The time warp is stuck on continuous play

Trivia time! Guess the year of the following headline:

Fannie Mae to Loosen Rules for Home-Loan Refinancing

a) 1989
b) 1999
c) 2009

If you guessed "C" give yourself a prize!

From the article:

Feb. 5 (Bloomberg) -- Fannie Mae, the mortgage-finance company under government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing.

Government front running

This is what happens when government front runs the private sector:

The notion of too big to fail

The following bubble chart compares the current market capitalization of our nation's biggest banks to what they were in the second quarter of 2007:

The chart is a little fuzzy, but the blue bubble represents Q2'07 and the green bubble represents Q1'09 YTD. The giant bubble with the tiny inset bubble that looks like the earth against the sun is Citigroup.

Keynesian Economics and Venezuelan Amerindians

Barron's takes a dig at Keynesian economics:

IN FACT, HALF A LOAF COULD BE BETTER FOR the economy, and better for Obama's ultimate treatment in the history books, not to mention his re-election odds. A $500 billion package -- say, 60% tax cuts and 40% increased spending -- could realize his stated aim of spending money wisely, while providing significant fiscal stimulus.One reason for caution is that priming the pump never quite works the way the textbooks say it should. The economy's lifeblood isn't consumer demand, but rather credit, both for the financing of business investment and the purchase of consumer durables like cars. No amount of fiscal stimulus will make much difference if credit is constricted. If credit is available, jobs and higher incomes will follow.

Posted so as not to be lost for posterity

Here are what I feel are the two most clearly written pieces I have read on the causes of the current economic crisis.

The first, Deciphering the Liquidity and Credit Crunch 2007-08, explains in simple terms the financial causes of our current predicament.

The second, Anatomy of a Trainwreck, explores both the political and the financial causes.

A trillion is the new billion

“Never confuse motion with action.” --Ben Franklin

This simple wisdom is apparently beyond the understanding of our elected leaders as demonstrated by the following headline:

Obama Warns of Irreversible Decline Without Action

Jan. 8 (Bloomberg) -- President-elect Barack Obama warned that without immediate steps by the government to revive the economy, family incomes will drop, the unemployment rate could reach “double digits” and the U.S. risks losing a “generation of potential and promise.”

Closing the barn door after the horse has escaped

There are those that feel if only there was more government regulation we'd not be in the financial mess we're currently in. The problem with regulation is that like most legislation, it is a fairly blunt instrument with which to try to fix a specific problem, and it is not uncommon to find instances where the unintended consequences outnumber the intended consequences--often significantly. The Sarbanes-Oxley Act of 2002 (Sarbox) is a perfect example. Put in place with the intention of halting further accounting scandals like the ones that brought down Enron, WorldCom, Tyco and a host of other publicly traded companies, it has also acted to limit the choices a small business has regarding its growth and has moved most of what was left of our IPO market

Dominos falling

Here's The Cato Institute sharing a little bit of common sense:

Daniel Mitchell, a senior fellow at the libertarian Cato Institute, said the government should have no role in helping the (auto) industry, except to provide positive economic conditions -- "a lower corporate tax rate, less red tape and things like that," he said.

Mitchell added that if the government takes control of the auto industry, it will be a recipe for disaster.

"The free markets allocate resources and reward people for doing good things and punish them for doing dumb things," he said. "Government misallocates resources and rewards people for doing dumb things and punishing them for doing good things.

Federal Reserve Liquidity Programs to Date

Every industry has its share of acronyms, but unless one is a part of a particular industry, specific acronyms generally have no meaning. Since it is our money being used in the latest iteration of the current corporate/social bailout, I believe every taxpayer should take an interest in the list below.

The State of Wall St.

When I first started working in the finance industry years ago, one of the first books I was advised to read was "Liar's Poker" by Michael Lewis. It remains one of the more memorable books I've ever read for a few reasons, mostly though because I like his writing style.

The Twin Frankensteins: Fannie Mae and Freddie Mac

The current liquidity gridlock and extreme volatility washing across all of our debt and equity markets has caused me to do some reflecting on what I think some of the possible causes may have been. Obviously, mortgage lending took a reckless and unsustainable turn. This is what I believe has been the major catalyst for our current state of affairs. (The second catalyst--and one I will not delve into in this piece--was a combination of the repeal of Glass-Steagall Act in 1999, the bursting of the internet bubble in 2000 and the subsequent squeeze on investment bank profit margins which led to their "all-in" approach to highly leveraged, high fee, structured investment vehicles).

In order to understand how this reckless mortgage lending began, a short history lesson is in order. In a word--regulation. Regulation driven by liberals and progressives, not free-market “deregulators” as the aforementioned would have you believe.

"New " Short Sale Rule

Even if you never pick up the business section of the paper, it has been hard not to notice that the stock market has been particularly volatile lately. Although there are numerous factors involved, most of the volatility has stemmed from the uncertainty surrounding the solvency of our nation's two largest mortgage lenders, Fannie Mae and Freddie Mac, as well as questions surrounding the balance sheets of some of the larger commercial and investment banks with large opaque mortgage portfolios like Wachovia, Washington Mutual, Merrill Lynch and Lehman Brothers.

Just as surely as blood in the water attracts sharks, volatility attracts short sellers. Yesterday the Securities and Exchange Commission announced an emergency order stating that they were going to crack down on naked short selling (i.e. selling shares you have not borrowed, nor have even a reasonable expectation of borrowing) in 19 of some of the most volatile and vulnerable financial stocks. Their plan will go into effect Monday.

Here are the highlights:

The carpenter and his tools

It's a poor carpenter who blames his tools for a shoddy job.

May 21 (Bloomberg) -- Moody's Investors Service said it's conducting ``a thorough review'' after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

In an up market the glitch is called a "feature." In a down market the glitch is called a "bug."

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an

The two faces of Citigroup

Banks, like all businesses outside of the non-profit realm, are in the business of making money. The difference between banks and most other businesses is that banks do not create anything tangible. Of course they make tangible products possible by providing financing for companies that do actually create things, but the value in a bank resides in the intellectual capital of its workforce.
Any industry that promotes the promise of a big payday tends to attract the most clever among us, and there is no shortage of clever people on Wall Street. It is safe to say that if it is possible to squeeze a dollar out of a rock, lever it to return $100 and charge 20% for the service, Wall Street has come up with 25 ways to do it.

Level 3 Asset Watch

DJ Merrill Level 3 Assets $82.4B At 1Q End, 8% Of Total Assets
Tuesday, May 06, 2008 4:37:57 AM (GMT-07:00)

Merrill Lynch & Co. (MER) said Tuesday that its Level 3 assets at the end of the first quarter increased nearly 70%, to $82.4 billion, from $48.6 billion at the end of the fourth quarter.
The Wall Street firm said the Level 3 assets, which include assets measured at fair value on a recurring and non-recurring basis, increased because of the recording of trading assets, for which the exposure was previously recognized as derivative liabilities at the end of the fourth quarter.