Sunday, March 29, 2009


Just think, the Great Financial Meltdown of 08 was caused by something as simple and innocent as people wanting to own that sine qua non of the American Dream, i.e. a house. A young couple with a baby buys their first house, which purchase enables a couple with three kids to move up to a larger house, which enables a banker and his family to spend his bonus on his petite manse. And so up the line the chain transaction went, a purchase leading to another purchase leading to another purchase. At every step was a smiling mortgage broker or banker willing to lend on increasingly exotic and generous terms in order to maintain market share and rake in ever larger amount of shekels. The Fed was leavening their dough with massive amounts of liquidity and the lowest fed fund rates ever. The originator of the loan would then turn around and flip it to Freddie or Fannie, both of whom were under increasing pressure from regulators and the Barney Franks of Congress to make sure every American was able to do so, no matter how flimsy his or her credit qualifications might be. In the case of loans that were too large to qualify for Freddie's and Fannie's limits, the Wall Street firms and other players like Countrywide happily stepped in and took the loans. Fannie/Freddie, Lehman, Bear Stearns, Countrywide, et al next packaged all these mortgage loans into securities and sold them to suckers all around the world, from the local college endowment fund to Singapore pension accounts. There was no shortage of buyers since these securities offered great yields for the triple A ratings that the rating agencies stamped on them, rating agencies that we now know really didn't understand what they were rating. And oh what a wonderful world it was, everybody getting their little pinch of dough as the urge to own a house got transmuted into a AAA security owned by some credit bank in Germany.

And then the daisy chain turned into a cluster fuck. All it took was a slight breeze and the house of cards toppled over. All it took was a slight uptick in interest rates, a leveling of housing demand, rumors of a couple of Bear Stearns hedge funds having problems to send investors stampeding toward the exits. It was like someone shouting, "Allah Akbar" in a crowded Baghdad market, everyone expecting the next sound to be KA BOOM!

Somebody during the Roaring Twenties said that prosperity swallows all sins. I suppose that the converse is true as well, namely that poverty pukes up all sins. The peasants have gotten the pitchforks out of the barn, lit up the firebrands and are searching every dark corner of the village for the sinners who caused this catastrophe. The blame game is a natural part of every boom-bust cycle; and since this boom-bust cycle has been especially vicious, the blame game has been vicious as well. Indictments fly like bats out a cave.

I pity those AIG guys. They are the scapegoats du jure. Mobs march outside their offices, a US senator suggests they do the honorable thing and commit mass suicide, that thug NY State AG, Andrew Como, threatens to release their names if they don't give up their bonuses. Como, what an asshole. He knows that the ACORN manufactured mob is in full froth and lather and ready to "exact justice." Given the temper of the times, would he really release names? Why would a responsible person even threaten to do so? The threat is real enough that some of these guys have moved their families out of town to the in-laws until cooler heads prevail (and who knows when that might be). The company in broad daylight offered these guys retention bonuses because AIG needs their expertise to wind down those disastrous positions in a way that will keep them from becoming even more disastrous. The evidence shows that Como, Congress, Gaithner all knew about these bonuses before the NT Times made them public. So where was the outrage then?

I am particularly tired of hearing about the outrage in Congress. The amount of AIG retention bonuses is $165mm, about what Congress just authorized to spend on waterparks in the recently passed stimulus bill. If anybody is to blame for the housing collapse, then those elected officials who put the Community Reinvestment Act on steroids and brow beat Fannie and Freddie into making stupid loans should be first in line. But for once that cliche "We are all to blame" holds true in this case. Everybody got something from the run up in housing prices over the past decade, everybody including the real estate agent, the appraiser, the closing attorney, the mortgage broker, the lender, the Wall Street banker who securitized the loan. And the biggest beneficiary was anyone who bought a house during those giddy times; in other words, just about everybody. We all knew, in the back of our mortgaged minds, that these housing prices were too good to be true. And so we milked it as much as we could, mainly by taking out equity lines to sap the crazy appraised values that justified the dumb loans.

How can you call someone a victim who was able to purchase a home that he had never in his wildest imagination thought that he could afford. And in reality he couldn't afford it. Many of these "victims" would have been better off remaining renters. Loose credit can perform magic of a sort. But instead of pulling a rabbit out of a hat, the lender-magician ends up pulling out a turd instead.

Congress is now talking about modifying mortgages for those struggling to make the monthly payment. Before we rescue somebody from foreclosure, maybe we should ask them to give up the flat screen HDTV that he purchased through his equity line. How many vacations, appliances, autos, wardrobes were paid for through equity lines? Like manna from heaven.

So what do we do now? I'm struck by the paradoxes contained in the solutions being offered to cure us of this malady. For years, even decades, we have been told by scolds that we borrow too much, spend too much. We all shrugged that off, but now the chickens have come home to roost. And what are the same scolds now telling us to do? Borrow and spend more. Don't save, consume. And if we were worried about those Bush deficits that got as high as $450 bil., we are now be told to be thrilled with Obama's trillion dollar deficits as far as the eye can see. All these proposals, all these Fed actions, all these new acronyms such as TARP, TALF are just whistling past the graveyard, dancing around the root problem, which is the roughly two trillion dollars of bad assets clogging our credit system. We are trying to paper over that two trillion with ten trillion of debased currency.

If the system is clogged, then get a roto-rooter. This is not going to be painless. Sure, all this spending might cause a temporary spike in the economy that might last a year or two. But right behind that will be an inflation dragon that will make the inflation during the Carter years look like a gecko lizard. The Fed will then have painted itself into a corner as it will either have to jack up rates like Volker did and possibly cause the depression that we have all been dreading or else resign itself to a banana republic inflation and depreciation of the currency. The economic, social, geo-political consequences of that latter course do not provide for serene contemplation.

The only true and sure way of getting of out this economic malaise is to recognize what those two trillion dollars of bad assets are really worth. The consequences of this will be severe but cathartic. Banks will fail. Big banks. But a year or two from now, we will be on the road to economic salvation and not facing hyper inflation. We must, brothers and sisters, atone for our sins. Only that way leads to redemption.

Sunday, March 15, 2009


Now that Obama is close to getting a belated Christmas present in the form of a healthcare bill, you would hope that he would lighten up on his wish list and focus on doing something about the trillion dollar plus budget deficits that stretch as far as the eye can see. (Remember all the angst during the Reagan years about "100 billion dollar deficits as far as the eye can see"?) But no, his appetite for spending appears to be insatiable. Take the unused TARP funds (and he is more than happy to take them). Why not use that $200 billion to pay down the deficit? Instead, Obama wants to spend it on another stimulus bill in the guise of a "jobs program." And so the beat goes on.

I wonder what the Chinese are thinking, given that they are the ones who are lending most of the money for all these dreams and schemes.

They are probably thinking the same thing that your local banker would be thinking if you, Mr. Valued Customer, paid him a visit with a similar wish list but scaled down to your individual circumstances.

"Hi Dan," you say to your friendly "personal financial advisor" as you plop down into the cushy chair facing his fake Louis XV desk. You pluck one of the Jolly Roger candies from the little brass bowl on his desk.

"What's up, Mr. Valued Customer. What can I do for you today?"

"I'm looking for a loan, Danny." Apprehension fills his eyes.

"A loan, huh? What type of loan?" He quickly presses his tortoise-shell eye glasses against the bridge of his nose.

"Oh you know, just a personal, unsecured loan," you say as you suck on the hard candy.

"Ah huh...and what amount are you looking for?"

"I was thinking a million to start."

Dan gags and almost spews out his mouth the coffee that he just took a big sip of.

"A million dollars! For what?"

"Oh, you know, I was thinking about making an addition to my house, another 1500 square feet or so. I really need a place to hang out away from the wife and kids. Sort of my own personal Valhalla, if you know what I mean. A place where me and my buddies can do what we like to do, shoot pool, catch games, drink beer...guy stuff." You don't need to mention porn watching as one of those activities because you know that Dan gets your drift.

"And you think that addition will cost as much as a million dollars?" Dan asks with a tremulous voice.

"No, but I also had in mind putting in that swimming pool that Betsy's been bugging me about for ten years. Labor's cheap right now with the Great Recession and all. So I figured that now is as good a time as any to git her done."

"But Valued Customer, we already have a two million dollar mortgage on your house. And if we did an appraisal today on it, I'd be worried that the value doesn't even cover our mortgage."

"C'mon, Dan, I'm talking infrastructure! I'm improving my house and putting a lot of local workers to boot besides."

"I don't know, Valued Customer. Even if I thought we could make the loan, I still don't see how it would amount to a million dollars. I mean, you're talking about us increasing our exposure to you by 50% in one year."

"I didn't realize that you looked at me as something that you're exposed to, Dan," you say with a hint of indignation in order to put him on the defensive. "What am I, some kind of disease?"

"No but, you know..." Dan stammers. "So what else you got in mind with the money?" he asks to get back to the main subject.

"For some good purposes, Dan. Like healthcare. With medical costs running like they are, I figured that it might be smart to prepay the next 10 years of my family's out-of-pocket medical costs. Something wrong with that?"

"Nothing's wrong with that, I guess. It's just that you can't expect me to pay for it."

"And also you got a problem with education? Cause I wanna fund my 529 college funds up to the gills with the money that you are going to lend me"

Dan looks at you with a befuddled, sad expression, like he's wondering what caused you to totally go insane.

Could the Chinese be wondering the same thing about the collective mental health of our nation? We are basically proposing to double our national debt this year. Foreigners now own over half of that debt outstanding and the Chinese own the largest percentage of foreign held debt. They hold close to $700 bil in US treasuries and almost two trillion dollars of US assets altogether. Is it any wonder that this week Chinese officials began to publicly raise questions about the future worth of their US Treasury holdings? During Obama's recent visit to China, leaders there treated him like he was some n'er-do-well in-law showing up the front door with his hand out. I don't think anyone seriously worries that the US might default on its obligations. After all, the US is in the enviable position of being the only country in the world that can borrow as much as it wants in its currency since the dollar is still the main reserve currency in the world. We can always print as many dollars as it takes to pay our obligations. But that's exactly what worries the Chinese and other lenders to the US. Assuming that the Feds at some point will have to open up the printing presses in order to loan money to the US TSY so that it can pay its obligations, a great debasing of the currency will occur. The dollars that we will be sending to our lenders will eventually be worth much less in those lenders' respective currencies.

Such curreny debasing causes inflation. The end of Obama's first term could witness an inflation rate that we haven't seen since the Carter years, thanks to this enormous expansion of the money supply. But maybe inflation is secretly or subliminally what Obama and his econ guys have in mind. After all, inflation is a boon to borrowers and anathema to creditors. Drastically devaluing the currency is a back door, "unofficial" means of defaulting as the borrower is in effect paying the lender back much less than what the lender has bargained for, in the lender's currency.

Notwithstanding this de facto default, the Chinese aren't going to dump their treasuries. The fact is the Chinese need us as much as we need them. The US GDP is almost one fourth of the world's total and US consumers consume almost a third of all the world's goods (ergo, our large trade deficit). The Chinese need the US to keep consuming those goods and will continue to lend to us so that we can continue to do so. The more we consume of their goods, the more dollars they will have and the optimal place to put those dollars is in dollar assets, particularly US treasuries. China can not unload its treasuries without causing harm to its gigantic US treasury holdings. Dumping would also cause US interest rates to soar and hurt their Most Valued Customer.

But that doesn't mean the Chinese will sit idly by while we go on a borrowing binge. They can, if they wish, exert the same leverage and control that any lender has over a heavily indebted borrower. And how might they exert this leverage and control? Don't be surprised if in the near future, some very hush-hush, closed door meetings take place between high government officials of the US and China. Maybe during such a meeting, the Chinese make it clear that they aren't happy with our spendthrift ways. Maybe they strongly suggest that we rethink that big Universal Health Plan that has been put on the table. Or even more likely and insidious, maybe they let it be known that they think our Dept of Defense budget is way too high and needs to be trimmed. Maybe they suggest that we cut back on the F-22 Raptor program or that new state-of-the-art destroyer that's on the drawing boards. After all, as much as the US and China might sometimes seem like two staggering drunks trying to hold each other up, China will increasingly become a military as well as an economic rival to the US. Yes, the Chinese want the US to remain strong economically since we are the primary end market for their manufactured goods; but that doesn't mean that they will not use their economic leverage to keep us from being too strong, particularly from a global strategic power point of view. The US-China relationship has more paradoxes and nuances than a Ingmar Bergman movie.

And what if we have the audacity to say in so many nice diplomatic terms, "Fuck you" to these "suggestions" from our Chinese lender? Then we can expect the Chinese to say, "Okay, then don't expect to see us at your next treasury auction." And since the Chinese have been buying roughly half the bonds at such auctions, that would be a mighty big "Fuck you" back.

Every lender has his borrower by the balls. The last thing a lender wants to do is kill his borrower. But that doesn't mean the lender can't squeeze those balls really hard.

Sunday, March 08, 2009

Temple of Doom

Hello, dear and faithful reader. Wow, can you believe that a little over two years have passed since I last wrote to you. Good Lord, where has the time gone and look at what it has wrought. One or two things of note have happened over the past couple of years...yuk yuk. I must tell you, dear Reader, that my world has tumbled and crumbled around me. I now know how Sampson felt when he brought the temple down, for I too once thought that I was mighty and strong. I was riding high back at the end of 2007, so high that I neglected to write to you. You see, I had just accepted a job offer from Bear Stearns. What better place for an aggressive, hustling stock dick like me than BS? (And yes, some envious jerks try to be cute and say that BS stands for Bull Shit). But gamblers and swashbucklers ruled at BS and you know how I like to dress up in pirate costumes. The move was definitely an up one from the firm where I once used to roost, BSBR Capital. (And yes, some envious jerks try to be cute and say that BSBR stands for Bucket Shop Boiler Room). But three months later and that Greek, butt fucker Jamie Dimon scarfs Bear Stearns down like he would a Gyro, with $60 billion worth of tzaziki sauce from the Fed.

And so there I was, out of a job, back on the street. But I picked myself up and dusted off my Armani pinstripe suite because that's the way I roll. After pounding the phones and reshaping some of the lies on my resume, I stuck gold and landed a job at Lehman in the high net worth group, otherwise know as the Lollipop Guild because the clientele consists mainly of suckers. Truth be told, more than luck got me the job, as I had to call the chits on a Lehman muckety-muck whom I used to supply with his weekly fix of coke back in the days of Palladium and Tunnel (now I'm aging myself). I don't need to tell you what happened next: The Fed started freaking out about something called "moral hazard," something which I thought you found only on a golf course, and decided to toss Lehman overboard like a ton of stinking pig shit. And so there I was once again, flat on my ass, back to to square one. To add insult to injury, Kimmy, my live-in bitch, decided that she'd had enough of this in-and-of-work bullshit and left me to go back to pole dancing. Just as I was about to give up this whole schlock stock broker thing and send my resume to the Post Office, a pal of mine gave me a tip: Madoff Securities was looking for a few good shysters. I was so stoked when I did finally get a job offer from Madoff because Bernie Madoff was the Man. Bernie the Mensch as he was known in every Jewish country club across the world.

The rest is history, as they say. And so is my career. Yes, the temple that was once Wall Street has come tumbling down. And just like Samson, we pulled it down ourselves, with motives much less credit worthy than his. But nowadays, is anything credit worthy?