Toxic Asset and Epidemic of Capital Destruction Edition

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions...?

--Alan Greenspan

So in my last rant I said I was hoping that nothing big would happen while I was away. I return on Monday and-- what the...Wall Street looking metaphorically like Galveston, Texas does in reality. The Dow is down 500 points today, banking execs are in a moderated panic, brokerage firms are stumbling left and right, and what do you know, everyone's waving their hands in the air to the Federal government for bailouts and help, a la Bear Stearns and Fannie Mae/Freddie Mac. Yep, everyone's against government interference -- until they need a bailout. Then suddenly they love the Fed.

So for those of us who have never had money, this whole thing might seem totally academic, because frankly, I've never had enough money to invest in a better grade of pointe shoes, much less retirement. But I do confess to a vague sense of moral outrage at the idea that it might be those tax dollars I so wistfully supplied that will go to propping up confidence in the institutions I will never have the means to participate in. Gosh, when I parted company with those tax dollars I had some hope that they might go to stuff I cared about say, oh like education or health care or bridge and road repair. Heck, I'd be fine with them winging off to rebuild the homes of the folks in New Orleans or supplying Walter Reed Hospital with a fresh coat of paint and some rat traps. What I wasn't thinking was "Oh, I want my dollars buying up any crappy mortgage-backed securities that absolutely no one else would touch with a ten-foot pole." I love it, we haggle over $650 million for veteran care, but agree to back billions in mortgage speculation. Yeah, yeah, I know, we have to do this or the economy goes to hell in a hand-basket. I'm just struck by the irony of all those "let the market decide" folks begging for meetings with the Fed.

By the way, for those in desperate need of a scorecard to keep track of how the sub-prime mortgage crisis kinda works, check out Wikipedia's diagram. The BBC also has a look at the crisis with lots of pretty graphs. Brits.

I won't even pretend to understand the system we're talking about, but whatever it is, even Alan Greenspan warns that this could be just the beginning: "But in and of itself that does not need to be a problem," he explained."It depends on how it is handled and how the liquidations take place. And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers." Spoken like a true Ayn Rand-ian Objectivist. Greenspan, by the way, isn't supportive of McCain's plan to keep the Bush tax cuts in place.

So in case you haven't followed it all, in one day,Sunday--that is--the 158-year old Lehman Brothers, was forced to file for bankruptcy, Merrill Lynch has gone and sold itself to Bank of America (which is now some sort of humongous behemoth after absorbing Countrywide Financial last year!) for half of what it was valued at last year, and A.I.G., America's largest insurance company, went begging to the Federal government for a $40 billion bridge loan. "The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments."

America's most circumspect investor, Buffett is rumored to be in on the A.I.G. discussions. Buffett's Berkshire Hathaway's core business is in insurance: property & casualty, reinsurance, and specialty insurance (a pretty far cry from BH's start as a cotton mill!) But he's had forays into banking as well--he bought into Bof A a year ago August. Don't get excited though. He's still pretty cautious about the banking industry, telling one his Berkshire Hathaway subsidiary banks to stop guaranteeing deposits at amounts higher than the FDIC level."That Mr. Buffett is withdrawing from this insurance market is an indicator of how many in the industry are worried about future bank failures." (From HuffPo because the Wall St. Journal doesn't put articles online for free!)

Here's what Buffett had to say back in April about the subprime mortgage crisis fallout: "Finance has gotten so complex, with so much interdependency. I argued with Alan Greenspan some about this at [Washington Post chairman] Don Graham's dinner. He would say that you've spread risk throughout the world by all these instruments, and now you didn't have it all concentrated in your banks. But what you've done is you've interconnected the solvency of institutions to a degree that probably nobody anticipated. And it's very hard to evaluate. If Bear Stearns had not had a derivatives book, my guess is the Fed wouldn't have had to do what it did."

Incidentally -- as this is my Political Rant, not a Financial Rant, let me inject some politics. Buffett also endorses Barack Obama and said, basically McCain would need a lobotomy to bring his (social justice) ideas in line with Buffett's.

The NY Times with advice on where to keep your cash, if you have any...

And Newsweek gives us great market collapses in history.Tulips, South Sea Trade monopoly, land speculation during the 1830s, (Eric, this one is for you) The Knickerbocker Banking Panic of 1907, plus more recent ones.

But what of our candidates? Who would be best qualified to lead in a situation like this? Obama and McCain weigh in on the crisis. "People are frightened by these events. Our economy, I think still, the fundamentals of our economy are strong," Mr. McCain told a rally in Jacksonville. "But these are very, very difficult times."
"We just woke up to news of financial disaster this morning and he said that the fundamentals of the economy are still strong?" Mr. Obama told voters at an afternoon rally here. "Senator McCain, what economy are you talking about?"

Biden says, "I could walk from here to Lansing and I wouldn't run into a single person who thought our economy is doing well...unless I ran into John McCain."

So with ALL this fresh in our minds, now seems like as good a time as any to talk about candidate positions on the mortgage crisis, bankruptcy and hey, let's throw credit card regulation in there too. (Incidentally when you're looking up how each candidate voted on bills, or who sponsored what, the Senate site actually has an up-to-the-hour searchable database of legislation.) Anyway, here we go. Much of this is from Barack Obama's and John McCain's respective websites.

Homeownership and Mortgage Fraud

Barack Obama wants to:

• Ensure More Accountability in the Subprime Mortgage Industry: Obama introduced comprehensive legislation over a year ago to provide the first federal definition of mortgage fraud, increase funding for federal and state law enforcement programs, create new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity.
• create a 10 percent universal mortgage credit to provide homeowners who do not itemize tax relief. This credit will provide an average of $500 to 10 million homeowners, the majority of whom earn less than $50,000 per year.
• create a Homeowner Obligation Made Explicit (HOME) score, which will provide potential borrowers with a simplified, standardized borrower metric (similar to APR) for home mortgages. The HOME score will allow individuals to easily compare various mortgage products and understand the full cost of the loan.
• eliminate the provision that prevents bankruptcy courts from modifying an individual's mortgage payments. Obama believes that the subprime mortgage industry, which has engaged in dangerous and sometimes unscrupulous business practices, should not be shielded by outdated federal law.

John McCain's approach to helping sub-prime or other financially strapped mortgage borrowers:

• No taxpayer money should bail out real estate speculators or financial market participants who failed to perform due diligence in assessing credit risks. Any assistance for borrowers should be focused solely on homeowners and any government assistance to the banking system should be based solely on preventing systemic risk.
  


• Any policy of financial assistance should be accompanied by reforms that promote greater transparency and accountability to ensure we never face this problem again.
• McCain has proposed a new "HOME Plan" homeowners will be afforded the opportunity to trade a burdensome mortgage for a manageable loan that reflects their home's market value.

• Eligibility: Holders of a sub-prime mortgage taken after 2005 who live in their home (primary residence only); can prove creditworthiness at the time of the original loan; are either delinquent, in arrears on payments, facing a reset or otherwise demonstrate that they will be unable to continue to meet their mortgage obligations; and can meet the terms of a new 30 year fixed-rate mortgage on the existing home.
  
• "At the same time, McCain is calling for aggressive federal action to help keep 200,000 to 400,000 families from losing their homes. That plan has many of the elements of a proposal by Rep. Barney Frank, D-Mass., and Sen. Chris Dodd, D-Conn., requiring participating lenders to forgive part of the loan principal and then write a new loan that would be backed by the federal government through the Federal Housing Administration." (Tom Raum, "Everyone's Invited: McCain Economic Plan Draws From Both Parties," Tucson Citizen, 4/17/08)
• McCain will bolster groups like Neighborworks America that provide mortgage assistance to homeowners in their communities.

Predatory Credit Card Practices

Barack Obama wants to:

• create a credit card rating system, modeled on five-star systems used for other consumer products, to provide consumers an easily identifiable ranking of credit cards, based on the card's features. Credit card companies will be required to display the rating on all application and contract materials, enabling consumers to quickly understand all of the major provisions of a credit card without having to rely exclusively on fine print in lengthy documents.
• create a Credit Card Bill of Rights to protect consumers. The Obama plan will:
  • Ban Unilateral Changes
  • Apply Interest Rate Increases Only to Future Debt
  • Prohibit Interest on Fees
  • Prohibit "Universal Defaults"
  • Require Prompt and Fair Crediting of Cardholder Payments
  Obama also co-sponsored the Credit Card Accountability Responsibility and Disclosure Act of 2008, which, among other things, would limit fees and penalties credit cards can charge consumers.

John McCain focuses on Keeping The Credit Crunch From Hurting College Students. He

• is proposing a student loan continuity plan. Students face the possibility that the credit crunch will disrupt loans for the fall semester. John McCain calls on the federal government and the 50 governors to anticipate loan problems and expand the lender-of-last resort capabilities for each state's guarantee agency.

Bankruptcy Laws

Obama wants to:

• Cap Outlandish Interest Rates on Payday Loans and Improve Disclosure: Obama supports extending a 36 percent interest cap to all Americans. Obama will require lenders to provide clear and simplified information about loan fees, payments and penalties, which is why he'll require lenders to provide this information during the application process.
• encourage banks, credit unions and Community Development Financial Institutions to provide affordable short-term and small-dollar loans and to drive unscrupulous lenders out of business.
• Create an exemption in bankruptcy law for individuals who can prove they filed for bankruptcy because of medical expenses. This exemption will create a process that forgives the debt and lets the individuals get back on their feet.

McCain's site does not have any positions on Bankruptcy Laws. However, he did vote in favor of the Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA) of 2005, which critics claimed favored credit card issuers, car loan lenders and mortgage companies and was used to take more money from the consumer. Senator John McCain however, called the bill "…an important step toward a fair and balanced approach to restoring personal responsibility to our federal banking system."

=========================

Dang, this is a long rant. A couple more small notes:

First of all, how freaking far have you gone if Underhanded Sleazy Tactic Meister KARL ROVE says you've gone too far?? "McCain has gone in some of his ads -- similarly gone one step too far," Karl Rove told Fox News, "and sort of attributing to Obama things that are, you know, beyond the '100 percent truth' test." He then realizes what he's saying and quickly adds that Obama's gone too far too.

Speaking of Codename:"Turdblossom", get ready for the ugly. Swift Boaters are readying ads against Obama. All together now: Ew. "Republicans appear to have a head start. In April, Simmons, a corporate tycoon who had spent heavily on the Swift boat campaign, began holding meetings with other Swift boat donors to discuss renewing their effort for 2008-- meetings that included input from Bush's former strategist, Karl Rove."

I hope everyone got to at least have a few minutes of levity watching Tina Fey as Sarah Palin on SNL. Frightening it is, how much Palin looks like Fey, and how Fey has got those Palinisms pretty much nailed.

And the ladies of the View are still debriefing on the little tea-party they had with Johnny Mac last week. Says Baraba Walters: "I think he, I don't know, maybe thought he was going to have a more folksy ride with us or something."

So I'm encouraged by the comments on sites like Women Against Sarah Palin, which my friend Jackie sent me. I think anyone who's read anything about her realizes what a fraud and disaster this nomination is. But I'm also worried, because I had an extremely disturbing conversation with a very dear friend of mine recently. I grant you, she lives here in California, a solidly blue state, but this intelligent, not particularly conservative woman blanched when I made one of my snide (yes, snide, I know it surprises you) remarks about Sarah Palin. "What?" she said innocently, "You don't like her?"

I'm sorry to report that my friend was serious, serious and very ignorant. We sat down for about an hour while I--I think--calmly explained exactly what the problem with Sarah Palin's candidacy for vice-president would be. And ergo, what I believe it means about the McCain Brain. Personally, I didn't really imagine it was possible, but I see now that there are people out there who seem not to know. It's up to us to get the word out. No I don't want Obama to campaign against her. Noticing her, I feel, is beneath him. But it ain't beneath me. So, please, feel free to send my rants out and to get the word out to everyone you know.

An email from Obama's campaign says their goal is to have 50,000 new donors by Friday at midnight. Obama raised $66 million in August, his best fundraising month ever. Whaddya say folks?