Screaming Penguin - Source Does Matter

So I have been struggling with this topic of the banking system problems. For YEARS I have understood that we have been inactive to our own detriment, but it seems to me we are not addressing the real problems. This is going to be a bit rambling.

First, there are a few memes that we seem to be talking about without addressing the real problem. McCain has been railing against failed CEO pay (nevermind that Clusterfuck-Carly is on his staff). This seems to me to be one of the few areas where supply and demand obviously break down. Of course we know that Oligopolies are a simple failure in free markets, but in terms of labor at top positions, it seems to me, they break the law the other way. If you are in a hugely profitable business, your competition for "top slots" in executive positions is so small, you have to exaggerate pay to recruit perceived "top talent." Here is the thing, for most of these companies, they have 50 VPs and maybe 200 directors that could actually be an effective CEO, if not dominant. However, if your company is so large that tiny deviations in actual performance translate into 10s of millions, or billions of dollars -- if 0.001 market share means a million dollars -- it makes obvious sense to spend tens to hundred(s) of millions on that deciding factor. Of course we are in this position because these companies ARE that large.

More than the blurring of lines between bank, investment house, and insurance company, it seems to my marginally trained mind that our problem is we stopped enforcing the Sherman anti-trust act as it was intended. When we went from 20 investment banks to 5, we created "companies too big to fail." This simply breaks the whole invisible hand/natural selection that Smith tells us we should have. (This applies to direct "banks" too, but I will come back to this in a bit). Sherman stems from the aftermath of the railroad implosion over 100 years ago where we let a few companies get too big to fail and ended up having to write into the law that railroads, literally, couldn't be bankrupt. Now we have a "financial services" sector that represents 21% of our "GDP" (product here, is an interesting question) controlled by about 5 companies. Obviously, we should have been controlling this MnA activity long before any housing bubble existed.

Second, we have a system where Fanny and Freddy became more than an FDIC for loans.Someone correct me if I am wrong here, but this is my understanding of how this market works:

1. Banks make loans. They would take these loans and roll them up into bundles. Fanny and Freddie were chartered by the government with a huge capital outlay to buy these loans to distribute risk on individual loans out more broadly. This prevented, what used to be localized, banks from failing in regional downturns (a factory closing) that resulted in high failures. This reduction in risk allowed "The Greatest Generation" to invest in houses and therefore increase the aggregate savings rate. Housing has never in the history of the country been a way to make money, but rather a safe, time delayed way to save money in an inflation tolerant form.

2. As a result of deregulating mortgage securities, we let banks take, not their total loan distribution, but just specific loans to people with poor or unestablished credit (liars' loans) and roll them up into big bundles. They would then say "the first 20% of payments that come in each month are a AAA rated security" since even in these risky markets, the idea that 80% of people would be in default was unexpected. The problem here is that this kind of security encourages risky lloans, including interest only loans and ARMs to more people. Housing prices go higher, so people assume for 8-10 years that real estate is now an "investment" that will earn them returns rather than a way to secure capital over the long term. This becomes a feedback loop, but since the banks now sell off loans to investment houses, they have no direct risk and enough liquid capital on the books to meet their FDIC requirements. They keep making loans and people keep buying them.

3. Bush tanks the economy and unemployment rises, real wages drop and now the ability of "regular people" to pay drops. The home market goes down a little bit, but since people are in "introductory" periods or ARMs they stick to it. This becomes a feedback loop, and now housing prices are down 20% and people with escalating interest can't pay it. The 7% foreclosure rate deceptively masks the opportunity cost built into these bullshit loans and the drop in value of of the property (accelerated by the bank ownership in certain areas, which decreases it more). While these AAA securities still get 80% of their money, they are now on notes worth less that 20% of the original roll up.

All of this leads me to one point: financial services is bullshit. I remember several months ago, O'Reilly did Bank Foo, to discuss innovation in the financial services industry. It seems to me we need LESS "innovation." Banks make money. Always have. Capital earns more. The problem is we have pushed, as is our wont in many areas (like pensions to 401ks) the risk from the people with capital (banks) to everyone else. Instead of pensions backed by investment bankers who conservatively invest in order to meet obligations, we have money markets and 401ks where people put money into these "AAA" securities to preserve capital. When they fail it is everyone who has to eat it, while the investment banks and "regular" banks have mitigated their risk. The reason Buffett is investing $5b in Goldman and AIG is is in the tank is because insurance companies need reliable investments based on actuarial tables and Goldman never held much of this shitpile.

So the big question for me is, (a) Bush wants 700b to buy these mortgage assets. How the hell did we come up with this number? That is $2,000 for every man woman and child in the US. I suspect that many of these high risk loans to families would rather see the $2,000. In fact, I would bet $8,000 to a family of 4 in a home that is about to be foreclosed on would get them out from under it for a little while. Nailing their interest rate or extending their terms would then seem to help the "man on the street" while fucking these people who have resold this 20 times. (b) No one has yet to explain to me why taking these companies into receivership and auctioning off these assets to establish a base price and working from that is not an option. The US taxpayer is being asked to buy a pig in a poke and then being told that we "might even make money in the long term." If that is the truth, then the US Government should auction off these assets and then participate as a bidder with a reserve price that represents anywhere from a -10 to 1.5% return price over 30 years. This might even still be high assuming housing prices normalize again, but at least *I* a non-fucktard could understand what we are doing and it becomes a 30 year adjustment and not a next-year adjustment. Moreover, people can stop kidding themselves that their houses are an "investment."

My final rant is that if AIG, our largest insurer, can't fucking be trusted and has to be nationalized to the point of a 1/5 stock dilution, why the fuck can't we just go to single payer heath care here? Nevermind that the overhead these fucks impose on us give us the highest healthcare/GDP of any country on the planet, they can't even fucking turn a profit doing it? I say take that stake and make AIG the insurer of the nation. At least with T-Bills backed with and owned by dollars, we could sort that out. If people want to tell us how the US heathcare industry drives the world, then paying these people in dollars should be OK with them, no?