From Newton To Einstein To…

Has the law of gravity been repealed yet?

We continue to pretend like growth is infinite. We blow bubbles. We make rules that foster irrational increases in asset values, then change the rules when the laws of nature and laws of economics bring those values down. We’re the masters of the universe. The world is no longer finite. Or is it?

For years, mark-to-market accounting allowed banks to cash in on the housing bubble. As long as home prices continued to rise, the securitized mortgage debt increased in value. When the home "value" increased, the securitized asset value was marked up. This markup works wonders on a balance sheet. The better the balance sheet, the more the bank could loan. And the cycle feeds on itself. Add to the equation, leverage of 20, 30 or even 40 times to 1 and the profit was exponential. Banks sold the securities to any and all buyers. Then buyers of the securitized debt wanted insurance, so credit default swaps were sold. Then insurance on the credit default swaps were sold. Then insurance on the insurance on the default swap. And on and on.

When phony asset values increase, everyone is happy. When the leveraged credit multiplier works in reverse, all hell breaks lose. What an elaborate house of cards.

Ponzi schemes are fun for everyone, except the last guy in.

So mark-to-market accounting is in the news today, but only because the banks have realized that the ponzi scheme has completed a full circle and they are now holding the bag. No one complains on the way up but someone inevitably complains on the way down. And the volume of the squeaky complaint is directly related to the import of the complainer. Surely, no one is more important than the bankers of the world. So the squeaky bank wheel needs some grease. And get the grease it will.

We’ll change the mark-to-market accounting rules. They worked so wonderfully on the way up, but damn them on the way down. Maybe we’ll use a new variation of mark-to-model accounting. Or mark-to-what-we-wish-the-market-would-bare accounting? Or maybe mark-to-fantasy?

We may not be masters of the finite real world, but damn it if we aren’t masters of Fantasyland. Population: Pinocchio, Mr. Toad, Snow White, The Mad Hatter, Dumbo, Peter Pan, Alice, you, and me.

The FAIL Parade Continues

The original version of the bailout plan was a short three pages. It was laughable in countless ways. Hank Paulson, former chairman of one of if not THE most highly regarded investment banks in Goldman Sachs, testified to Congress that the credit crisis had snuck up at such an alarming speed that we had one week to act or we would all be swallowed alive by the Derivatives Devil in an apocalyptic catastrophe. Ben Bernanke concurred, then snored. President Bush addressed the nation and in Act II of his 'Scare Them Into Submission Then Railroad Your Plan' tragedy themed play, told us that if we didn't act immediately we would be penniless and hungry. We wouldn't be able to get loans for new shiny automobiles, or send our children to college, and our retirement accounts would be bankrupt.

Thanks to heroic bi-partisan efforts that kept congressional leaders and staffers up 'til the wee hours of Monday morning (bless their souls for the noble sacrifice) , the three pages was re-worked and stretched to one hundred and ten. Entirely new pages addressed equity stake, warrants, golden parachutes and traunches. It was a plan that both Democrats and Republicans could live with. The bailout was now a rescue.

Would the new legislation free up the frozen credit markets? Would it prevent an increasingly severe recession? People were now talking about avoiding a depression. A Depression?! Phew! That was close.

So they voted. But, surely, the vote was just a technicality. The one hundred and ten page document had been finalized. They'd worked through the messy details and agreed. We needed to act and we needed to act now. The whole world was watching. Thankfully, the vote was a done deal. It wouldn't go to the floor if they didn't have the votes... right?

Wrong.

206 votes Yea
227 votes Nay

The Nay's have it.

I'm not smart enough to know whether the bill was a good one or not (if I had to guess, I'd say it's a bad idea) but one thing is crystal clear, in an evironment where confidence and stability are needed like oxygen, our fearless leaders have outdone themselves in proving that they are completely and totally incompetent. YOU DON'T TAKE THIS BILL TO THE FLOOR WITHOUT THE NECESSARY VOTES TO PASS IT YOU FUCKING DONKEYS (and elephants)! In what will probably go down as one of the most epic legislative blunders in U.S. history, the partisan poo-flinging continues.

DOW -777, Nasdaq -199, S&P -106
$1.2 trillion in "market value" wiped away in an afternoon.

And the crude oil traders even sold off the one thing of real world value. Light sweet crude closed down 10%.

Oh and by the way, five more names were added to the Killed In Action list: (The governments of Belgium, the Netherlands and Luxembourg took partial control of Fortis. Britian seized Bradford & Bingley. Germany bailed out Hypo. Iceland's government took over Glitnir, and Citi swallowed Wachovia)

Happy Monday!

Helicopter Ben

Federal Reserve Chairman Ben Bernanke got his nickname when, during a 2002 speech to the National Economist Club in Washington D.C., he referred to a statement made by Milton Friedman about dropping money from helicopters. Friedman’s helicopter drop scenario was theoretical one. In it, he imagined what effects the new flood of money would have on the demand for goods and services and the prices of those items. In Bernanke’s speech, he attempted to explain why deflation would never happen here (he probably convinced himself).

Deflation is the economic boogeyman. It’s the nightmarish monster that stalks economists and central bankers in their sleep. Inflation can usually be managed and contained. Deflation, if left unchecked, spirals out of control and, like a black hole, sucks in almost everything within reach. Fortunately, when it’s spotted, deflation is attacked with (hopefully) overwhelming force. Unfortunately, the fear of not snuffing it out in time tends to cause central bankers and policymakers to (sometimes wildly) overshoot the anti-deflation target. The re-flation sometimes turns into hyper-inflation.

Ben Bernanke’s Essays On The Great Depression, published in 2000, is an interesting (and sleep-inducing) read. Whether you like him or not, Ben Bernanke is an expert on the subject and his position is clear. The financial system is being flooded with liquidity. Helicopter Ben may literally earn his nickname. I hear the turbine engines winding up. The rotor blades are beginning to spin. Try not to get your head chopped off.

Obama At The Bat

I hate to say it, but I think McCain won the first presidential debate last night. In what should be a landslide victory for the Democrats, based on the polls, they're essentially tied.

Personally, I'm still undecided (trying to lean, wanting to lean towards Obama), but I'm waiting for a reason to vote for him. All he needs to do is provide that reason, but he hasn't been able to it yet. Why not?

If the Democrats don't win this election, they're done for good. Finished. Irrelevant. Time to just pack up their things and go home.

We are teetering on the brink; staring into the abyss. Two failed wars, a borrow-and-consume economy that is unravelling, the dollar on its deathbed, a standing in the world that wanes with each passing week, and hostage to our own foolish energy policies.

It would be wrong and ignorant to place all of the blame at the incompetent feet of the Bush administration, however, they get the largest piece of the blame pie. Such is the nature of politics, and the responsibility of the highest office. Sadly though, we're all to blame.

Welcome to Mudville. Obama is at the bat. Please bring back some joy and knock the fucking ball out of the park.

If you strike out, grab your clown shoes and hit the showers.

Feel The Whoo Hoo!

Goodbye WaMu.

Hello largest bank failure in U.S. history.

Are Jamie Dimon's gnads the size of medicine balls? He is either the smartest banker in the world, or he's digging JP Morgan's inevitable grave. I'm leaning towards the latter, but it's JP Morgan so I'm sure I'll be proven wrong.

The mortgage backed security and credit default swap problems haven't disappeared. On the contrary, with each new phase of this financial shitstorm we peel back another layer of the onion and what's revealed stinks more than the last. Leverage is a mother-fucker.

JP Morgan has now swallowed two of the largest ticking time bombs in Bear Stearns and WaMu, and has got to have the mother of all stomach aches. Pass the Pepto-Bismol. JP Morgan's growing derivatives exposure may turn out to be its Achilles' heel. Will JPM be able lift the weight of Bear Stearns and Washington Mutual or will these two cement shoes drag JPM down? Only time will tell.

Either way, they should probably eighty-six the "Feel the Whoo hoo!" WaMu advertising campaign a.s.a.p. - I assume it's rubbing some customers the wrong way.