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.

SORRY BOUT THAT

I hit the post sign yesterday and BLAM it disappeared into cyber space. After a year, I'm getting this stupid letter recognition thing from Google. Can anybody tell me how to get them to stop this? I've tried.

Anyway, two of the worstest humans in the world appeared together today to talk about reforming our financial system. Chris the Crook actually sounded serious and sincere (we know better) but barney Baby was his usual partisan attack dog self. And now the games begin. The result, I fear, will be worse than the health bill although that is only from the standpoint of craftsmanship not as to the effect it will have upon the nation. Remember all that talk about insuring that we cooperate with other members of the G-7 or G20 or whateverthehell number of countries there were involved in this thing? No more. What we will have will be a completely partisan effort, designed to fix blame (in the wrong places), involving substantial ass-covering for the two Chairman and regulations that will probably, as a result, prove to have been ineffectual at the first sign of the next crisis...and yes, dear reader, there will be another crisis. The beneficiaries will undoubtably be the financial systems of or trading partners who will move quickly to take advantage of the restrictions and conflicts in our system. We shall see how this plays out after the spring break. If one is looking for a silver lining there is one: yesterday tThe Suit appeared to agree with a general feeling that is moving through the Congress that Fanny and Freddie are busted and at some point should probably be wound up. Unfortunately, there are also some hair-brained ideas that they should be replaced with MINI Fannies and Freddies. Gotta give these guys credit. They would own the world of the stupid. And so it goes.

Meanwhile, a number of their genius colleagues are bound and determined to pick a fight with the Chinese over the value of the Yuan. This appears to be a bipartisan effort demonstrating that dumb is where you find it. What is being missed here is the understanding that the boys running the show over there are not in total control of their economy as they are of civil rights (or the lack thereof) or foreign policy. They have their constituents and 600,00,000 un-or-underemployed citizens under the watch of local political leaders. It is a different China that 20 or for that matter even 10 years ago. Life is not easy for the leadership and being seen to bully them is a sure fired way to get nothing accomplished. This gang might also consider the manner in which we are viewed and that is as a mass of out of control fiscal nut cases which may not be far from the truth. There is also the belief--mistaken in my view--that if things get ugly universal support from our traditional asian friends will be there. If things do and if I am correct that situation will open up the uglies can of worms that we have seen in quite a while. Oh, I'm not talking about guns going off; keep in mind they own 2 trillion of our bucks and we have to borrow an enormous new amount every week. If they decide to sit out a big auction....

Still, the best show for the price is Greece and the Euros. What a kick, although one of the guys on tv pointed out that Thursday or Friday is Greek independence day. From whom, one might ask? Anyway, things could get out of hand. We shall be watching.

Sorry about yesterday

WHILE WE WERE AWAY...

We're back and I wonder why. The grandkids were great, I sat through an original middle school play and survived (I thought I would never have to do that again) we have a glorious spring-like day and now I have to comment on the latest monstrous piece of political stupidity put forth by Chris the Crook which, if enacted, will pretty much end the finance business. I never though one could root for Barney Frank but these are strange times.

I hate to say it but I think I hit this one right on the head announcing some weeks back that what Chris the Crook would produce is a populist pill of rubbish as his parting shot to the American people. It is worse. In addition to being unworkable and foolish in conception it completely politicizes the regulatory process by requiring that the president of the New York Fed, the body which has prime responsibility for the really heavy lifting, be a political appointment of the President. Any semblance of international cooperation will be lost as it is New York that has the prime responsibility of dealing internationally and no independent central bank will have any desire to deal with a political hack in the first instance except on a very well-defined basis. Then too, it would appear that the government would be involved in every aspect of oversight and regulation with political appointees serving in tandem with the Federal reserve at every level which is a guarantee of failure in all roles undertaken. Some much seems wrong with this thing that it's difficult to be fully expressive unless all 2000 pages are reviewed, but one should keep in mind that which is not covered, to wit, Fanny and Fredie. Remember dear reader, these two swill dispensers hold over 5 TRILLION at risk with estimates of impaired assets standing around 20%. That's 1 TRILLION in potential losses to the taxpayers. And nary a mention: whatuowiththat, Chris? So far, it is madness but not enough is known to comment further. I'm trying to plow through this thing so I'll have more to say in the coming days.

Moving right along, I remain impressed with the Euros and the manner in which they continue to perform this marvelous gavotte which while denying any agreement amongst the member states to bail out Greece the assurance that, if needed, a bailout will be available remains firmly planted in the mind of the financial market. Sounds very French to me. They have always been good at that. There is a BIG chunk of refinancing due in a bit over a month's time but the success of Greece's foray in the Eurobond market two weeks ago has taken the edge off a bit. The stakes are too high for a calamity unless one is caused by a totally unforeseen event, so I remain convinced that one will not occur. If I had any money--which I do not--I would be long the "on the run" Greek Euros with a yield of around 6 1/2% Like the currency as well as what is happening on our side of the pond is hardly cause for optimism what with the very real possibility for a full blown constitutional crisis over this House health care vote looming this week-end. For their part, the Greeks are behaving rather well although for how long remains the real question. Just long enough is, I suspect, the answer.

More tomorrow. It's 60 degrees. Me and the Mutt are going for a walk

THE BLOGGER'S BUDDY

He did it again! Krugman is simply a joy for somebody like me. After a weekend of terrific football, where you're all worn out and hung over, comes this jackass to lighten your life and give you something to write about. Today, he gave a luke-warm thumbs-up to Ben Bernanke calling him a "superb research economist"--takes one to know one. But he's too complacent says Paul, as he was before the crisis, and it was his complacency that caused the same. Seems that Paul thinks Ben didn't speak out on sub-prime lending. Ah, Paul. The origin of sub-prime was always Fanny and Freddie and the Fed had been speaking out against their policies for years--you and your boys just didn't listen. Now the problem is too much complacency about under-employment. It seems that Ben is going to have to adopt policies to create jobs.

How the hell a central banker is supposed to do that Paulie doesn't tell us...which of course begs the question entirely as to whether that is a central banker's job at all. What it does do, however, is avoid the difficult conclusion that The Leader's administration, for the first year at least, has been more or less a disaster on the job and fiscal front which is the real purpose of the piece. Krugman concludes that Bernanke should be reappointed nevertheless because a successor would face too hard a battle in congress. He right there. What he's really saying is that if Ben stays around we can blame him forever...just like george Bush

WHAT A DIFFERENCE A DAY MAKES

Boy, was I wrong when I said not much was going on. Today exploded with action on the regulatory front all of which stank.
First, The Leader and his boys let it drop that they were trying to figure out ways to insure that the American Taxpayer gets all of his money from TARP back. Of course they couldn't give a damn about the taxpayer but here presented itself another way to lay a tax on the banks which they believe no one in the country cares about anyway. These guys are like Willie Sutton , who wen asked why he robbed banks replied,"Because that's where the money is." Actually, they are worse than Willie; he didn't lie about his reasons.

Anyway, what we have seen is that almost all the "banks" have repaid their TARP funds, with interest and with an additional healthy return generated for the USG by way of the sale of the warrants that were part of the deal. But it would appear that there might be a few problems along the way because if one remembers, a whole bunch of taxpayer money went to GM (now owned by the Gov.), GMAC, Chrysler, Chrysler Financial and AIG. That aint comin' back soon. Then of course there is the little matter of Fanny and Freddie, the makers of the feast about whom we have spoken ad nauseam over the months. So why tax the banks for the decision to bail out this bunch? Think Willie Sutton. Actually, if the actions of the Government were to be viewed from the prospectus of Cui Bono, why not tax the United Auto Workers? How far do you think that idea would get? Or better yet, is there a way to garnish the salaries of Congress? Just a little midwest populist jibe there, don't take me seriously. I'm a little past my "use by" date, but in my lifetime I have never seen a more venial, useless bunch than has been put together by The Leader and his handlers. These guys are the worst.

Well, let me rethink that. Came today Shelia ("Poo") Bair, head of the FDIC with another idea. With a split vote, the FDIC is now proposing a tiered level of deposit insurance to be paid by banks based upon the perception of risk that SOMEBODY will determine exists on the banks' balance sheets. To put it another way, she is proposing to tax liabilities (she claims it's not a tax) according to some credit determination made by SOMEBODY (you see, she doesn't have nearly the talent in house) at some point for some non-defined period of time. This is a Bair of very little brain. When questioned about this on TV this morning she was unable to come close to explaining her theory behind this. Nor has she apparently considered the fact that the cost of this hair brained scheme will be passed right through to the consumer depositors in the form of either lower interest payments, additional fees, reductions of service or all of the above including a few other delicious charges all of which will be blamed on the FDIC. Nor has she considered the fact that the two biggest risk takers, Goldie and Morgan Stanley have little if any consumer deposits but as bank holding companies they now come under the FDIC umbrella and the implied protection that that brings. If there is a X rated version of "Dumb and Dumber," she should be the star.

Finally, it now appears that Helicopter Ben may well be back in trouble as to his re-confirmation. He deserves it, the jerk, and on top of it all he is now in a nasty little open-air brawl with John Taylor, now of Stanford over the "Taylor Rule" which the good prof feels Mr. Bernanke has deliberately mis-catorgorized. Academics at each other's throats!! Hide the Children! I could care less if the Chairman gets himself into this little brawls except that it does no good for his institution in these times. Somebody had better start standing up for the only group of people who actually know what the hell is going on out there otherwise we are heading for a real mess if not catastrophy .

CUI BONO?

Quite a day today. If you pick up your local blat, you are bound to see some leaked story concerning what our regulators are doing (or not doing) in regard to one of our more prominent institution and you may ask yourself, "Now I wonder who (or why) leaked that?" One of the things you learn in Law School is the old Latin adage, "Cui Bono...who benefits? I bet even Judge Sotomayor learned that at an early age even though according to the Chairman of the Judiciary Committee she never had the benefit of being exposed to the classics. Having attended Cardinal Spellman H.S. in New York City in the seventies as did the good Judge, one wonders where that moron got that idea, but I digress. The latest leak was the secrete agreement under which B of A, Citibank and a couple of other of our stalwarts are operating concerning management, oversight, good practices and God knows what else. As these dictats generally come from the institution's primary regulator, i.e. either the Fed or the Comptroller of the Currency (Treasury) one can assume that its someone on the outside looking in who thinks they can benefit from throwing a spanner in the works and I suspect that it is none other than our old friend Shelia Bair of the FDIC who, through creating disruption and doubt believes she can enhance her own position as she has been attempting to do since this mess started. Cui Bono? This dope. Bet on it.

The other big who benefits question today came from the House hearings featuring former Treasury Sec Henry Paulson. To the surprise of practically no one, Ol' Hank said yeah, I told Ken Lewis that he was toast if he tried at the 11th hour to queer the Merrill Lynch deal. I was watching the proceeding on CNBC when Michelle Caruso-Cabrera asked one of the congressmen, "So?" I like the gal; gets right to the heart of the matter. There was no answer. Of course what Hank did or didn't do is hardly the issue. What this is all about is the ongoing battle about who will do what to whom in the future. Congressman Issa, probably speaking for the Repubs on the committee has from the git-go tried to use this incident to kneecap Ben Bernanke, he being totally opposed to his reappointment as fed Chairman. As we mentioned in a previous post, Rep Issa had best be careful for what it is he wishes. The Dems, on the other hand, are determined to portray all parties as being out of control, a situation that cries out for an entirely new system of regulation and oversight, going as far as to muse that these dark dealings might well take on aspects of criminality. Setting aside for the moment the brilliance demonstrated by both Houses in the oversight of Fanny and Freddie under the guiding genius of the tag-team of Frank & Dodd, one wonders what use 535 Members and 100 Senators would have in solving the kind of mess faced by Paulson if such a situation should again arise. The Mall would become one giant foxhole. But Cui Bono? Seems to me it was Ben Bernanke. Ol' Hank proved to be a stand-up guy and essentially said it was me not him who dropped the hammer on Ken. So maybe we have Ben to kick around for another term. Could be worse. But as Lawrence Peter Berra said, "It aint over 'til it's over." This one isn't. In the mean time, CIT is about to go in the tank and while not an AIG, CIT provides a hell of a lot of credit for a hell of a lot of companies, who provide a hell of a lot of jobs, who...well, just let's say nobody benefits.