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