Monday, July 14, 2008

Wile E. Coyote Nation

Today, boys and girls, we can discuss Katie's latest column, a paean to Wal-Mart, or we can discuss the financial industry's impression of Margaret Hamilton as the Wicked Witch of the West in the "I'm melting!" scene.

Let's go with Katie, yea! Katie! Katie! Katie!

Oh, grasshopper, you are such a philistine sometimes. We'll discuss the financial meltdown, a subject more important in the long run, and the short run for that matter, than Katie. Besides, the "Farian did a nice job on Katie already, including this paragraph, first a quote from Katie, then the response:

Wal-Mart is the world's largest nongovernment employer, because it's the world's most popular retailer. [Coca Cola is the world's most popular beverage, but not because it's good for you. Each day Wal-Mart presents consumers with the same challenge: will you stab your neighbors in the back by supporting a wage-cutting ruthless employer just to save a nickel a package on infant formula? And each day increasingly broke and desperate American workers say, yes, just save me a few nickels so I can put shoes on my childrens' feet and maybe they won't die from the illnesses we can't afford medicine for]

Turning now to the financial situation, apparently Henry Paulson got out of church early on Sunday to deliver this statement:

... I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. ...

Well, hey, that's great Hank! Spot hopes you negotiate for a good price on the stock you buy for us all.

But Spot has to ask: Why would you buy stock in a bankrupt concern and put your (our) good money behind all the other bad money sunk into these corpses by current lenders and investors? Why not take the position of a post-petition creditor in a bankruptcy?

James Kunstler thinks last weekend may have been a Wile E. Coyote moment for America:

There's a particular moment known to all Baby Boomers when Wile E. Coyote, in a rapture of over-reaching, has run past the edge of the mesa and, still licking his chops and rubbing his front paws in anticipation of fricasseed roadrunner, discovers that he is suspended in thin air by nothing more than momentum. Grin becomes chagrin. He turns a nauseating shade of green, and drops, whistling, back to earth thousands of feet below, with a distant, dismal, barely audible thud at the end of his journey. We are Wile E. Coyote Nation.

Is there anyone in the known universe who thinks that the US financial system is not fifty feet beyond the edge of the mesa of credibility?

Nothing will avail now. Not even if Sirhan Sirhan were paroled at noon today and transported directly to the West Wing with a .44 magnum in each hand (and a taxi driven by the Devil waiting outside to take him to the US Treasury and the offices of the Federal Reserve).

It's hard to imagine what kind of melodramas were unspooling on the Hamptons lawns this weekend, while everybody else in America was watching Nascar, or plying the aisles of BJs Discount Warehouse for next week's supply of mesquite-and-guacamole flavored Doritos, or having flames and chains tattooed on their necks, or lost in a haze of valium and methedrine.

With the death of the IndyMac Bank last week, and the GSEs Fannie Mae and Freddie Mac laying [shouldn't that be lying, Jim?] side-by-side in the EMT van on IV drips, headed for the Federal Reserve's ever more crowded intensive care unit, there was a sense of the American Dream having passed through the event horizon that denotes the opening of a black hole.

Here was the Treasury Secretary just last week:

Just three days earlier, Mr. Paulson was the picture of calm when he told a Congressional committee that there was no need for any new or additional legislation beyond what he had previously sought because, he said, there “isn’t a silver bullet” to restore the markets.

“I have grown up in a world where you don’t always have all the tools you’d like to have and where I’ve very seldom seen a perfect hand that someone has to play,” he told the members of the House Financial Services Committee, noting that it was better to do things right than to rush through legislation that did not correctly address bigger systemic issues.

But by Sunday afternoon, Mr. Paulson was telling lawmakers that the plan he was about to make public in a few hours would arm him, and his successors, with “a bazooka in my pocket to pull out when we need it to shoot down” problems that the companies might face in the financial markets, several lawmakers recalled.

Is that a bazooka in your pocket, or are you just happy to see me, Hank?

One of the best discussions of the role of Fannie and Freddie, and how they got to where they are, that Spot has seen was in a post today at Calculated Risk:

I think we can give Fannie and Freddie their due share of responsibility for the mess we're in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren't the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box. But Krugman [in his column today] is right to focus on the fact that it was the regulatory and charter constraints of the GSEs that kept that box closed. In the schizoid reality of the GSEs, when they had their "shareholder-owned private company" hats on they did plenty of envelope-pushing. When they had their "affordable housing" hats on, they rationalized dubious theories of credit quality--like the fervent belief that low or no down payment can be fully offset by a pretty FICO score--to beef up their affordable housing goals, often at the expense not of the poor put-upon "private sector" but of FHA, whose traditional borrower pool they pretty thoroughly cherry-picked. Nonetheless, the immovable objects of the conforming loan limits and the charter limitation of taking only loans with a maximum LTV of 80% unless a well-capitalized mortgage insurer took the first loss position, plus all their other regulatory strictures, managed fairly well against the irresistible force of "innovation." If there has ever been an argument for serious regulation of the mortgage markets, the GSEs are it.

Krugman asks the question: Well then, how did the GSEs get into trouble? Calculated Risk's reply:

Well, that [that the GSEs were too-highly leveraged] and the fact that the minute it looked like the party was over, Congress and the administration both fell all over themselves to push the GSEs into jumbo markets they had at least managed to stay out of during the worst of the boom, cheerfully lifting their portfolio caps at the same time. How do you go on a stock-selling binge at the same time you have just become the official lender of last resort (along with FHA), handed the mandate to take out all those toxic ARMs with too-large loan balances into "safe" 30-year fixed that the borrowers in question still can't afford? If credit risk wasn't, heretofore, mostly the GSEs' problems, it will be now.

In other words, boys and girls, we've turned a private loss problem into a public one.

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