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This page contains a single entry from the blog posted on July 14, 2011 5:47 AM. The previous post in this blog was Hanford neighbors settle cheap in thyroid disease lawsuit. The next post in this blog is Hold out your wrists. Many more can be found on the main index page or by looking through the archives.

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Thursday, July 14, 2011

Is this handbasket fireproof?

We don't find ourselves talking back to the car radio much these days, but last evening's news got us going. First they put on the chairman of the Federal Reserve, Ben Bernanke, who was prattling on about how the Fed would do more to stop the invisible "recovery" from slipping back into an undeniable depression. Gee, Ben, you've got the money market at about 0.000001% interest; what else can you do? Print money is all. And apparently that's what he'll do. Our kids will eat that $20 loaf of bread yet.

Then they tell us that Moody's is threatening to lower the federal government's bond rating below AAA. What a joke. Moody's -- are they still in business? Those are the grifters that assigned AAA ratings to all the garbage securities that went bad three years ago. Somehow they're still pontificating about creditworthiness, and not from a jail cell, where some of them belong. Anyway, they're making their usual Wall Street Republican noises. As the financial collapse they engendered illustrates, the smart thing to do with Moody's is to not pay too much attention.

After we parked the car and went into the house, we started reading last Sunday's New York Times magazine, where we found this valuable interview with Sheila Bair, the just-departed chair of the Federal Deposit Insurance Corporation. When people like Henry Paulson and Tim Geithner were picking the middle class clean, handing the spoils over to Wall Street, Bair did what she could to stand up to them.

Here are a couple of money quotes from the interview:

"They would bring me in after they’d made their decision on what needed to be done, and without giving me any information they would say, 'You have to do this or the system will go down.' If I heard that once, I heard it a thousand times. 'Citi is systemic, you have to do this.' No analysis, no meaningful discussion. It was very frustrating."...

"I've always wondered why none of A.I.G.'s counterparties didn’t have to take any haircuts. There's no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut. There could have at least been a little pain for them." (All of A.I.G.’s counterparties received 100 cents on the dollar after the government pumped billions into A.I.G. There was a huge outcry when it was revealed that Goldman Sachs received more than $12 billion as a counterparty to A.I.G. swaps.)

Bair continued: "They didn’t even engage in conversation about that. You know, Wall Street barely missed a beat with their bonuses. Isn’t that ridiculous?"

She looked out for bank depositors, homeowners, and taxpayers -- you know, the folks who make this country a great place. Bair thought that investment banker fat cats, who privatized profits without paying government insurance premiums, should also absorb their losses, like grown adults.

But no. Too often she was ignored -- certainly by thieves like Paulson, but also by hot shots like Geithner in the Obama administration. The President's heart may be in the right place, but the crew he's assembled around him is continuing right along in the Bush and Clinton traditions of feeding the very few rich and pushing everyone else down.

I wish Bair, a Dole Republican from Kansas, would run for President. I'd vote for her, over Obama or anybody else in the field at this point.

Comments (13)

"I've always wondered why none of A.I.G.'s counterparties didn’t have to take any haircuts."

Because one of the biggest counterparties was Goldman. Paulsen had all his personal wealth in Goldman stock having run the place along with Corzine. We needed to protect Paulsen's wealth so we could have soccer here.

See it all fits together.

I don't get why they just never called bad debt bad instead of going through this long drawn-out process either.

"also by hot shots like Geithner"

One more thing, besides being a tax scofflaw, I think the only reason Geithner got the job is because he can have his strings pulled easily.

I have no love whatsover for Goldman Sachs or Hank Paulson or Geithner or Bernanke, but Sheila Bair's Monday Morning quarterbacking two and half years after the fact, polishing her own apple, is just about as convincing as Anthony Weiner's BS.

Paulson, Geithner and Bernanke had a few hours to make decisions in September 2008 as leaks were springing by the hour in the dikes around them. They didn't know what was going to happen next; Sheila Bair in her comfy world of FDIC insurance land wasn't prescient in real time and focused almost exclusively on the solvency of her proprietary insurance fund, to the exclusion of the broader systemic and cascading events affecting financial entities outside of her jurisdiction.

Going into the meltdown Sheila Bair was every bit as asleep at the wheel as her bretheren. As she acknowledged more candidly in Paris, July 2007,

"Loans were frequently made based on "stated income," without documentation. Many of these loans, some 2 million this year and next, will reset with the potential for widespread foreclosures."

"I don't know of anyone in the regulatory community or the ratings agencies who really "connected the dots" on this problem until late last year. Certainly, we all knew sub-prime lending was a growing asset class. We all understood that borrowers were exposed to rising interest rates. And we all knew that home prices would not rise at double-digit rates forever. But it took a long time to see the problem, and now we're scrambling to fix it."

"Paulson, Geithner and Bernanke had a few hours"

So you are saying they were taken totally by surprise with no clue whatsoever even after Bear Stearns sank several months earlier.

I think the main point is how many times are these people going to cry wolf to get another cash handout. Moreover, if you look at JP Morgan's profits this AM, it seems as though banks have plenty of cash so Bernanke throwing even more money in the pool is going to be diminishing, if any, returns.

On a larger scale, now we have Congress and the President crying wolf again on the debt limit, just so we can get away without any significant spending cuts and just bumping up the debt limit again instead of taking a stand.

So you are saying they were taken totally by surprise with no clue whatsoever even after Bear Stearns sank several months earlier.

No. By September PBG knew more was to come.

During July/August of 2008 they probably (and erroneously in my view at the time) thought, or at least hoped more than what was prudent (Geithner is no thinker by the way, thinking was done by Bernanke and Paulson), that the Fannie/Freddie bailouts had been enough to stop a meltdown.

There is a big difference between knowing something is going to happen and knowing what specifically is going to happen and how that specific event relates to the webs of relationships in the financial system.

In more recent venacular, come September PBG knew there were more Black Swans but they didn't know where the Black Swans were and how important they were. It was clear (to me at least) that without massive intervention the financial system was going to fail along the lines of what happened in the Great Depression, but not clear what interventions were big enough and timely enough to prevent that outcome. Paulson, Bernanke and Geithner were flying mostly blind.

The core problem is the tunnel vision, the ineptitude and the foolishness that led to the meltdown in the first place rather than the inevitably simple to criticize emergency responses.

I can't agree that Obama's heart is in the right place. Obama's heart is caged in by a mind that is craven when dealing with the powerful, manipulative when dealing with the weak, and, of course, hell-bent on reelection.

This would be the time to have a US leader that would be willing to stand up to the Saudi snake; instead, we are selling the Saudis arms, and our president is bowing to their royalty.

And we wonder why the world hates us even more than under Bush.

Check out the documentary "Inside Job." Summarizes the financial crisis nicely for those who were watching American Idol and not paying attention. Touches on the ratings agencies and academia too. Recommend it to anyone who will listen.

The systemic problem of asset price overvaluation (illegal under 18 USC 1014) became readily apparent to the big money folks no later than late 2005. Thereafter they positioned themselves to minimize their losses, culminating in the Fannie/Freddie bailouts.

Many of the big bailout ploys are directly related to saving the FDIC (and ultimately the taxpayer) from having to make good on deposit insurance. Sheila Blair was in the key position to insist that the FDIC would not cover for any loan amount that exceeded the rental-justified collateral value of any asset pledged for a loan. Her failure to insist upon this cap on FDIC cover allowed 2 evils to proceed with gusto:

1) wholesale transfer of risk to the public, and the unearned transfer of wealth to the already-rich (including foreign sovereign funds); and
2) the nearly 100 percent transfer of blame to borrowers who were not creditworthy at the outset, and who were snookered into agreeing to use borrowed money to pay double the value for an asset that they purchased (sellers got their money, taxed or even exempted as capital gains)

You have to witness the "glee" of a borrower who gets approved for some gargantuan loan to understand the dynamics. Being approved is like a vote of support from the general public, even though they are the mark for some bigger con game.

Sheila Blair was useful, because she apparently failed to understand enough about the system to put a halt to the greatest wholesale crime of Cronyism that the world has even seen -- on her watch. She should play dumb, because the alternative is much worse.

The "Inside Job" documentary starts with the repeal of Glass-Steagal, which is appropriate. The bi-partisan repeal of the regulatory framework that had worked for 65 years is what set the stage for and enabled everything that followed.

I read a column from Dwight Jaynes about his visit to the Timbers game last Sunday. He wrote about how much of the stadium is still old and in need of remodeling.

Question> Where did all the money go that the City gave to Little Lord Paulson?

"The core problem is the tunnel vision, the ineptitude and the foolishness that led to the meltdown in the first place rather than the inevitably simple to criticize emergency responses."

I don't know - We've had 2.5 years to address this problem and the one answer seems to be floating even more money to get the economy turned around. So far it's not working, or at least not working to the point of wondering if doing nothing would have the same effect.

If I criticize emergency responses they're simple since there only seems to be one approach taken. It might have been cheaper/quicker just to let banks get stuck with bad paper and recognize it as such.

Alternatively, what would suggest they do?

Steve, I may not be far from you on this.

The Fed's printing presses should have been turned off after the emergency passed. Had the ink stopped flowing there would have been another rough patch but we would have gotten through it and the economy would be rounding into better shape today.

A rough analolgy of what could have occured is the trajectory of economic growth during the first Reagan admistration, when the Gipper teamed up with Volcker at the Fed to induce a double dip to cleanse the system of double-digit inflation. After the second dip, in the 18 months prior to Reagan's re-election, payroll job growth averaged 350,000 per month (benchmarked to today's population that would be about 475,000 per month).

If Obama actually were actually a pea eater he could have taken bad economic news early on in the name of allowing market forces to reset the economy and set the stage for a resurgence of growth. That he didn't has left us in a zombie land of little to no growth and creeping inflation eating away at stagnant incomes. The man doesn't understand and doesn't deserve to be re-elected.

"If Obama actually were actually a pea eater he could have taken bad economic news early on in the name of allowing market forces to reset the economy and set the stage for a resurgence of growth."

OK - Agreed.


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