Plan? We Don' Need No Steenkin' Plan...

I've received an number of emails asking me to "explain" the Bush Administration's "plan" to bail out Wall Street... or whatever you want to call it. As you know, I'm all about my readership, so here goes...

There is nothing, at this time, to explain.

Honest.

That's because the "plan", such that it is, exists in name only.

Nobody, including anyone in the Bush Adminstration, or at the Federal Reserve, or at Treasury, or at the S.EC., or anywhere else has, at this moment, enough hard information as to what is actually going on to know what needs to be done. Chances are, there will be large variations in the solutions proposed based on the unique needs of the different industries, markets and companies requiring help. Gathering the information necessary to develop and then weigh policy options is going to take a fair amount of time.

At this time it is inconceivable that anyone has gathered even of the fraction of what is necessary.

Anyone telling you otherwise is either full of shit or selling something.

Probably the most important thing that can (and should) happen now is that some sort of plan be put on the table that both the Administration and Congress can buy into, and buy into quickly. What the markets need now is the confidence to roll with the punches... because the next implosion is going to be amongst the regional banks, and that's going to be bloody in and of itself.

Comments

[Marcus]

The world and the world of finance is a complicated place. No mention of the reasons for this mess? Maybe something to do with simple-minded concepts of unfettered markets?

[Dennis The Peasant]

Absolutely.

Two of the many issues that need to be examined in detail are...

Sufficiency of the regulatory environment (regs themselves + agencies + enforcement strategies).

Appropriateness of accounting treatment of securities involved.

[Allen]

I have noted that what is lacking in this whole mess is clarity. I'm not even sure some of the folks who invested in these vehicles are even sure of the details. Due diligence appears to have taken a smoke break, or maybe has been on a bender.

I tend to agree with you, a sedative is needed at this point to prevent full blown hysteria from breaking out.

[Dennis The Peasant]

It is clear that in some cases, these design of the instruments was so complex that it will probably take years in various courtrooms to clear up the essential details.

It's all too pathetic to rouse my interest.

[TmjUtah]

Howdy, Dennis.

I have tried to explain to my wife and kids that the fundamental element of the free enterprise system is confidence.

Hold up a dollar bill. "Why does this buy you a scoop of ice cream, with a dime coming back?"

Because the merchant and customer both believe it is a fair transaction.

Mrs. Utah asked how this happened. I thought about it a long time and the best I could come up with was this:

"On the front end, the government coerced business to loan money they would never, ever see again... and business spent the next thirty years working to get the government to be the last sucker to buy the bad debt... after trading the debt through dozens, if not hundreds of transactions, all with their own commission and fee structures."

She gets testy if I name names. She thinks I'm "politically motivated".

I'm glad I'm not Christopher Dodd, Barney Frank, Chuck Schumer, Jimmy Carter, or Bill Clinton. Damned glad. Unfortunately for the rest of the political class, if things break as badly as they could look to be heading now hear at 2200 mountain time (and no, I cannot imagine how "bad" badly can be) it will suck to have nothing to flee in but a $2000 suit and a limo.

I had the radio and phone off for two days. Catching up has been... devastating.

[markg8]

It's not that complex. But you have to be able to see into the future to tell whether a lot of these mortgages backing the securities will be honored.

Some will be, but some - like ARMs and those with giant balloon payments - never were intended to be paid off at maturity. Most of those buyers assumed or were conned into believing they could either refi into a 30 year fixed or sell the property for more than they paid before the impossible payments kicked in.

A kid I'm working with on the Harper campaign worked for a software co. in Boston right out of the U. of Chi. that wrote software for Wall St. masters of the universe to put valuations on these things.

Rampant "flip this house" speculation in some markets like Miami condos, and parts of CA drove prices up regionally to a point they're not coming back to in the forseeable future if ever. That part wasn't criminal just stupid.

Crimes were committed when mortgage sellers lied or were lied to about buyers income, and appraisers ginned up home values. When Wall St. carved up the mortgages into pieces and repackaged them together with others the rating agencies rated them AAA the way Wall St. wanted or they'd risk losing the business. Everybody took liberties because there was no oversight, no penalties for breaking the law or being incredibly reckless and a whole lot of pressure to keep the game going.

The banks writing the mortgages didn't care because they were just going to sell them anyway. So up the ladder they go to Wall St. There's very little profit in mortgages, the spread is tiny, so in order to make big money on these things Lehman alone borrowed 30 dollars for every dollar they put into mortgage backed securities. They too planned on selling them all.

It was all fine and dandy because houses never fell in value. Nobody took into account that ever rising housing valuations would eventually price too many homebuyers out of the market just when stupid money created a glut of new construction chasing those higher price profits.

The godawful bankruptcy law seriously compounded matters.

The problem from here forward is predicting if the economy is going to be healthy enough to employ Joe, Joan, Jim and Mary in jobs paying enough for them to hang onto their houses or buy different ones. Those with ARMS, balloons and little or no money down on way overpriced houses probably are going to move. But they have to move somewhere. Depending on who takes the hit and how it's structured the bailout may restart the housing market if credit for mortgages is available.

On Wednesday I got my weekly credit card offer in the mail from WaMu. Yesterday WaMu failed, was eaten by FDIC and then promptly sold to Chase. Good thing too, WaMu was the single biggest commercial bank failure in history (they were actually a S&L but that doesn't matter now) and FDIC would have been wiped out or required the $40 billion cash infusion they asked the Treasury for last week to cover depositors.

The era of little to no government is over. I hope the era of predatory capitalism is too.

[jcw]

Mark, certainly the players you mentioned are at fault but you forgot to mention one of the major ones, the US Government. The Treasury and politicians from both sides are complicit in this debacle. The Treasury with cheap money and the pols with their hands all over Fannie and Freddie. I'm with Dennis on this, the smoke needs to clear a little before we're able to get our hands around the problem. More government might not be the best answer.

[TmjUtah]

Mark,

There's no such thing as "predatory capitalism".

Just ants finding sugar.

The government told business who they'd give money to. If and when criminal culpability is addressed, you will find that the mechanism of failure in this event is based on legislation and regulation - not "predatory" anything.

The government took the penalty for failure out of the market. And here we are thirty years later waiting for the hammer to hit the anvil.

Goddamn good thing we've got Pelosi and Reid at the helm isn't it?

And if you didn't just throw up a little bit, you are a stronger man than I.

[markg8]

For an explanation please read the whole thing. Here's the pertinent parts. It's not just subprime mortgages of course but otherwise Corn gets it right.

http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html

"Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown.
...
He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy.
...
In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the sec's workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an sec rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history.
...
The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."
...
(Enron Loophole not germane to this discussion)
...
But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It's like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm's bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

In essence, Wall Street's biggest players (which, thanks to Gramm's earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. "Tens of trillions of dollars of transactions were done in the dark," says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. "No one had a picture of where the risks were flowing." Betting on the risk of any given transaction became more important—and more lucrative—than the transactions themselves, Partnoy notes: "So there was more betting on the riskiest subprime mortgages than there were actual mortgages." Banks and hedge funds, notes Michael Greenberger, who directed the cftc's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets."

These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."
...
In 2003, he (Gramm) left the Senate to take a highly lucrative job at ubs, Switzerland's largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill. He would soon be lobbying Congress, the Fed, and the Treasury Department for ubs on banking and mortgage matters. There was a moment of poetic justice when ubs became one of the subprime crisis' top losers, writing down $37 billion as of this spring—an amount equal to its previous four years of profits combined. In a report explaining how it had managed to mess up so grandly, ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been "key to the growth" of its out-of-control cdo business."

Here's what John McCain thinks of Phil Gramm:

http://www.youtube.com/watch?v=1mHsuL6FfY4

[Dennis The Peasant]

Mark-

Would you care to name to co-sponsors of that bill?

Would you care to name which one of them spoke at the Democratic convention this year?

As usual, you overlook the fact that all of our nation's catastrophes are bi-partisan in nature.

Oh yeah, and where was the veto on that bill?

[Dennis The Peasant]

And why in the fuck would you be quoting Mother Jones here?

[David N. Scott]

wtf is up with people trying to blame the entire financial market coming down on, like, one guy or a handful of people?

The entire Wall Street way of doing business is collapsing. Washington Mutual is going under. It's Bob's fault!!

Yeah, sure. This isn't a 'blame a side' problem. This was a failure everywhere, business and government.

[David N. Scott]

Man, I'm peevish lately. Trap me in massive infection isolation for a few more days and I'll end up like Dennis.

(I kid because I love)

[TmjUtah]

Gee.

I never said it wasn't bipartisan, Mark. But the final fault lies with US.

The U.S. Congress, as an institution, has proven itself to be incapable of performing its duties. Look, I will stipulate up front that I judge certain individual members of congress to be lower forms of life than payday loan vendors. I am not a student of all the denizens of our hallowed halls of legislature - but here we are watching morons we wouldn't allow near our plumbing try to tell us that our economy is about to disappear... or that things are okay... or that it was Phil Gramm... or because of not enough regulation... or too much regulation. There are bad examples on both sides of the aisle. But the party that embraces populism, class/race war, and income redistribution is Democrat. Or fucking Chicago Communist, if they are going to really try to shove Obama up our collective ass.

That's generous. They've proven themselves by equal measure of cynicism and incompetence to be unfit for office. And we, Johnny and Janey tax payer, have listened to warnings of benefits and entitlements meltdowns our entire lives and haven't changed the character of the only organ capable of addressing the problem.

Because it was NEVER (well, I never had a Rangel, Frank, or Conyers, etc. true) OUR GUY who was the obvious instigator. But you know what, our guys just shut up and went along, because the scam, in the short term, even though anybody who understood markets at the lemonade/car wash level would have to understand that the failure would be two things: unavoidable and catastrophic. But OUR GUYS didn't stand on the steps of the congress, or in the well after hours, or on the street corners explaining that not only were entitlements and benefits and unfunded mandates and continuous operating deficits unsustainable, but that our entire economy was being grown by known bad loans being extended left, right, and center... because they weren't bad because in the end, everybody from the first guy in a strip mall office that sold an interest only loan, to the bundler who bought that paper first, to the derivatives manager at Lehman who shuffled it off to Fannie or Freddie - all followed the letter of the law and regulations that took thirty years to evolve.

The laws and regulations that congress passed to keep the money coming that political appointees thought worth paying in order to get millions in salary and tens of millions in bonuses... and oh, fuck where the ball landed, or whose fat ass hit the floor when the music stopped.

Well, the music is stopped but the echoes still haunt the hall.

There's no chair.

I think it is due more to the blazingly incoherent, incompetent, and cowardly performances of the Democrat caucus over the last thirty six hours than to any resilience of the American economy that we haven't seen the doors come off.

Have a fine one.

[markg8]

Why would I quote MJ here? From their masthead:

Mother Jones has won just about every journalism award for which the magazine is eligible, including:

Four National Magazine Awards

* General Excellence
* Reporting
* Public Service
* Fiction, Criticism, and Belles Lettres

Twelve National Magazine Award Nominations

* General Excellence
* Public Service
* Reporting
* Interactive Feature
* Single Topic Issue
* Fiction
* Fiction, Criticism, and Belles Lettres

Sigma Delta Chi Award

Five Investigative Reporters & Editors Awards

Nine Alternative Press Awards

Seventeen Top 25 Censored Stories Citations from Project Censored

You can read all the awards here:

http://www.motherjones.com/about/pr/motherjones-awards.html

As for the bill Corn cites it's called the Commodity Futures Modernization Act of 2000 S.2697

http://thomas.loc.gov/cgi-bin/query/D?c106:2:./temp/~c106ZhVogN::

Title: A bill to reauthorize and amend the Commodity Exchange Act to promote legal certainty, enhance competition, and reduce systemic risk in markets for futures and over-the-counter derivatives, and for other purposes.

Sponsor: Sen Lugar, Richard G. [IN] (introduced 6/8/2000) Cosponsors (2)
Related Bills: H.R.4541

Latest Major Action: 8/25/2000 Placed on Senate Legislative Calendar under General Orders. Calendar No. 766.

Senate Reports: 106-390 COSPONSORS(2),
ALPHABETICAL [followed by Cosponsors withdrawn]: (Sort: by date)

Sen Fitzgerald, Peter [IL] - 6/8/2000
Sen Gramm, Phil [TX] - 6/8/2000

As I understand it this bill was rejected in favor of a House bill that was much more restrictive but Gramm stuck his 262 page version in the huge must pass omnibus spending bill on 12/15/00 just before congress was set to recess for the holidays. That was two days after the Supreme Court ruled on Bush vs.Gore. Clinton was busy trying to cement his legacy by forging a peace agreement in the middle east, waiting on the CIA to confirm Al Qaeda was responsible for the attack on the Cole so he could bomb the shit out of their camps in Afghanistan and his staff was busy looking for new jobs. No one knew it was in there and nobody but nobody wanted another government shutdown ala Gingrich's stunt in 2005.

Here is congressman Ed Markey (D-MA) expressing his reservations on the house version of the bill October 19, 2000.

http://thomas.loc.gov/cgi-bin/query/D?r106:6:./temp/~r106kZn1jY::

Hope this helps.

[TmjUtah]

Wow, thanks mark.

So, al Qaeda killed our economy. Cunning bastards, them.

Or it was a job search gone horribly, horribly, awry?

I guess I'll just have to go cling to my muzzle loader for a bit and see if I get any clarity...

At least I'll end up with a clean rifle. The longer congress clings to anything, the dirtier it gets. Anything.Gets.Dirtier.

TTBO.

[TmjUtah]

Oops - on closer reading I may have jumped a conclusion.

The U.S. Supreme Court killed our ecnonomy?

Clingclingcling.

[Dennis The Peasant]

Oops. I forgot Gramm, Leach and Biley were all Republicans. Never mind...

But let's all remember Bill Clinton signed the thing... As well as the fact that most Democrats dropped their opposition when Republicans threw them the bone of an expanded Community Reinvestment Act.

Bi-partisan. Anyone who says otherwise is either full of shit or selling something. Or both.

[markg8]

Who have been the deregulators over the last 30 years Tim? You can't point at Rangel, Frank, or Conyers or any other Democrat for that.

The U.S. Congress, as an institution, has proven itself to be incapable of performing its duties.

Seeing as Republicans in the Senate have forced any legislation to pass with 60 votes over the last two years you're right. They have blown their filibuster record from last year out of the water already and the session isn't even over yet.

Look, I will stipulate up front...(bipartisan disgust with all politicians)...or because of not enough regulation... or too much regulation.

You really ought to understand that by now it wasn't too much regulation that caused this.

But the party that embraces populism, class/race war, and income redistribution is Democrat.

Oh please, tell it to the Republicans who insist it's all because minorities bought houses. And I'm sorry why should the head of Lehman (who by the way donates to Democrats) walk away with his $45 million bonus? Or the head of Merrill Lynch (who is on McCain's economic team) walk away with $66 million? How about Countrywide's Tony Mozilo and his $150 million? Ask Senators Shelby and Bunning if they think that's ok. Shit even John McCain has been waving his arms around like he's Huey Long since last Wednesday.

I don't know how you conclude Obama is a communist but you're drifting into Roger L. Simon territory which I find "deeply unserious".

And we, Johnny and Janey tax payer, have listened to warnings of benefits and entitlements meltdowns our entire lives and haven't changed the character of the only organ capable of addressing the problem.

What exactly do you think Clinton was trying to do with his tax hike and Gore with his lockbox? Shit, the Medicare meltdown hasn't even happened yet. Democrats have been trying to change the healthcare system since forever.

But you know what, our guys just shut up and went along, because the scam, in the short term, even though anybody who understood markets at the lemonade/car wash level would have to understand that the failure would be two things: unavoidable and catastrophic.

Just went along huh? Here's Ed Markey on the House floor back on 10/19/00:

"In the Commerce Committee, Democratic members worked cooperatively with the Republican majority to craft a bipartisan bill that addressed investor protection, market integrity, and competitive parity issues raised by the original Agriculture Committee version of the bill. As a result, we passed our bill with unanimous bipartisan support. Following that action, we stood ready to work with members of the Banking and Agriculture Committees to reconcile our three different versions of the bill and prepare it for House floor action. But after just a few bipartisan staff meetings, the Democratic staff was told that Democrats would henceforth be excluded from all future meetings, and that the Republican majority leader was going to take the lead in drafting the bill. What's more, we were also told the chairman of the Senate Banking Committee (Phil Gramm) was invited into those negotiations--despite the fact that this bill comes within the Agriculture Committee's jurisdiction over in the Senate and the Senate has not even passed a CEA bill. In fact, the Senate Agriculture Committee decided not to include the swaps provisions sought by the chairman of the Senate Banking Committee when the committee reported S . 2697, because these proposals were viewed as so controversial."

Tim YOUR guys did this. They stripped the refs of their power to call the game. Then they threw out the rule book. Is it any wonder it became a free for all?

It's not entitlements that are killing us. The two largest parts of the federal budget by far these days are Defense and interest on the DEBT. We spend more than the rest of the world combined on the military. You'd think Osama Bin Laden was developing fighter squadrons and a two ocean navy by the way we're blowing that cash on F-22s and aircraft carriers. We've ballooned the debt from less than $1 trillion in 1981 to $10 trillion now all because trickle down, regulation free economics does not work.

I agree with the musical chairs analogy. You may think it's the Dems who screwed this all up but look at the polling. The American people disagree.

You have a fine election.

[TmjUtah]

"Tim YOUR guys did this."

Fuck you, Mark.

If you should find your raggedy ass wandering into Utah after the apocalypse, don't come to Orem.

[markg8]

The Gramm, Leach and Biley bill set the stage by tearing down the Glass Steagall firewalls. The Commodity Futures Modernization Act poured gasoline all over the living room floor. All while the fire department's budget was cut.

[TmjUtah]

So you don't think any of the lobbying money, any of the sinecure positions, the accounting scandals...any of the refused suggested reforms... any of that has any bearing?

I said it was both sides, and stand by that. The Democrats because it is how they govern, the Reps because it was easy money in a town that doesn't do hard.

Oh, Dennis, I apologize for the profanity. To you. Not my house.

[markg8]

Or as I like to tell Republicans Tim, when it all goes to hell in a few years don't come around my side of the dump looking for choice scraps, I won't be sharing with the likes of you. Eat your gold.

It's kind of funny about Bin Laden isn't it? America's economic downfall is exactly how he wanted it to play out.

And you can have Utah Tim. I think I'll stay near one of the biggest fresh water lakes in the nation. Ain't gonna be too long til it's a precious commodity.

[markg8]

The Democrats because it is how they govern,

Democrats haven't had the power to enact much of anything or even stop awful Supreme Court justices from being confirmed since 2000. The last two years Harry Reid has had to get 60 senators to even get a cloture vote.

So you don't think any of the lobbying money, any of the sinecure positions, the accounting scandals...any of the refused suggested reforms... any of that has any bearing?

Tell it to Rick Santorum and his K Street Project. Tell it to Tom DeLay and Denny Hastert. Tell it to Ken Lay. If Democrats are guilty of anything it's rolling over too easily for your guys.

[Dennis The Peasant]

Enough.

As usual Mark, your analysis starts with the thesis that Republicans are at fault for everything, everywhere at all times... and then works outwards to whatever issue you happen to be expounding upon.

It must be great to live in such a simple world. Simple problems, simple villains and simple solutions put forth by simple heroes that somehow never quite work out the way they are supposed to.