AS DARKNESS FALLS

I was going to close out the week yesterday but two items came up just as everything was shutting down in typical Washington fashion.  If you have something going that you suspect some folks might not like, make it public when few are sure to be watching.  Ever see Hilliary Clinton's E-mails released on Monday morning?  Never.  On a Friday after business hours hopefully before a three day weekend?  Always.  We had two incidences yesterday which will bear continuous monitoring.

It appears that the "claw-back" demands contained in Dodd/Frank, many of which have been implemented by the largest financials institutions in various ways have not passed muster with the regulators.  They have therefore let it be known that they will compel their "clients" to undertake far more harsh rules regarding executive compensation AND expand the categories of those who fall under these rules.

I'll wait to see what is proposed but little by little, we are getting closer and closer to the nationalization of the financial industry...which by the by, one candidate running for the Democratic nomination  for President has proposed...which in other jurisdictions has been proven to be not a particularly good thing.  Aside from that, the best and the brightest tend to go where there is more not less, so it gives me some difficulty in trying to figure out why regulators would wish to limit the attraction of talented people to those institution they regulate.  Or to put in simpler terms, to quote a former colleague, "You pay peanuts, you get monkeys."  There are massive difficulties in attempting to implement such a program as opposed to the one notion in its favor:  big compensation encourages bad behavior thru the taking of inordinate risk.  Somewhere along the line this became the fashionable reason for the crash of 2008 and the even-more fashionable reason for avoiding responsibility on the part of those who clearly shared the responsibility.  Which brings me to our second incident.

If there was ever responsibility to be taken for the mortgage crisis, a lot of it could be laid at the front doors of Fanny and Freddy and the politicians who allowed them free rein throughout our financial marketplace.  Remember the attempt to reform both in 2006, killed stone cold dead by the refusal of Barnie Frank to deal with the issue memorialized in his wondrous lisping and saliva spitting decision of "I tink I'll roll da dise on tis one?"  Came up craps didn't it Barney, but you skated.

These two disasters waiting to happen were at the time publically owned corporation but they benefited from the "implied" guarantee of the U.S. Government.  Some implied.  There are now in "conservorship" (what ever that means) with a pile of crap on their books and forced to pay over to the government all of their profits.  This does two things: it allows the government to say "Look at all the money we are making!" and it delays the day of reckoning for the accounting of portfolio losses until all the capital runs out.  What to do?

In the middle of Holy Week, comes the announcement that a number of D.C. whizzes--all Democrats by the by and all connected to Ms. Clinton--have come up with a solution to what at some point will become a monumental embarrassment.  A Brand New Corporation!  This one will take up the rolls of BOTH Freddy and Fanny going forward, absorb much of it's predecessor's portfolios and......ready for this.......WITH THE EXPLICIT GUARANTEE OF THE U.S. OF A.  Don't need no damn "implicit" stuff for this baby! In short, this will repeat all the stupidity of the past with the added bonus that with the government ownership, the political allocation of credit is a sure thing accomplished by a bunch of political hacks to whom risk will be no object.  God!  you just have to love the sheer audacity of it.  Know what?  It just might pass through Congress because of the number of asses this will cover and the political favors available to those who get on the band wagon.  In the dead of night.

May you have a lovely Easter Weekend.

SEND IN THE CLOWNS

It would be nice, perhaps even useful, if the policy makers wandering around Washington today could get together every once in a while and compair notes.  A couple of days ago Janet Yellen was waxing poetic about her concern for the increase in risk in the banking sector as a result of bank lending to M & A transactions and to private equity firms which supposedly were inherently risky clients.  Actually, banks have done pretty well over the years with such clients because the structure of most transactions is such that banks are in a pretty good position among the debt holders; they are in fact the preferred lenders.  They also get out first and depending on the state of the markets, often before the expiration of their commitments keeping the substantial up-front fees while losing the risk which supposedly justified said fees.  But, with this Fed composed more and more of proponents of the theory that banks take deposits and make good old C & I loans, this stuff does look risky.  Forget about the fact that losses in this area have been historically no higher than any other sector of lending and in fact probably lower.  Each transaction is unique; each is subject to individual risk assessment; each is individually structured and of considerable importance, there is diversity of sectors.

Now one area of lending that has caused problems in the past and which has probably been the home of most losses is real estate.  It's sector lending pure and simple and when things go wrong they go wrong all at once and all over the place.  There is no diversity whatsoever.  The bubble bursts and good-bye asset values.  The other bad thing about real estate is that the proclivity of the sector to "bubble-up" is a result of excess liquidity which, resulting in the unnatural ease with which to finance transactions, drives up demand which in turn drives up prices to uneconomic levels which results in, well, can you say 2007/08?

Anyway, while Janet was warning about too much risk in bank lending (while continuing to pump scads of liquidity into the system), comes the newly installed boss of Fanny and Freddie announcing that these institutions along with a couple of other are about to formulate a new set of rules, loosening credit to home buyers, abandoning the tightening measures which were put in place to avoid the insanity lending of year 2000 and on.  One could almost hear Barney Frank lisping and spitting all over the House conference room saying, "I think I'll roll the dice on this one."  It seems that The Leader and the geniuses around him have come to believe that the slow growth of the housing sector is playing a major roll in the lack of growth in the economy.

Now I know that I can be accused of being too critical at time regarding the folks in charge of running this show, but it seems to me that if you want to get a pretty good idea of why there is a reluctance on the part of business and industry to invest, you might want to ask yourself who the hell is in charge here and what is the fiscal and economic policy of this administration?  You simply cannot have the Federal Reserve which becomes less independent as each day, pass warning about risk in the system where historically there has been acceptable risk and a political appointee mandating policies in a sector that together have produced the most enormous losses in the nation's financial history.  And the policies are exactly the same as those which have been condemned for the past five years!  Are we now saying that the financial institutions of this country are to be directed by their regulators as to their activities on the basis of political concerns?  Europe, here we come and one can see just how that has worked out--or not as the case may be--and continues to reap havoc even as of this date.  Where are the clowns?  Don't bother they're here.

Off to see granddaughter #1 graduate from high school.  Back next week.  God! I feel old.