GOOD CHRISTIAN DISCOURSE...

...which we will all see tomorrow in the annual leading article in the WSJ repeating another journal written in 1620 just before the sailing of the Mayflower. It is a wonderful piece that I used to read to my sons every year. Imagine, sailing across the ocean to God knows where on a leaky bucket not much larger than the one owned by Bernie Madoff for a dream to be free. Every year, I love the Journal for printing that article.

Last week, however, I hated it. My Friday's posting was to be a follow-up on TheSuit's testimony or to be precise, one little nugget of the same. Of course, the buggers at Dow Jones had to get to it before me but I came to the conclusion that I should cover it BECAUSE IT WAS MY IDEA IN THE FIRST PLACE (they print earlier than I do) and it is important.

What everyone overlooked except for the Journal and me was The Suit rather blandly stating that Credit Default Swaps (CDSs) in the case of AIG really didn't matter. As the Journal said, "Hello?" Well if credit default swaps didn't matter in the great scheme of things, what the hell is all the excitement about these awful things called derivatives? With all of this regulatory nonsense going on might we be looking at the wrong tree in the forest.

As I have said repeatedly, a CDS is nothing more than an insurance product written on an existing risk generally or most often expressed (the risk) as a bond, a loan or some form of documented liability of a borrower. Now once the original CDS is written the purchaser can market it for oodles of purposes but cut through all the nonsense and there is still the original writer of the risk; in our case AIG. Again, as I have said a half-dozen times, if all of a sudden there was a bid out there from the biggest pile of money in the world (the Fed) on the CDS-covered asset, the credit worthiness of the AIG structured finance unit is no longer an issue. There would still be hell to pay among secondary holders but hey, nothing that can't be settled among gentlemen. But that did't happen. Originally we all thought that it couldn't happen but The Suit has indicated that that portion of AIG's business was manageable. So, one might ask one's self, "Self, where was the problem?"

Before we start rearranging the entire regulatory landscape it seems to me that it might be a good idea to use AIG as a test case in an attempt to discover where it is that the problems truly lie. If we were to do this I have a suspicion that the trail might lead not to those areas already investigated in nauseating detail--with little to show for it I might add--but back to the undiscovered country such as the core businesses of AIG--the straight-up insurance business-- overseen one might point out not by the Federal reserve but by the Insurance Commissioner of the State of New York and the role played from the git-go in this mess by the State's AG, the odious Mr. Cuomo. Nothing may come of it but would we not have a fuller understanding of what really happened? Ponder this over the Turkey and football this weekend. Let us all give thanks for what we have and also for those brave souls it set forth 400 years ago and made all of this happen.

See you next week.

LITTLE BIG HORN

It got really ugly up on the Hill today. The Suit was up in front of a joint committee or some-such mass of mindlessness. The Repubs were out for blood with one inquisitor calling for him to quit whilst another was suggesting that he shouldn't be there in the first place. Our Hero was giving as good as he got until he started on the "blame it all on Bush," mantra that The Leader's handlers have instructed to be the high ground to which all within the administration will fall back on when things are looking bleak. The high ground, as I learned at Ft. Benning is not a bad place to be but when you're alone and there are ten thousand Indians running around down below it's probably not going to make a lot of difference. Nice things were said by the assembled Dems but it was quite clear that there wasn't anybody there that appeared to be ready to take an arrow for the good Secretary. Here I go again making excuses for the guy but he doesn't have a real strong hand to play at this stage. It's been a year since Bush and rightly or wrongly, the impression is that things haven't improved to the point where the past is past; the problems remain and they are now perceived as being those of this administration.

Unemployment is the key, certainly out here in the fly-over zone and when these jerks start talking about jobs saved in non-existent congressional districts, credibility tends to suffer. It's crap and the good folks know it. Lectures given to the United States by finance ministers who in some instances are the first in their family to wear shoes also resonate loudly among that portion of our population who is not into the we-are-just-like-everybody-else-except-we-have-made-more-mistakes-for-which-we-need-to-apologize crowd that seems to inhabit the east and left coasts (as far down as Virginia in the former's case) where, surprisingly, they are reported--if only by Fox news. They are not liked. Nor is the great health care debate in which the folks have a pretty good idea they are about to be screwed but they are not quite sure how. Unless things improve quickly--and I fear they will not--the next sound you hear might well be the big SQUISH as The Suit is pushed under the bus by the Chicago Boys. Too bad, then again it's a rough neighborhood. Such is the view from the heartland.

There are a few, little points of light. People are actually beginning to talk about things that might work without savage assaults from the Mainstream media...like a reduction in the payroll tax. Gee, I wonder what that would do to Al Gore's LOOOOOCK BOOOOOX (is there a more pedantic dope on the face of the earth)? Then again, the Laureate Krugman continues to mue for another stimulus package in the face of all the evidence in the world that the last one was a complete waste of effort except for the political slush funds in states and municipalities in which it landed. So it goes. I'm sort of bummed as the weather has been yuk but I think I'll go out and look for a turkey for next week. Damn things are all over the place and are MEAN! On top of that we have had a regular parade of deer through the back yard recently, where the wife's peonies are beginning their winter nap. She is making menacing and threatening noises. Hey, how bout a "Cash for Cannons" program? She'd be the first one on line for that.

20-20 HINDSIGHT

By now, some of you might have the impression that I don't always agree with The Suit. I can see how that might have happened but every once in a while even I can commiserate with the guy. He was up on the Hill yesterday and got his bum handed to him over the AIG bailout of last year. Seems as though, following the report of some inspector general there are so many of those) some of the Hill types seem to have gotten the impression that maybe the latest anti-Christ, Goldman Sachs and friends, got too good a deal when the got paid 100 cents on the dollar by the Fed for their AIG exposure. Ok, they did, s*** happens and The Suit was running the New York Fed while auditioning for his present job so that means he has to carry the can for this one. Unfortunately, this could be a real problem for Our Hero because both sides of the aisle hate the AIG situation, the GOP believes that his little income tax "misunderstanding" should have disqualified him for the job and most everybody is coming to the belief that there is more than a bit of arrogant little snot around this guy's personality. He got big-time testy yesterday during the questioning knowing full well he's not the flavor of the week.

Now I am on record in stating that this was perhaps not the NY Fed's best moment. Before bailing everybody and his brother out of that mess I thought they might have tried a bit of market action like putting a bid behind the paper on which AIG had issued CDSs and then getting inside quickly to avoid the shorts who were falling off buildings but they didn't. And I suspect that this is the reason.

I'm sure you also remember me having stated that a lot of the history of past crises was rewritten last year. Many had seen this before going back to the first real systemic risk of our business lifetimes in 1982 with the Latin American debt crisis. At that point in time most of the major banks in the U.S. were technically broke but the crisis was resolved with a lot of hard work over time. It was a bank crisis, and while terrible in its effect, not everything ground to a halt. Last year, there were two major differences. The first I would call the financial equivalent of Moore's Law and the second the complete grinding to a halt of all mechanisms of credit extension world wide. There was no credit available to anyone as all depositors and liability holders ran to save havens and because of the technological advances that had occurred since 1982 it happened in the blink of an eye. Unlike 1982 when months were spent to resolve the situation a good friend who was involved in the events of last year told me that, "the time we had was measured by a clock's second hand." In this scenario, I am prepared to give The Suit a pass: it perhaps wasn't pretty but what had to be done was done. Frankly, if he were to be forced out, I would shed no tears (except that I shudder to think of the replacement) but if it occurred over this, it would be a bum rap.

While all of this is going on it's going to be difficult for the Treasury to get up to speed on the two bills relating to governance pushed by Messrs. Dodd and Frank. They had best do so as these two monstrosities have in them the capacity to do more damage to our financial system that 10 AIGs. On top of that, The Leader's trip has proven to be a train wreck and there is some serious backing and filling that needs to get done as every single approach on the international front was kaboshed. Enough there to keep a boy out of trouble for some time.

THE CARRY TRADE

The Leader was wandering through Asia for the past week trying to look and sound Presidential. Things started off in Japan if not poorly then certainly with a bit of awkwardness when our guy asked to comment on the bombing of Hiroshima and Nagasaki in the opening press conference. The japanese, as a nation, have managed to raise two generations in the belief that the use of the Atom Bomb on them removes most if not all of the Empire's guilt for and during the war (for the youngsters among you, yes, we did go to war with Japan--I know your history books might have overlooked it). Rather than a, "You started it, we ended it, let's all move on---and oh, by the by, the action probably saved 5,000,000 casualties," which is badly needed by the way, The Leader punted. I suppose many would call it skilled diplomacy but after 65 years it's time to get real. In my mind, an opportunity missed which is too bad because nothing else was accomplished other than another low bow to a foreign leader whose old man admitted some time ago that he wasn't divine...with...ah...some encouragement to be sure.

Moving on to Singapore, things got considerably more uncomfortable with the full compliment of Asian leaders in attendance. To begin, everyone had to agree that THE GREAT WE ARE GOING TO END GLOBAL WARMING MEETING IN COPENHAGEN scheduled for December just wasn't going to happen. Bummer. I was really looking forward to a photo op with Michelle and the two kids with the Chick on the Rock but not enough gravitas surrounding the trip will probably nix that. Next up was what I guess what one would call an expression of concern from the assembled gathering as to The Leader's economic policy, focused on fiscal deficits that seemingly are without end and the concurrent slide of the U.S. Dollar which in case you haven't been watching is falling like a rock. Despite The Suit's protestations of support, reports heading this way had the Asians flatly stating that they didn't believe a word of it and that something better happen tout suite (a holdover from the French mandate in the area). The Suit, by the way, is up on the Hill today. More on that tomorrow.

This is a tough go for Mrs. Obama's little boy Barry. You see, as we have spoken of this before, the dollar is the carry trade currency of choice. What that means is you can go out and borrow dollars--lots of dollars--because the interest rate is so low and invest them anywhere. In this country you can buy long dated Treasury Bonds and make a 3% turn or if you are not an American, you can borrow the damn things and invest them in your own country in things like...well...real estate! And wait, it gets even better. Because of the well perceived policy of bugger the dollar being carried out by The Suit and his guys, chances are you will repay your loans in DEVALUED dollars!!! Such a deal...unless you happen to be an Asia finance minister who has to monetize all those dollars pouring into his country and is watching everything around him inflating away to the moon and--dare we say it--bubbles forming all over the place. These guys have seen this movie before; it has a really lousy ending. When asked what he was going to do about this state of affairs, I am told the silence from The Leader and his band of merry men was deafening. The bad part about this is that this bunch are pretty much friends of ours, so I can imagine what the poor guy was expecting when he went off to China. Yep, he got it. But he gave it right back explaining that China had to turn itself into a consumer society otherwise we could all be in trouble. 'Cept China has about 700,000,000 people living as they did in the Ding Dong Dynasty. Consumer society? Wouldn't that work better if they each had a job so they could earn money so they could buy things so they...I wonder if that's what the Chinese told him. I wonder.

A DETECTIVE CALLS

"CHARLIE?"

"LAST TIME I LOOKED."

"IT'S PETE."

"DEAR LORD, IT'S BEEN A WHILE. WHAT BROUGHT THIS ON?"

"GOT A QUESTION FOR YOU."

"SHOOT."

"I'M A BLOG READER AND I CAME ACROSS THIS ONE CALLED 'MIDWEST MUSINGS.' THAT COULDN'T BE YOU COULD IT."

"WHAT MAKES YOU THINK THAT?"

"BECAUSE IT SOUNDS EXACTLY LIKE YOU."

"THAT TRANSPARENT, EH."

"SURE IS. TO KNOW YOU CHARLIE, IS...TO KNOW YOU."

"OK, OK. WHAT DO YOU THINK."

"OVERALL I LOVE IT, BUT THE LAST FEW WEEKS OR SO I'M WONDERING WHAT HAS GOTTEN THAT OL' TIME RELIGION INTO YOU? IN THE OLD DAYS YOU WERE SCREAMING TO GET RID OF GLASS STEGLE. NOW YOU WANT IT TO RETURN. WHY?"

"AH PETE, YOU CENTRAL BANK GUYS NEVER UNDERSTAND. GLASS STEGLE WAS AN OUTRIGHT PROHIBITION ON US GUYS COMPETING. ALL I WANTED WAS A LEVEL PLAYING FIELD."

"AND NOW YOU DON'T?"

"OF COURSE I DO BUT WHAT IS BEING PROPOSED UNDER THE GUISE OF GETTING RID OF GLASS STEGLE IS GOING TO SCREW EVERYBODY. THESE IDIOTS ARE FIXATED ON SEPARATING THE DEPOSIT TAKING FUNCTION FROM INVESTMENT BANKING BECAUSE THAT IS THE POPULIST THING TO DO. LIKE THATIS GOING TO AFFECT THIS CONCEPT OF SYSTEMIC RISK THAT NOBODY CAN EXPLAIN BECAUSE NOBODY UNDERSTANDS IT. I GET SO GOD-.."

"NOW, NOW CHARLIE, CALM DOWN I KNOW WHERE YOU'RE GOING."

"OF COURSE YOU KNOW WHERE I'M GOING BECAUSE YOU'RE A DAMN REGULATOR...IF YOU HAD DONE WHAT YOU WERE SUPPOSED TO DO NONE OF THIS WOULD HAVE HAPPENED...OK, OK, THAT MIGHT BE AN OVERSTATEMENT."

"WE ARE AS INNOCENT AS THE DRIVEN SNOW."

'YOU WERE INNOCENT WHEN CENTRAL PARK WAS A FLOWER POT. LOOK, WHAT I WANT IS FOR THE FUNCTIONS TO BE SEPARATED NOT BANNED, AND THAT'S EXACTLY WHAT WAS CONTEMPLATED WHEN THIS LEGISLATION THAT BATTLIN' BOBBY RUBIN AND THE BOYS DID BACK IN '99. THAT WHICH ENGAGED IN ALL OF THESE ACTIVITIES WERE SUPPOSED TO BE SEPARATE ENTITIES, SEPARATELY CAPITALIZED, SEPARATELY MANAGED AND SEPARATELY FUNDED."

WERE THEY?"

"WELL, YES, I MEAN...TO A POINT.'

SO THEY WEREN'T."

WELL THEY WERE, BUT THE UMBRELLA OF THE PARENT WAS DEEMED TO BE OVER THEM, AND..."

"AH HA!"

"AH HA CRAP!" YOU GUYS HAD AND HAVE ALL OF THE AUTHORITY THAT DODD AND THOSE OTHER DOPES WANT TO GIVE TO A POLITICAL HACK. YOU DIDN'Y USE IT. WHAT CAN FIX IT IS ALREADY IN PLACE; WHY DON'T YOU TELL THEM THAT?

"A RHETORICAL QUESTION NO DOUBT, OL'BUDDY."

"RHETORICAL TO THE EXTENT THAT I KNOW THAT HAD YOU GUYS INTERFERED TO THE EXTENT THAT YOU COULD, DODD AND HALF THE HILL WOULD HAVE BEEN ALL OVER YOU LIKE STINK ON POO. BUT YOU DIDN'T, AND NOW WE FACE THIS GARBAGE. TELL ME I'M WRONG PETE OL' BUDDY."

"WHY DON'T YOU EXPLAIN THIS IN GREATER DETAIL TO YOUR WORSHIPFUL AUDIENCE?

"I JUST MIGHT. CAN I SAY WE AGREE?

"CHARLIE, I DON'T EVEN KNOW YOU MUCH LESS AGREE WITH YOU. HOW'S THE BRIDE?"

"COULDN'T BE BETTER. KIDS GRADUATE?"

"THEY EVEN HAVE JOBS!"

"WONDERFUL! WHERE?"

"ON THE STREET, OF COURSE. THE MONEY'S GREAT."

"SCREW YOU! KEEP SAVING THE WORLD, PETE."

"WE TRY CHARLIE, WE REALLY TRY. BYE."

CHANGE OF PLANS

Chris the Crook released his 1100 page bill regarding financial regulation to public scrutiny yesterday. It is pure and simple a political power grab of the first order and at first blush worse than anything that could be imagined. It completely destroys the independence of the Federal Reserve, wipes out the Reserve System as we know it, transfers all oversight to a yet to be determined council or regulators, appears to eliminate all emergency lending powers of the central bank in domestic markets and appears to demand oversight authority on international operations of the central bank such as bank to bank swaps (central banks) and currency procedures. It also sets up a consumer protection agency which will almost certainly result in less consumer credit and foster unsound practices as the the community lending legislation of years past. In short, it may be the stupidest piece of financial regulation ever proposed.

As previously stated, this is a populist rant, put forward by a Senator desperate to retain his seat in the 2010 election in the face of voter anger over clearly conflict of interests which have been revealed over the past 18 months. Dovetailed with the health legislation moving slowly through the congress it is a thinly veiled attempt to control yet another huge portion of the national economy in some sort of big government orgy which those on the political left feel is needed if not wanted by the public. We might as well call it what it is...socialism...and there is absolutely nothing wrong with the concept of socialism. Throughout my career I had a great deal of contact with societies operating under various levels of socialism which had been voted for or imposed. Some worked, many didn't. None had the dynamism, the productive capacity, the flexibility, the drive or the sheer excitement of that which we have created here. But if that's what we want, they are sure prepared to give it to us.

Anyway, what Dodd seems not to understand is that the socialization of the financial sector will probably result in greater, not lesser risk to the American public. This great, unseen terror of systemic risk, lurking behind every corner is not limited to an American zip code but is a compendium of possible risks arising from the globalization of risk at many levels and in many locations. Further, whilst it may well be true that the origin of the last crisis began in the fertile minds of American financiers,
it's development and maturity of the crisis came about as a result of world-wide financing and investment decisions. To think that at a point we will not face another yet-to-be-identified crisis is to be a fool: to think that a hodge-poge of governmental appointed and directed bureaucrats, operating within a highly charged political environment will have the flexibility and authority to deal with it when it comes is to be a monstrous fool. To believe that politicians around the world in democratic societies are to be this stupid is to be...well, Chris Dodd. And yet, unless all of the now-annointed G-20 sign on to this sort of arrangement it will have no chance of acceptance on a global level. Be assured, they will not.

DOWN THe RABBIT HOLE

A couple of journeys are underway that probably should have a GPS attached before they go any further.

Bernie Sanders, Senator of Vermont, an avowed socialist and therefore a man to be recognized for at least being honest, has proposed a two page bill giving someone--forgive me, I'm not quite sure who--the proposed authority to close down or break up a financial institution deemed too big to fail (TBTF). The great thing about Bernie is he is right up front; no nonsense, no hidden agendas, no subterfuge. Bernie wants financial institutions either nationalized or tightly controlled by the government to the extent of de facto nationalization...the big ones that is. Bernie's argument is that his idea gets rid of the TBTF risk. Sure would. Bernie is the Mad Hatter in our little adventure, understanding little but expressing much. Sort of sets all notions of corporate governance and regulatory affairs back a notch, eh? Some clown wakes up one morning and says, "Think I'll shut down Goldman Sachs today, wonder how that might affect their debtors and creditors?" Counterparty risk? Don't give it a thought. Continuing obligations? Who cares. Shareholders? Win some, lose some. To guys like Bernie, the chance to play God is really appealing.

The other road down the hole is presently being explored by our good buddies, the Euros. Their immediate solution to things they don't like is to tax them--hopefully, out of existence. They are proposing that certainly banking activities they don't like be taxed. Quite remarkably, The Suit has expressed his displeasure. Could it be, unlike the Euros, The Suit hasn't realized that his boss desperately needs every source of revenue under the sun and here's another way to get some more from the bad guys in our little tea party? The Euros figured out this approach a long time ago. Of course if the business is worth doing it will get done; a tax only raises the cost of the doing and that of course is ultimately paid by the client. But perhaps I am too harsh. Perhaps The Suit recognizes that this really isn't such a good idea.

Anyway, as madness goes to the fore, the name and looming presence of Paul Volker has reappeared. The Leader has figured out that if he were to put all the credibility attached to his band of merry men in a basket, it wouldn't amount to a bucket of spit next to that of Volker. Re-enter Paul after being badly used by this mob at the start of the year. I hope the grand old man has learned his lesson but then again, no one is more correct in the approach to TBTF than he and if what comes out of this is a return to the future through a re-examination of the merits of Glass-Stegle considerable good will have been done. However, I am completely distrustful of this administration and I fear that he is back only once more to be used as a frontace to their designs. Then again, I've been wrong before...at least once.

There is a common theme emerging throughout all this and that is one of complete and total control of all things this bunch touches. It is still a bit too soon to see how this works out and much has yet to occur. I think I might wait and see but in the mean time I'm going to wax a bit philosophical over the next few days with some more random thoughts. A friend has asked for a couple of ideas as to what is on the horizon and I think I may just do that here. I'm beginning to like this God-like role. Maybe there's more commonality between Bernie and me than I realize. Scary, eh?

WHA' HOPPONED?

No idea. I'm awaiting a report from the big meeting over in Basel over the weekend. God the excitement! And in Basel no less, flesh-pot of Europe. If I were a central banker I would demand combat pay for having to spend a weekend in Basel. We simply don't appreciate what these, brave, selfless civil servants do for us. Don't understand much of it either. Reports should be flowing in by tomorrow. I'll be back.

...THE LARK'S ON THE WING..

...the snail's on the thorn, the Yankees have won it, all's right with the world...Well, not exactly. It seems that Chris Dodd (hereinafter refereed to as, "Chris the Crook"), is about to go beyond the mind-boggling power grab attempt of his House colleague, Barney Frank in dealing with the financial industry. Chris the Crook is reported to be putting the final touches on his plan that will essentially place the entire financial system of the United States under the command of a newly-created, executive branch appointed, board of over-seers while at the same time destroying the Federal Reserve System as we know it. A brand new regulatory agency will be created to oversee all aspects of financial regulation while the Fed would be restricted to it's traditional (?) monetary role.

The chance of all this occurring is, I suspect, nil, but given all that we have been through as a nation and industry over the past year make this self-centered, obviously politically motivated action appear even more despicable. Clearly in political trouble and facing a loss in next year's election, Dodd has chosen to present himself in the most crass populist manner caring not a whit for his position of responsibility and his duty to correct some of the very real oversights of regulatory responsibility that have become all too apparent.

Chris the Crook isn't a fool; indeed, he is not only intelligent but knowledgeable in the field. As a result, I suspect he will be able to gather about him considerable support in his efforts which makes them all the more dangerous not only from the standpoint of the ridiculousness of their logic but also from the standpoint of delaying the final product through constant political in-fighting and grandstanding to the least rational and, by definition, the least informed players of influence. Not to be forgotten is the effect something like this has on the willingness of the international community to take anything we do seriously as it will be seen as purely a internal American political game and not as a serious attempt to gain international agreement or reform. They will of course be correct. Not even God in His heaven could make sense of this. More next week as more is revealed.

ARE YOU KIDDING ME

My property tax bill arrived today. It seems that the county assessor is being influenced by the thinking in Washington. The appraisal is 48% higher than last year which was based on an appraisal of two years ago. It has taken me all day to try to get this thing back to sanity. I'll try again tomorrow to write something.

SAD WEEKEND

Just got back from Illinois where we had to attend a funeral. Sad. A good man only 57 years old. Makes one think

Back tomorrow.