Earlier today, John McCain said that SEC Commissioner Cox
should be fired. Bravo John, you got that one right! From the suspension of the
“uptick”short selling rule in July 2007 through the failure to enforce rules regarding
naked short selling down to his present absence as an effective player while
the financial industry collapses and his charges disappear, Cox has been an
incredible failure. His firing would be but a minor sanction. For those who
don’t know him, he was a Republican Congressman from California before being
rewarded by President Bush and placed in a job heading an industry he knew
nothing about. Par for the course for the Bush administration. In response to
McCain’s firing call, earlier today Bush praised Cox, a replay of doing just a
heck of a job Brownie. Score one for McCain. Apparently, Barack is sitting this
one out, thinking up no doubt intelligent but passionless and convoluted plans.
Earlier this week, Treasury Secretary Paulson engineered a
confiscatory takeover of AIG, lending money at an interest rate of roughly 11
¾%, with mandatory principal payments and penalties and received a warrant good
for 79.9% of the company. Some might think that Vladimir Putin had a hand in
this and others looking at the interest rate and terms might think the deal was
arranged by organized crime. Both the media and politicians of both parties are
calling this a bailout. Others believe that the US has made a good and necessary
loan, and will be money good at the end of the process. Nancy Pelosi,
Democratic Speaker of the House, severely criticized the move as a bailout, not
appearing to recognize the need for the action in both US and global markets
and countries. Strike one on Nancy and the Democrats.
The end of the previous week was marked by the Treasury’s investment money in Fannie Mae
and Freddie Mac at interest levels around 10% and again seizing control in an
effort to keep the national mortgage apparatus fluid. Also this week, the
Treasury refused to help Lehman Brothers with its long-term liquidity and that
company filed bankruptcy and is now in liquidation. Most Democrats again
decried the use of government funds in the private sector.
Most people, including myself and at least 99% of our
Senators and Congresspersons, are not fully informed and just not competent to
understand the very complicated innards of “Frannie.” But I think I know enough
to believe that given the luxury of time, and no need to go to the public
market and raise capital, and no regulatory requirement to comply with FASB 157 (I’ll get to that
later), this “bailout” may ending up costing the taxpayer very little if not
nothing. Many have opined that at least 85% of the mortgages held by Frannie are
current, and will, over a time, return the principal and interest owed, and
will more than cover the 15% of the mortgages that are not current or in default.
With the luxury of time, perhaps as many as half of those 15% of problem
mortgages, will, with proper individual care be worked out, recovering all or a
large part of their principal, or, if houses are foreclosed, return a good part
of the loan In the end, the much maligned “bailout” may pay off, and may turn
out to be a good trade for America. But in any event, the loan to Frannie
should not break the American bank and Democrats would be well advised to get
with the program instead of thinking that somehow the Bush administration is
bailing out stockholders!
You can’t turn on the Republican propaganda machine known as
CNBC without repeatedly hearing the expression “moral hazard” from guests and
commentators alike, and listening to Paulson, and his stern admonitions may remind
some of Cotton Mather. Sadly, many Democrats have joined the moral hazard crowd.
The babble is indistinguishable.
And where is Barack Obama on all of this. I haven’t heard
any displaced anger, such a gentleman Barack is; no “Fire Cox” emanates from
his mouth. Sadly, and I’m a long-standing, card carrying Democrat, albeit a
past supporter of Hillary Clinton but an Obama supporter now, I just don’t know
where he is. I haven’t heard any passion from him, any criticism – no nothing –
that registered with me. I just received an e-mail of a new ad that drones on
about jobs etc., etc., etc. I imagine that he’s off somewhere thinking about the crisis and
probably developing some complex long term strategy, but hey man, there’s a
pretty big fire raging now!
In November 2007, the Financial Accounting Standards Board
(FASB) put into effect Rule 157 that required most financial institutions to
“mark to market” their holdings of CDOs, CMOs, etc. etc. FASB is a non-profit,
advisory organization made up of business and financial leaders whose mission
is to standardize accounting rules for consistent reporting. In simple terms, the rule required those
institutions to value the assets on the last sale, rather than on a theoretical
mathematical model, as was previously allowed. As many institutions began fire
sales of assets, last sale prices went lower and lower, forcing institutions to
devalue the portfolios, and the devaluation meant that many institutions took
write-offs and had to raise capital to meet regulatory ratios. Continuing sales
by other market participants led to a vicious cycle of re-pricing, devaluation,
write offs and capital raising. In one recent one-month period, Merrill Lynch
sold assets at prices beginning at 48 cents on the dollar that went down to 22
cents on the dollar just a week or so later. Obviously, distressed asset sales
destroy orderly markets and lead to chaos.
I was wary of FASB 157 when the rule was passed and believe
that the impact of the rule has been to destabilize markets by mandating and
establishing false asset values and depriving financial institutions of the
time required to solve problems. The minutes of the FASB Board meeting on
October 17, 2007 revealed that the professional staff of FASB had recommended
at that Board meeting that the implementation of the rule be deferred by one year,
which would have brought it to November 2008 for implementation. After
discussion by Staff and the Board and deliberation of a grand total of 45
minutes, the Board in a vote of 4-3 decided not to accept the recommendation to
defer but to implement in November 2007. I believe FASB 157 to be a major
contributing factor to the financial crisis which led to the collapse of Bear
Stearns, Lehman Bros., Fannie Mae, Freddie Mac and AIG, and the shotgun merger
of Merrill Lynch, with the Bank of America, as well as the hundreds of billions
of dollars in lost wealth and market value of the so far surviving companies.
Democrats seem to be on the wrong side of this problem. Let
me just say that as a Democrat, I am totally confused about the party’s
position. There seems to be opposition to Treasury and Fed intervention in the
markets and seemingly little understanding about the complexity of the global
financial markets. They really have to change the mindset on dealing with corporate
America and the huge shift of wealth from the United States to the rest of the
world. A new approach has to be developed that goes beyond charging Exxon with
price gouging and grabbing at windfall profits. By the way, in spite of the
tremendous increase in oil prices through the first half of this year, Exxon stock
was one of the largest losers in the Standard & Poor’s 500 in that time. My
friends are Democrats and frankly I am tired of hearing stupid ideas about
corporate villains and hearing many of them sounding like conservative
Republicans.
At some point in the 1990s, the nation went through a
financial crisis involving the S&Ls, and Citicorp stock sold in single
digits. A Saudi Prince, Prince Alaweed, made a huge purchase of Citi stock at
around $9 per share. Earlier, today, Citi stock traded down to the $13 level, a
round trip for Prince Alaweed from the mid-$50s price from just a little over a
year and a half ago. Next time around, or in this current cycle, the Prince or
another sovereign investment fund may l buy the whole company at the depressed
price, rather than becoming a passive investor and allowing inept, careless
management to destroy asset values. The foreign takeover of American assets
based on our desperate need for capital is about to begin anew and it will
leave American citizens and the country’s leaders gasping for air in its wake.
Remember the Dubai ports battle which aroused Democratic bloviating about
national security? We ain’t seen nothing yet.
Although this is an election that shouldn’t even be close, Barack
Obama is in danger of losing. He’s a brilliant guy as are his advisors about
the causes and risks of the present financial crisis, but so far, what he is
saying about it and his positions are just not resonating with this Democrat
and probably many others, and independents for sure. Democrats, get with the
program and get with it soon. McCain/Palin for change, for sure, from bad to
worse!
PRMCO
