The (Financial) Pain
Last week was historic – the worst week for the Dow Jones Industrial Average (DJIA) EVER. It closed last Friday with the largest one week percentage drop in its history. The S&P Index didn’t fair well either. It had its worst week since 1933. Worse yet, all of that happened AFTER third quarter broker statements went out showing gut wrenching year-to-date declines for most investors. This week hasn’t been very reassuring either.
Words cannot express how sick I am over the financial crisis unfolding around the world.
I’m normally a gloom-n-doom kind of guy so that when bad things happen I’m usually more prepared. When things go wrong I usually think “that sucks” but I also have a hint of “I told you something like this could happen” in the back of my mind. I often have contingency plans mapped out in my head for what I’ll do when disaster strikes. Pessimism has its advantages – it blunts the pain and increases preparedness.
Apparently I wasn’t pessimistic enough.
I’m not suggesting that it’s time to panic because that doesn’t help anyone. But I’m definitely having a Dr. Zackary Smith moment – Oh the pain… the pain.
As always, I try to make light of a bad situation because humor is good and sarcasm is my friend. Somehow it isn’t helping much lately. It’s like the weeks after 9/11/2001 when it seemed like there was a moratorium on humor.
This week I had the fleeting thought that Al-Qaeda had finally achieved one of their goals when they planned the attacks. The World Trade Center was one of their targets because, in addition to death and property destruction, they wanted to see widespread financial ruin. They wanted to see capitalism on its knees. Are we there?
People are losing their homes – in some cases leading to more death and destruction. (Click here for a disturbing Associated Press article from earlier this week.) Businesses are failing. Credit markets are frozen. Small countries are teeter on the edge of bankruptcy. Nest eggs and retirement savings are being decimated. Never have I imagined that things could get this bad on such a global scale. I wish I was exaggerating to make a point. I’m not.
I don’t actually believe that terrorists are responsible in any way for the current worldwide financial debacle, although I’m sure that some really warped individuals are taking a perverse pleasure in watching some of this crisis unfold. There is plenty of blame to spread around, but I’m not giving terrorists any credit.
I’m also not going to blame any one person or any particular political party. I believe they all played a role in this mess. Republicans, Democrats, Clinton, Bush, Greenspan, Bernanke, bankers, hedge fund managers, bond rating agencies, and yes… even the occasional accountant.
What do we do now? Well I think the first step is to mentally process what happened and how we got here. This is the part where I give my semi-educated view of how this all happened (factually based, but slightly biased of course). This part can be boring, so I’ll understand if some of you skip ahead to the end. (Kitty – this means you.)
Many politicians and financial analysts trace the roots of this crisis back to the Clinton administration when he and many other key Democrats effected changes to rules that made it easier for Freddie Mac and Fannie Mae to make riskier loans. The idea was to increase home ownership in our country, particularly in poor communities with high minority populations. Perhaps they loosened a bit too much, but it was for the noble cause of helping more Americans own their own homes. The next damage was done when these same Democrats loaded up the management of these companies with less-than-qualified do-gooders of their same ilk. For this they, and many others, were rewarded with large campaign contributions and visits from lobbyists who regularly argued that there was no need to look behind the curtain. Taking a look would have revealed problems and incompetence.
Critics emerged who pointed out problems and issues regarding Freddie and Fannie – many, but not all of them, Republicans. George W’s administration actually tried to pass significant overhauls that would have increased oversight early in his administration. With Republican control of both houses at the time, nothing ever became of the tighter rules even after accounting irregularities were uncovered in 2003. How is this possible? Republicans were picking on a Democratic project that, in theory, was working. Home ownership was UP in the targeted classes. All is good, right? Several less-than-brilliant Democratic congressmen and representatives from Freddie and Fannie shooed back the Republicans. Campaign contributions and lobbyists were on the move. Nothing to see here – really.
While many analysts had legitimate concerns, everyone seemed to be pointing at Freddie and Fannie and nowhere else. Republicans wanted more oversight of these quasi-government agencies but more regulations for capitalist institutions were taboo. (Perhaps because those entities make large campaign contributions to Republicans?) They wanted to regulate the Democratic project that was helping low income people buy homes with almost no money down, poor credit and even sketchy employment histories. Yet increasing regulation for bankers, brokers and insurance companies was somehow bad. You would think that after the savings and loan mess of the late 1980’s the Republicans would have learned that some regulation is good, but deregulation continued.
With relaxed regulation, other lenders concluded that what was good for Freddie and Fannie was good for everyone. New and crazy mortgage products popped up and now they were for everyone. 100% loan-to-value and negative amortization financing – yea, yea… that makes sense. (We don’t even care if you have a job – just lie to us and tell us that you do.)
Then the use of derivative investment vehicles became more prevalent. This gets confusing (even for an accountant) but collateralized debt obligations, credit default swaps and other creative ways to disguise and hedge against risky investments became all the rage. In the post Enron/Worldcom world, the accountants started working on ways to shine a light on some of these new investments. Before they could get mark-to-market accounting rules in place, something REALLY crazy happened.
Sometime after George W failed to get increased transparency at Freddie and Fannie some changes slipped by at the SEC allowing certain firms to start leveraging their assets at up to 40 to 1. The danger of this concept can be hard to explain to those who don’t understand a lot of accounting lingo, but imagine you borrow $39 then add one of your dollars and invest it in a $40 stock. Now the stock goes down to 20% to $32 but you still owe the $39. Uh oh. Now imagine it was publicly traded companies that did it and add a lot of zeros. Owners of the companies stock now have a worthless investment and wherever that loan came from – many of them are screwed too.
Freddie and Fannie – they had different rules. As of August 2008, Freddie Mac’s assets-to-capital (leverage ratio) was 70:1 and on the rise. This, as we now know, led to a government takeover.
Let’s back up to those accountants for just a minute. The new accounting rules started kicking in a while back and for the most part this would have been good. Greater transparency of financial information so investors have a better feel for what they are investing in and CEOs that receive multi-million dollar salaries would have a harder time hiding some of their mistakes. I’m sure that everyone expected a few hiccups as the new rules kicked in. Unfortunately they kinda timed things poorly.
Around the time that mark-to-market accounting rules were kicking in the real estate market started having problems. Property values started dropping and foreclosures started going up. With each passing quarter, the values of assets backed by mortgages were being written down and leverage ratios were going up. Broker-Dealers started failing (Bear Sterns, Lehman Brothers, Merrill Lynch) and the rest of the dominos started to fall.
Ok – for those who skipped the boring explanation, here is a recap:
- Democrats tried to make it easier for financially underprivileged people to become home owners with help from GSEs (Government Sponsored Enterprises – specifically Freddie Mac and Fannie Mae).
- Democrats also put less-than-competent chums in charge of the GSEs and allowed them to run amok in exchange for campaign contributions and advice from GSE lobbyists.
- Republicans tried to raise flags and make new rules for the GSEs but they failed because they were too busy deregulating everyone else based on the advice of brainiac economists and high priced lobbyists for non-GSE financial institutions. Oh, and they got campaign contributions.
- Non-GSE institutions started making similar high risk loans and the use of derivatives exploded. This, along with the collapse of several large companies earlier in this decade, led to new accounting rules that kicked in right about the time that real estate markets started to crumble.
- Leverage ratios went up, institutions started failing, fear permeating the financial markets, the availability of credit froze up, stock markets around the world started to crash and now we have a global financial crisis.
So here we are – many of us in pain. I know that for some it’s hard to imagine how we are going to recover from this financial train wreck. It’s hard to know what to do. Yet, as gloom-n-doom as I have been known to be, the one thing I know is that we can’t just give up. Things are going to be tough, but we’re not doomed. Well… yes we are, but not necessarily because of this financial mess.
I have hope because a lot of smart people are starting to call a bottom and throw around words like capitulation. They all throw in that caveat about retesting the lows, but optimism is on the rise. Some of the richest and smartest investors, like Warren Buffet, are diving back into the market because they see incredible values in American companies. Most of the really bad skeletons are out of the closets and governments around the world are stepping up to stabilize our markets.
Other parts of the economy still have some hits to take. Housing, unemployment rates, inflation… these need more time. But the stock markets usually hit bottom first and start to recover while we still experience pain in other areas.
Like many of you, I have my retirement savings invested in the market and I’ve seen large drops this year. Are we at the bottom? I don’t know, but I really believe we are close and I think it’s too late to bail out now. Certainly we all need to re-evaluate our investment strategies and reallocate or rebalance as necessary, but if you’ve stayed in for the trip down then now is not the time to freak out. History shows that the market always recovers from the bad times and it comes back stronger. It may take a while, but after taking the beating you don’t want to miss the recovery.
I want to ramble on about deregulation being bad and why we need to stop blaming the accountants, but I guess I’ll save that for another day. I have things to do and I can’t spend all my time in my grass hut. As for that pain? Scotch helps.
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IMHO, two things need to occur in US congress to get our country back on track.
1. Demand that every government entity become completely transparent to the taxpayers and citizens of the United States…by posting their check register, real-time & online, in a searchable format. Use your imagination here…the College of Dupage saved $300k on one issue 2 months after they posted their register.
2. Make all laws constitutional, or reject them. Yes — many (thousands) of federal laws are unconstitutional.
My two cents. If you really read into #2, we would disband the Federal Reserve. Hmmm….
Steve
Steve – thanks for the input. Not sure they are the best ideas, although I’m sure you meant to include exceptions.
I’m all for more transparency. Posting the checkbook may work for the College of Dupage but I’m guessing we shouldn’t be posting the checkbook for the DoD. Then again, you may be on to something. We should know how much we’re paying for latrine toilet seats that do not splinter. When we hire foreign mercenaries with cash how will that line show up? (Oh, you KNOW it happens!)
I agree that unconstitutional laws should be rejected. This will mean equal rights for homosexuals with regard to tax and inheritance laws. Good for them! No cheating by trying to get a constitutional amendment. It would just end up like prohibition – reversed a few years later.
As for the elimination of the Federal Reserve… I’m not going to say it’s a terrible idea, but something has to replace the void. Reality is that a truly free market of supply and demand won’t work right now. Too much greed and stupidity along with the effects of global economics. Somehow we need to have oversight. Maybe we fix the Fed problems instead of deleting it altogether. But I’ll ramble more on that another time.
Christopher
Christopher,
The Federal Reserve is a private, unaudited entity that controls our GOLD, and prints money on-demand without publishing the M3.
And…now they have $820B to disburse without any oversight.
What a fucking mess.
Transparency is the absolutely the first thing this country needs. And if you’re worried about the DOD, great — make them last. Here are four I would recommend:
1. Department of Education (by the way, this is an unconstitutional department). Make every school district in the United States post their check registers.
2. Department of Transportation. That’s right, every DOT for every state, federal, county and city project and on-going maintenance. Put it online.
3. Social Security Administration. My buddy works for the SSA in Chicago — they pay $1.25 per roll of toilet paper in that building. Put it online…
4. Medicare / Medicaid. This is why healthcare is so expensive — the government price fixes procedures for the entire country (ie, a broken arm is $500) — so, when a 42 year old guy has a broken arm, the Insurance Company will charge the doctor…uh, $500 (because that is the going rate). Anyway…these groups are out of cash?? Post the registers first.
Let the public (who is damn smarter than any legislator or body of government) conduct simple audits.
This transcends all types of political thinking, yet only one standing member of congress is just as passionate.
Hmmm…who?
Steve,
I’m agreeing with the transparency – 1, 2, 3, 4 and more. Get in there and make it happen, my man! But be sure to make exceptions for national security. And do it without trampling on civil rights. (ahem WIRE TAPPING cough)
Also agree that we have a f-ing mess on our hands. But eliminating the Federal Reserve is not necessarily the answer. Fix it – don’t throw it away. Audit them, require oversight and require public disclosures. If they whine about it – broom the lot of them and replace their asses with COMPETENT people. Republican and Democratic cronies need not apply.
Christopher
Christopher —
The only way I can get into office is to raise enough capital to educate and market this concept. We will begin filming two Television commercials this weekend.
Please support the campaign by encouraging your huge network of friends to “chip in” — easy to do at http://www.VoteSteveMiller.com
$10 or $20 works across a network of 100.
Thanks!!
Steve
And there it is. An official political advertisement at GH&C. From a Republican no less!
Readers – see the post above from Steve and check out his web site. If you agree with his views then send him a ten spot. Maybe more if you are so inclined and not about to lose your house to the bank.
Christopher
Christopher,
Thanks for another interesting article.
In response to the comments from Steve and yourself; just how much larger would you like to make the government? For every checking account you would like to display, and there are thousands, you would need a staff of people to provide and maintain this information. The American governments are already the largest employer in the world and you would like to increase it by adding more complexity at every level? The federal government already has almost 2 MILLION employees and you think it would be a good idea to add thousands more? And the equipment to provide and protect this information. The government needs to be REDUCED not increased.
Oh, and in response to the financial disaster.
The source of the real estate portion of this disaster (and that is a significant part of it) is the greed of the mortgage providers. These people were providing the loans knowing that they would sell the mortgage to a corporation that would bundle them with other debt and sell them to investment companies. These unscrupulous business people consistantly offered and even recommended outlandish loans to customers that were beyond any accepable business sense. A certain amount of the responsibility lies with the person buying the home, they know what they are worth. The majority of the responsibility lies with the business insisting that the person accept a mortgage that excedes anything the customer could ever hope to pay. These greedy mortgage providers and the unwitting (or in some cases even greedier) buyers are the first link in this chain reaction of financial ruin.
hey chris
, as for how bad it can get reminds me of a funny quote from the movie Tommy Boy. it goes ,” I can get a good look at a T-bone by sticking my head up a bull’s ass, but I’d rather take a butcher’s word for it.” The bulls ass being the unregulated securities industry, and the t-bone being the cdo’s. Problem is that you can’t take anyones word for it when it comes to how big that CDO/T-bone is! some things i have read and heard estimate that the “shadow banking system” has 500 TRILLION in securities out there. If that is true and the whole house of cards is coming down, how can they recapitalize that! it would take 50 TRILLION just to get a 10 to 1 ratio . similar to what bank reserve guidelines are. If it is that bad wouldn’t the world fiat currency system be reduced to toilet paper? maybe we will all be living in grass huts by then.
Stephen,
I agree that we need smaller instead of larger government, but I think you may be exaggerating the manpower needed to make some of this accounting information public. Accounting is all done with computers now. Should be easy for a couple IT guys to dump the data into files that can be publicly accessed. Heck – create the searchable data files and let Google or some other company get them on the web. They may even PAY for the data. Free viewing by the public for static info but Google could charge a nominal fee to recoup what they pay the government for search features.
Plus, I think Steve’s point is that it will more than pay for itself since the public will sniff out the excesses and put a stop to a lot of spending stupidity. Again – we just have to be careful how much we disclose in certain areas.
As for the real estate portion of the disaster – plenty of blame to go around there too. People knowingly borrowed more than they could afford and more than the actual values of the property. And the unscrupulous brokers and lenders convincing some less educated consumers that they could afford these loans when they probably couldn’t (for large commissions). Most of all, many of these mortgage products don’t make business sense to me. They shouldn’t have existed in the first place. And as you pointed out, these guys created them, wrote the loans, then repackaged them to be dumped on others. There is the real crime – clearly there wasn’t enough disclosure or no one would have purchases these packaged loans because it should have been clear how risky they were.
Whether the person borrowing the money knew or not is one problem. But the fact that these loan products were even available in the first place is far worse. Smart, greedy, bankers created and resold these loans and they should have known better. If a guy with $0 down, poor credit and sketchy employment wanted a loan the answer should have been “no” on day one.
Christopher
Rick,
Your comment has elements of doomsday. THE SKY IS FALLING. I’m not learned enough on the topic to properly respond to your comment and I have not looked up the bull’s ass, but I think the 500 trillion is an exaggeration. Even if it isn’t, I think a lot of value has already been unwound with mark-to-market accounting and the drops in the stock market we’ve already seen. Also, some of these investments do have SOME value – even if the end investor ends up with a $100,000 house they loaned $200,000 on. Plus, there are two sides to every transaction and one side didn’t necessarily get screwed.
So things probably aren’t as bad as you are suggesting.
If I’m wrong maybe you and I should go into the grass hut building business. People have to live somewhere.
Christopher
Hey Chris, yup doom and gloom buddy. That’s the way I see it since knowing that the Federal Reserve is just backstopping it’s own holding companies like JP Morgan Chase. If a majority of citizens realized that the Fed is a private for profit entity they would get the conflict of interests issues and shut down this taxpayer subsidized rip-off.
As for “value” that’s where securities fraud turns into accounting fraud. Instead of the market dictating the “value” of assets, the government has to buy assets at inflated prices to prevent the CDO insurance from coming due, just so everything nets out. The one they missed (Lehmans) has 360 billion of insurance contracts coming due and who is going to be on the hook for that. Us again , and the government tells us that we have to as to avoid the rapid collapse of the derivatives pyramid. And what of mark to market accounting ?, that’s just another way of saying crystal ball forecast bullshitting! not trying to rag on accountants but they are guilty coconspirators in this scheme and have played a major part, and are currently engaged in the unwinding with more smoke and mirrors. Just terrible stuff for the average American who has been getting hosed and who’s great great grandchildren will be hosed.
As for the 500 trillion , I have heard even bigger numbers and they come from former fed governors and institutional analysts. But does that number really matter if the government is going to let the Fed plug up the dam by buying up mortgage paper at the inflated prices?
So to summarize I believe the doomsday is on the dollar. how can it have any value after all of this? I ask rhetorically.
Have a nice day !
I also want to add one thing to the list Steve Miller started.
Congressional redistricting has to stop. (gerrymandering). We the people have control only if we can control our representatives and Senators, not the other way around.
GO RON PAUL !
here here here!!! Ron Paul for ALL.
Yesterday, the Chicago Tribune endorsed Steve Miller for US Congress, over the 30 year incumbent.
http://www.chicagotribune.com/news/opinion/chi-08endorsements-htmlstory,0,5602186.htmlstory
And…posting check registers online happens once, at the cost of $100 per check register. No maintenance required…they’re already electronic.
TMI…silly people….it is all doom & gloom if you see it that way. As far as I know most of you still live in better homes and have more choices than those outside of the United States! So use your God given Wisdom and choose right…make a difference. Be happy…life may not be perfect but it is good 🙂
Good for Ann Marie for having the “don’t worry – be happy” attitude. In the meantime I will use my “God given wisdom” to choose. Because the ability to “choose” is important. A vote for Obama is a vote for choice. Choose wisely.
Sorry I have to disagree with you on that one…a vote for Obama is not a vote for choice by every human being. The innocent babies do not have a choice whether to have a life or be killed by someone else…Obama thinks it is O.K. for someone else to make that choice for them.
Ah yes, that hot button issue where we will have to agree to disagree. My final point is that I agree that innocent babies cannot choose for themselves, but I would rather let trained physicians and affected individuals make the decision – NOT the government.
The decision needs to be based on pertinent facts like the mother’s health, the baby’s health, religious beliefs (there is more than one religion) and other factors. This is not a decision that should be made by suits in D.C. because then we will have more problems with women getting substandard medical care while hiding from the law. Trained doctors and psychologists should be involved, not rusty coat hangers in back alleys.
If my mom was a destitute crack whore with AIDS and my dad an unidentified rapist – PLEASE abort me. That would be my wish. I am fortunate, but the fact is that everyone does not get to live happily ever after.
Regardless, the baby still does not get a choice as to whether he/she can live. And all babies come from God…even you 🙂
To clarify the doom and gloom thing , I did not say “it’s all doom and gloom” . I’m a pretty sarcastic person but not that cynical. The doom and gloom was in reference to the U.S. financial system, which if you are well informed, you can use you Buhdda or God given wisdom or your education to make intelligent choices.
“Don’t worry be happy” Chris? that sounds like head in the sand philosophy , I know that isn’t you. But I guess it sounds good.
I AM that cynical – we are all doomed! But I’m a happy-go-lucky cynic, so don’t worry – be happy.
Keep your eye on the ball, not your head in the sand.
As George Will once said:
The nice part about being a pessimist is that you are constantly being either proven right or pleasantly surprised.
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