The Beltway's Governor Le Petomane rides again

Debt Swap Rules Risk Being ‘Rushed and Reactionary,’ A&O Says

2009-03-31 By Abigail Moses March 31 (Bloomberg)

"We've got to protect our phony-baloney jobs, gentlemen! We must do something about this, immediately, immediately, immediately!"

"Harrumph! Harrumph! Harrumph!"

"I didn't get a "Harrumph!" out of that guy!"

"Harrumph!"

"You watch your ass!"

Looks like Allen & Overy doesn't want to give a "Harrumph!" Instead, they're saying "Just give me 24 hours to come up with a brilliant idea to save our town. Just 24 hours. That's all I ask."

Count me among the dissenters to the federales' 'Shoot, Ready, Aim (we're the govt, we don't need to aim), Shoot again, Shoot the innocent so the guilty won't look bad, Shoot 'em all one more time' approach to crisis mgmt. Blazing Saddles, indeed.

JRB

3/31/09

"PPImP My SPV"

Treasury Statement on Public-Private Investment Program (Text)

I read the full text on Bloomberg. "... private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns." -- But since the taxpayer is providing half the equity in each program, plus "non-recourse loans" in the "legacy securities" program, we obviously share the downside, too, much more downside.

In the so-called "legacy loan program" the FDIC's guaranty is collateralized by the (toxic) assets, but is are these also non-recourse? We, the taxpayer, already share in between 35% and 90% of the profits, depending on whether you use the corporate tax rate (35%) or the Barney Frank Special 90%, legislated 'in arrears' (so to speak).

Beyond that, it's hard to see an integrated or cohesive plan. The central problem is homeowners who can't afford their mortgages. We have several confused and/or confusing programs for that. Taxpayer "capital" has already been indiscriminantly sunk into banks. And now we have these intermediate "loan" & "securities" programs, along with all those other half-baked and less than half-executed programs (TALF, TARP, CP, MMkt,etc.).

If you fix the front-end problem, then do you need all these intermediate (intermediary) programs too? Probably not, as it's just one set of cashflows going thru the system, haphazardly propped up at various stages by this proliferation of federal programs, with much taxpayer "equity" injected at various points along the way. Hard to make sense of it.

Since there's so much convexity in the underlying mortgages & RMBS, won't these investors or funds need some swaps to manage rate risk? But what ISDA lawyer wants to dive into this morass of FDIC guaranteed loans, "non-recourse" Treasury loans with Treasury as 50% equity partner, all of which is probably subject to second-guessing and/or confiscatory taxes if successful? What is the governing law by which these 'brave new' PPIFs are organized: are they corporations, '40 Act companies, SPVs, LLCs, or is it just more ad-hoc Treasury decrees? In other words, who has regulatory jurisdiction and responsibility for bankruptcy or liquidation?

JRB

3/23/09

Regulation by hemlock

Grassley Suggests AIG Execs `Resign or Commit Suicide'

Bloomberg News, 3/17/09

The AIG fiasco just keeps getting more absurd. Unless you work for AIG because ACORN, the folks who have made an industry of voter registration fraud, have organized a guided "victim selection" tour for anyone less patient that Grassley. (The Stamford Advocate reported on Monday that 3 of 4 passengers were members of the media, a fact not reported elsewhere).

I'm sticking with my earlier forecast of GM, Chrysler, and/or AIG bankruptcies by May, although I suspect Congress would rather, and will, flush more billions & trillions down the drain first. After all, what's more important, our tax-dollars or their 15-second sound-bites?

Even Obama is now complaining about AIG's bonuses. Well, guess what, a federal bankruptcy judge has the authority to nullify employment and other contracts but the POTUS does not. It's called "law". Bankruptcy courts were established by Article I Section 8 of the U.S. Constitution, a document which also prohibits 'bills of attainder' such as Congress voted for a few days ago (the bonus tax).

Instead, we are getting incitements for mob violence. Well, after all, that is what "community organizers" do for a living: 'legislate' by threat & intimidation. (Which sounds like what state attorney generals do, extort & legislate by threat & intimidation.)

"Can't anyone here play this game!"

Soft on terrorism, tough on AIG. It's going to be a long century!

JRB

3/23/09

Proving the SEC is under-brained, not under-staffed

Naked Short Sales Provoke Complaints but No Cases

Wall Street Journal By KARA SCANNELL -- http://online.wsj.com/article/SB123742141942278703.html

Back when the SEC was banning short-selling and making a list of nearly 1,000 'unshortable' bank stocks -- "banks" like U-Haul, Moody's, CVS (drugstores), and GM -- I suggested they instead require shorts be executed via a three-way (short, broker, lender) order matching system on an exchange or at a clearinghouse -- e.g., NYSE or DTC. On 9/28/08 I even sent a letter (email) to the editor of the WSJ -- alas, unpublished (in its entirety, below).

Among other benefits, it would have made stock-lending more efficient for everyone, including for lenders like pension funds and insurance companies. (It would be a simple matter to include collateral monitoring in the matching system, too, to enable real-time counterparty risk surveillance -- i.e., counterparties & regulators could have seen both sides of AIG's sec' lending balance sheet. Oh well!) It would have given the SEC perfect and real-time transparency, and allowed them to use computers (!!!) to perform surveillance.

Instead, the SEC "...noted understaffing, saying four people ... review[ed] 1.38 million emails" over 18 months. That works out to reading 2 emails every minute of every working day. I'd say that proves the SEC is far more under-brained than under-staffed.

JRB

3/19/09

--------------------

To: wsj.ltrs@wsj.com

Subject: "Short on Common Sense" (9/25/08) -- a far better solution

Date: Sun, 28 Sep 2008 17:38:05 -0400

A simpler, more effective, and market-friendly solution to 'naked' shorting would be for the SEC require that all short sales (beyond "retail") be done through a clearinghouse, like DTC. The short-seller, securities lender, and prime broker input their instructions, DTC matches & settles them. Fewer fails, nobody's 'naked', there's an audit trail, and no more biweekly short interest surveys as the SEC would have real-time surveillance.

Take it a step further and create "dark pools" or crossing networks as alreadyexist for block-trading. Now you have all of the above, plus more efficient price & size discovery for the benefit of both securities borrowers (including shorts) and lenders (institutional investors). Granted, maybe it isn't the best time for that step.

GM and Ford aren't the most ludicrous names on the list. Moody's is there, but it's their opinions not their balance sheet that are the "systemic"risk concern. Is the SEC opposed to 'poetic justice'? The good folks at U-Haul (Amerco) are also on the SEC's list. That seems an even more unlikely short, what with all the capitalists packing-up in search of free markets and lower taxes.

JRB

Jack R. Buchmiller

Stamford, CT

9/28/08

Does Air Force One have training wheels?

Obama Says AIG Bonuses Show Need for Agency to Oversee Bailouts
2009-03-18 By Roger Runningen March 18 (Bloomberg)

We already have such an "agency" established pursuant to Article I Section 8 of the U.S. Constitution. It's called "Bankruptcy Court". (Just what do they teach at Harvard's law school these days?) The OTS is, or was, to AIG as the FDIC is to banks -- that's part of the Executive Branch, Mr. President. (Just what do they teach "community organizers" these days?) Except the OTS is not the liquidator of holding companies, nor is the FDIC nor Fed as that's the Bankruptcy Court's job, just as it is for bank holding companies (but not banks), insurance holding companies (but not insurers), securities holding companies, and just about every other kind of corporation. The reason we don't have a regulator specifically for "bailouts" is because the federal govt cannot, and therefore should not, be doing them (see Amendment 10 to the Constitution -- just what do they teach ... nevermind).

If he wants to do something constructive he should amend section 13(3) of the Federal Reserve Act to create a "legal lending limit" for the Fed. The formula for commercial banks used to be 10% of capital but was raised several years ago to 15% on unsecured and 25% on secured credits. I especially like the feature, as applied to commercial banks, of making bank directors personally liable for any loans in excess of the legal limit, although apparently that varies by state. That might focus the minds of Geithner, Paulson, & Bernanke a little better. ASAP, please, as there's no provision in the Bankruptcy Act applicable to the federal govt itself (see Article VI of the Constitution for precedent). As Walter Wriston put it so bluntly, "Countries don't go bankrupt." That's because we taxpayers have unlimited liability -- so why not these White House, Treasury, and Fed rookies, too? That'd teach 'em!

JRB

3/18/09

Tim Geithner and the Starship Enterprise

Only an idiot would have tried to rescue the S.S. Titanic by lashing themselves to it, even if they were skippering the U.S.S. Enterprise (pun very much intended, even though it's not of Nimitz-class size!) But here we (taxpayers) are.

But then apparently Geithner thinks he's skippering the Starship Enterprise:

"Put her into warp-drive, Ben!"

"But Captain, the ship's fisc can't take it much longer!"

"I don't care Scotty -- I mean Ben -- we've got to pull away the Klingon's Bonus Pool!"

"Excuse me, Captain Kirk -- I mean Tim, this isn't logical. We still must first escape the Subprime Death Star. (From which I told you not to try to pull the Starship Citibank out of by brute force because the Collateral Tractor Beam is too strong to defeat head-on. Besides, that's "Star Wars" not "Star Trek")."

"I don't care, you pointy-headed -- I mean eared -- Vulcan, Starship Citibank is the Federation's flagship! It's carrying Admiral Rubin! Go back to your station, Spock!"

[Spock to McCoy, aside] "I think the Captain has gone insane. Besides, we beamed-up Admiral Bob in the last episode. It's Captain Hank who's still aboard, even though relieved of command last season."

[McCoy to Spock] "Suicide or mutiny, Mr. Spock, which is more logical? "

[Spock ponders; fade to black]

JRB

3/18/09

Grassley Suggests AIG Execs `Resign or Commit Suicide'

Grassley Suggests AIG Execs `Resign or Commit Suicide'
Bloomberg News, 3/17/09

This just keeps getting funnier & funnier. Unless, of course, you are a taxpayer like us and unlike so many of our Senators and our Treasury Sec'y. Grassley should go to work for the NY Post as a cartoonist.

I'm sticking with my earlier forecast of GM, Chrysler, and/or AIG bankruptcies by May, although I suspect they'd rather, and will, flush more billions & trillions down the drain instead. After all, what's more important, our tax-dollars or their sound-bites? Even Obama is now complaining about AIG's bonuses. First Chuck Schumer announces a run on the bank at IndyMac, costing taxpayers billions, then Chris Dodd tries to sink Citibank with his moronic "nationalization" comment, so why shouldn't a "community organizer" chirp-in? Well, guess what, Mr. Obama, a federal bankruptcy judge has the authority to nullify those employment contracts but you, the POTUS, does not. It's called "law" -- something that we used to at least pay lip-service, but no more. At least in 2012 he can campaign on the slogan, "Soft on terrorism but tough on AIG."

"Can't anyone here play this game!" -- Hello Depression of 2009.

Is there any question that my suggestion back in September -- and not in hindsight, would have worked? (That 'collateral is the contagion' and therefore the federales should step into AIG-FP's ISDA CSA's as the 'credit support provider'.)

JRB

3/17/09

A cash investor suffers but a single loss; a mark-to-market counterparty suffers a thousand losses.

A cash investor suffers but a single loss; a mark-to-market counterparty suffers a thousand losses.

Each mark-to-market of one of those Warren Buffett-ish “weapons of mass destruction” is a mini-Hiroshima for one counterparty and, when the market zigzags the other way, a mini-Nagasaki for the other counterparty. All before Enola Gay has left the tarmac.

The federales are applying torniquets to the banks before checking to see if the cuts are arterial.

JRB

3/1/09

How Washington is creating the Depression of 2009 (catching up on my blogging!)

The "Subprime Crisis of 2007" triggered the "Panic of 2008" and now we're plunging into what is becoming the "Depression of 2009". The Subprime fiasco has roots beginning on Capitol Hill -- CRA of 2007, "red-lining" legislation, Fannie & Freddie, etc., but it is the actions not just of politicians but of (supposedly) independent & non-political regulators who have turned crisis into panic and panic into depression. They were busy in February, so I fell behind in my blog. The following gets me more or less caught up.

JRB

3/1/09

State Debt Ratings May Be Affected by Pension Losses, S&P Says
2009-02-26 17:18 -- Bloomberg News, by Jerry Hart

But S&P (and Moody’s & Fitch) still accepts that liabilities can be discounted at 8% or more. CAPM, Modigliani & Miller, and all the rest of modern finance don't exist in pension-world. Yet cash is cash so, in my world, they must converge. Ah well, it's all too late now. More than just first-mover advantage has been lost.

Also, a separate report came out stating California’s OPEB is over $42 bln. CalPERS alone lost $92 billion on investments this past year.

JRB

2/26/09


Dodd Surprised By Market Response to Nationalization Comments
2009-02-24 19:05 -- Bloomberg News, by Alison Vekshin

What an idiot! He’s chairman of the Senate banking committee, and surely he saw IndyMac get ‘schumered’ just a few months ago.

A few days after this, federal regulators announced their third bailout of Citibank, now all but 100% effectively nationalized. "Insanity is doing the same thing over & over again, expecting a different result" said Bill Clinton, when running for president.

It’s too much to hope for, but the entire House and Senate banking committees should resign in disgrace. As for myself, when Chris “Friend of Angelo” Dodd is up for re-election, I’m writing-in Travis Herold’s name. While it may not be true that ‘a thousand chimps given a thousand typewriters and a thousand years could write Shakespeare’ it appears true that 535 of them can generate 787 billion tons of pork in a matter of weeks. But they’ve been practicing their earmarks for years.

U.S. Bailout, Stimulus Pledges Total $11.6 Trillion (Table)
2009-02-24 Bloomberg News, by Mark Pittman and Bob Ivry

Back in November I gave up trying to keep up with the proliferation of new bailouts. I think Bloomberg may have undercounted.

JRB

2/24/09


Central Banks Sacrifice Independence as Crisis Grows
2009-02-09 12:24, Bloomberg News, by Rich Miller and Simon Kennedy

And none more than our Federal Reserve. The only way to completely remove the cancer of moral hazard is to abolish the Fed and replace it, them, with something else. But what?! Anyway, that’s not going to happen (unless we have The Great Depression of 209), but as it was the moral hazard created by 1984's Continental Illinois bailout created the current global potlatch, how else do we remove it? (Not only were uninsured depositors bailed out, so were creditors and even preferred shareholders.)

JRB

2/9/09


Bernanke Risks ‘Very Unstable’ Market as He Weighs Buying Bonds
2009-01-26, Bloomberg News, by Rich Miller

How can they even contemplate another "Operation Twist" when the PSBR* is into the trillions!? It was a complete failure!

* “public sector borrowing rate” is the UK’s term for “deficit”.

JRB

1/26/09