The sun also rises

Just a little something to remind us all of the symbiosis between hope, spirit, and music.

Bonfire of the Vain and Stupid

The Dow is up for the third consecutive day. No doubt some are thinking the bottom was reached last week and we have a long slow recovery ahead of us... but I'm not one of them.

I am reminded of 1929: The stock market crashed and came back then too. It wasn't until 1932 that the impact of a mangled manufacturing base hit with full force. It's easy to look back at Harry Hopkins and FDR as heroes for getting the nation out of the Great Depression, but it took a full ten years of fiscal tweeking and a wartime economy to get millions of people back to work. It was hardly a miracle.

In the end it was greed that got us. For once in recent history, the market was allowed to operate without intervention or regulation. The past decade has been the story of manifest entitlement by the privileged few. The creation of new investment facilities that enabled investment bankers to multiply their profits by selling MBS's to second tier entities that later repackaged and sold the risk to trusts and corporations in the form of CDO's and Credit Default Swaps. Complicit, and critical to all of this were the bond and rating agencies - like Moody's, that assigned AAA ratings to these trusts and corporations - the "shadow bankers" a requirement before shares of these products could be sold to thousands of pension funds, hedge funds, and municipal and state fund managers.

That any third party - completely unrelated to any of these transactions, could later take out insurance policies that paid off in the case of a default of these trusts and corporations is clearly bordering on, if not outright criminal. These derivatives paid massive returns to holders of the paper so long as people kept borrowing and buying houses. They paid even more when the bottom dropped out of the housing market and millions of new homeowners defaulted on their mortgages. Those betting on a collapse could then cash in their default swaps for insurance remissions from companies like AIG.

Perhaps the best first-person account of Wall Street culture, written to date, is a story written by Michael Lewis in Portfolio.com, entitled "The End of Wall Street's Boom".

The solution is far from a done deal. There is an old saying, "use a thief to catch a thief." If there is any truth to that then President-elect Obama has assembled a first class team to lead the nation through the crisis, because most of them had a hand in creating it. As for me, I am growing weary of reporting on the ups and downs of it all. I'd like to get back to writing about the sorts of things that contribute to the growth of the human spirit. But, I'm an addict, and as such will no doubt be drawn back to what is the biggest story of my mature years. In the meantime, I am going to get on to some other subjects.... if I can.

"Too big to fail."

Citigroup should be getting split apart today, but it didn't because it was deemed too big to fail.

The $25b taxpayer handout proved insufficient to stem confidence among shareholders who tripped over each other to unload their stock last week. When Lehman Brothers were allowed to crumple, the damage gained force the further it spread from the host - such was the tangle of debt. But Citi crossed every country's border, dominating financial markets in everything; from student loans to credit cards, Mortgage Backed Securities, Collateral Debt Obligations, Hedge Funds and placed massive bets on Credit Default Swaps.

If Citi had gone down then more than $3 trillion dollars in paper assets would have been exposed as worthless, affecting every country in the G20. Too big for anyone but the Chinese to buy it out, it would have taken years to sell off the individual tentacles that made up this giant.

Of course it helped to have Robert E. Rubin on your Board of Directors. Rubin was Treasury Secretary under Clinton and has acted as the principal advisor to Barack Obama through his election campaign and with the transition team. His proteges will run the Treasury and Federal Reserve in the next administration. Rubin also chairs the Council on Foreign Relations.

TARP, Market chaos, Automakers and Hedge Fund Managers in front of Congressional committees, and Cabinet appointments have all captured our attention while a much bigger, more dangerous game is taking place behind closed doors in Washington and New York. The Federal Reserve and Federal Deposit Insurance Corporation have pledged a further $7.76 trillion dollars to guarantee corporate short-term paper and deposits. Not in the headlines is the $139 billion in loan guarantees for General Electric (no wonder their stock went up) . Not in the headlines is a further $200 billion for Freddie Mac and Fannie Mae.

The total amount of bailouts from all Agencies would run New Zealand for 100 years or pay off half the mortgages in the United States. Incredible.

So as the United States commits the equivalent of half its GDP to saving the finance industry, the question has to be asked: Is the United States too big to fail?

Housing Co-operative Model

If it were left to me, I would take the bailout money and form a new secretariat and call it Public Housing. I would find someone, like Ralph Nader, to set up local bodies in each area affected by high foreclosures. Homeowners would have the option of joining up or not. The mandate would be this:

1. Re-value houses in foreclosure, or in danger of foreclosure, to establish their real worth.
2. Purchase them using TARP monies.
3. Establish a monthly housing charge, based on the cost of renting those properties in their respective marketplaces. (ie. draw a 10 mile radius around the house and average out the rent for a similar property)
4. Offer the previous owners right of tenure in those homes based on a contract requiring upkeep, taxes, and regular payments. (In some communities, say Detroit, these housing charges could be geared to income)
5. These neighborhoods could be organized into corporate bodies, where members would have an equal vote, elect officers, and conduct their business.
6. When the housing charge contribution reaches a 20% percent equity with respect to each home, then members can purchase their homes at 0% down and take back possession.

Something like this makes sense to me. What do you think?

The Currency of Trust

It seems that every Monday morning, before the stock market opens, either the Fed or SecTres makes an announcement to encourage people to keep pouring money into stocks. This morning the Fed announced manufacturing had risen 1.3% in October; describing it as a "return to normal" after the Boeing strike and hurricanes. This despite record job losses, bankruptcies, and foreclosures. Does anyone believe anything coming out of the mouths of Bernanke and Paulson these days? If you had cancer wouldn't you want to know? But if the doctors say you are fine; when every day you are getting weaker and losing weight, what do you do? If you can't trust what public officials are saying anymore then maybe all we have left is to pray... and trust God.

Paulson to be next Chairman of Citigroup

At the same time Henry Paulson announced he was making TARP funds available to financials holding credit card and student loan debt, reports started filtering out that the Citigroup board was maneuvering to get rid of Citigroup Chairman, Win Bischoff. Perhaps it is only a coincidence that Henry Paulson will be looking for a new job in two months.