Tuesday, September 30, 2008
I’m sure that the slap in the face you received from the rank and file about the bailout has you considering a move to the left to get the votes you need. If I were you, I’d reconsider, and count the number of Republicans it costs you carefully. If you go to the left with this bill, then it will be viewed as a Democratic bill. Since your base doesn’t understand modern banking or economics, they’ll believe that you sold out to the “fat cats”, and you'll drive them from the polls on election day. But on the right it will be portrayed as a 700 Billion Dollar money grab from taxpayers that was all handed off to special interests, and will bring them out in droves.
If you do that Mrs. Pelosi, you’re going to cost Barak Obama the Presidency, and it will cost you a number of “at risk” seats in the house. That vote was the American taxpayers letting the Democrat’s in congress know that the party is over.
Monday, September 29, 2008
Sunday, September 28, 2008
Saturday, September 27, 2008
I think my biggest complaint through all of this is, why does the market always have to melt down during hunting season? I’m sitting here with a buck that will score 140 eating my wife’s flowers and scraping the bark off all of her landscaping, but between my 11 hours of work per day and my 3.5 hours of commuting per day I don’t have time for anything fun.
Not that this has really been a big hoot for anyone. The banking industry has been decimated in New York. The talk is that we can expect somewhere between 30% and 50% of all hedge funds to just disappear. And between the lack of available credit, the higher cost of funding, and the monumentally idiotic (and inevitably useless) ban on short sales, the markets that are left will be much smaller, less liquid, and lower priced than they are today. Now that I know a little more detail about Paulson’s proposals I’ve changed my view on the short term outlook for inflation, but that’s mainly because I believe that an economic slowdown is a foregone conclusion.
And to top it off, we’ve done that all too foolish of things and put congress in charge of “solving” the problem. More than anything else what our banking system needs right now is a solution that’s effective, expedient and (comparatively) cheap, but that’s the opposite of what congress specializes in. Putting them in charge of settling this issue is like going out for a night of binge drinking and making the most intoxicated person take the role of designated driver. And Congress has stayed absolutely true to form. Whenever they talk about it, the congressional leadership has sounded just as confused, slurred and verbally staggering as any drunkard.
First the Democratic leadership announced that they have no intention of sticking their necks out and doing and deal without the support of Republicans. They have all the votes they need and can do what they like without the Republicans if they want to. But this plan involves snatching 700 Billion Dollars from the US Taxpayer, so they don’t want it to be called “The Democrat’s plan” after the fact. Next they announced that they had “agreed in substance” but they hadn’t actually asked the Republicans in the House to agree to anything. And when the house Republicans saw that the plan included giving 20% of the money to A.C.O.R.N. (the radical leftists group being widely investigator for voter fraud) and that a bunch of other liberal special interests were also getting a piece of the action, they decided that they didn’t like the deal as much as the Democrats had already said they did.
Not that they were ever asked you understand…. Barney Frank just assumed that with the entire economy teetering on the brink, he could shove what he liked down the Republicans throats and if they didn’t like it, he could accuse them of playing politics with the future of America. Well that’s what happened, and that’s what he did. The Media jumped on the bandwagon and accused house Republicans of being “obstructionist” without ever explaining that the thing they were obstructing was Barney Frank turning the “bailout package” into the largest Democratic cookie jar in history.
And that’s another thing… is it that hard to find someone to work at the major networks who knows even a little about how a modern banking system works? If you listen to those idiots on CNBC you’d think that 700 billion dollars is going directly into the numbered Cayman Islands retirement accounts of the mortgage traders who got recently fired. All they seem to be able to manage in the way of information is a mumbled story about how the “fat cats” are screwing America, and that the future of the American Taxpayer is to pay for someone else’s greed. Well I suppose there are a few things in there that might pass for information, but they certainly haven’t “gotten to the root cause” of the issue to say the least.
They didn’t say that banks were making bad loans thanks to the Carter Era “Community reinvestment act” that made it a requirement to write mortgages for people who were unlikely to pay them back. They didn’t say that Fannie and Freddie’s unlimited capacity for bad mortgage paper that met all the political requirements but none of the fiduciary was the REAL cause of the mortgage problems, and the “crisis” only happened when their Ponzi scheme ran out of suckers. They never mentioned the decades long role that wholesale accounting fraud at Fannie & Freddie contributed or how the Democrat controlled congress ignored all calls for improved governance by BOTH parties. To the dunderhead media … it was all about the evil rich guys on Wall Street.
What’s more, the media never bothered to tell anyone who will inevitably be getting the 700 Billion dollars the taxpayers are about to shell out. In fact, they’ve addressed this so poorly that in my lifetime I can’t think if an issue that’s been more universally misrepresented by the media. For example, do you know why no one in the media asked the question “How did the Wall Street traders manage to skim off 700 Billion dollars for themselves”? The answer to that is simple, it’s because they didn’t. The people who got that money were all the sub-prime mortgage holders who bought homes they couldn’t afford and got mortgages approved because they met the political agenda of the liberal left. The only thing that the people on Wall Street got was fired when they found out that Fannie and Freddie weren’t going to reward them anymore for ignoring the facts in favor of politics.
Look, I’m not saying that a bunch of people on Wall Street didn’t act incredibly stupidly. I never bought into the whole thing myself. In fact many of my friends had gotten kind of sick of hearing me talk about how overvalued that market was and how all the Mortgage and CDS guys were simply trading volatility for liquidity risk. But at the end of the day the reason things went awry in the first place is because the mortgage market thought it was more important to meet the Democrat political agenda than to be financially prudent. Fannie & Freddie were the tools that leftists used to get the markets to bend to its will, and the markets bent the way they were told to.
I’m not crazy about the Paulson deal. To be frank, I’d like it better if it didn’t involve Congress in the decision making. I knew that Barney Frank and Chuck Schumer could never resist the urge to jam a few hundred billion in pork in there. In my mind, the best solution would be one where the public and private sectors are clearly walled off from one another, but the odds of this congress doing something like that are very small indeed. I also think there are ways to let the burden fall on the guilty instead of the innocent, but every time I try to write an essay about that the situation changes making it ‘out of date’. So for the most part I’m not going to comment on the details of the plan until they’re a little more concrete. This isn’t me being evasive… I just don’t have the time of a full time blogger. If you’re that curious what I think of some aspect of the deal then ask and I’ll try to get to an answer.
I will say this though; the short sale ban is stupid. Everyone knows that professional investors won’t participate in a market where they can’t hedge. So when a name gets added to the list (like CVS laughably did … yes the drug store company) the stock will rise a bit while short sellers close their positions, then the stock will sell off in light volume while the pro’s get out of their long positions too. In the end it will mean a lower price for most companies… short sale or no.
Since the dawn of time CEO’s have blamed short sellers whenever their stock trades down, but they are just the most convenient fall guy. In reality by covering their shorts during times of crisis, it’s short sellers that add greatly to an orderly market. But there is just no educating some people. And if you’re going to have a witch hunt, everyone knows you had better find at least one witch. We’re one step away from a farce with this solution. I can’t wait to see how they try to legislate Wall Street going forward. Hopefully by them sanity will have returned to a few people at least, and the media can go back to worrying about Sarah Palin’s shoe size.
Until then though, try not to believe what you hear about this on TV… I honestly can’t remember a time when they were ever more universally wrong about anything than this.
Monday, September 22, 2008
Last week I got a ping from Jack Grimes. Jack works for State Assemblyman Jay Webber, one of the members of the Republican side of the New Jersey Legislature. Jack had read my essay on the financial meltdown in the corner. (thanks John) And since the Democrats in the State Assembly had planned a little show trial for today, he asked me if I could come down to Trenton and discuss the issue.
Well since the committee meets during open market hours, that wasn't realistic, but at Jack's suggestion I've submitted comments in writing instead. There will be no vote in the committee so it's probably not a terribly important day in legislative history. It's just a show trial; a Labor committee meeting where the Democrat faithful get a chance to explain how they blame this whole financial crisis on racism or sexism or tax cuts or whatever pet agenda they're looking to advance this week.
Anyway ... I started to write a deeply partisan diatribe, but I ended up going another way. The fact is playtime is over now. If the Democrats in the State Assembly do like they've been doing for the last 20 years, then New Jersey is in BIG trouble. It's time for them to grow up and face reality. and I figured the best way to get them to do that was to tell them some of the things about all of our future, that are no longer the subject of much debate.
So here it is. My written comments to the NJ State Assembly Labor Committee - 9/22/2008.
My name is Tom X------------X and for the last 19 years I’ve been employed as a quantitative analyst and portfolio manager in the financial services industry. I started my career at JPMorgan, but for the last 11 years I’ve been working for multi-billion dollar hedge funds like X-----------X and X----------X. Much of my work has been dedicated to developing an understanding of market crises like the one we’ve recently witnesses, and I hoped it might help to offer the perspective of someone who makes their living dealing with circumstances like this.
As you can imagine, there are many questions about what the effect of this crisis will be, but some aspect of our economic future are already set is stone. So I’d like to take a moment to tell you about some of the more certain consequences of our current circumstance, and how they will change the economic condition of New Jersey in future weeks and months.
In a few weeks, a plan will be put in place for the federal government to take on a large portion of the devalued bonds that were the initial catalyst of this crisis. That will greatly expand our national debt. The current package approved by the government is for 800 Billion, so that can be thought of as a minimum. Further insolvencies might push it substantially higher than that before the crisis is over. This makes our national debt so large that the politically viable alternatives for either political party to deal with it begin to diminish dramatically. In the end they’ll have no choice but to embrace the “Japanese Solution” which is to dramatically inflate the currency and to hope for economic growth.
This will affect the New Jersey economy in several ways. First, to raise the 800 billion dollars they need, the federal government will issue Treasury bonds, and that will cause interest rates to rise for everyone. So it follows that the cost of borrowing money for the state government will be much higher than it has been in the past. Thanks to rising costs for government labor, a massive unfunded pension liability and other heretofore unaddressed expenses, the balance sheet of New Jersey’s state government is already in strained condition, and significantly higher interest costs will push it close to its limit.
New Jersey will also be dramatically affected by the cutbacks in the financial services industry. Even if further failures are prevented, estimates of the total number of unemployed for the greater New York area are already in the hundreds of thousands. The financial professionals who will be unemployed spent a great deal of money to support doctors, car dealers, contractors, stationary stores, restaurants and other businesses. A significant part of New Jersey’s total economy was driven by financial services and all those who provided them their services will also feel the pain. It’s not just some fictional “fat cats” who will bear this burden, but everyone.
The combination of the strained balance sheet for the state and the dramatic drop in tax revenues from high unemployment will almost certainly bring the New Jersey’s credit worthiness into question. In the past New Jersey’s made great use of the very same tools and products that have just blown up in the Mortgage market’s face. Bond insurance and Credit Default Swaps will no longer be viable tools for reducing the states interest payment’s on its debt and with the states credit worthiness in question, New Jersey’s cost of borrowing will rise even higher.
In the meantime, economic activity in New Jersey will slow to a crawl. Thanks to the high taxes and heavy handed regulation already in place, New Jersey already has a higher unemployment rate than the rest of the country. But the contraction of the financial services sector will strike New Jersey directly, and will make conditions in the state much worse than the country in general. Nationally we’re headed toward a recession. And with the present policies in place I would expect the unemployment statistic in New Jersey to reach 11% or 12% at a minimum. If any new “anti-business” regulation is added or taxes are increased, then it will likely be even higher. Either way, since current policy will cause the economic recovery to take longer here than elsewhere, the most productive members of the population will leave in large numbers as they abandon New Jersey for jobs in the low-tax, pro-business states in the west and south. In short, with the present policies in place, ours will be a deeper trough, and a slower climb back than most other states.
I referred to the unemployment “statistic” a moment ago because I would expect real unemployment to actually be much higher than that. Roughly 280,000 people in New Jersey work “off the books” either because of a lack of legal work status as immigrants, or to avoid the minimum wage laws and other obstacles to low income employment that government’s put in place. These people don’t show up on any employment statistics, but they represent such a large “underground economy” in New Jersey that the effect of their absence will certainly be felt. I would expect productivity in the construction sector in New Jersey to fall 80% at a minimum, and for a similar percentage of the foreign nationals working in New Jersey, to simply return home as rising prices and high unemployment make conditions here more closely resemble those in the countries they left behind. This loss of population will also affect the demand for housing, so the resale of existing homes will likely drop as well.
In the meantime on the national scale, all prices will begin to rise dramatically as the government allows the currency to inflate as a means of reducing its debt. In the hope of generating economic activity, the fed will push short term rates to new lows, but indecisions about the future and the threat of additional regulation from government will counter the effect and keep economic activity and confidence about the future low. Productivity will fall, and the economy will slow and eventually begin to contract. A national recession under the next administration is a foregone conclusion.
While all of this takes place, the most economically and historically ignorant in government and the media, will be demanding that government “Do Something!” They’ll be presenting this as a failure of capitalism or claim that it was caused by deregulation; neither of which is true. Operating from a position of complete ignorance of history and economics, they’ll be demanding a “New - New Deal”. They’ll call for policies with the intent of “helping people” but in reality they will be ensuring that those same people remain unemployed, and that the economy goes into freefall.
It won’t occur to them that they’re contradicting to the academic consensus that the policies enacted in the 1930’s made the depression much worse than it could have been. They’ll remember the myth that it solved things, rather than the reality that it actually made things worse. And because of that ignorance, they’ll demand new anti-business policies that make them feel better about themselves, but which really cause greater harm to the very people that they want to help. And while each political party will certainly be busy blaming the other as the “one who caused all this”, it’s already clear that it was policies endorsed by both parties which actually created the cause of this crisis.
So if a “New - New Deal” will cause more harm than help, what’s the State government left to do? Without command and control economic policies and fixing wages and prices like Roosevelt did, what options does the State have left for improving conditions of its citizens?
Well ironically New Jersey is one of the few states that actually has the power to cure locally what was caused for it nationally. And the answer is its unusually high tax rates. Every state in the country is about to see a period of rising prices, higher interest rates, and slower economic growth. The result will be a reduction in the “standard of living” across the entire country. But if the state legislature could seize this moment to adopt a pro-business, light regulation and low tax economic policy, the pain of the coming economic contraction could be kept to a minimum for everyone. With cuts to tax rates and to government spending, New Jersey will become an economic lifeboat in the sea of financial troubles. And when the trouble has past and the economy begins to grow again, New Jersey will be a clear leader in the next economic expansion. By seizing this opportunity the New Jersey legislature could create an engine of unprecedented wealth creation, and make New Jersey the envy of the nation. Or it can reduce its remaining citizens to bread lines and welfare roles, while it’s best and brightest flee.
This financial crisis will create great challenges for everyone. But we aren’t powerless. New Jersey’s future can either look like Monaco, or it can look like East Germany. Low tax pro business polices will lead to one future; high tax, strong regulation policies will lead to the other. At this point we can either learn from history, or repeat it. There is no third choice.
Wednesday, September 17, 2008
House Speaker Nancy Pelosi has ordered a broad, swift investigation of Wall Street and will demand testimony from Bush administration officials and captains of finance, congressional officials said.
I personally feel like someone should be saying to me "Apart from that Mrs. Lincoln, how did you like the play". My personal situation is unperturbed, but it's no fun watching 30% of the people you know at risk of losing their jobs.
For people in the know, it's been really hard to imagine this circumstance getting worse... that is... it was until this story came out. But this just sounds like on top of all our real problems we're also going to have to deal with Barbara Boxer getting on TV so she can tell us how she wants to nationalize the banking industry. Dear God please save us all from these economic imbeciles.
Sunday, September 14, 2008
A friend emailed me this video about three days after it was posted on youtube. I watched it and found it to be pretty good. It gave useful language to an issue that I’ve often struggled with and that is “how do you explain how liberals think in a way that stops them from making their most obvious mistakes about logic and reason”.
And I guess over the last year I’m seeing it with new eyes. I still think it’s a really great and highly entertaining lecture, but I think it makes a tactical error. Well… maybe not, but it fails to do the thing that I hope to do which is convert liberals back to a view where logic and reason and critical thought become a part of their world view. To be fair, it doesn’t actually fail at that task because it isn’t designed to accomplish it. This is a lecture designed to explain to conservatives how the political opposition thinks. And to accomplish that he uses the tool and thought processes which he clearly says that liberals don’t practice. He uses logic, and reason, and critical thought.
In that way he’s crafted a speech which is the opposite of one which might change liberal minds because it elevates the dialog to the place where the liberal defense mechanisms are at their strongest. The thing I would try to do would be to repackage this lecture in a language which slips under the doors and through the cracks in the liberals defenses and actually change their minds.
I don’t know… maybe it can’t actually be done. Maybe the very fact that life hasn't changed their minds about issues means that they are the people in our society least capable of logic and reason. All the same though I'd love to hear what liberals think of this video. It will probably be all ad-hominem attacks and accusations of arrogance, but I'd like to hear them all the same. Send this video to liberal you know. I’m going to do the same. Ask them to watch it and give you some feedback about it. I’d be interested in what they come back with. Feel free to send me email comments or leave them here.
Saturday, September 13, 2008
We might have just been whistling past the graveyard, but my co-workers and I all had a good laugh this week. The drama that had us so pre-occupied was the negotiations of various parties for Lehman Brothers, the erstwhile respected financial institution which is the most recent casualty of the imploding credit and mortgage bond market. For those who don’t understand what’s happening, here’s the way it’s playing out:
Lehman, like many large financial institutions had dealt heavily in the highly obfuscated credit derivatives and mortgage bond market. It’s a gross simplification, but in essence what they were doing was borrowing money to buy mortgage bonds, and then using the bonds themselves as collateral for additional borrowing. That in itself isn’t a big deal at all. It’s basically the way that the entire banking system works. When that same practice is done with US Treasury bonds no one blinks an eye, nor should they.
But the reason no one needs to worry about that practice where Treasury bonds are concerned is that, within certain very well understood limits, a Treasury bond will be worth pretty much the same thing tomorrow as it’s worth today. US Treasury bonds are rated AAA and represent a minimum risk of repayment. So little in fact, that for years I’ve been joking that “if the US ever defaults on a bond issue, then you won’t need to buy gold because the only commodity that will be worth anything at all will be bullets”. Anyway for that reason Treasury Bonds are considered "riskless" and make excellent collateral for additional borrowing by banks.
Until very recently everyone …well as I will explain in a minute not “everyone”… but it was the general market consensus at least that many mortgage bonds were AAA rated as well and therefore justified the same investor confidence as Treasury bonds. As you have certainly guessed by now, that’s turned out not to be the case. And the issue was one which is still looming out there as a potential threat to the financial markets, and will continue to be a threat long after this issue with a “credit crunch” is resolved.
Financial professionals know a great deal about the potential risks inherent in various financial instruments. The greater the risks, the lower the bond’s value. For treasury bonds for instance, their price can be affected by a change in interest rates, or a few other very well understood risks. And it was generally believed that in broad terms, the only additional risk between a Treasury bond and a mortgage bond was the exposure to credit. So if you could find a way to adjust the properties of the bond to reduce the “risk of repayment” then you would have a bond which would be worth essentially the same as a Treasury bond more or less.
The industry found ways to make that adjustment by using a bunch of mathematical tricks which I fully understand but would make for really poor reading so I’m not going to detail them here. It should suffice to say that in theory anyway, the process they used for mitigating the repayment risks were sound. In the same way that two plus two always equals four, the models used to determine the value of the bonds were accurate to within their stated limits. Higher math often involves a level of intuition. So while you still had to leave room for a few “unknowns” that you would be estimated with probability, the models were for the most part accurate. It's generally agreed that this crisis has not been caused by a problem with the models.
But when you’re trying to figure out what a bond is worth, there are two ways to do it. You can either use the model to get the theoretical value, or you can simply ask everyone else what they will give you for it and take the highest value offered. If you’re going to hold the bond until it matures then the theoretical value becomes a perfectly fine way to determine its worth, but if you need to sell it today, then you have to take what others will pay and that’s the end of it. And what that means is that under certain circumstances there is another risk that needs to be included in the value of all bonds and that’s called “liquidity risk”.
The issue of liquidity risk isn’t really well understood in the financial services industry. There have been a number of papers on it by guys a lot smarter than me, but it hasn’t made its way into the conventional wisdom of the industry yet. There are no models for it, and no "generally accepted" ways to estimate its effect on the value of a bond. It’s a behavioral issue that hasn’t been very well quantified. And that’s the REAL problem with the mortgage and credit markets.
The sudden stop of the housing industry’s growth caused mortgage default rates to rise. That increased risk subsequently lowered the value of all the mortgage bonds out there in a small but measurable way. But some firms, like Bear Stearns for instance, had stretched their balance sheets so thin that even a small drop in the value of those bonds would push them beyond the limits of collateral needed to meet the federal banking regulations. In essence, they received a “margin call” and were required to raise cash immediately. But when they went to sell their Mortgage bonds in the market, there were no buyers willing to pay them the “theoretical value” of the bonds so they had to drop their price.
When they finally sold all the bonds they needed to, the lack of willing buyers had pushed the price of the debt far below what the models had said they were worth. And that’s when their real trouble began. Good accounting practices required Bear to include that much lower sale price in their methods for determining the liquidity risk inherent in the remainder of the bonds they still held. It was only a "paper loss", nothing had changed about the bonds. But it made their remaining bonds worth so little as collateral that the entire bank became unsustainable. Eventually that news crept out and made it to the ears of the other accountants and bond traders at other firms. And when they used their models to value the new level of liquidity risk into their bonds, the entire US mortgage market collapsed.
Again, this is all a simplification …in reality it was like watching a man fall down the stairs in slow motion; there were many more steps and little breaks and bruises involved. But that basic description does capture the essence of the crisis. And now that the consensus on the value of mortgage bonds is so much lower than it previously was, other firms have lost their footing as well. Freddie Mac and Fannie May had to be taken over by the Treasury department to keep them from total insolvency. All the Wall Street Banks have taken major losses and continue to feel pressure on their balance sheets. A slurry of mortgage companies, regional banks, and other mortgage lenders have been driven out of business. And now Lehman Brothers is facing a potential drop in their credit rating, which will necessitate their raising more money as collateral, and the whole thing will go round and round again.
Noticeably absent however from the list of the dead and dying are any hedge funds. Hedge funds don’t have to meet federal banking requirements so most of them haven’t felt the same imperative to sell that the banks have. But away from that, because of a differing set of incentives, Hedge funds have generally been more prudent than banks when it comes to estimating liquidity risk. They never really believed that a Mortgage bond was as risk-less as a Treasury bond because hedge fund valuation methods always included liquidity as a risk. So while it’s been a worrisome time for us while we watch our friends in the industry lose their jobs, for the most part the hedge fund world is surviving it all pretty well.
Besides, the same as we knew back in the day that mortgage bonds were never worth the same as treasuries, hedge funds also know that the fire sale prices being offered for the bonds today don’t reflect their accurate value either. If you have the luxury of waiting it out, the bonds are still backed by real assets and reflect real repayment as people continue to pay their mortgages. Under all of it, there are still real homes and other actual “real estate” underlying all of its face value. They are not really worth the “next to nothing” that US accounting rules make them seem to be.
But none of that is funny at all, and it wasn't why my co-workers and I were laughing. We were laughing at Ben Bernanke.
When Bear Stearns was about to go under, the news made its way to the Federal Reserve which is responsible for the stability of the US currency and banking system. Dr. Bernanke, the Fed Chief, looked at what would happen to the broader financial markets if Bear Stearns were forced into receivership and was then compelled by law to sell out all of its assets. He looked into the future and he didn’t like what he saw. He determined that the Fed should help Bear find a buyer before they would be forced to swamp the entire US financial system and basically bring Western civilization to a close. (Remember my bullets joke?)
But in the process of negotiation, “Uncle Benny” made what many believe to be a big mistake, and promised the buyer, JPMorgan – Chase, a backstop against losses. He exposed the US taxpayer to potential losses, threatened to increase inflation, weaken the dollar, and according to many views, totally exceeded his authority. He made the US government an active player in the potential losses of the financial markets. And as tragic as that sounds, THIS is what my coworkers and I were laughing about.
You see right now, Lehman Brothers is in a similar set of negotiations for its sale, and once again the Fed has stepped in to try to broker a deal. And my coworkers and I were all certain that there will come a time when the buyers will realize that they have the US government right where they want them. They will look at this man who spent most of his career in academia, totally insulated from the rough and tumble take no prisoners world that we live in every day, and in an attempt to size up his character they will probably say “If you don’t give us the same guarantees that you gave JPMorgan, the deal is off.” That’s the moment when Ben Bernanke will discover that he sold his soul to the devil in the form of Jamie Dimon, the JPMorgan Chief. And I’d love to see the look on Ben's face when he’s forced into that realization.
Members of the Federal Reserve board have been saying all day yesterday that there shouldn’t be any “risk backstop” for the buyers, but in politics “shouldn’t” is a long way away from “won’t”. And it will be a little more politically calamitous for Ben because if he says yes this time he’ll probably never be able to say no again. Even worse, it looks very much like a Chinese bank will be a part of the consortium so if he gives in to their demands, the US taxpayers will in effect be guaranteeing a foreign bank against loss.
I’m certain the buyers will demand it of him. There is no reason not to. Even if they agree not to up front, even if they say all through negotiations that the issue is off the table, there is nothing preventing them from giving him “the squeeze”. That’s how our business works. And personally I think Dr. Benranke will find a way to meet their demands for protection, but will obfuscate it in such a way as to make people believe he hasn’t. Or maybe there will be some other, separate banking issue resolved in the buyer’s favor or some other backroom deal. I don’t really know, but it’s the way I would bet. It’s not that I think he’s a bad person, but there is a level of self aggrandizement that comes along with this too, and I think it will be too much temptation for him to resist.
Many of us in the business believe that this issue is a much bigger concern than the value of Mortgage bonds, which will certainly be resolved eventually. The moral hazard of letting the Fed use tax money to protect financial players against loss will not go away because there is no real incentive for it to. It’s an issue we’ll be facing for a long time after the current crisis is resolved. From now on “too big to fail” will become a goal of many financial institutions, and it will be treated as an escape clause for imprudent investment management. Like most government actions, it actually makes the next crisis more likely not less likely. We were chuckling at Ben Bernanke’s character test, but at the same time we knew that it represents the graveyard we were whistling past.
I wrote this on Saturday. Now it's Monday and here is how that conversation played out:
- Ben Bernanke told the buyers of Lehman no. This was certainly the right thing to do, but as any parent knows, sometimes the right thing is a painful thing. We're about to find out how painful. Lehman was forced to file for bankruptcy protection, and it turns out that Ben Bernanke has a soul after all. Good for him. I'm sure it wasn't keeping him awake at night, but he has raised my estimation of his character.
- Merrill Lynch, who was also in similar trouble to Lehman has sold itself to Bank Of America.
- Bank Of America, after it's purchase of Merrill Lynch, can longer meet the banking requirements fo collaterlization of it's loans, but the Fed has agreed to suspend those metrics for BofA until they can clean up the mess and get their house in order. This is one of those things I'm disappointed to have been right about, but it really does look like a necessity to me.
- There has been a 70 billion dollar fund established by the major money center banks to handle "emergencies".
- AIG, the massive insurance company, is now in the 'looking to raise capital to avoid a credit downgrade' stage of distress. Anybody want to buy an aircraft leasing business?
- China has reduced it's interest rates in anticipation of further economic slowdown in their principle 'customer country' the US.
- Bloomberg sticking to it's tendency to overstate the obvious, is saying that "Global Markets are tumbling and Us expected to be down this morning." Geez ... ya think?
- Your humble author can't get that REM song out of his head. You can't imagine how glad I am to be back at a hedge fund, and away from banks. All the same though many of my closest friends are out of jobs. And the near term prospects for the New York area are particularly bleak.
Friday, September 12, 2008
Here is Jonah Goldberg proving that he's a braver man than I am. This is a hilarious piece that accurately depicts the false outrage of old school feminists at Sarah Palin's nomination. Here it is from National Review Online . I'm betting that his new gmail account will be so swamped with angry missives that it will temporarliy cause the gmail servers to draw more current than the hadron collider.
I disagree with him about some issues but in this piece Charles Krauthammer totally knocks it out of the park, and scraps a half finished essay of mine in the process.
Now I guess I'll have to write about Ben Bernake's realization this week that he has apparently sold his soul.
Obama's Race to Lose - And He Might
Thursday, September 11, 2008
So what’s with all these Democrats losing their minds over Sarah Palin? You haven’t heard? Here from a Byron York article on thehill.com are just a few examples:
- Wendy Doniger, the Mircea Eliade Distinguished Service Professor of the History of Religions at the University of Chicago Divinity School, wrote that Palin’s “greatest hypocrisy is in her pretense that she is a woman” and denounced “the Republican Party’s cynical calculation that because [Palin] has a womb and makes lots and lots of babies … she speaks for the women of America.”
- Carol Fowler, the chairman of the South Carolina Democratic Party, said that Palin’s “primary qualification seems to be that she hasn’t had an abortion.”
- Juan Cole, professor of modern Middle Eastern and South Asian History at the University of Michigan, wrote that Palin’s values “more resemble those of Muslim fundamentalists than they do those of the Founding Fathers” and asked: “What is the difference between Palin and a Muslim fundamentalist? Lipstick.”
- The Washington Post’s Richard Cohen wrote of “[Palin’s] sarcasm, her exaggerations, her smug provincialism, her hypocrisy about family and government, her exploitation of mommyhood …”
- Salon’s Cintra Wilson wrote that “Sarah Palin and her virtual burqa have me and my friends retching into our handbags. She’s such a power-mad, backwater beauty-pageant casualty, it’s easy to write her off and make fun of her. But in reality I feel as horrified as a ghetto Jew watching the rise of National Socialism.”
- Slate editor David Plotz wrote that “night after night, [Palin] appears in my dreams, always as a scolding, ominous figure.” And one of Plotz’s Slate colleagues wrote that in her own dream, “she had urged her young son to kill Palin with a string bean.”
There are many, many, many, many more out there if you try to look. So what is it about the attractive and clear eyed governor of Alaska that makes these people go round the bend? The answer to me is pretty obvious. They’re Democrats and Liberals. Liberals don’t think about results of policies they only think about intent of policies. So by rejecting the idea of their candidate as the obvious choice, these people believe it’s their entire vision for America that’s being rejected. They don’t think Sarah Palin is opposed to the methods they would use to make America a better place, they think she’s opposed to the ideal of making America a better place at all.
I know ... it sounds ridiculous. But think about it. Most people get up every day believing that people think … that is to say they weigh options and come to conclusions, in exactly the same way they do. Liberals get up every day and think about what a wonderful place America would be if everyone were rich, and healthy and no one was judged for anything they do, then they embrace the most simplistic policies they can imagine to get to that goal.
It never occurs to them that the methods they propose won’t work or have been tried to great failure in Eastern Europe. They never think about social policy decisions as choosing one good thing at the expense of another. They never worry about any of the negative consequences of what they plan. Because for them policy decisions aren’t about any of that… they are about showing people how much they care about the issues. It’s exclusively about self-congratulation. It’s all about demonstrating your intent.
So when they see someone like Sarah Palin who they believe 'should' agree with them but is instead rejecting their entire view of "how" to make America a better place, they assume that it's their "intent" of making America a better place that's being rejected even though she hasn't actually commented on their intent in any way.
That’s what all this is really about. Sarah has rejected their view of the ‘modern woman" so they say she’s “against women”. She has rejected their view of economics so they think she’s “against a healthy economy”. She's rejected their childish view of the environment so they think she's against a clean environment. She has rejected their foreign policy view so they think she’s acting contrary to America’s best interests. They think it’s all about her intent. They never consider anything else.
It has never occurred to any of them than a person’s political beliefs can be about anything but their own ego because for them it never has been about else. They think Sarah Palin's social policy choices are just like theirs in that they do nothing but demonstrate her intentions. And since the intentions that liberals infer from her policies don't match their own, they assume that her intentions are actually the very things that they are against.
Like I've said before, it's like dealing with a crowd of people that have never matured beyond adolescence. They are the high school in crowd, and she is the beautiful new girl who just moved to town. They can't stand that she isn't a part of their self congratulatory clique.
That’s one of the main reasons I hope McCain wins. Because I think it would go a long way to helping these people hit bottom, and finally admitting to themselves that there might be another way to get things accomplished than trusting the all powerful state to take care of us all.
Also Byron, I’m sorry about ripping off all your excellent research work but right now I have a 12 hour a day job with a 4 hour a day commute. Next time you want contacts in the hedge fund world let me know and I’ll try to make it up to you. You can get my number from John Derbyshire.
John Stossel on why government can't create any jobs let alone jobs in industries which don't exit yet:
Governments create no wealth. They only move it around while taking a cut for their trouble. So any jobs created over here come at the expense of jobs that would have been created over there. Overlooking this fact is known as the broken-window fallacy. The French economist Frederic Bastiat pointed out that a broken shop window will create work for a glassmaker, but that work comes only at the expense of the cook or tailor the shopkeeper would have patronized if he didn't have to replace the window.
The rest can be found on TownHall.Com
Mark Hemingway on a McCain - Palin Rally Yesterday:
One good indication of the enthusiasm were the number of creative signs and campaign paraphenalia by those present. I saw two high-school girls together — one had a custom T-Shirt that said "The Future Mrs. Track Palin," and her friend's shirt said "Piper Can Do My Hair" (my memory may not be exact). There were also lots of special needs children and mothers present. One mother had a rather lovely and affecting sign with a picture of her son with Down syndrome that read "47 Chromosomes from Heaven." Geraghty and I saw another woman with a sign that said "McCain Hero with a Heart and a Veep Just Like Me." Just like me? Women really seem to identify with Palin.
Read the rest here: NRO - The Corner.
Wednesday, September 10, 2008
When you've based your entire campaign on the fact that the media love you, it can be a very painful thing when the decide that they like someone even better. But that is apparenlty what's happened to Barak Obama. After 19 months of kid gloves and "chills running down their leg", the media has found someone they like even better than him. He's melting down and creating a gaffe a minute, and astoundingly, the media is now (finally) reporting them.
Thanks to the heroic efforts of our uniformed service men, I guess we're about to find out.
United States Senate
We invite you to join us in cosponsoring Senate Resolution 636, a bipartisan resolution that recognizes the strategic success achieved by the surge in Iraq and expresses our gratitude to the brave men and women in uniform who made that success possible.
As you know, the war in Iraq has been deeply divisive for our country. The Senate spent much of last year locked in intensive debate about the wisdom of the new strategy that General David Petraeus was pursuing in Iraq and the deployment of approximately 30,000 additional U.S. Army and Marine Corps servicemembers in support of it.
In fact, it was just one year ago this month that General Petraeus and Ambassador Crocker returned to Washington to report on the progress of the surge. At the time, many Americans still doubted whether the surge was working.
Today, by contrast, it is beyond dispute that the surge has been an extraordinary strategic success for our country, an operation that is certain to be studied and praised for decades to come in the annals of American military history.
Although the war in Iraq is not yet over, virtually every indicator of progress-political, economic, and military-has dramatically improved since General Petraeus took command in February 2007 and the surge began.
Large-scale sectarian violence has effectively ended. Al Qaeda in Iraq-which our intelligence community last year characterized as "the most visible and capable affiliate" of al Qaeda's global terrorist network and "the only one known to have expressed a desire to attack the Homeland"- has been dealt a near strategic defeat, in the words of CIA director Gen. Michael Hayden. The Iranian-backed militias that once controlled large swaths of the country have been routed. And as our enemies have retreated, American casualties have likewise plunged.
These represent more than mere "tactical" gains. Because of the surge, the United States has been saved from a strategic defeat in the heart of the Middle East that would have carried catastrophic consequences for our country, and our allies, far beyond the borders of Iraq. Indeed, because of the success of the surge, America's strategic position in the Middle East and the world is stronger; our most dangerous enemies- al Qaeda and Iran are weaker; and our country is safer.
General Petraeus is expected to hand over command of coalition forces in Iraq on Tuesday, September 16. After months of divisive debate, we hope that members of both parties can set aside whatever disagreements have divided us over Iraq in the past, and join together now to acknowledge what we all know to be true: that the surge has been a strategic success; that we owe our deepest gratitude as a nation to the courageous men and women in uniform who fought so valiantly to achieve that success; and that their
struggle and sacrifice must not be squandered.
We hope that you will join us as a cosponsor of Senate Resolution 636 to send a bipartisan message of national unity that we salute our heroic troops for their extraordinary achievement.
If you have any questions, please feel free to contact Vance Serchuk in Senator Lieberman's office or Jen Olson in Senator Graham's office.
Joe Lieberman, United States Senator
Lindsey O. Graham, United States Senator
My bet is that the far left (including the democratic leadership in congress) refuses to call a victory a victory. It would be too damaging to their ego to admit they were wrong about anything. That's how it is when you use self congratulation as the basis for social policy. No matter what the issue is, as far as you're concerned it's always about you.
Tuesday, September 9, 2008
Every now and then I struggle to explain the “liberal ideal” in a way that would make it clear to any reader. I probably have a dozen half-finished essays in a folder on my home PC which each try to do just that, but I can’t finish them because the idea ends up slipping away from me. The concept is all perfectly clear to me in my mind, but for some reason when it comes time to explain it to others, it’s like bailing mercury.
Thankfully I’m not alone in my struggle. Thomas Sowell has written two books on the topic of the liberal vision, and a dozen others that examine the aspects of its various failures through history, so he definitely knows the subject. If you can take the time to read them (I'd reccomend it) then you’ll know all you could ever hope to about why liberal policies have always proven to be so harmful. And while this shorter essay of his goes as far as any toward describing the biggest fault of the liberal vision, I think it stills falls short of that Rosetta stone of political essays. Strangely, I feel a little better knowing that even a master thinker and essayist like Sowell fails to hit the mark exactly. But like everything he’s ever written, it’s a worthwhile piece all the same.
Here is my personal hero Thomas Sowell:
The Vision Of The Left
Monday, September 8, 2008
“How am I supposed to do my job now? Do they want me to just make up my own stories or what?” exclaimed a member of the CBS news staff who was left struggling to compose an original news piece for today’s TV report. “The NYTimes told us what to think and when to think it. It was the paper we read when we wanted to know what’s going on in the world and what we should be writing about if we want to stay current. But now that they’ve gone out on this limb they can’t expect US to go out there with them? The suits would have a fit if we tried to do a story like THAT! Maybe we can include something about the baby having a third arm or something ….”
“It’s like I don’t know what to think now!” said Martin Weeks a typical liberal who lives on Columbus Avenue. “For years I’ve read the times and just thought whatever they told me to, but now it’s like I don’t know what to think. That piece they wrote didn’t tell me what a racist she is, or how she hates animals or the environment or anything. They can’t mean that it’s OK to be Republican can it?” he said visibly trembling “That would be as if they were lying to us all those years!”
“This is an isolated incident only.” said a member of the NY Times Editorial board who asked not to be personally named out of fears of threats against his family. “In the face of the recent media embarrassment dealing with Sarah Palin’s announcement as candidate for Vice President, we felt it was necessary to write an unbiased article or two in order to be able to preserve our claims of objectivity.” He said with a wink and a grin… “But rest assured that once the blood lust dies down, we’ll be right back to the standard misrepresentation, hyperbole, and liberal dogma that both of our remaining readers have come expect.”
Here is their piece if you think your nerves can handle it.
Saturday, September 6, 2008
What a big week it’s been for the “News” media huh? They’ve taken what should by all rights be momentous moment in US political history and done their level best to turn it into a Jerry Springer episode. The Republicans have nominate a woman for Vice President, assuring that either a woman or a minority will be working in the Whitehouse next term. And instead of celebrating that fact, the far left attacks her because she doesn’t stick blindly to the liberal orthodoxy demanded of women. They say that she’s not a woman in the same way that they say that Clarence Thomas or Thomas Sowell is not a black man. Genetics and (and obvious appearances) are irrelevant to them. They will not be dissuaded with so called “evidence”, no matter how obvious it is.
Once again we’ve seen that diversity of opinion is utterly reviled among the political left. And in the meantime many members of the media have had their curtain whisked away wizard of Oz style, to reveal that while they were claiming to be objective they were really just transparently liberal democrats, and hopelessly partisan Obama hacks. From CNN, ABC, CBS, NBC and all the other networks, a claim of objectivity now has the same credibility as the WWF when they claimed that professional wrestling is real. We all know better now no matter what they say.
Mind you, I’m not talking about the guys like Alan Colmes who is paid to tell us his opinion, or even people like logically challenged laughingstock Kieth Oberman who never really tried to hide his ultra-liberal view. I’m talking about all the reporters whose names you don’t know if you aren’t in the news business. All the pretty faced talking heads (both male and female) and rain slicker clad microphone pointers who can be seen standing out in the hurricane doing a Dan Rather impersonation; The reporters who claim to just be reporting “just the facts” for the major networks. The jig is up for all of them and we see them now for what they really are. They are, almost to a man, Democrat party kool-aid drinkers who are fighting every day as hard as they can, to get Obama elected no matter how the American people may feel about it.
How do we know this? Well for most of them, their questions this week for vice presidential candidate Sarah Palin were only one level up from the old joke “Have you stopped beating your wife yet?” She’s been accused by them of all manner of horrible motives and evil acts. They’ve tried their hardest to depict her strengths as irrelevant and her potential weaknesses as critical. They made sure that any comparisons between her and Obama left her seriously wanting, or that she was so outclassed by the Chicago Democrat, that the comparison itself was ridiculous. They clearly did their level best to tear her down as much as possible before the American voters could get to know her on their own.
You can’t imagine all the kinds of deeply deranged “facts” I had people report to me this week on the trading floor from various blogs, websites, and news reports. About the best list I’ve seen is here, but even this list is woefully incomplete. They all turned out to be lies generated by the angriest, and most irresponsible parts of the extreme left. But that didn’t stop the news media from reporting them, or from anyone who considers themselves part of the “elite” from repeating them. And rumors being what they are, it will probably be months before any but the worst lies will be publicly rebutted, if they are ever rebutted at all.
Of course the good news is we can always count on liberals to be liberals. As can be seen from the self congratulatory policies they support, liberals are incapable of telling the difference between intent and effect. And consistent with that, the media hand puppets of the far left set out to achieve one goal, and ended up achieving another. In this case their “intent” was to so discredit Sarah Palin that no one would ever consider voting for her for “polar bear catcher” let alone Vice President. But instead, the “effect” they got was that the conservative base pulled together and circled their wagons around her. Reporters ended up stammering and sputtering while guys like Newt Gingrich and Rudy Giuliani stuck their fingers into their faces on the convention floor and made them answer for their obvious slanders. They were ridiculed from the podium by people like Mitt Romney. And liberal tabloids like US Magazine lost thousands of subscriptions when customers called to cancel after they published a hit-piece cover story on Mrs. Palin. In short, the far left and their media zombies ended up looking like fools, and after her artfully delivered acceptance speech, Sarah Palin came out looking better than ever.
Well she did to most people anyway. The members of DailyKos probably still believe that she was flying from a secret puppy eating contest sponsored by Halliburton for 8 hours after her water broke, and that’s what caused her son to be born with downs syndrome. You may laugh at that (or shake your head in disgust), but I had someone (an educated man, with multiple degrees, all from top universities) tell me that a rumor not too dissimilar from that was “absolutely confirmed” to be true. I figured it made no sense to argue with him about it. What can you possible say to someone who takes such a ridiculous rumor seriously? I just ignored him and left him to destroy his own credibility. With quotes like that I figured he didn’t need any help from me.
So that’s more or less how it’s played out. Instead of destroying Sarah Palin, as the media so obviously intended, the people who are inventing these rumors are just destroying their own reputations. Chris Mathews will never live down that “chill he felt running down his leg” when Obama spoke, and no one will ever really take his claims of objectivity seriously again. And he’s just one small example of what the media has thrown away in this election. Their efforts to prevent the Republicans from keeping the Whitehouse will end up costing them what’s left of their reputations. And that reputation now lost, is never coming back.
As for Mrs. Palin’s response to all of these “totally confirmed facts” about her past, she seems to be letting it roll right off her back. This is no doubt the right thing to do, and I wouldn’t expect anything else from her. She not only has the poise and communications skills to beat the media talking head at their own game, but she’s got that central core of values by which she obviously lives her life, and that’s a big plus. It keeps you grounded in face of overwhelming and obvious slander. It puts you in a place where you don’t really care what lies people tell. Like John Adams said, facts are stubborn things, and you can rely on them to make fools of the slanderers.
In the meantime the “liberal ideology watchdogs” over at NOW think her position on abortion will hurt her in the election, but the polling says differently. Women (and the rest of the country) are split just about 50-50 on the issue of abortion, and the only demographic that’s strongly pro abortion is single men under 24. (That really tells you something doesn’t it?) I think it’s safe to assume that a 44 year old conservative woman is unlikely to get a lot votes from that demographic anyway so I don’t imagine the numbers will be keeping her awake at night. But if those totally unsubstantiated rumors of a soft core porn movie turn out to be true, then she’ll probably have that voting block all locked up as well. Lies or more lies, I guess the Democrats just can’t get a break.
Friday, September 5, 2008
Here is Roger Kimball at Pajama Media commenting on the elite reaction to Sarah Palin:
The Boston Phone Book, “Harvard,” and Sarah Palin
In the early 1960s, Bill Buckley famously observed that he would rather be governed by the first two thousand names in the Boston phone book than the two thousand faculty members of Harvard University. It is perhaps worth pointing out that Bill, a Yale man, was not singling out the Harvard faculty for special opprobrium. Harvard was merely a synecdoche [a reader suggests that “metonymy” would be more accurate–maybe he is right]. It was the smug, “progressive” liberal consensus that our elite academic institutions inculcated, even back then, that Bill objected to, not Harvard per se.
...Oh yeah .. I remember where it was now...
... note the publishing dates....
Thursday, September 4, 2008
Reagan in High Heels?
A corner post from Mark Hemingway on that excellent speech by Sarah Palin.
%%%%%%%%%%%%%% ---- UPDATE ---- %%%%%%%%%%%%%%
Over at the "NRO Corner", John J. Miller is ignoring my new favorite catch phrase, but he agrees with my conclusions.
I can't wait until they decide to write an advanced review of the debate between Sarah Palin and Joe Biden.
Wednesday, September 3, 2008
The reigning emotion of it all has been anger—anger at being surprised, anger at being denied the spectacle of a Republican circular firing squad, anger that a conservative pro-life Republican could also be a woman and might represent the aspirations of other women, anger at being handed a person they did not know and who did not know them, anger that this upstart thinks she can ruin their coronation party. And the anger was fed by, and was indicative of, a profound elitism—a sense that we were dealing with some redneck moron from a state with no decent restaurants. The Republican candidate for president chose as his running mate a young, charismatic, female Republican governor—probably the most popular governor in the country—whose attitude and resume ring precisely of McCain’s kind of politics, and who has been on most people’s short-list since he won the nomination, and the press treats it as a symptom of some terrible and reckless madness.
Read the Rest Here: