Congress's come-to-Jesus moment

This is just a correction in the financial markets, nothing to be alarmed about, move along, nothing to see here.

Sounds like this briefing should have happened about 10 years ago, but better late then never, I guess.

If Congress doesn't push for prosecution of all of the honchos who made this mess possible -- and I'm talking about the financial "leaders" in the industry who made the critical-point decisions, though I'd like to see some political heads roll as well (alas, that doesn't seem likely) -- then there will be an era of legislative regulation the likes of which have never been seen.

Or we'll just have another meltdown in a few years, assuming we aren't a bankrupt nation by then, whichever comes first.

Considering the savings & loan story, I am not hopeful in any regard.

"When was the last time you heard of the U.S. government identifying a problem, developing a multi-hundred-billion-dollar program and announcing it within about 48 hours?"

Now that's what I call top-notch constituent services!

I haven't heard that any of these transactions that led to these gigantic failures were illegal, so I don't see how we can prosecute these idiots. I believe I heard that the trading in derivatives were explicitly exempted from regulations, for instance.

Maybe some people will have legal recourse based on private law (actions to collect on a debt, or breach of contract) but good luck collecting on those - isn't the idea that all this wealth was really made-up in fantasyland? In which case, they may pay you fantasy-money. But unless I have missed something, I think many if not all of these insane transactions did not violate any criminal laws.

Unless there's something else lurking out there that I haven't heard of (perhaps under a general fraud theory?), there won't likely be any perp walks to ease our collective desire for justice.

Pitchforks may be the order of the day.

Pyrrho @ 5:32 PM writes:

"Does this mean the nominal value of all outstanding credit default swaps is not the commonly cited $65 trillion but somewhere far north of that figure?"

I wouldn't be at all surprised.

If the Wonderful Gang of Happy Monkeys isn't really, really careful, troops, we could have ourselves a nice big dollop of inflation over the next few years as the said Monkeys try to monetize all these new obligations they're taking on all of a sudden. Meanwhile, the Chinese and the Arab oil-states are going to get sick and tired of lending us all this money at some point. That's when the fun really starts.

Your servant,

Lord Karth

Oh, and incidentally, just wait until talk of bailing out the automakers comes next, and then the airlines, and then... well, you get the idea.

Pyrrho:

I think I understand what you mean about the nominal value of the credit swaps (and why the %65 trillion(!) figure is off), but I'm not sure - could you explain (even though I think the it will probably make me ill)?

Well, one blessing in this is that it certainly does illuminate an area where all of us on this forum are sympatico, regardless of where we come down on the presidential election.

I'm certainly leaning towards pitchfork mode myself. I'm actually reminded of how I felt in the days immediately following 9/11. It's so easy to recall, even in hindsight I see the seeds of so many problems and mistakes of judgment I made over the following couple of years.

But I remember genuinely wondering what direction our country would choose in the aftermath of the attacks. I worried that we would lean back, play defense, and adopt essentially the kinds of tactics that were used against terrorists in the 90's. I believed then - and still believe now - that the attacks were qualitatively different, and an act of war.

I'm still angry at the Congress for never coming up with a properly articulated declaration of war, and at the leadership in general - but the Bush administration in particular - for failing to develop a sufficiently powerful national narrative that named our enemy (beyond the postmodern "terror") and rallied the public to sacrifice for the sake of the cause. I still wonder if the war would have been fought better to this point if these essential early decisions were made differently.

Even then, my reaction to Bush was mixed, although generally positive. The rally at the ruins was truly a great moment in American leadership; the request to Americans to "go shopping" was a critical failure.

But it was when McCain made his "God may show you mercy, we will not" speech and Bush made his "axis of evil" speech that I knew the moment had shifted, and we were on the path to war.

I feel the next few days are equally critical. I'm astounded that this plan has been put forward as a fait accompli. If this were any state in the country, I'm sure, nothing this massive could be considered without calling for some kind of immediate ballot or bond vote. My initial reaction is to say - No! I'm not going to f***in' pay for this s**t. And you can't make me. I can see at a minimum a huge rise in tax resistance, fed by a new cadre of Thoreaus calling out just how immoral this financial system is in its dictatorial assertion of state-backed power. But I wonder how this will play out.

What happens if enough people say, simply, no. We are willing to see these businesses and industries fail. We recognize it may harm us, but we also know that the operation may be worse than the disease. It's like chemotherapy, it seems. Yes, a lot of people will feel a lot of pain. But given the choices I suppose I'd rather see all this money channeled in to a kind of Katrina-style disaster relief for the affected areas (nationwide, I suppose; massive job loss in every metropolitan area and consequent suffering for all) then this Faustian attempt to manipulate a global system that only a tiny fraction of humanity understands even well enough to hold a simple conversation on the issues.

What happens then?

Bless,
Doug

Bfinlay: Well, that's the point, I think. I'm happy to acknowledge my general ignorance on many of these issues. I also don't speak Arabic, but I try to make good decisions in the realm of Middle Eastern policy preferences anyway. Here's the question:

If the vast majority of us don't have the financial expertise to even really understand what is going on, why should we pay for it?

Doug

Doug Cramer: If the vast majority of us don't have the financial expertise to even really understand what is going on, why should we pay for it?

LOL, good shot.

Re: the 48-hour solution - it's amazing what people can come up with when they just put their mind to it, isn't it?

We now have nationalized banking and mortgages - can we have our national health care now, please?

cb--

I did some --probably amateurish-- back-of-the-envelope calculations and figured we only had a 1-in-20 chance of a financial market meltdown. I assumed 65T in CDS in my calculations, but nobody has any idea how much of this toxic waste is out there. They are private contracts that do not have to be reported to regulators. If Ben and Hank are holding meetings like this on Capitol Hill, I may have been too complacent. They know more than I do and are freaking.

By the way, the rally in New York and London today is not a good sign. Hedge funds and other "players" were heavily short this market and had to exit their positions because of the new regulations going into effect on short selling. This involves buying back stock. "Investors were encouraged by the news" my arse.

I'm off for the night. And I'm taking my Cub Scouts for a hike tomorrow. What a week!

Question" Why did a Democrat Congress and White House create Fannie and Freddie?

Answer: http://www.youtube.com/watch?v=RWpU8sX10_4

I don't have a series 6 or 7, but I have a serious problem when I see people and institutions bailed out for stupid, greedy, and unethical behavior.

Pardon my ignorant interpretation of our current situation, and I understand that the alternative to the socialization of the American economy is worse, but, here's how I see it: Everytime I hear a politician say they "feel your pain" as you watch your home value erode...please. Home values are correcting because they were rediculously, artificially, high due to unethical practices and greed on Wall Street. This greed allowed people who had no business buying homes worth 10 - 20 times their annual income to get loans worth 10 - 20 times their annual income. They were stupid. They were greedy. They believed the real estate agent who said "they're not making more land!" and "Get in now before it's too late--home prices never drop! Hurry, hurry, hurry!" This increased demand rapidly propped up home prices. Now that lending standards have become responsible once again and poor people can't get loans that they have no business getting, home prices are dropping and shouldn't stop dropping until the median home price in any geographical area is worth 3-3.5 times the median income. That's the prudent, healthy, and conservative way of calculating loans.

Now, in order to keep our economy going, the government has to buy all the bad loans that evolved downward from the AAA rated bundles and try to keep house prices artificially high--rewarding stupid people and saving greedy, unethical institutions.

Who wins? Stupid, greedy, and unethical people. Who loses? People like me who could afford a home and chose not to buy because we didn't want to get a loan for 5 - 6 times our annual income and be stuck upside down in some miserable condo conversion (I'm in Southern California) for 16 years because we knew there was no way its value could keep rising. We did the right thing, listening to our inner, prudent conservative, and now are being punished because if the goverment succeeds in keeping prices high and lending standards low, we'll never get to buy a home the right way. The people who did the wrong (greedy, stupid, unethical) thing are being bailed out.

So, to save America's economy, stupid, greedy, and unethical people must be rewarded, and conservative, prudent, ethical people are being punished.

That's the state of our economy--were inprisoned by greed, unethical behavior, and stupidity.

Bfinlay writes: "...people with no military experience discussing warfighting or people with no financial expertise talking about what is happening on Wall Street. How many commenters here even have a series 7 or 6?"

This is a democratic republic, by the way, or was before a group of high priest financiers got together this week to decide that the taxpayers would be stiffed with trillions of dollars in toxic debt. We can talk about military matters -- and vote on them -- without having been in the military. That's the lie of the "chickenhawk" charge by the leftists.

And no offense, but I don't have a "series 7 or 6" or whatever gnostic secret knowledge you seem to think we need to have. I don't need those things to understand the basics at play here -- the geniuses on Wall Street don't even understand all the black magic derivative nonsense they cooked up and let loose.

Here's what I do understand: The vast middle class is picking up the tab for the long party. Actually as Bush succinctly put it that "Wall Street got drunk." And this is a massive bailout, essentially we're bailing drunk Wall Street out of the drunk tank.

Yes, it might alleviate pain that might have been much greater if it weren't done. But don't condescend to us and pretend we need some degree in finance to understand irresponsible speculation and greed.

It's not much more complicated than that, frankly.

Pitchforks are sharpening as we speak, and perhaps those with a "series 7 or 6" will be the first to get a taste of the prongs.

quote: "There is blame enough to go around. I blame the idiots in SoCal earning $50k a year living in $800,000 homes with a brand new BMW in driveway. If we want people to go to jail, for their culpability in this mess lets set up some debtors prisons."

Binlay,

I completely agree with you here. But here's the rub. Many of these kinds of people will go bankrupt and will lose their homes (if they haven't already) in all this mess we currently find ourselves in. As it stands, it looks like many of the greedy idiots who loaned them this money will get a big government bail out.
I'm not a financial expert. But it doesn't take a financial expert to realize that things such as interest only loans and loans such as you described above are very risky loans. The financial institutions that loaned out this money took big risks. So why shouldn't they face the consequences of their actions? Isn't that just part of the free market?
Yes, I know that the failure of certain institutions would aversely affect the entire economy. But someone literally has to pay for all of this. And it shouldn't just be the ones who took out these stupid loans. It should be those who were responsible for giving them out. They knew what they were doing. It wouldn't bother me a bit to see them lose everything they own or even go to jail.
I'm conservative both in my politics and my personal finances. I have no debt and good credit. I've work hard, saved, and lived well within my modest means for years now. The idea that I will have to pay for this mess through higher taxes is infuriating. I'm generally against blaming the rich for everything. But if we have to raise taxes to keep the federal government from eventually going bankrupt, we better damn well start with the rich since they're the ones getting the bailouts.

rr

Another thing about all this is that it totally destroys the credibility of major financial institutions and our political leaders. After all, ordinary middle class people aren't going to listen to what those who are experts on series 6 and 7 have to say if these are the same people behind this massive screwup.

rr

Hmmm. It appears my comment was eaten. Let's try again:

Series 6: http://www.investopedia.com/professionals/series6/

and....

Series 7: http://www.investopedia.com/professionals/series7/

Mike D. is exactly right.

When we bought a house for the first time last year it cost us about 3 times our annual income. Now, a year later, after my wife has gone back to work full-time, it is a little over 2 times. Our mortgage debt to income ratio is 21.5% and our total debt ratio is the same since we have no other debt. And yet my family, who lives in nice but modest 1600 sq. ft. house in an urban neighborhood, where we commute less than 15 min. each in a 4 year old car and a 11 year old car, is going to be taxed--or have our income growth and economic prospects limited--in order to bail out fat cats on Wall Street, as well as crazed consumers who make the same income we do but live in 4000 sq. ft. behemoths.

How dishonest that all the calculators online say people can manage a 28% mortgage debt ratio, and a 36% total debt ratio? This is just absurd, as we now know. Even at the low debt ratio we enjoy we have a hard time tithing to our church and making offerings, paying all our bills, staying debt free, and also saving enough for retirement. That's why my wife had to go back to work full time. And yet these were the "conservative" calculators we found. When we first started looking for a house some calculators were telling us we could afford a 250K home on a 50K income. This with fixed mortgage at 5.5% and insurance of 1200 per year and taxes of 3600. (They were also saying that if we took out an adjustable rate mortgage at a beginning rate of 2.5% we could afford a 350000 house!)

Fortunately I did some more research in more conservative sources, like the Christian based, Crown financial program, and we adjusted downward. And yet how many other first time home buyers, even and especially those that trusted the online research that they did on supposedly knowledgeable and reputable sites, believed what those sites said they could afford? No doubt these are some of the thousands who are now struggling to keep their houses or are in foreclosure. This is not entirely their fault. They were lied to by these calculators, and by the banks, realtors, and mortgage brokers who didn't laugh at the calculators and set them straight on what they could really afford.

There need to be new lending rules, requiring mortgage debt to be no more than 25% of documented income and total verified debt at no more than 30%. If these rules had been in place we would not be where we are today. And Mike D. is right. Housing prices need to be allowed to come down everywhere in the country to where the median house price is around 3 times the median income. Lots of pain on the coasts for sure, but they deserve it.

I'm on the center-Left. I pay my mortgage. I have no credit card debt whatsoever. I save and live within my means. And now I will pay while the Republicans' CEO cronies keep the multi-million dollar bonuses they've racked up in the last 10 years.

If only it were that easy to separate the good guys from the bad guys. Obama and McCain are both swimming in contributions from Wall Street. And here's the left-lib magazine Prospect on Clinton Treasury Sec Robert Rubin's role as the mastermind of Democratic economic policy in the 1990s. Did you know Rubin supported the repeal of Glass-Steagall, which Clinton signed? I think you should read what David Cay Johnston said in that Moyers interview (I started a new thread on it above): in Washington, there's only one party, and it's the party of Money.

Lancelot (and Ben),

I wonder is there is a specific or designated moose-shot, the way there is buck-shot.

If so, Barack Obama, Joe Biden, Chris Dodd, Chuck Schumer, Barney Frank, Franklin Raines, Jim Johnson, Penny Pritzker, and, oh yes, all their Republican friends deserve a good blast of it, preferably at close range ... if only metaphorically speaking.

William Ayers' (rich and influential) dad was able to get Bill and Bernadine into grad school and law school respectively and then into good jobs after school, once the two of them had had enough of setting off bombs and sticking it to the man.

If he's still alive, maybe Ayers's dad can step-in Mr. Drummond-style to help that marvelous youngster Barack with the economy ... and also to help him pick the moose-shot out of his butt.

Doug,

You've clearly gotten my point about Obama and Ayers and clearly it's getting to you, clearly it's making you question your faith in Obama.

Good -- it ought to. (And you wouldn't bring it up if it wasn't doing so.)

Which is why I'll continue to talk about it and to do so as much and as often as I see fit.

If you are worried that reading any more of what I have to say on this subject will lead to your not voting for Obama and you don't want that to happen, then fine -- don't read any more.

Series 6 -- en.wikipedia.org/wiki/Series_6 -- and 7 -- en.wikipedia.org/wiki/General_Securities_Representative_Exam -- are the financial trading/brokerage equivalents of the Bar, CPA and Enrolled Actuary certification programs. It essentially gives the recipient legal access to the practices involved.

It does not make the certification holder an expert, a moral person, or capable of explaining the esoterica of the field.

Bfinlay, there is indeed value in having a formal education in a subject. However, it is of no value to claim that experience is not a valid way to learn a subject. It may take longer, or be less accurate in some details, but demonstration of understanding is good enough in most cases.

Anyway, my deceased equine in all this: let the companies fail, let the people suffer. It's the only way to make them learn the lesson. Every generation, lacking a memory of events during which it was not alive, requires the lesson: once burned, twice shy.

Not to denigrate those who paid good money to qualify for Series 6 and 7 credentials, but the "credence" anyone give them is worth no more, no less than the fiducary trust of the institutions they trade amongst with their vast knowledge.

Now do not get me wrong, I am no lollard, here -- the sad thing is that mere mortals in the "real" economy (which fundamentally is ticking along nicely since we're all still buying foodstuffs and essentials we think are good value for money and using services whose benefits to our existence outweigh their costs, right, even those of us who do so using public funds such as food stamps and Medicaid?) face the same conundrum as the "brights" with their series 6 or 7s in the financial sector: when the monetary units of exchange do not hold up under scrutiny we are hosed!

Scrutiny is the key here. It is another word for regulation to be sure, but by a process of subsidiarity, we are all called to scrutinize those with whom we interact, privately as clients, or publically as citizens. The fault for the suddenness of the crisis lies not with the private parties who bought and sold bundles of debt, but with those that gave them the funds -- on credit -- to do so, our government. Ironically since they created the mess, its actually quite fair that they bail it out I suppose. The problem is who should have been scrutinizing their poor judgement in printing FIAT money to flood the markets with cheap credit? Our congressional leaders (Paul, Dodd, Franks, Schumer et al) and our Treasury Secretary had their hands tied, since they aren't given the power to turn the fawcet off - not even the Fed has that power. So who do we grant inscrutable powers to? The president? No, he can only play along to get along, since to interfere with sound money would be tantamount to embezzelment, right?

I lay the blame at our educators who have misled the populace into believing they are too dumb to understand the economy, and must have blind faith in Mammon not their Maker. Poppycock! We the holders of the Federal Reserve Notes must demand "revelation" on their origins, and scrutinize carefully the public's interest in their credentials (oh would that there were "series 6" and "series 7" banknotes we could entrust our wealth too, sadly not we have the toxic contagion we have, and now must learn to live with it)

I hope our public television and radio stations ( I can recommend Terri Gross's "Fresh Air" from last Wed with the Prof from Uni Maryland who disagreed with Rubin all those years ago in the Clinton administration, but has been vindicated by recent events) are doing their public service to study and inform us of the history of embezzelment that has occurred these past 90 years since the Fed was forced upon an unsuspecting public. Perhaps they will find some philanthropist, even a ragged trousered philanthropist, who will fund it?