers, there is no review. (this one is really incredible)
Sec. 8. Review. 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.
There are no stipulations for punitive actions. Instead for institutions able to move their bad debt to taxpayers, or able to buy debt at discounted rates this will be quite rewarding.
The arbitrary nature of the bailout creates greater uncertainty in the markets. Furthermore some market watchers speculate that this could result in a greater devaluation of U.S. credit as there is fear we’ll nearly bankrupt ourselves trying to take on the debts of these failed institutions. The measure calls for raising the national debt for example.
Sec. 10. Increase in Statutory Limit on the Public Debt. Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
We already have an excellent solution in place Chapter 11 Bankruptcy.
In Chapter 11, companies with a solid underlying business generally swap debt for equity: the old equity holders are wiped out and the old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure. Alternatively, the debt holders can agree to cut down the face value of debt, in exchange for some warrants.
Luigi Zingales and Robert C. Mc Cormack the authors of the above quote maintain the process would have to be faster than chapter 11 normally takes. But passing a law, especially one of the magnitude normally requires much more investigation and vetting. If we can entertain passing a law of this magnitude this quickly, isn’t there a possibility that an expedited Chapter 11 program could be created.
The Mother of All Bailouts. A measure of this level is unprecedented. You may have heard that this isn’t dissimilar to the Resolution Trust Corporation founded in 1989 to help us out of the S&L Crisis. But
In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC's job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system. (Sebastion Mallaby of the Washington Post)
And they want to bailout whatever they decide. This will likely include bailouts for foreign businesses as well.
The U.S. Treasury submitted revised guidance to Congress on its plan a ... Officials now propose buying what they term troubled assets, without specifying the type. (Bloomberg)
It goes counter to the spirit of the American free system that maintains those that reap the rewards should bear the losses.

The basic premise of a free economy is one governed by laws and not men, where property rights are respected, where individuals are free to make contracts with each other, and where honesty and transparency exist in the marketplace.(Mish)

Please contact your senator now and ask them to prevent, block, filibuster, and vote no for any bailout.

I’d also encourage you to drop me an email or a comment if you make the call.

Thank you.

Update: 10/2/2008

Dodd's revised version of the bill made what appear on the face to be significant changes. But upon further examination, the latest proposal doesn't deviate from Paulson's plan. The oversight is there but it's token oversight. The secretary of the treasury, for example would be the head of their own oversight committee. While we've heard sound-bites about greater assurances, very little has been done to alleviate the problems with the bill.

Anyone saying the problems have been fixed are mistaken. Read it for yourself. (First 113 pages or so.)

A tiny ray of hope.

2008-09-21T16:39:00.000-07:00

Dems say they won’t get fooled again

Specter urges leaders not to 'rush to judgment' on bailout

Boehner wants more oversight in the plan.

Fed Amputates Invisible Hand

2008-09-21T00:05:00.000-07:00

An excellent headline from Minyanville:
Fed Amputates Invisible Hand.

Let's Backup Quality Firms, not Garbage.

2008-09-18T13:08:00.001-07:00

"Look to where you want to go."
"Reward good behavior, not bad."

Those are two axioms I've come to understand that really work in the real world. Applying them to the current financial situation offers some perspective on "what we need to do."

Talk about Moral Hazard
What are we doing now?

By throwing money at the losers the worst of bad behaviors is rewarded. The biggest, most interconnected faulty institutions are getting government assistance.While those that are more prudent and pragmatic are being ignored.

Look at Lehman versus Bear Stearns. Barry Ritzholtz says it best:

• Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.

• Bear Stearns is the little pyro -- the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.

Because Lehman was a slightly better market player they and their investors didn't get the benefits of being bailed out, while the Bear, who's executives should potentially be prosecuted does.

Perhaps I'm being naive but wouldn't it be better to break things down, maybe back up smaller better institutions with some sort of government review of investment institutions? (yeah I know this should have been happening all along) It could be followed up with a 6 year guarantee or backing of some sort.

It's not the idea solution or the one that I want. But if you have to intervene in the markets this is better than throwing money at losers right?

But Cox Should be Fired

2008-09-18T13:08:00.000-07:00

McCain, today called for the firing of SEC chairman Christopher Cox. Immediately he was attacked by Chuck Schumer (D-NY) and Harry Reid (D-NV).

From Senator Schumer:

“Instead of firing Cox, McCain should explain how his policies differ from President Bush on this issue,"

Senators Reid and Schumer are right in saying that it's the Bush administration ultimately at fault for SEC issues, but that doesn't mean the SEC chairman doesn't need to go.

McCain and Schumer are wrong about the short selling issues, and McCain is wrong about the reasons for firing Cox. Short selling is not hurting our economy.

From Time:

Last year the SEC let the longstanding uptick rule expire, which stipulated that traders could short a stock only after it had moved up. Cox called the rule useless, because an uptick can be just a penny in the decimalized market. His view is supported by academics such as MIT's Paul Asquith, who has done extensive research on short sales. Asquith reviewed two years of data during which short trades were tracked by the SEC, and found that 30% of all trades are short sales. All the short sellers are going to do is make the market react faster, he says. "The question is, Can the short seller take a firm down? The answer is no. Not by themselves. If there is nothing fundamentally wrong, all you need is a couple of smart people on the other side to show that they're wrong," says Asquith.

Short selling is a scapegoat. And the Dems are attacking McCain for making Cox a scapegoat. But Cox has played a role, but not doing his job.

It is curious however how McCain decries "naked short selling" when like Cox and Bush, he's been anti-regulation for some time.

From The Boston Globe:

throughout his two-decade Senate career, McCain has cast himself as an outspoken critic of government intervention in the markets, saying that he is "fundamentally a deregulator."

"After all the years of tearing down the regulations that govern financial institutions, it rings hollow to claim that he will build them back up," said Elizabeth Warren, professor of bankruptcy law at Harvard Law School. "This economy is the direct consequence of the deregulation that John McCain fought for day after day, year after year, since the mid-1980s."

Christopher Cox is to this financial crisis and the SEC as Brownie was to Katrina and FEMA.

Leadership isn't going to come from the administration on this and you're not going to see any from the SEC either. There's been little real leadership on anything thus far.

What are some measures the SEC should have taken?

Enforce quality accounting standards that would have led to greater transparency and market confidence.

Instead the SEC has completely avoided this issue allowing companies to keep tens of billions of bad investments off balance sheets. Which has allowed for...

Prosecute the lies and misrepresentations made by corporate executives to their shareholders.

Because the books are unclear poor accounting standards, comments from CEO's and other corporate executives have been used to influence the investment community. Unfortunately there have been enough lies, rumors, and deliberate misrepresentations (which are illegal and should have been investigated and prosecuted by the SEC) that investors have been hurt and have lost faith the quality of information that is on the market.

Enforce existing rules.

Firms are collapsing because rules have been relaxed by the SEC.

From the Big Picture:

the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

And I would maintain capital is pulling out because accountability standards have been eliminated and there's no way to know what you're buying short of being an insider.

The SEC is the police for the market, Cox is the guy in charge. The SEC is non existent.
Cox(ie) has got to go.

[The Crypt]

The Headline Says it All

2008-09-18T01:27:00.000-07:00

3-MONTH TREASURIES WILL NOW GET YOU $4 ON $10,000 PER YEAR

[Bespoke]

Pelosi Barks at Bush and Bailouts

2008-09-17T18:09:00.000-07:00

"Is it a free market if you privatize the gain and nationalize the risk?"

“This is crony capitalism manifesting itself in the meltdown of our financial institutions,” Pelosi said, lamenting the fact that taxpayer dollars would now have to be used to fund the bailouts."

VIA The Crypt

I have to admit I'm a bit jaded. This seems like a great way to help Obama and the Democrats case.

I'd like to see some sort of mea culpa of various Dems, mostly Chris Dodd, as they pushed through and authorized at $300 Billion Bank Bailout bill.

What I also worry about is Congressional Stock positions. From Capital Eye:
According to the nonpartisan Center for Responsive Politics, nine lawmakers have between $785,900 and $1.8 million of their own money invested in Merrill Lynch...Fifty-four lawmakers ... held stock in the company in 2007, worth between $1.9 million and $5 Million.

Eight lawmakers owned stock in Lehman Brothers at the end of 2007, valued at between $102,170 and $184,160.

And Again...

Of all of the companies facing major transitions over the last week, lawmakers owned the most stock in AIG. Twenty-seven lawmakers owned stock in AIG last year, worth between $6.4 million and $20 million.

Then there's campaign contributions with AIG, Bank of America, Lehman, and Merill Lynch contributing over $40 million to both sides of the aisle.

I'm going to leave out Fannie Mae and Freddie Mac for now.

Letter to Congress: Stop The Bailouts

2008-09-17T14:46:00.000-07:00

Dear Congress Member

I've been very close to the markets for some time now. I'm very aware of the things that are going down now. I am also aware of many of the potential consequences as some of these institutions like AIG, Bear Stearns and others fail.

I submit to you however that these institutions must fail. By propping up housing prices, and the markets, prudent investors like myself, and better, functional institutions, are being robbed of actual cash by the less cautious, and more reckless market players.

Keeping these failing institutions is hurting market transparency, creating greater moral hazard in the marketplace, preventing new functional institutions from reinvigorating the markets.

I am one that believes very much in market policing, and I believe just as with FEMA and Hurricane Katrina, the bush administration has stripped the markets of much of the effective enforcement that could have mitigated some of the disaster we're facing now. But now, the current government intervention amounts much more toward Corporate Welfare, and a corporate run government. These actions do not represent the best interests of the markets or the people.

These actions seek to prop up institutions that have proven they are failures.

Please prevent tax money from going to these institutions. There are much better ways to let this economy adjust.

Thank you for your time and consideration.

Dilbert Creator Polls Economists.

2008-09-17T11:55:00.000-07:00

Dilbert Creator Scott Adams paid for a survey company to conduct a survey of 500 Economist Members of the American Economic Association to see who they thought would be better for the Economy McCain or Obama.

When asked which candidate for President would be best for the economy in the long run, not surprisingly, 88% of Democratic economists think Obama would be best, while 80% of Republican economists pick McCain. Independent economists, who in this sample are largely from the academic world, lean toward Obama by 46% compared to 39% for McCain. Overall, 59% of the economists say Obama would be best for the economy long term, with 31% picking McCain, and 8% saying there would be no difference.

Interesting survey if you ask me. Check it out. And be sure to check out his thoughts on the results here.

Great move Mr. Adams.
[The Scott Adams Blog Via Freakonomics]

Paulson Gives Dodd the Finger

2008-09-16T10:27:00.000-07:00

Via The Crypt

When Paulson announced he was planning on taking advantage of the new powers congress and the president allotted him in a recent Housing (bank bailout) bill and take into government control Fannie Mae and Freddie Mac, Senator Dodd, who introduced the bill was shocked, or at least he acted like he was.

He scheduled hearings on the bailout scheduled for today. The hearings were postponed today by Dodd. "At the Treasury Secretary’s request, I have postponed tomorrow’s hearing."

Of course Mr. Paulson must be busy dealing with everything that's going on the the markets with WAMU, AIG, Fannie, Freddie, and well every other major financial institution to look after right? No.

"It is regrettable that the Secretary has said he is too engaged in the current crisis to come before the Congress, yet is available to give speeches on the same day he was scheduled to testify," (a banking committee aide)

Apparently Paulson decided it was better to debrief the Brooking Institution today.

Where's Chairman Cox and the SEC?

2008-09-15T16:31:00.000-07:00

Listening to the story of the SEC and Chairman Cox in this weeks “This American Life” brought up striking reminders of Michael Brown, FEMA and the disaster of disaster management that accompanied Hurricane Katrina in 2005. Michael Brown and Christopher Cox are evidence of and extreme neoliberal ideology that pervades the Bush administration.

The current financials crisis that is melting down Wall Street is worse now because regulators like Chairman Cox’s SEC and the FDIC haven’t been doing their jobs. Instead his lack of action is reminiscent of the the neoliberal idea that government should have little or no input in markets, an extreme position that believes that regulation leads to inefficient markets and bloated government.

How concerned is Christopher Cox with doing his job?

One Friday in March, with investment bank Bear Stearns Co. teetering toward collapse, the chieftains of U.S. financial regulation dialed into a 5 a.m. conference call to craft a bailout plan. When they were done, the Treasury secretary informed the president. The head of the Federal Reserve Bank of New York called Bear Stearns.

Christopher Cox, chairman of the Securities and Exchange Commission, didn't call anyone. Though the SEC was Bear Stearns's regulator, he didn't take part in the meeting.

In an interview, Mr. Cox said the time of the call changed overnight and no one told him. SEC staff members were on the early call and Mr. Cox says he was involved in calls later that day and throughout the weekend with his peers.

Big crises put Washington's regulators to the test. At pivotal times during the current financial turmoil, Mr. Cox has appeared peripheral. The next night, as Fed and Treasury bosses negotiated a bailout, Mr. Cox was at a birthday party. He was missing from a Sunday conference call announcing the sale of Bear Stearns and the Fed's plan to lend funds to investment banks. The following weekend, he left town for a family vacation.
From the Wall Street Journal June 23, 2008

In Cox’s own words “markets should be efficient, competitive, transparent, and free of fraud.” Citing potential problems with government own investments Cox says: “If government-owned investments lack transparency, they could contribute to market volatility stemming from uncertainty about the allocation of their assets.” Isn’t this also true with private investments? Since the start of the break down a year ago rumors, and blatant manipulations have been floated around wall street with impunity. Illegal statements made by corporate executives in an attempt to stave of disaster and help insiders have been made time and time again with no SEC enforcement actions to be heard of. In Enronesque fasion companies throught the markets have illegally misreported their financial situation in order to manipulate their stock price.

Where’s the transparency Mr. Cox? In a large part the lack of transparency is what’s destroying our markets. With full disclosure and a better understanding of each companies financial situation capital would have a place to go. But as it is, uncertainty is eating away at the entire market.

The ironic result of all this is that we’ve now come full circle, and are as far away from the neoliberal ideal as possible. With government take-overs of companies that are supposedly “too big to let fail” we are setting ourselves up for an even greater disaster when the money runs out or the debt reaches too high. We are now headed toward more of a Corporatic welfare state or the ultimate in corporate socialism where the government is inherently tied to propping up and maintaining the welfare of corporate interests at the cost to the people.

Coxie, You're doing a heck of a job.

Where's the Real Polling?

2008-09-15T01:29:00.001-07:00

I must admit I'm not much a fan of polls, I do believe they have an influence in shaping the debate.

The questions asked often end up laying out what's on the table for discussion rather than interpreting what's being discussed.

As a result some large and significant issues don't get addressed.

Looking at the issues going on in the markets these days it really is amazing that we don't see them being raised in the polls on discussed in the interchange.

What kind of issues might voters be concerned about?

Bailouts
Corporate crime and influence
Government accountability
The lack of party distinction
The rapidly growing national debt
The secretisizing of government
Denial of due process and habeus corpus
Expansion of government to spy on Americans.

These all very much could be issues if people were able to voice their reall concerns.

AIG Stuck on Mortgages

2008-09-13T20:57:00.000-07:00

Amidst the news of WAMU, Lehman, and rumors of Merrill failing, the insurer AIG is seeking to raise $20,000,000,000 to cover it's own shortfalls. UK Times Via Nakedcapitalism.

The company has been taking major losses in large part because of its mortgage and security insurance businesses. The losses are likely to continue to grow.

Here's what's odd. Business News Americas this week reports that AIG is hoping to inure 140,000 Mexican mortgages by 2013. The Mexican housing market, while not in the same position as the U.S. is currently showing signs of weakening. One can only hope the company learns from past experiences, so far that doesn't look likely.

Of course it doesn't look likely the company will be around by 2013.

Sharp Market Declines Held Up By Corruption

2008-08-27T14:27:00.000-07:00

Mish's Global Economic Trend Analysis: Soft Canadian Job Market Masked By Public Hiring Binge: "Soft Canadian Job Market Masked By Public Hiring Binge."

How often are people here in effect, employed by the us government through bailouts and corporate welfare? How accountable can the recipients be in those situations?

Smells Like Enron (Lehman Brothers)

2008-07-31T09:26:00.000-07:00

Lehman Brothers, a sort of Wall Street cousin to Bear Stearns (read: should have collapsed a long time ago), is showing that it finds Enron style solutions to financial inconveniences a usefull way to stave off pending disaster.

The company spun off a hedge fund staffed by "former" Lehman executives. R3 Capital Partners is a group that was essentially established to "buy" Lehman's risky investments, taking them off of Lehman's balance sheets.

Lehman is going out of its way to deny that it has any "ability to exercise significant influence'' (Lehman Spokewoman Keri Cohen) over R3. But the evdidence shows otherwise:

1. R3's employees maintain their restriced Lehman stock as if they were still Lehman employees.

From Naked Capitalism
"the former employee charged, based on information provided by several people at Lehman, that the R3 employees' restricted stock was still vesting on its original schedule, as if they were still on the firms' payroll. If true, this is both highly unusual and costly."

2. Lehman assets could account for nearly half of the fund's investment base. According to Lehman's own advisor Felix G Rohatyn in an interview with Andrew Sorkin of The New York Times, money like that does buy influence:

“The big difference is the political element,” he said. Mr. Buffett is seeking the best return when he invests; that’s his only goal, Mr. Rohatyn said. For Dubai and China, whether the investment returns 10 percent or 20 percent — or perhaps much less — is almost beside the point, he suggests. What they really want is influence on the world stage, despite their insistence otherwise."

Yes the article and the quote are discussing a different idea, but Rohatyn's point is that money buys influence. But given this quote an admitted 48% holding by Lehman in R3, could Rohatyn deny that Lehman has influence in R3?

3. Lehman is R3's Landlord.

The Empire Strikes Again
R3 allows Lehman to hide the truth from investors, creating and funding it's own buyer for potentially failing assets. This is very much like Enron's Chewco created to hide debt off balance sheets and inflate profits. Chewco was named after Chewbacca, a Star Wars character, I have to say "R3" sounds similarly named considering the star droids R2D2 and C3PO.

[Naked Capitalism and Bloomberg News]

A Guaranteed Way to Save the Markets and the Economy

2008-07-31T01:30:00.000-07:00

MarketWatch's David Weidner takes an amusing look at some of the recent actions government has taken to prop up our faltering economy.

[MarketWatch via The BigPicture]

Further Reading: Bloomberg

Further Evidence of Blatant Fraud on Wall Street

2008-07-30T14:35:00.001-07:00

Karl Denninger today rants about Merrill Lynch's recent declaration on their earnings call that they had evaluated some of their securities at $11 Billion. And today they're declaring the value to be $6.7 Billion.

The consequences of these types of action are further market erosion as confidence is blown away. To have misstated value to this amount is incredible. The markets are already facing a confidence crisis with the federal government doing everything to the point of offering government guarantees and loans to keep these companies afloat.

Making misleading statements like this violate SEC regulations. The problem is regulators have been effectively missing in action these last few years, which has lead us, at least partially into this economic mess in the first place.

The question now is will things like this continue to go unchecked? Or will regulators step in and deal with these issues so we can save some small bit of market confidence?

Further Reading:New York Times

Chinese Spying Out in the Open (In the Name of Security)

2008-07-29T17:25:00.000-07:00

Senator Sam Brownback (R-KS) today has called out China for it's big brother approach to the coming Olympic Games.

Brownback said that China's Public Security Bureau has communicated with hotels, warning them of "severe retaliation" if they refuse to install government monitoring equipment. This is apparently directed at monitoring the internet use of guests.

The State Department Warns:

All visitors should be aware that they have no reasonable expectation of privacy in public or private locations. All hotel rooms and offices are considered to be subject to on-site or remote technical monitoring at all times.

Of course the U.S. Government doesn't have the inconvenience of having to go to those hotels, they can now go directly to AT&T and Verizon. And yes while Brownback was a critic, he voted for H.R. 6304 the FISA "compromise" bill.

Further Reading:[Associated Press] [Catholic News Agency]

Popular Senator Ted Stevens Indicted

2008-07-29T14:57:00.000-07:00

Looking out as a citizen, the political landscape can seem incredibly corrupt. Personally I know that speaking out can feel very futile. The amount of money and influence proliferating politics is overwhelming. Yes a vote still means something, but when put up against large corporate money a constituent can be left feeling very small.

In Washington D.C. today a federal grand jury returned an indictment related to false statements Steven's made on his financial disclosure forms. More than $250,000 in gifts are a part of the charges.

Sen. Stevens has been under investigation for his relationship with VECO Corporation, an Alaska oil pipeline company recently purchased by CH2M HILL. According to the Justice Department's Release former VECO executives have pleaded guilty to providing more than $400,000 in corrupt payments to Alaskan public officials.

The senator is wildly popular, he's brought a lot of money into his state, MarketWatch points out that he's the longest-serving Republican Senator in the party's history representing Alaska for some 40 years. Some months ago when I first heard the story it was on PBS's NOW there was some doubt as to whether or not such an indictment would ever be produced.

"Certainly, Sen. Ted Stevens is involved somehow, but whether he will actually be charged with anything remains to be seen."
David Shurtleff Nov. 2007

Stevens announced he will step down from his ranking positions in the Senate for the time being and maintains his innocence. He is up for re-election this year.

While I don't see this as any end to the frustration, for those of us concerned about the rampant corruption, this indictment provides a glimmer of hope that perhaps these actions will not go unchecked, and warnings will not go completely unheeded.

Update: The Crypt blog reports that The Senate Ethics Committee has been under fire for not taking up an investigation on Senator Stevens, with this latest indictment the Department of Justice has allowed for the ethics committee to not take up the issue as they "defer investigation into matters where there is an active and ongoing criminal investigation."

Are Bailout Concerns "moralist and purist?"

2008-07-12T12:15:00.000-07:00

Tanta at calculated risk yesterday posted this

there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. ...I for one would rather try debating with a pragmatist than a purist or a moralist.

Tanta's post completely and openly insults and alienates the Calculated Risk Readers.

I see a growing frustration with the state of our (The U.S.) political, financial, and legal landscape. I see large numbers of people looking for outlets. Calculated Risk represents one of those outlets.

The frustration is with corporate malfeasance, and the seemingly (or blatantly )

corrupt government policy that goes to support it. I'm not the only one decrying the growing legal corruption and moral hazard that this privatized gain, socialized losses program breads.

What's wrong, Why are people angry?

Prudent market investors get screwed. Dropping market confidence.
For prudent real estate investors there's no clear strategy. The markets are much less discernible.
Tax payer is forced to hand over money to corrupt or inept institutions
Risky, careless and sometimes illegal behavior is rewarded.
This type of policy stability through inept and failing institution.
By not shutting down some of these institutions new institutions don't have a space to come in and rebuild.

There are alternative ways to "work through a financial crisis." The $29 billion dollar bailout to Bear Stearns and JP Morgan/Chase went to support inept management, this was not a necessary part of the takeover. Why is Alan Schwartz allowed to break the law, and walk away with his corporate bonuses? How many investors who correctly identified the problems with Bear Sterns lost money when the CDS's (Credit Default Swaps) they purchased ended up worthless?

In my opinion there is a growing perception that large corporate money gets the attention of policy makers at a detriment to the individual. There appears to be a growing disconnect between policy makers, and their constituents.

Yes a lot of people are angry about helping to cover the salaries of Angelo Mozilo, Jamie Dimon, Alan Schwartz, or James Cayne. It's not OK to reward criminal behavior that further degrades the markets and the economy. An orderly collapse may be the best solution, but an orderly collaps does not have to be a "bailout" for James Cayne.

Gawking or not, many of us, your readers, are "pragmatic." Tanta, your characterization of "moralists and purists" might as well have said "cranks and crackpots."

Update: Mish's Post today is a great example of the concern I am talking about.

Lawrence Yun Sounds a Bit Confused

2008-07-12T00:47:00.000-07:00

Does it matter if the government takes over Fannie and Freddie?

I do not have enough information to evaluate fully. Right now, I do not think it matters over the short term. The long-term impact could be the "inefficiency" of a non-profit organization running a mortgage business - and somewhat higher cost of mortgages.

Lawrence Yun, Chief Economist for the National Association of Realtors 7/10/08

What? Excuse me?

Lawrence seems to of have gone off track. The basis for the commentary is that there are concerns that Fannie Mae and Freddie Mac ARE running inefficiently currently, as for profit companies. The classic neoliberal assessment of a potential government takeover of a failed for profit institution to betrays your bias and at the same time almost invalidates it.

4-8 Billion down 48 to 52 billion to go

2008-07-11T16:24:00.000-07:00

That's how much money may be left in the FDIC's account after it finishes paying for Indymac's mistakes. At an estimated $32 billion in assets this is the second largest bank failure in U.S. history, but not the last you'll see of things like this for some time. Matt at ActiveRain claims there are another 2 billion in uninsured deposits.

Yves at naked capitalism points out that while this is the second biggest, the biggest Continental Illinois for $40 billion in 1984, was during a time when the rest of the banking system was in better shape than it is now.

Continental Illinois' wikipedia entry claims Continental failed, in part because of the bad loans it took on when it purchased Penn Square Bank of of Oklahoma. It wasn't until 1994 that the federal government was able to find a buyer for Continental Illinois.

Bank of America recently swallowed up Countrywide financial. I'm honestly not sure why. It might have something to do with the $300,000,000,000 bailout to banks promised by H.R. 3221. Otherwise the Countrywide deal looks like it could land bank of America in the same boat as Continental Illinois.

The bank that finally purchased Continental Illinois from the government...Bank of America.

Corporate Handouts Live On.

2008-07-10T16:14:00.000-07:00

Assisting Bank of America in its purchase of CountryWide Financial, Christopher Dodd (D-CT)has almost succeeded opening up the government purse to handout $300,000,000,000 of tax payer money to unscrupulous and inept banks and their investors.

The bailout law is was put into H.R. 3221 by Senator Dodd, and was authored by it's main beneficiary Bank of America. Dodd has been well supported by these two consituents with below market mortgages and campaign contributions.

While Bank of America's proposal included notes to be sure the law was not "percieved as a bailout"(pdf link), Dodd worked to couch this as the "Hope for Homeowners Act" and senators pointed out the potential problems our cities and counties would face with the costs of foreclosures going forward.

Why not just hand the money off to the cities directly?

Unless congress can come to see that it's OK to let bad businesses fail. We'll make it harder for us to create new and better solutions and institutions to carry us out of this hole.

"Don't Dump Bad Loans On Us."

2008-07-10T11:19:00.000-07:00

Speaking out against H.R. 3221 FHA Commissioner Brian Montgomery accused congress of trying to "dump bad loans" on his
agency.

"Some want to dump bad loans on us, many that never should have been made in the first place."

Speaking at a conference hosed by the FDIC, Montgomery voiced concerns about how congress's $300,000,000,000 bank bailout as "in effect federalizing the mortgage market."

Bloomberg via L.A. Land

We're Number One! U.S. Leader for Illegal Drug Use.

2008-07-10T10:00:00.000-07:00

A Word Health Organization survey of 17 countries released this month ranks the U.S. highest for cocaine and marijuana use.

Some tidbits:

Americans were four times more likely to report using cocaine in their lifetime.
"Countries with stringent user-level drug policies did not have lower levels of use than countries with liberal ones."
People with higher incomes were more likely to use drugs.

That last one is pretty interesting considering the public image that's been put on drug use.

WebMD: via AngryBear

Why This Housing Bust Is Worst Ever The American Dream Ends: Tech Ticker, Yahoo! Finance

2008-07-10T02:10:00.000-07:00

Barbara Corcoran sits down with Yahoo Tech Ticker discussion the state of the housing market.

Tech Ticker, Yahoo! Finance via Calculated Risk

The Definition of Insanity is...

2008-07-10T01:04:00.000-07:00

I’ve been writing who ever I could for days trying to raise awareness about H.R. 3221 and it’s 300,000,000,000 bank bailout plan, and while I haven’t received a response, someone I asked to get involved in my lobbying efforts has. Here is an excerpt from a response from Senator Maria Cantwell’s (D WA) office.

“Each foreclosure can impose damages up to $80,000 to the surrounding community, including the loss of property taxes, the damage done to the prices of neighboring properties, and the cost of foreclosure related services performed by the government.

While I understand your frustrations with what appears to be a "bailout," I believe that we must closely evaluate every proposal and consider the best path forward that will stabilize our nation's faltering economy. The housing market is an integral component of our economy's health. Without action, over three million homes are likely to be foreclosed upon in the coming years, and approximately two million families affected. With such grave financial consequences, the coming foreclosure emergency must be addressed head-on, and Congress must take appropriate action.”

Mrs. Cantwell is right to be concerned about the affects of these foreclosures, but her response to the situation is misguided.

In a previous post I pointed out the evidence of moral hazard, investors, thinking the government won’t let these larger institutions fail, are doubling down on bad bets. This will exacerbate the problems we are facing.

We need money to go toward the smarter investments, not those that the government is backstopping because they are falling apart.

These interventions create market confusion and destabilize the currency. Prudent investors are left hanging. Markets need capital infusion, in order for that infusion to occur investors have to be able to discern what it is they might invest in.

In an April speech to congress Dean Baker laid out how H.R. 3221 will prolong a housing decline,and hurt homeowners. Homeowners end up in a worse position because they are unlikely to accumulate equity under the program and they end up paying more than they could pay otherwise. It makes home ownership less affordable, new buyers will less able to enter the market.

...doing the same thing over and over again expecting a different result.

Mrs. Cantwell expresses a concern about the problems cities are having with these foreclosures, I would submit to her that the money is better spent being sent directly to the cities. Doing a simple calculation with her own numbers shows that tax payers could save over $60,000,000. But that isn’t even necessary, shut down these institutions, and bring in smarter investment.

These banking institutions have already shown that they are incapable and inept. They are almost insolvent, don’t bail them out, shut them down. After shutting them down, repackage these mortgages into transparent securities so that new investment can make better decisions and infuse capital back into the system.

Allow these banks to die so that better entities can learn from their mistakes and help grow the economy again.

It’s transparency and confidence that we are missing. These problems will not be resolve by allowing more of the same behavior, with the same institutions.

HUD Secretary Speaks out on H.R. 3221

2008-07-09T12:26:00.000-07:00

Further evidence that H.R. 3221 is a bank bailout does little to help homeowners, HUD secretary Steve Preston argues that taxpayers will be absorbing "preventable and foreseeable losses."

Preston argues that FHA needs to be able to implement risk based pricing. This is interesting considering the mortgages this bill was written for actually fall outside the guidelines that would normally have had FHA backing. What this risk based pricing would ultimately show however is that almost none of these loans are worth taking on for any investor.

The fact is here the banking industry made a risky bet, and they came back to congress, specifically Christopher Dodd, to bail them out, the potential cost to taxpayers? $300,000,000,000.

Washingtonpost.com via The Real Estate Bloggers

Ron Paul is Up

2008-07-09T10:11:00.000-07:00

Checking in on Ron Paul's investment portfolio

Taking OpenSectrets.org data from his financial disclosure last year, Tim Iacono shows us that Ron Paul would be up $295,000 this year had he not made any changes to his portfolio.

Not too bad.

Evidence of Moral Hazard from Bank Bailouts

2008-07-09T02:11:00.000-07:00

Bloomberg.com:

"The bailout of Bear Stearns Cos. arranged by the Federal Reserve in March shows the government won't allow the companies to fail, Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina."

Recent action, like the Fed bailout of Bear Stearns, and currently the "Hope for Homeowners Act" are creating an environment that insulates investors from risky behavior. By preventing them from facing the consequences of their investments they are more likely to take riskier bets. This moral hazard threatens to harm the economy and worsen a decline.

Congress must not pass the "Hope for Homeowners Act" (section 257 of H.R. 3221) By backing these loans with GNMA it is a 300 billion dollar bailout for banks, just like the $29 Billion dollar Bear Stearns/ JPMorgan Chase bailout facilitated by the Fed.

Hope For Bankers Act

2008-07-08T15:00:00.000-07:00

It's no secret that H.R. 3221 is about to move on to the president for signing. What's less understood is that a section entitled "Hope for Homeowners Act of 2008" was written by Bank of America. The effect of the bill is to offload from lenders some $300,000,000,000 of some of the worst performing loans to taxpayers.

Senator Dodd (D CT) introduced the bill stating there would be no investor bailout, but a reading of the bill shows clearly that's what it is.

Dodd has been in the limelight more recently for improprieties related to preferential treatment he received from one of the main beneficiaries of this bill Countrywide Financial. Furthermore the bill, was written by the other main beneficiary, Bank of America Corp.

This bill threatens to extend a housing crisis and the economic recession in that it harms prudent investors and prevents those less prudent from bearing the full consequences of their actions.

The section of the bill that provides for the bailout, and Bank of America internal documents can be found here.

http://sites.google.com/site/bankbailout/

Senators Kit Bond (R MO)and Jim DeMint (R S.C.) seem to be the only ones raising any concern about the bailout portion of the bill.

From an Associated Press Article

Rep. John A. Boehner, R-Ohio, the House minority leader, called on Rep. Barney Frank, D-Mass., to hold a hearing investigating allegations that Dodd and Sen. Kent Conrad, D-N.D., got preferential mortgages at the behest of Countrywide Financial Corp. CEO Angelo Mozilo. Countrywide, a leading subprime lender that has been blamed for helping to cause the mortgage meltdown, is among those that could benefit from the housing rescue.

"Democrats who receive sweetheart deals from their campaign contributors shouldn't be pushing legislation forcing taxpayers to bankroll a $300 billion bailout of scam artists and speculators, and the American people have every right to demand answers if they do," Boehner said in a statement.