This greed is just astonishing. Hedge Funds Fight Plan to Modify Mortgages [DealBook].
Andrew Sorkin reports in this morning's New York Times that despite the billions in bailout, or "rescue," funds doled out by the Treasury, U.S. banks are still not making loans. "The dirty little secret of the government’s $250 billion handout to nine banks to get them lending again is this: So far, they have stuffed it under their mattress like the rest of us." Urged to Lend, Banks Sit on Bailout Cash [DealBook].
Now this is a creative response to the current “global credit crunch.” All the more remarkable because it is proposed by a Republican administration and flies in the face of Republican economic orthodoxy. U.S. May Take Ownership Stake in Banks [New York Times]. Are they thinking out of the box or just out of their minds? Today’s fall in the stock market to below 9,000 suggests the latter, but I still believe this is just a symptom of herd mentality run amok. Or at least I hope so.
See, whatever governments do, it is not enough to calm the stock market lemmings when they are panicking. Stocks Volatile After Rate Cuts [NYTimes.com]. The Fed discount rate is 2.5% and prime is about 3.5%, close to their historic lows, oil is down to $80 per barrel and the DJIA still falls by almost 200 points to less than 9,300. That’s nonsensical at best, insanity at worst and inexplicable on any rational basis. For a suggestion on how to cope, see my Twitter finance lesson of the day…from the ancient past (a mere eight days ago) — “What Does Down Shall (Soon?) Go Up.”
This is hard to believe. CitiGroup waltzed in earlier this week as the beneficiary of a government-engineered buyout of part of Wachovia, which included financial assistance from the FDIC. Now, when Wachovia cuts a private deal for sale of all its operations (not just banking) to Well Fargo — requiring no governmental support at all — CitiGroup cries foul. CitiGroup Demands Wachovia, Wells Fargo Terminate Merger Deal [Bloomberg]. Ah, that’s why we have a market, folks. Shut up, foresake the government subsidy and make a better offer on your own!
The title of this WSJ.com blog article says exactly what I have been posting regarding our current financial crisis. In Lieu of Any Real Leadership, Let’s Ask Franklin D. Roosevelt [DealJournal]. But you have gotta read the comments. They are hilarious. Still re-fighting the battle of nearly 80 years ago of whether the New Deal was making America socialist. Get a life; get a brain! It’s a wonder these people are even allowed to vote they are such rigid morons.
Last week’s prime time speech by Pres. Bush was hardly reassuring. He was scared, shrill and stiff, almost the opposite of FDR as he spoke gloomily of the economic risks arising from the subprime mortgage crisis. If the point is to provide comfort and stability to investors and financial markets — and what else can the government really do? — it failed wildly.
Bob Herbert writes in When Madmen Reign [NYTimes.com] that
[w]hen President Bush went on television last week to drum up support for the bailout package, he looked almost dazed, like someone who’d just climbed out of an auto wreck.
But that’s only half the story. By proposing to buy up failed mortgage assets (defaulted loans on real estate properties worth less than the oustanding loan balances) rather than inject capital and liquidity into the market, the government was offering simply to rescue these lenders from their own financial miscalculations. The comfort needed was reassuring depositors that their insured savings are safe and reasuring credit-seeking businesses that the Federal Reserve would ease up on the money supply to support the availability of lending capital.
So instead of reassurance and leadership, we got fear-mongering coupled with a straight-forward bailout, which spooked conservatives into limbo. Coming on the heels of Bear Stearns, Lehman Bros. and AIG, all now defunct and brokered firesales by the US government, investors saw a collapsing house of cards, while market professionals saw a financial policy bereft of new ideas and paralyzed by indecision.
I don’t think the question to be asked in light of yesterday’s Wall Street stock plunge is who caused the bailout plan to fail in the House of Representatives. Instead, it’s why a bailout plan was being peddled in the first place and why no one focused on the psychology of investors and markets. In the 1930s, FDR closed all banks temporarily — a “bank holiday” he called it — to prevent a nationwide run and announced that fear itself was the only risk. Now our leaders cannot even “throw money at the problem,” something legislators have been great at for decades.
There’s a propular cable television series called Madmen on AMC. Reality is even better (worse)!!
So the consequence of making absurd investment decisions in real estate is that, if you are a banker, the government spends $$ trillions to bail you out. Bernanke Reiterates Need to Act Quickly, Clarifies Comments on Valuing Assets [WSJ.com]. Worse, the Bush Administration is advocating immediate passage and unreviewable discretion in what the Treasury Department does with all that money. As I see it, since depositors are insured, who cares how many banks fail due to poor real estate investment decisions? That’s why we call it a market economy. If the risk of failure does not exist, there will be absolutely nothing enforcing financial discipline on the bankiong sector in the future. That’s bad for the economy and bad for consumers. We should let the subprime bankers twist slowly in the wind for awhile. Enough with the bailouts already!
It’s chairman was a crook, its investments were stupid, nothing it does affects consumers and it has absolutely terrible TV advertisements. So what the heck justifies US$85 billion for AIG? Did We Say No More Bailouts? [Forbes.com]. Forbes opines that this “prov[es] that pragmatism trumps conviction in the historic financial crisis sweeping through the world’s financial markets.” Not at all. It is simply white shoe, country club brothers helping each other out, with free (i.e., taxpayer) money. Read carefully:
Federal officials worried not about AIG’s ability to insure its ordinary customers — those assets are kept in myriad subsidiary units of the company, all closely regulated by state governments in the United States, as well as Europe and elsewhere. The major concern was AIG’s massive exposure to credit default swaps, essentially insurance products for corporate debt.
Meaning that the Wall Street gamblers who experimented with exotic financial instruments face absolutely no market discipline and have no cost of failure. This sort of permissiveness in the face of naked greed and business malfeasance has a price, which we are already paying. G.M. and Ford Officials Seeking U.S. Loans to Meet Fuel Goal [NYTimes.com]. None of this would have even been thinkable 30 years ago, let alone if the Reagan Revolution was something Republicans like George W. actually believed in. Who stepped up with a bailout when the dot.coms and telecom firms all collapsed in 2000? For a nation that has led the world in promoting open, competitive markets, shielding large financial institutions from the price of their own mistakes is backwards. Depositors and investors are insured. Those guys should be in jail, not on bail!