Think Twice Finance

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 »

Freddie and Fannie Offed? Dare to Dream.

A reader asked me the other day when Freddie and Fanny were created. I knew the answer was that rarest of events, something that happened before my time. God created the earthquake, so I thought it might have been on the third day of all time or something. So I Googled it. Turns out FDR created the F—-ies when he was creating every other agency I know and love. But I forgive him. He, after all, left their debt on the Treasury’s balance sheet. Our government got down and dirty with Freddie and Fannie when Congress and the President took the F—-ies off the balance sheet in 1968, thereby magically reducing the government debt while continuing to borrow their collective asses off behind the backs of happy idiots among the citizenry. (A happy idiot is somebody who doesn’t understand that the definition of a lying politician is “a politician whose mouth is moving.”)

I am so bored with the current offerings of the public airways that I tuned in to the Congressional testimony of Henry Paulson, Ben Bernanke and Chris Cox to the Senate Banking Committee. Good move. I got the chance to watch a group of jackasses (the senators) tell a group of men (Paulson, et. al.) they were jackasses. Better, I got to hear the group of men agree that a jackass has two legs and an opposing thumb, while men bray and have hooves. It was reality TV taken to the ultimate.

The Chairman of the herd of senators, Jackass Dodd, kept reminding Secretary Paulson that he would soon be gone and Dodd would be left in his chair to deal with the consequences of Paulson’s “idea” to bail out the agencies. (Hint to the happy idiots. You can vote against Dodd next time he’s up. Make some somebody happy.)  True, Paulson will soon be gone – but the emphasis is wrong. The problem is that Dodd and his ilk were in their chairs, pumping up the debt of the F—-ies long before Paulson was caught holding the bag.

Poor Secretary Paulson thought he was being hired to clean up Congress’ mess. This week he had to hire another Goldman executive to whom that job will be delegated. He is charged with the duty of getting a bill through Congress that simultaneously gives the F—-ies the authority to borrow a whole lot more money and backs the whole thing with an unlimited line of credit from the taxpayer. This is being done because Paulson wants to ensure that he never needs to use this authority. And I am the Queen of England.

What is it with Goldman Executives? I think of them as smart guys. Maybe there is a hidden room in the offices of Goldman where executives are brainwashed and become The Manchurian Candidate.

Posted in Creative Accounting, The Banking Crisis, Federal Housing Agencies | No Comments »

Are Freddie and Fanny Too Big to Fail? Here’s a Better Question – Is the United States Too Big to Fail?

I am so sick of having it explained to me that Freddie Mac and Fannie Mae are too big to fail. There are two aspects of this little tale that make me nauseous.

First, the reason Fannie and Freddie got this big is itself criminal (before you sue, Federal Reserve, I using “criminal” in the figurative sense, of course. No reason to throw me in jail here.) So getting back to the fiction that Freddie and Fannie are government sponsored criminal enterprises, they got this big because the banks would never have been willing to buy all the mortgages they bought without a government promise to bail them out should the mortgages go sour. The government withdrew this promise (wink, wink) but to the surprise of zero bankers, is about to reinstate the guarantee (because it suddenly is possibly useful.)

Second, the “Are they too big to fail?” question is silly. IBM was once 10% of the S&P 500 index. Rome once ruled the known world. Everything eventually fails. The life expectancy of a corporation is about the same as that of a person.

But in my current offering I’m going to make a simple point. If we don’t squeeze the life out of the corrupt and ineffective Freddie and Fannie (and if t’were done t’would be best done swiftly) we will soon be confronted by the question raised by Peter Goodman (NY Times, July 20, 2008.) Is the United States too big to fail? And although I know there is many an American that thinks the answer to that question is yes, there are no students of history among them.

Goodman is no babe in the woods. He carefully counts the major costs of letting Freddie and Fannie fail. The US Treasury would need to assume much of the debt of Freddie and Fannie. The total is $5 trillion, which would double the size of the US debt. This would no doubt drive up the government’s borrowing costs and perhaps downgrade the rating on Treasury bonds, costing taxpayers some serious money. A downgrade would put US’ financial reputation in doubt. Since the reason that most other countries around the world hoard our debt is that very good reputation, other countries would be pressured to sell in favor of the Euro or, gadzooks!, the Chinese Yuan, both of whom have been flogging the dollar for some years now. The point is, every American, and many non-Americans, are going to suffer if we don’t bail out Freddie and Fannie. And sadly, not one single politician or official is going to lay out the following truth.

We said Continental Bank was too big to fail and we bailed it out. That set a precedent. We said the Savings and Loan industry was too big to fail. That expanded the precedent. We said Long Term Credit was too big to fail. We said little bitty Bear Sterns was too big to fail. Now we are saying that Fannie Mae and Freddie Mac are too big to fail. We had better get our minds around this fact. If we bail out Freddie and Fannie, the world is going to ask the question, “Is the United States too big to fail?” And if you want to know the answer to that question, just travel abroad. Ask anybody.

Posted in Bank Management, Federal Housing Agencies, Polticial Decisions Affecting Banking | No Comments »

Classifying Banks During the Banking Crisis: Wells Fargo Was Never “One of the Boys.”

In the 21^st Century there have been four archetypical ways of making a living as a bank.

First there has been the way with which we have become most familiar since the crisis. Find the best scam the bank regulators are passing out and push it to the max. This was the favorite among the Large New York, Toronto and London banks, who would have faded into obsolescence long ago if the regulators had not been passing out the candy. The disadvantage of this strategy has become pretty obvious.

Be a genuine investment bank. That means living on the edge, eschewing imitation but constantly needing new and better strategies to outdistance your competitors, requiring vigilance in managing the new risks new ideas entail. Most visibly the archetype in New York is Goldman Sachs (and, yes, Lehman) but hidden “down under” are the still more creative and wisely anonymous Macquarie Group and Babcock and Brown. The disadvantage here is you are constantly being imitated and therefore need to keep creating. Something Adam Smith warned about.

Be a banking WalMart. This is Wells’ strategy as well as that of the Four Pillars in Australia. (Your bad if you don’t know who they are. See Wikipedia.)  One cuts costs to the bone, focuses on retail products only, and does not adopt the latest flim-flam out of the House or Senate Banking Committees. The strategy carries a reputation for being boring. The profits are not as spectacular as those of the investment banks. Most importantly, you have the very difficult job of balancing cheap IT innovation with the need to keep customers happy. In other words, this strategy also requires creativity of an unsung kind. But it works in good times and bad, as we are learning from the institutions’ earnings reports.

Be a Hedge Fund or Private Equity firm. This is sort of an investment banking Darth Vader. You are very cool and very successful, but nobody knows why or how. But these Darth Vaders have been the most important positive factor in banking over the past decade. In banking, “You’re Nobody Unless Everybody Hates You.”

Posted in Australia, The Banking Crisis, Bank Management | No Comments »