Bill Herbert

Mr. Market Has Spoken

Bill,

Excellent article.

You're right, we have been hosed by the bankers beyond belief.

I for one would like to see the entire racket busted for good, never to return in its present form.

Freddie/Fannie Plans In Motion; Why Are They Being Underplayed?

"Gabe Borenstein is dreaming. Fannie Freddie losses
over the next 3 years will easily run to $200-300B.
Mercifully, the shares can only go to 0. "

I agree - anybody who doesn't think that FNM and FRE common will go close to zero is a nutcase. I expect a huge rally in other financials on Monday though - this is exactly what is needed to take the fear out of a bid on housing and the banks.

I'm not saying I like the banks - I think they are run by crooks who have screwed themselves and their shareholders royally.

But you can't deny this is a positive for the equity holders of all major and regional banks - in some cases, like HBAN, we may see a 40% gain in one or two sessions. i have no position short or long here - but I read this as the catalyst for a huge move through year-end in the SP 500, a hit to the bond market, and a likely gradual decline in the dollar.

Long term, I think the dollar will fall hard, but the stock rally and some pent-up consumer 'sigh-of-relief' spending should help to keep the dollar from falling too hard here, and will keep corporate profits from looking too horrible in Q4. It's too late to do much about Q3, which will be ugly.

Bill Gross: Politicking for His Own Bailout

This is a crisis brought about by a huge oversupply of unneeded housing, which resulted from a reckless and unregulated investment boom based on phony economics and corrupt business practices in the financial community. I think we can all agree on that, no?

To keep it simple, and without getting into a thorny discussion of various econ viewpoints, I believe we can view the present situation as follows:

1) Major Banks and institutional investors are stuck with a lot of mortgage paper that is truly worth about half of par. Some of this is trading well below that level, and a lot of it is residing in CDOs and whatnot, and has taken various markdowns over the past 18 months or so. Some of these markdowns are perforce based on indices (Markit) that overstate the actual loss profile of the paper being marked down, but that is an anomaly that we have to deal with.

2) There is a large glut of housing, both 'for sale' and already repoed/vacant, that is killing the normal functioning of the housing market.

3) But despite those two realities, most of the housing stock is worth as much as it was two years ago in REAL economic terms - it just can't be easily sold right now for its true worth, in terms of providing shelter, location, access to good schools, and so on - all the traditional measures that influence property prices in a normal, arms-length market.

So, how to solve this predicament? Some would say we need an economic blowout, resulting in lots of lost jobs, severely reduced commerce, increased suffering among those who live paycheck-to-paycheck, and gut-wrenching market drops to "clear" the markets of the excess.

That would surely result in a lot of chaos, many more foreclosures (and the concomitant moving, dislocation, etc. affecting families) and really benefit very few. In short, a lot of true economic pain for little to no discernible gain. In the end, we would reach what many economists define as "equilibrium" or some stability in the sense that people are not forced into self-injuring sales in a panic market, and so on. But the damage would be horrendous.

As an alternative, if we had a government that was both honest enough to assign the blame where it belongs, and responsible enough to realize that there is an overriding interest in protecting the innocent bystanders from undue hardship and property loss, as well as maintaining order and a functioning economy (I know, that sounds altruistic, but it should be a goal of society at large, IMO), then we could find an alternate solution that does not spring from chaos and economic stress. The right solution would also not punish those in the broad economy that did not act irrationally or recklessly in terms of investment decisions.

The answer is to bust up the Lehmans, Bear/JPMs, hedge funds and others who cynically play a paper-credit trading game, strip them of their asset base and market power (i.e. price the govt purchase of the toxic paper at a level that wipes out their equity, and by extension, vanquishes entirely the institutions or funds that created the problems in the first place) and de-leverage the entire parasitic Wall Street machine, while leaving the 'MainStreet' economy to continue to provide goods and services to the broad populace at normal prices, and without needlessly destroying businesses and legitimate investment in essential, everyday enterprises that are the mainstay of a prosperous economy.

Corporate Fraud + Government Intervention = Bailout Nation

I agree 100% with this commentary. To suggest that the banks had no role in their own demise is totally laughable. Any responsible banker or economist should have known long before the "meltdown" that extremely serious problems were occurring, like phony appraisals, bogus 'insurance' on mortgages, ludicrous lending and documentation standards, and an atmosphere of fraud and tolerance for bending/breaking rules on all levels.

People were making a lot of money and had no regard for the consequences. And I agree, it's people like Phil Gramm who are more to blame than anyone. I've always considered him to be a joke and a menace to sound financial principles and responsible conduct of our financial markets.

Two cases in point - Gramm led the charge to allow massive fraud and market-rigging behavior in the commodities markets - the result was Enron and significant corruption and volatility that exists to this day. The second example is as described above - the whole "deregulation" effort that destroyed Glass-Steagal and brought in a bunch of crooks and racketeers to run our biggest banks and brokerage houses.

The result of that is insanely huge compensation for criminals and a complete breakdown of responsible conduct, and now the U.S. taxpayers and foreign investors will be hit for several trillions to pay for it, so that a bunch of corrupt jokers like Phil's friends and campaign contributors can enjoy mansions and fleets of expensive luxury cars. What a travesty.