Think Twice Finance

Rethinking Energy Policy: Stark Reality in South-Eastern Europe, Central Asia and the Middle East.

It is time to quit telling ourselves bedtime tales of a Lennonesque future of universal peace and brotherhood.

There was no end to the Cold War, as Gorbachev made clear in his most recent speech. No more rubber chicken and honoraria for him.  Russia used the last 15 years to replace their failed military with a successful foreign-built energy weapon, while Gorbachev passed out platitudes. The rust will eventually set in when we pull out of Russia, but meanwhile, we’re on the defensive.

We have a few friends; some old, some new. Western Continental Europe, as usual, is too preoccupied with itself to be of any use. The Sarkozy deal with Russia was a wink and a nod that nobody took seriously.

The short term stakes are the oil resources of East Asia, Siberia and the Middle East.

It would have been lovely to have thriving democracies and peace in the Middle East, but we underestimate how much democracy owes to good luck and how little it owes to human nature.

So the Middle East will not be able to defend itself. We are going to have to hold our noses, as usual, and protect them from Russia and themselves. Give them 50 years, and maybe the Middle East will be viable. I hope so, because they are certainly going to be expensive until they get themselves in hand.

Yes, the longer term answer is energy independence and the good old Atlantic and Pacific Oceans to keep us out of harm’s way for 100 years or so. But for the next 20 years, no Middle East – no good times.

Russia sees no reason why they shouldn’t control the oil outside the Middle East. Unfortunately, they have a point. And we better do something about that as Europe hangs in the balance. If Western Continental Europe doesn’t miraculously wake up to its precarious position, we have the desperate corridor from Britain to Georgia that “gets it,” and is willing to fight, and maybe help from Asia. This sounds extreme. The problem is, it fits the facts.

And a look forward would be useful over here as well. Not even energy independence and a couple oceans is enough to protect us from a Soviet Republic of Europe. And that’s where Russia sees the future. It’s been tried before by folks with fewer resources behind them, and it almost worked.

Posted in Energy Policy | No Comments »

Fannie and Freddie – Is the Public Itself in Denial?

Evan Newmark points out (WSJ, Aug 15, 2008) the fundamental facts of Fannie Mae and Freddie Mac’s (henceforth F&F) existence. None of them are news but his conclusion, that F&F should be closed, is news of a sort. I have not seen this conclusion before in the popular press, although it’s been my position and that of many other experts since F&F were created as entities separate from the Treasury in 1967. Since the decision to close is so obviously appropriate, I thought it would be useful to list the reasons. The purpose is to make what I think is an important point. F&F are the emperor’s new clothes – a situation so obviously inappropriate, yet so embarrassing for the public that it does not want to acknowledge it. We need some callow youth to jump out of his chair and say, “Look! F&F have no redeeming social value.” Barak Obama comes to mind.

OK, so what’s wrong with F&F?

1. F&F were chased off the Treasury’s debt roles in 1967 to perpetrate a fraud upon the American public. The taxpayer was to believe he was not bearing the burden of the agencies’ debt. As recent events have made indisputable, that belief is and always has been a corrupt deception.

2. F&F perform an undesirable function. To provide cash for mortgages that banks can buy without concern for the willingness or ability of the ultimate homeowner to pay the mortgage back is a dangerous policy. The danger is, of course, that very risky homeowners will ultimately do the borrowing. Recent events have taken that risk out of the realm of possibility and made it certainty.

3. There is no control on the size of these agencies. As a result, they now cover half the country’s private housing debt. The amount doubles the size of the Federal Deficit.

4. They are a corrupting influence. Entrepreneurs think “If we can get away with this, what can’t we get away with?” The answer, for Mortgage Sellers, Most Large US and European Banks and some Investment Banks has been, “Almost Nothing.”

5. Perpetration of corruption is among the duties of the Secretary of the Treasury and the Chairman of the Federal Reserve. Paulson understands this; Bernanke is in apparent denial.

6. The new “reform” law perpetrates the status quo. It leaves the fraudulent agencies in place, encourages them to get on with their job of subsidizing bad mortgage practices, and provides further assurance that the Treasury will bail them out. (But Secretary Paulson has hired a Goldman Sachs guy to reform all this some years from now. So all our worries are over.)

I have one question. Which of these six points is the public not capable of understanding? My answer is “None of them.” Yes, the public is fed a lot of s— and kept in the dark as though they were mushrooms. But the public is used to this. They figured out they were being treated like that in foreign policy, didn’t they? The public figured that out in health insurance, haven’t they? I think they’ve figured it out here too. F&F are going away. I just hope many, many senators and congressmen are going down with them. But America, triage is best done quickly.

Posted in The Banking Crisis, Federal Housing Agencies, Polticial Decisions Affecting Banking, When Regulation Goes Wrong | No Comments »

The Auction Rate Municipal Securities Bare Washington’s Greatest Fear

It is not the intent of this article to explain exactly what banks are doing to mislead investors with regard to the sale of auction-rate municipal securities. That is the trap into which most articles on the subject fall, and since confusing the public is the purpose of every significant security that has played a role in the credit crisis, let’s just avoid that trap.

What the public needs to understand about these securities, it does understand. Let me provide the obvious fact about auction rate securities. They are a way of hiding an enormous risk being passed to the Money Market Funds of US investors. This is what Washington calls “an inconvenient fact.”

First of all, auction rate securities were designed to deceive investors about their risks. Municipals, like homeowners, prefer long term debt to short. Long term debt is not acceptable to conservative investors, so the maturity had to be manipulated to get it sold. Auction rate securities were designed to permit banks to profit from securities trading without risk to themselves. This was to be accomplished by devising a way of taking all the day-to-day risk out of the business, replacing it with a risk that the method would fail, resulting in a cataclysm. (Tom Friedman’s description of how the Chinese are ruled provides an apt metaphor. As the Olympics display, it’s a great show until it all falls apart.) I hasten, along with all the bankers involved, to add that nobody claimed these securities were riskless. The approach, as usual, is to say it’s like a riskless security. The banks are being sued because some prominent brokers forgot to use the l— word. The outcome of the suit will hinge on how often the word was forgotten and whether it was in writing. (Or, if the chief executive and some other cretin had a good giggle about it over the email.)

So it did fall apart.

When bank scams fall apart, the Federal Reserve who (make no mistake) condoned the scam in the first place, makes the banks “eat their sins.” That is, the banks must repurchase all the bum securities. Since these institutions are now all wholly owned by Persian Gulf Governments (Allah be praised!) and the US government, the transaction should actually be viewed as follows.

The risky debt of municipal governments is now being assumed by the Federal Government and Governments in the Persian Gulf. This, of course, has been a plank of the Republican Platform since God was born. But there must be an easier way.

Posted in Games Bankers Play, The Banking Crisis, Bank Management, Polticial Decisions Affecting Banking | No Comments »

Disband The American Financial System.

We need to take an honest look at our financial system and a more pragmatic assessment of the possibility of putting it “back on its feet.” It is clear that the time when that was possible is gone. Our latest attempt was last week’s “Housing and Economic Recovery Act.” This was 900 pages of pork that nobody can yet claim to have digested. What we know is that it does nothing substantive to alter current regulation. It is an act, “full of sound and fury, signifying nothing.”

The consequences of the alternative to the act, which – make no mistake – letting the insolvent agencies and large banks fail now, would indeed be dire. But to to stick with the current plan promises to end with the failure of the US Treasury. That would be worse.

Here are the conclusions we can draw from the past few weeks. Secretary of State Paulson’s proposal to make the resources of the entire US Treasury available to Fannie Mae and Freddie Mac was rejected. As any banker knows (but none will say in print) those Treasury resources would most certainly be provided if needed, regardless of the current law. Paulson’s move was simply an attempt to allow the public in on the open secret that those resources would be available to the agencies if they were to need it. He may have hoped that this would motivate the corrupt legislators who oversee Fannie and Freddie to clean up their act – or better yet, the public to throw them out. The 900 page Obfuscation Act that was passed this week is a transparent attempt to leave the public in the dark. Fannie and Freddie are corporations who are currently paying dividends out of debt issued with an implied government guarantee, the equivalent of taxpayers paying stockholders who claim ownership of a nationalized firm. If there was ever a way to “reform” these “institutions”, it was crushed by the new bill.

The large New York Banks are, under current regulations, permitted to “sponsor” the subprime mortgage conduits that have been a focus of this crisis. What no journalists ever report is that FASB tried to make these conduits illegal under legislation following the accounting debacles of Enron. It no longer takes a genius to understand why FASB was of that opinion in 2002. Nor is there any doubt why the Federal Reserve lobbied against these reforms and successfully rolled FASB, leaving the conduits available. The word “dysfunctional” is just inadequate to describe our financial legislative process.

The reason for all the shenanigans is that the banks in New York, London and Toronto would be insolvent without major government subsidies. It should be humiliating that the form this subsidy took was an elaborate hoax. But the senators in question are beyond humiliation, somehow. The banks were given permission to buy high risk credit, then fund it with commercial paper and zero capital. This paper was sold with promises from the banks that could not be kept, which is why they are being forced to buy the commercial paper back now, returning the subprime loans to their proper home one the balance sheet of the once-again money-losing banks.

The appropriate solution to this crisis is to let these institutions die. The government’s actual plan is to expand the subsidy club, welcoming in the investment banks as well. Any real bankers interested in taking real risks in pursuit of real profits are moving to private equity. So the good news is, there will always be real bankers. The country can’t do without them. The bad news is the club of subsidized non-banking subsidized bankers is expanding exponentially along with the taxpayer’s ultimate burden when the whole house of cards comes tumbling down.

Posted in Creative Accounting, Bank Management, Polticial Decisions Affecting Banking | No Comments »