Bob the Chief Caveman

"It's like the chief caveman in the tribe telling the other cavemen not to use fire because they might burn themselves."
Thus spoke a heartbroken man grieving the premature death of short selling. Short selling was gunned down on the streets of London.
His words have roused me from my dogmatic slumbers. Fire is all. Let the cavemen play with their fire! Let us set our hair on fire! Let us burn our caveman pants!
Nobody knows the truth here in these panicked times. Least of all me. My previous posts have been benighted. Expect a long over due purge or "expungation" from the Direwolf.
The return from the misty valleys and peaks of West Eire will bring with it new insight. I have been communicating with a man who wishes to be known only as the Hill. Soon the Hill will speak.

Section 8

Yesterday I posted an unedited version of The Treasury’s proposed legislation. Let’s pause and re-read once again section 8:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Now admittedly this should be changed as the bill goes through congress in the next couple days. (If it isn’t we can all abandon hope.) The fact that this was the Treasury’s starting position; however, which is soviet polit-bureau-esque, betrays a level of desperation that is not healthy.

The idea that the American government would even consider creating a post with absolutely no checks or balances is ludicrous. Even the president can be impeached or out voted, judges removed, legislators vetoed, but now the treasury secretary would sit above all of that? Limited only by his discretion? This bill would put Hank Paulson on a cloud, with a tope coloured cotton toga, throwing lightning bolts of money at the ground while scared financial peasents go running for their hovels.

As it stands this bill is simply unconstitutional.

Place this latest movement in the bigger picture. This bill is just another thundercrack in the statist’s storm. No matter who gets elected in November their will be no chance of even the most palatable conservative principals being championed. Government ownership and involvement in the private sector of the United States will exceed that of Britain, and might even be comparable to Putin’s Russia.

Look at what the government has done in the last week: Socialized the insurance business, socialized the housing market, assumed leadership and control of the financial markets. This is on top of already massive socialized spending (1 out of 6 tax dollars by some estimates) on health. This is the legacy of the "conservative" Bush administration?

Margaret Thatcher once said that the facts of life are conservative, but these days it looks more like the facts of life are big federal governments calling the shots through high powered state departments, and the people better hope that their leaders are benevolent and wise.

Scholars will be looking at what’s happened here for years asking themselves: How is it that with so much legislative and executive power over the last forty years has the conservative movement led the country so far down the path of socialism? Maybe it is part of an unavoidable progression. Maybe it's a good thing, maybe its not. Who knows? The point is despite all this talk about an unstoppable Republican Machine, it is the Paul Krugmans of the world whose economic vision is being implemented on a massive scale.

Nobody is going to tell Americans how they should run their country and nobody knows who will be running it come November fourth. The attraction of this election is it is the foment of a radically new ideological direction for the United States. Articulating just which is struggling with what and who with whom will be the trick.

'Slating

Quote:LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by The Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

(6) Seizing goats to sacrifice on the alter of mystical capitalism.

Sec. 3. Considerations. In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--
(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress. Within three months of the first exercise of the authority granted in section
2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases. The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding. For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority. The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act. Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection

(b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000. Sec. 11. Credit Reform. The costs of purchases of mortgage-related assets made under section 2

(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable. Sec. 12. Definitions. For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.

(3) United States.--The term “United States” means the States, territories, your ass, and possessions of the United States and the District of Columbia.

Two Points

The complexity of what is going on right now is pretty staggering. Still we can pick out a couple root problems: hubris (see yesterdays post) and the lion tamers syndrome (today). The Fed's reaction is going to be largely predicated by how pissed the foreign Heavies, who's money is tied up in these CDO/CDS/CD-everythings are, and how agitated Americans become. Let's look at the Lion Tamer syndrome, ask a couple questions, and then speculate on how this will affect american politics in the coming week.

It appears the problems at AIG were from the derivatives trading unit (which stems from the early 2000s) and not its insurance business. This is too text book for words. It’s Coca-Cola changing their formula after a hundreds of years of success and billions of dollars of profit.
Here’s a hypothetical. Say all the actuarial accountants at AIG decided they were tired of the Insurance Business and wanted to do something more exciting. So AIG launches a new branch: The Lion Tamers Branch . AIG purchases massive circus tents, lots of ferocious man-eating african lions, and then sends its accountants out with leather whips and chairs to tame the lions. Financial pundits would poo-poo this arrangement, they would say accountants know nothing about taming lions, and AIG should stick to insuring people (not participating in circus spectacles). Yet nobody seemed to mind when AIG launched its derivative trading branch. Hypocrisy runs deep.

And as the situation broadens and worsens and deepen and widens we get to see the hypocrisy of free market ideologues. It is as utopian a stance as socialism. Wall street runs amok but if things go wrong they turn to the federal government. When things are good the calls to de-regulate are deafening. When things go bad they go running home sobbing with scraped knees to mum and dad.

So it goes. Sometimes you're up sometimes you're down. I really didn't use to mind die hard capitalism. It was this notion of wealth generation which sold it for me. Sure Goldman Sachs was handing out bonuses bigger than the combined GDP of however many african nations you can name. But these casinos were really generating wealth. Right? All these complex financial instruments helped a rising tide of prosperity for all?

So where is the real tangible wealth? That golden bed rock.
It’s hard to see what is there and what isn't. This system managed to generate excessive liquidity and access to funds, but didn’t that just promote gross amounts of consumption? Massive suburban building projects, highway networks, and wallmarts aren’t real wealth... As I reflect on the opportunities which may have been missed by too much dogmatic laissez-faire compared to actual investment in infrastructure my worries abound.

But grand philosophical reflection comes later. Today we must exercise our right to speculate and mock.

Uncle Sam will be opening up his pockets again next week when Washington Mutual starts shaking. The whole secret to this mystical mess lies in the real value of what Uncle Sam has bought and what alot of other people are holding and desperately trying to get rid of. What is the value of the securities held by AIG, Bears Stearns, Fannie, and Freddie? That is the question and that is what markets will decide.

As the markets act the Fed reacts. They can't just let these banks all tank. If the do they will be getting some very pissed off calls from people wondering what happened to their guarenteed investment. China would not be cool with a 300 billion dollar default.

I only started following the world of mystical capitalism in July of last year. That was a funny period: like being on a big ship cruising along. Suddenly, in the middle of the night there was a bump and a long, worrying metallic groan, then silence. Everything seemed fine, the boat continued steaming along in the moonlight, but then a few people went below deck to survey the damage…

Anyway to contextualize and make relevant; The Wall Street Ship Wreck has got people talking. And because of John McCain’s yahoo stylings he doesn't look like the rationale sort of human being who should be in charge these days. Big Bad Barry Obama has had this served to him on a golden platter. When things go bad and people are panicked they veer left. After undergrad at Columbia and Harvard Law school politicking and demagoging from the left will be right up his alley. If he keeps getting angry this will translate into votes.

Christiano Ronaldo Works for George Bush

The remote and mountainous Country of Finance is experiencing, to employ a gross euphemism, unrest. What is happening within its secret borders can only be inferred from distant satellite photography and the often conflicted testimony of refugees that are streaming across its borders in search of peace. We hear stories of dogs and cats sleeping together, rivers running with blood, mass looting, and the rule of law totally suspended.

The American Federal Government is pursuing a politically safe and ultimately ruinous course. In an election year where Senator O’Change and Senator Mc’Change run on a constantly Changing platform of Change we get to see how little appetite political and commercial institutions really have for Change when the rhetoric is suspended and reality rolls onto the stage.

Bear Stearns, Merrill Lynch, Fannie and Freddie, Lehman Brothers, AIG, and coming next week Washington Mutual have both borrowers and lenders been and have contracted fatal exchange-related diseases. Fatal! They are dead but Sam and Fed have seen Weekend at Bernie’s one too many times and like macabre circus folk have tied strings to all these financial corpses. The world will now get to watch as they force these unfortunate marionettes to smile and do the river dance until someone (maybe Big Herb ) says no more of this perversity.

Between let the hard times roll or spend billions of dollars in a frantic and pointless attempt to push the hard times back three months the Fed obviously chose the latter.
And who walks? CEO’s, regulators, financial shamans and seers. Ideally a lot of these financial tigers would be tied up to trees and shot by letting the markets act. Market mechanisms which most of these failed architects professed an undying love for, but no, poetic justice will not be served, they have all been ‘bailed’ out. They won't be crushed by the falling steel girders of 'raw capitalism'.

Letting Lehman go to the dogs does seem fair. They had liabilities of around 700 billion dollars and real equity of 23 billion dollars. If you are leveraged at 30:1 expect chaos and ruin and horror you greedy bastards.

The full implications of these bailouts are egregious. A bunch of hot shot financiers. Most of them those go-go, attaining, hyper-achievers, that blew minds all the way through high school then Yale or Harvard or LSE created a mad hellish financial kitchen and ultimately couldn’t handle the heat. But they don’t need to sweat (metaphor reaching critical mass). Why should they sweat? The Fed has a magic solution.

There solution is buy everything! Let’s play monopoly and let the kid who stands to lose everything be the banker: if they don’t have enough money print some more!
Along those lines Bush and Hank Paulson have reportedly locked Condie Rice and Dick Cheney in the basement with a 1930’s era printing press, some paper and a lot of green ink.
Even if I misread my source on that one, it's fair to say that barring deus ex machina the US leaders will be pretty desperate pretty soon and this current administration isn’t the most imaginative.

I just don’t think the American government understands how big a piece of pie they swallowed: tainted meat pie at that.