Friday editorial: “This is a pickle, George”
No, but you . . . you . . . you’re thinking of this place all wrong — as if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house, right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?
— James Stewart as George Bailey
in Frank Capra’s “It’s a Wonderful Life” (1946)
Financial crises nowadays are a little more complicated. Today, Bailey Bros. Building & Loan probably (and Mr. Potter definitely) would securitize the mortgages on the homes in Bailey Park, packaging them with other debts as CDOs (collateralized debt obligations) or CMOs (collateralized mortgage obligations) and selling them to investment banks that would re-sell them to institutional customers. The CDOs would be “tranched,” meaning they have different maturity dates and risk levels.
Smart customers would hedge their debt through a monoline insurance company such as an arm of American International Group, which would issue guarantees called credit wraps or credit default swaps. AIG would assume the risk on the fixed-income securities by underwriting their credit worthiness.
Lots of people on Wall Street got hugely rich precisely this way, essentially by doing nothing more than betting that Joe and the Kennedys and Mrs. Macklin were going to continue making their monthly mortgage payments. They invented all sorts of exotic parlays, called “derivatives,” that stacked risk upon risk, all of it predicated on houses in Bailey Park and a million other places.
Many of today’s mortgage companies didn’t know their customers as well as George Bailey did. Nor did they demand collateral and proof of credit-worthiness as old man Potter did. Instead, they lent to people who couldn’t repay, particularly not when the economy slowed down and the housing bubble burst. Investment houses such as Lehman Brothers and Bear Stearns, which bought a whole bunch of CDOs and CMOs, and AIG, which owns $450 billion worth of default credit swaps, turned belly-up.
In the immortal words of Uncle Billy Bailey: “This is a pickle, George. This is a pickle.”
On Thursday morning, another George — that is, President Bush — made a brief statement about the pickle. He said, “The American people are concerned about the situation in our financial markets and our economy, and I share their concerns.”
As a statement of confidence, this wasn’t exactly, “We have nothing to fear but fear itself.”
Like the rest of the nation, Mr. Bush has no idea what’s going to happen next. The stock market, having plunged nearly 900 points from Monday through Wednesday, recovered its footing Thursday with the Dow Jones industrial average closing up 410 points.
But other investors continued spurning anything remotely exotic, preferring boring old T-bills and gold. That safest of havens rose $46.50 an ounce to $897, up $116.50 in two days.
Meanwhile, conservative Republicans began bashing the Bush administration for its decision Wednesday to bail out AIG. Sen. Jim Bunning, R-Ky., went so far as to compare Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to Venezuelan president Hugo Chavez. The only difference, Mr. Bunning said, was “that Chavez doesn’t put taxpayer dollars at risk when he takes over companies. He just takes them.”
Lehman Brothers, which sought Chapter 11 bankruptcy protection Monday after the government declined to step in over the weekend, must be wondering what it did wrong. Bear Stearns got a bailout, Merrill Lynch found a suitor, Fannie Mae and Freddie Mac got nationalized and the Big Three automakers may get the $25 billion in loan guarantees they want from Congress. AIG, being judged critical to world financial markets, also got loan guarantees. Only Lehman Brothers was left to contemplate the realities of moral hazard.
Clearly, this ad-hoc approach — some live, some die — does nothing to reassure the markets. That’s why news that the Fed and Treasury are considering creating an entity to oversee the reorganization of financial markets comes as a relief. It would be the Resolution Trust Co. — the entity that was created after the savings and loan debacle of the 1980s — on steroids. A systematic approach run by old-school bankers according to strict rules could return a measure of confidence to the battered system.
Here’s where this entity should start: When money is borrowed, there should be something tangible to back it up, something not leveraged 40 times, something more than the full faith and credit of the United States Treasury. That’s already pretty badly extended.
Your editorial didn’t go far enough. I am no expert on the economy. However, I am no expert on the law of gravity, but I don’t stand under a palm tree with coconuts on windy days.
I saw this ponzi scheme fallout coming the day sub-prime loans were initiated. Yes, I bought gold, It has been good for me.
It hasn’t been so good for people who can’t READ OF DO 5th grade arithmetic. That includes the congress of the United States who encouraged lenders to lend to people who demanded, yes demanded that every American, no matter how credit unworthy be given loans to so they could achieve Achieve the American Dream. As it has turned out it is a nightmare, Ask Barney Frank, not George Bush, Barney led the charge to the nightmare.
Maybe you don’t understand how the economy works. You blamed George Bush for the Federal Reserve Bank for bailing out AIG. Bush, had no more to do with the federal Reserve Bank than I do, or you do. The Federal reserve is autonomous.
And I bet you think the Democrats are going to bring change right? And Obama’s economic advisors are going to bring change, right?
Jim Johnson - former CEO of Fannie Mae and head of Obama’s VP vetting committee. Jim, by the way, had to quit the Obama campaign when it was revealed that he took a sweetheart loan from Countrywide Financial (headed by Angelo Mazilo). Johnson was also Chairman of the Board of Lehman Bros.
Franklin Delano Raines - former CEO of Fannie Mae and current Obama economic advisor. Franklin pocketed $52 million in salary and bonuses at Fannie Mae. He took “early retirement” and paid a fine to the SEC for padding the books in order to provide himself and other directors with hefty bonuses. As reported by the Wall Street Journal.
Barney Frank (D-MA) - called on by Obama to fix Fannie Mae and Freddie Mac. Throughout Barney’s career he refused to acknowledge any necessity for closer control by the Treasury Dept saying “These two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis.” He added, “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
> That’s why news that the Fed and Treasury are considering creating an entity
> to oversee the reorganization of financial markets comes as a relief.
It will be a relief to investment bankers, but a tremendous cost to the rest of us. I can hardly wait to see this bill.
— johnh
“I am no expert on the economy. However, . . .
Maybe you don’t understand how the economy works. You blamed George Bush for the Federal Reserve Bank for bailing out AIG. Bush, had no more to do with the federal Reserve Bank than I do, or you do. The Federal reserve is autonomous.”
You had your McCain moment and stated you were no expert on the economy, so why should we accept your explanation of the Fed to be credible.
— A CENTRIST
“And I bet you think the Democrats are going to bring change right? And Obama’s economic advisors are going to bring change, right?”
Here are my thoughts
I know what John McCain has said he’ll do and 8 years of it under Bush2 is enough. Eight years of those policies have resulted in our present state of economic carnage.
o Continue spending $10B/mo in Iraq
o Continue the tax breaks to oil companies
o Continue the tax breaks to the rich.
o Spend, spend, spend without any consideration of returning to the surplus budget inherited in 2001
o I want change, real change.
o I want a guarantee I don’t get 4 more years of Bush
o I want the younger generation to get the baton because the elders have proven they are inept.
I blame class warfare. The position that everyone should own a house because some do pushed Fannie and Freddie to lower the standards for loans. When will people understand that when you set down the rules, business people will play by them. If you create an environment where the goal is to put more people into homeownership, don’t be suprised that people do it because they can make money doing it. You tell CEO’s their job is to hit short-term goals (only worry about this quarter), don’t be surprised that they do it and ignore the long term. Be careful of the rules you set, people will play by them.
McCain, as a member of the Keating Five and a major player in the Savings & Loan crisis of 1989, ( another dregulated banking scandal under W’s father ) made the comparrison this week between the S&L crisis under Reagan/Bush and today’s subprime mortgage mess.
McCain blasted the credit crisis as bad behavior by Wall Street. He also blasted lax financial regulators. This kind of rhetoric masks McCains unchanged support for minimal financial oversight. He’s in favor of doing whatever the financial lobbies want him to do… Hell, these bank thieves are on his staff and payroll right now. Remember, Graham called us a bunch of whiners.. They’ve been on his payroll since Keating gave him $100,000 for his first senate bid.
…Then, when there’s a big blow-up like in 1989, he tends to blame it on bad people; therefore we’re going to clean-up the mess on Wall Street, get rid of the greedy CEO’s - find a scapegoat until the current scandal disappears and then jump back into bed with the same group of corrupt bank lobbyists.
The Savings $ Loan scandal cost us $180 billion. McCain was right in the center of it and he cried wolf.
As Harry Truman use to say:
“How many times do you have to be kicked by the mule before you get out of the way”?
DW - I owe you one - I said Obama had no black advisors or aides. However, I just discovered that Franklin Raines who got booted from Fannie Mae for falsifying signatures to secure his $300 million in pay, is black, and he is one of Obama’s economic advisors
A CENTRIST, you are a real treat. Did you go to the same school of truth telling that “rape kit” Palin did? I’ve looked and looked and can’t find where Raines is listed as one of Obamas’ advisors or aides, but of course, it must be right because you say it is so. You’ve taken a page from the “Bridge to Nowhere” Palin book of say the lie long enough and often enough and eventually there will be enough stupid people to believe me to almost make it credible.
George/McCain picked her and he just knew that he was getting the best and the brightest. “Troopergate (I said I would but now I won’t)” Palin’s only claim to being the brightest would probably be in reference to the lipstick she uses on those two faces of hers. Surely she can’t be the best the Republicans have to offer?
Hey, how about George’s (I’m a free market type guy) trillion dollar plus gift to the financial industry. George is a real prince.
— A CENTRIST
“. . . I said Obama had no black advisors or aides. However, I just discovered that Franklin Raines . . . is one of Obama’s economic advisors”
Debunked yesterday - again
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091903604.html
But then you knew that and you chose to repeat the lie in the ad.
Shame on you