Escalating In A Quagmire

Haven't I tried to make the point that a felicitating congress as well as the SEC in their lack of supervision and enforcement of FASB guidelines, got the country into the debacle in which we currently reside? Can it possibly be, that the justices of our supreme court do not read this blog? How can they be so naive?

Just in case anybody out there doesn't think that the K Street Project was a success, yesterday's Supreme Court decision on campaign finance ought to put you over the top. Thanks Hammer.


So, who got us into this mess, and who benefitted from it? More importantly, upon whom did congress and the administration rely to craft the bailout legislation and has that legislation benefitted the American people?

Here is an excerpt from today's WSJ: Critics contended that corporations and unions continued to spend general funds on electioneering through ads masquerading as commentary on public issues that implicitly urged a particular candidate's election or defeat. McCain-Feingold aimed to plug that purported loophole by restricting those ads in the weeks before a federal election.

But Justice Anthony Kennedy, writing for the majority in a 57-page opinion, said the effort to divide corporate political spending into legal and illegal forms chilled political speech.

"When government seeks to use its full power, including the criminal law, to command where a person may get his or her information or what distrusted source he or she may not hear, it uses censorship to control thought," he wrote.

Justice Kennedy wrote that, taken to its extreme, the restriction on corporate spending could silence media organizations or even allow banning such political-themed movies as "Mr. Smith Goes to Washington."

He rejected the view that government had an interest in preventing corporations or unions from "distorting" political debate by funding ads. To the contrary, "corporations may possess valuable expertise, leaving them the best equipped to point out errors of fallacies in speech of all sorts," he wrote.

I think that the justices failed to grasp the the meaning of the golden rule, e.g., he who has the gold rules ...

THINK!

Questions For the Big Guys

The Times asked some experts to submit three questions that they would ask the heads of Golda, and a couple of banks about what happened to cause the financial crisis. Here are the only really relevant questions that were submitted:

1. Describe in detail the three worst investments your bank made in 2007 and 2008 — that is, those transactions on which you lost the most money. How much did the bank lose in each case?

2. What was the total compensation of each manager or executive supervising those three transactions — including yourself — in 2007 and 2008?

3. Are those executives still with your bank? What investments do they supervise today? How much will they be paid for 2009, including their bonuses?

— SIMON JOHNSON, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics

Here is my submission:

1. Do you suffer from dementia or any other memory altering malady? No? Well then, how could you possibly get involved in a flawed market that mirrors exactly what happened to mortgage lenders during the period from 1989 to 1991 (see post of 01/06/09), e.g., how could you possibly be a party to a market that allowed borrowers to be qualified at teaser rates?

2. If Billy's mother let him jump off of the Mystic River Bridge, would you let your little Lloyd or Jamie or Johnny?

3. WRT to the GSE's - Fannie and Freddie, were you aware that they employed greater than 100 times leverage in their risk management? Yes? Given a simple default analysis, you were therefore aware that a modest increase in defaults would bankrupt them, were you not? Yes? Were you also aware that the government's line of credit to them was far less than what was at risk? Yes? We take it therefore, that you were confident that the government would step in and bail out the market? Yes? Knowing the potential for loss, you proceeded anyhow ...

Parry and Thrust

So, we have heard from Ben Bernanke again. As in the past, he has absolved the Fed from any responsibility for the current economic mess. Here's the quote:

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke, whose nomination for a second term awaits Senate confirmation, said in remarks to the American Economic Association.

He has a point, because the Fed is really responsible for the regulation of national banks and setting monetary policy and not direct supervision of the capital markets. But, let us not lose sight of the fact that Bernanke was a member of the Open Market Committee and as such, should have seen, along with the rest of the Board, the very simple relationship between median income and median home prices in the markets. The fact that some three trillion dollars was running through the mortgage market in 2006 should have raised concern - ABSOLUTELY! That it did not is the reason why we are here. OOPS, that would be blame, and we can't have that, can we?

So, who is to blame? We know, that it's not the Fed, because Bernanke just said that it was not. It is also not the Congress because they did a superlative job of supervising the GSE's and removing any accounting obstacles that relate to reporting by the company's that issued the derivatives that didn't cause the mess. It also couldn't be the Wall Street firms that caused it, because, after all, the securities were rated. It also could not be Fannie Mae and Freddie Mac because companies that employ leverage of greater than 100 times are really well managed and the decision makers are really smart and very conservative and really understand risk. Also, it definitely was not the rating agencies, because, they too really understand risk and know a AAA security when they see one. It was also not the SEC because we all know, that their supervision of FASB was right on the money and definitely NOT influenced by the Congress and Congress was, in turn, NOT influenced by K Street. It also was not the mortgage bankers because they really know how to underwrite and would never, under any circumstances, put a bad credit risk in a house that they could not afford. It's also not the Realtors because we all know that the affordability index is a really well constructed economic indicator and that they would never publish it if it were not. WAIT! I think I figured it out ... it was the housing market itself! It had the absolute cheek to stop going up in price.

What else could it possibly have been?