Monday, January 26, 2009

"TARP, Squared?"

The Troubled Asset Relief Program (TARP)

This past week may be an aberration in the past 15 months which have been filled with them. But, I am beginning to think that the Obama Administration and the Congress may need to double the $850 Billion financial relief package they now are crafting and hope it doesn’t take more.

But, if it does, then the Administration should seek it and the Congress should approve it.

Hopefully, going forward no federal financial support will be given to any company/financial institution without a reciprocal equity position for Uncle Sam in that recipient. The federal government, at some point, needs to pay back all of that borrowing and get paid for all of its support.

President Obama is a popular figure and that is all the more reason for him to eschew questionable spending in his stimulus package. Paying off any Democratic constituencies with initiatives that do not bring the hope of near instant leveraging and jobs is not what I would urge the President to do. And, that goes for giving too much to the GOP, too.

As Obama has pointed out in his meetings with the GOP congressional leadership, he won and they lost. So, while they have a seat at the table, it’s a small one.

There are plenty of ways to spend that money that could insure it gets quickly worked into the national economy and working for all of us. (I’ve always liked giving $1000 checks or more to every family/citizen, which only can be cashed for goods and services at stores or other commercial otulets. Those businesses then can get credited with money from the Treasury, when they deposit them at their local bank.)

There is time for larger Pell education grants, federal arts program, and other good ideas, but that time is not now. The more good will (and down the road revenue) which President Obama can generate from pure stimulus spending will provide the basis for attending to these collateral societal needs sooner rather than later.

And please, Congress and Mr. President save us any tagalong “secret union vote” provision. We do not elect our public officials in that manner and there is no compelling or good reason why our union brothers and sisters need “secret votes” to enhance their numbers.

Alan Blinder

Mr. Blinder, certainly no Fannie Mae or Freddie Mac shill, authored “Six Blunders En Route to a Crisis” in yesterday’s (Jan. 25) New York Times business section. In listing his half dozen reasons why we have experienced this pernicious financial and economic meltdown, try as I might I couldn’t find any reference to Fannie Mae or Freddie Mac, but did see Wall Street mortgage and security originations and lax federal financial regulation prominently noted.

Freddie Mac

Nobody in the “GSE friends” world (both of them!) should take any joy in Freddie Mac’s financial problems. It was reported this weekend that they may need another $35 Billion in federal financial assistance to cover their losses, to go with the almost $15 Billion which they’ve taken already.

Now, the same could soon happen to Fannie Mae, but I have my doubts, since it long has been the presumption that Freddie’s books, portfolio, and back office were a mess, in comparison to the company in DC.

Yet even Fannie is making adjustments, laying off hundreds and beefing up their “Real Estate Owned (REO) and loss mitigation” efforts, headquartered in Dallas.

The surprising thing to me is that when the dust settles Fannie thinks it still will carry about 5500 employees.

What are they all doing? It’s not a thriving business anymore, so all of those formerly busy folks can’t have a lot to do. I am not advocating adding to the nation’s unemployment roles, but at some point I can’t see where that many people can be gainfully employed doing Fannie’s business, unless they get something else major to do.

To the New Senators and Members Serving on the Banking Committees

Few of you have any idea (no matter what you now think) about the issues you will be called on to shape, bless or kill in the coming year. Yes, you’ll get briefing papers and some staff input, but--with all due respect--you are going to be dealing with buzzwords and phrases for a long item, unless you take the initiative to get smart and fast.

Every single financial interest in own is drooling to come in and meet you and your top legislative assistant(s). Let them and now. But make them give you a “ding-dong school” lecture on what they do, exactly how they do it, and where they fit into the national financial economy. Make sure that you know where and how they work back in your state or congressional district. Your political survival may depend on it.
Of course they will spin and possibly mislead, but by conducting the same exercise with multiple and conflicting interests, you will begin to get a sense of what’s really happening out there.

Use the Congressional Reference Service experts and the Library of Congress resources and make yourself aware. Don’t be afraid to ask lots of questions. There are no “dumb questions,” just questions for which you need and want an answer.

While your congressional Rabbis, committee chairs, and subcommittee chairs, will help, you need to help yourself. And, yes, there are elements in town that would have you less knowledgeable than more.

Question everyone and then find your comfort level, but don’t stop questioning, ever. The interest groups—which can be most helpful--preceded you and will be here when you finally leave. Use them to make yourself a more intelligent advocate for your constituents. Just because they brief you doesn’t mean you owe them your vote or support.

And, despite the different names and apparent functions, every single interest you encounter in the financial institutions world has one thing in common. They all borrow money at one rate (from depositors, policy holders, institutional investors, regional and central banks and other credit facilities) and try and reinvest it at a higher one, holding onto as much of the margin as possible for their profit.

That’s the single most important thing to know about financial service companies and you’ve just learned it!

Andrew Cuomo

Why do I feel that the “happiest Democrats in town” are those New York public officials and interests, not to mention the Senate Democratic leadership and the Obama White House, who won’t have to deal with “Senator” Andrew Cuomo?

I just can hear them saying, collectively, “Hello and welcome Senator Gillibrand and thank you Governor Patterson, no matter what your motives. Oh, and Andy, you are a great state Attorney General.”

Cinematic Revelation (to me)

I happened to catch Stanley Kubrick’s “Dr. Stangelove” on TV the other night. That wonderful Cold War black comedy, with the late British comedian Peter Sellers playing multiple roles, had bravado performances by Sterling Hayden and George C, Scott. But, how many realize that the Air Force navigator on the nuclear armed B-52, which doesn’t get recalled and heads alone to bomb “Soviet” targets, is a very young James Earl Jones?

Maloni 1-26-2009


John M said...

The most brilliant piece of casting in that movie (and IMHO one of the best ever outside of The Magnificent Seven, which was in a class by itself) was Slim Pickens as Capt Kong. He was great in Blazing Saddles, too.

I liked a young Raymond Burr as intrepid reporter "Steve Martin" (of all names) in the pasted on American scenes to the original Godzilla, but that was pretty lame.

Bill Maloni said...

How about Slim and Katy Jurado in the "Billy the Kid" movie with Kris Kristoferson, James Coburn, and Bob Dylan?

Dylan's "Knocking on Heaven's Door" song, as a wounded town Marshall Pickens realizes that he's soon to die, is haunting.

Don't get me going on Clint Eastwood in "The Outlaw Josey Wales" or John Wayne in "The Quiet American."

Last comment, Eastwood in "Gran Torino" and Mickey Rourke in "The Wrestler" are must sees!

Bill Maloni said...

John. Make that "The Quiet Man," with John Wayne.

One of these days, I'll do a completely typo free blog and comment section!!

Anonymous said...

Some must reading about the financial crisis in the Economist this week.

Although there are many ways of looking at it, one angle struck me as prescient.

With housing and mortgages, we took an process that used to be local (and which used local judgment and expertise in making loans), then nationalized it, and then, with the creation of the CDO market, exported it around the world, with disastrous results.

The Economist also points out how silly the CDO markets were. With the currency exchange markets, the banks did a good job - because their quant models held up - note these markets mostly trade on short term time horizons and the banks knew at some level what they knew and didn't know in terms of assumptions. But the models made no sense with hopelessly complex mountains of paper cdo's - that no one can now figure out.

My guess is that the GSE's stubbed their toe badly here - but not as bad as the private banks, who muscled their way into the market with aggression.

Bill Maloni said...

We can quibble about facts, but some things stand out.

The "local" real estate market was history after the "Thrift Debacle," in part because of the Post-Vietnam War inflation which tragically proved that thrifts--heretofore the largest of mortgage lenders/investors--couldn't manage the interest rate risk, when their costs rose above their revenue.

That fact, in the early 1980's, is what gave huge impetus to the development of Fannie and Freddie and use of their mortgage backed securities and debt activities. Those securities had buyers all over the world. It made our mortgage market the most efficient, liquid, and successful.

That, in itself, wasn't a problem. For more than 25 years, all of the "Belgian dentists" and other foreign investors bought both the Fannie/Freddie debt and mbs and funded American home mortgages, because our domestic deposit base and our depositories (banks and thrifts) couldn't.

Our multifacted current problem keeps coming back to the same source; hundreds of billions of dollars in poorly underwritten U.S. home mortgages--originated by by Wall Street and their mortgage broker networks--and sold around the world (with even Fannie Mae and Freddie Mac buying them) to "yield hogs," while no Bush federal financial regulatory source was willing or able to blow the whistle, until it was too late.

International financial interdependence is a contemporary fact of life. It didn't go awry--in any major way--until all of those overseas investors/markets OD'd on toxic private lable (non-GSE) subprime mortgage securities.

And, as long as we are a debtor nation, we better hope those foreign financial relationships don't go away.

Anonymous said...

bill - your third paragraph from the bottom hits it squarely.

I am not sure that I absolve the GSE's from the process - they bought this paper and did the same shoddy due diligence as Wall Street did. Anyone taking a close look at the loan qualities (as opposed to hiring outsourcers who sampled loans on an ad hoc and pressured basis) would have refrained from buying this paper. I suspect the GSE's were subject to the same market pressures as Lehman and Bear - and went along. One can bet some smart people at the GSE's saw it early on and objected, but to no avail.