READ: Well, At Least It Wasn't 666

Perhaps the only good news yesterday was that the DOW dropped 777 points and not 666.  Then it would have seemed like this was some sort of devilish act of wrath.  Like this, it is only a complete disaster.

Many are pointing fingers at the House Republicans or Nancy Pelosi's remarks at the 11th hour (as a sidenote:  Seriously?  Grow the hell up!), while McCain wants have his cake and eat it too by both blaming Obama and Democrats and saying "Now is not the time to fix the blame; it's time to fix the problem."  Whatever John, you've done quite enough.

In reality, the failure of the rescue package can be traced back to the incompetence of the administration which first refused to acknowledge the seriousness of the problems in the credit markets and then tried to bully everyone into a fast approval of a massive package combined with dictatorial powers and a non-sensical unwillingness to compromise on any detail that would make it more palatable to the public (compensation, oversight, size, etc).  Did they really believe that this approach would fly the second time around after the WMD/Iraq disaster?  How could they neglect public opinion 5 weeks before an election that puts many house and senate seats on the line?  Why was there no concerted effort from minute 1 to explain the urgency in simple non-threatening terms and how this trickles down to the average person, before the package became labeled as a "Wall Street bailout", the most absurd misnomer?

Naturally, witnessing the magnitude of the market drop after the bill's failure made everyone uneasy and alarmed.  CNN is now suddenly dedicating prime time minutes to explaining the impact of the credit crisis to the average Joe, something they could have done a bit more of before Joe, Mary and Jane called their representatives to tell them not to expect to be reelected unless they kill the bill.  Meanwhile, much of the $1.2 trillion in market value lost yesterday will hit people's investment and retirement accounts immediately.  That is real money though that can be reversed in a few days.  What can't be taken back is the shock this could create throughout the system.  Will this uncertainty accelerate the "invisible bank run" that Cramer is talking about?  This isn't just some crazy theory, as Washington Mutual and Wachovia have demonstrated.  What all can happen in the two days before we get another vote, if it seemingly took a few days for Lehman to go from troubled to bankrupt?  Did anyone pause to think about that?

READ: Debating the Debate

OK so Obama is officially my candidate.  Issues aside (which I also think Obama dominated on on the domestic side and was all least tied on the foreign front), here's why:  (1) throughout the debate McCain was so incredibly condescending to Obama that I can't seriously envision him facing a foreign leader he doesn't like.. he's seemingly physically incapable of diplomacy; (2) the entire debate he didn't look at Obama once, whereas Obama addressed him directly and looked at him throughout the debate.. once again McCain either has a physical impediment or he's so arrogant.. either one makes it unfit, in my opinion; (3) McCain's vision and knowledge of the world is incredibly narrow (albeit deep in the 2 areas he seems to want to always talk about - war and earmarks).

McCain can drop a ton of names and that's cool.  He is knowledgable about other countries and military strategy - which makes him a great candidate - for a general.  Presidency? Not quite.. consider this:  "I looked into Mr. Putin's eyes and I saw three letters: K, G and B".  That is just incredibly irresponsible.  And the attitude of not talking to people because that would somehow validate and justify them belongs to kindergarden  - and it's so W's first term!

READ: How It All Began - Follow Up

In follow up to the previous post, I searched to see what Peter Wallison is up to and there you go - on September 23 he published an article in WSJ which I thought was pretty helpful in undestanding not just the root causes of this mess but also contained some counter-intuitive setting-the-record-straight about which party and which candidate was and was not instrumental in preventing this from happening.  

Blame Fannie Mae and Congress For the Credit Mess

By CHARLES W. CALOMIRIS and PETER J. WALLISON

Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.

How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them. By late 2004, Fannie and Freddie very much wanted subprime and Alt-A loans. Their accounting had just been revealed as fraudulent, and they were under pressure from Congress to demonstrate that they deserved their considerable privileges. Among other problems, economists at the Federal Reserve and Congressional Budget Office had begun to study them in detail, and found that -- despite their subsidized borrowing rates -- they did not significantly reduce mortgage interest rates. In the wake of Freddie's 2003 accounting scandal, Fed Chairman Alan Greenspan became a powerful opponent, and began to call for stricter regulation of the GSEs and limitations on the growth of their highly profitable, but risky, retained portfolios.

If they were not making mortgages cheaper and were creating risks for the taxpayers and the economy, what value were they providing? The answer was their affordable-housing mission. So it was that, beginning in 2004, their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that originators were scraping the bottom of the barrel to find product for buyers like the GSEs.

The strategy of presenting themselves to Congress as the champions of affordable housing appears to have worked. Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the "arrangement" with the GSEs at a committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.

In light of the collapse of Fannie and Freddie, both John McCain and Barack Obama now criticize the risk-tolerant regulatory regime that produced the current crisis. But Sen. McCain's criticisms are at least credible, since he has been pointing to systemic risks in the mortgage market and trying to do something about them for years. In contrast, Sen. Obama's conversion as a financial reformer marks a reversal from his actions in previous years, when he did nothing to disturb the status quo. The first head of Mr. Obama's vice-presidential search committee, Jim Johnson, a former chairman of Fannie Mae, was the one who announced Fannie's original affordable-housing program in 1991 -- just as Congress was taking up the first GSE regulatory legislation.

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.

If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.

Source: Wall Street Journal, September 23, 2008

READ: How It All Began

My question is, where is Peter Wallison and is there an award of some sort we could give him?

Check this out:

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

...

Source: New York Times, September 30, 1999

READ: 2 Good Reads on the Bailout

Shortage of free time the last few days prevents me from a more profound polemization on the bailout (though I did get a chance to see a decent chunk of hearings with Paulson, Bernanke and the third wheel Cox and it was horrifying to see how much of this is a work in progress at best and a complete experiment at worst), so in the meantime, 2 good reads on the crisis - one funny and one scary one.  The funny one can be found here and the scary one is here:

"Peter Boockvar [equity strategic at Miller Tabak] wrote a note that had some some very interesting insight on "bailout city" --  The Paulson bailout plan is a government bailout of the previously failed government bailout which was a bailout of the previously failed government bailout etc… Each bailout had its own unintended consequences which the next bailout tried to address. Greenspan bailed out the economy after the stock market bubble popped with 1% interest rates which sowed the seeds for the credit bubble. In order to bail us out, Bernanke slashed interest rates to 2% and a dramatic rise in commodity prices ensued. When that bailout didn’t work, he instituted a bailout of the investment banks with the initiation of the TSLF and PDCF credit facilities for investment banks. That slowed down the deleveraging process as it gave the investment banks a false sense of security. I highlight Dick Fuld’s comments soon after it began where he said it takes the liquidity issue off the table. The lack of dramatic deleveraging brought us to last week’s panic in GS and MS, a failed LEH and a shotgun wedding for MER which led us to the Paulson bailout. The unintended consequence of this bailout will be a much lower US$ and selloff in the US bond market which will leave us with higher interest rates and higher mortgage rates throw’s the intentions of the Paulson plan out the window. Who will bailout this bailout?"

PLAY: The Awesomest Brooklyn-Centric Weekend Plan

Friday afternoon - school is out.  Go food shopping at the newly open Trader Joe's, make dinner, watch the presidential debate at Galapagos.  After taking a brief break from Brooklyn in the Bronx, spend Saturday worshipping spicy goodness at the Chile Pepper Fiesta at the Brooklyn Botanical Garden, stop by for dinner at No. 7 on the way to the BAM party.  Sunday - sleep in, OD on rest of yumy food from TJ's and spend the rest of the day lazily walking around DUMBO's art festival.  Is Brooklyn the best place on Earth?  Quite possibly. 

READ: Brilliant

Steve Dubner over at the NYT Freakonomics blog asked a question that I have been pondering since last week - what are the MBAs in school right now planning to do now that their #1 career option has evaporated?

Some of the responses are interesting but there is one that inspired this post because it is just so brilliantly funny: 

"I’m a maverick English major; I’m planning on ’shaking up’ the I-Banking industry with my outsider image, extensive consumption experience, and designer glasses.After all, I said, “Thanks but no thanks” to the lucrative ‘Internships to Nowhere’ where my econ major friend’s job offers continue to disappear."

READ: The Strategy of Pressing Urgency

Call me paranoid but I see a strange pattern.  There is a crisis and to deal with it the administration demands a carte blanche from the Congress.  Sounds vaguely familiar?  Perhaps we could also call any opposition to it "unpatriotic" and voila - we're back to 2002.  Now, I'm not saying the Congress should just sit and do nothing.  After watching the biporal markets last week, up close and personal, I have no illusions.  Something needs to be done.  However the sense of urgency being employed right now to ensure minimal opposition or questioning by the same people who up until recently insisted that everything is just fine, is a tad suspect.  Krugman makes this point really well.  At least  the dems are trying to tag on some extra provisions and attach a string or two to make it a little more than just a naked Wall Street bail out.  For example -  limiting the pay of the execs of companies that will use my tax dollars to clean their own mess.  Pretty reasonable, I think.

PLAY: Thank God There's Theater.

Normally this time of the year you find me pretty down about the fact that the summer is slowly but visibly going away.  When I wake up, I panic briefly when I look out the window and see the temperature on the Jehovas' Witnesses' WATCHTOWER go a little lower every morning.   This year, worrying about seasons changing has been a tad overshadowed by the other stuff, you know, like the-end-of-the-world-as-we-know-it type of thing.  

So what's a comrade to do while cities are crumbling down and the planet is being flooded ON TOP OF unpleasant weather changes? 

Go to theater, I say, escape reality.  For my part, this is what I am dying to see: 

Equus - $100 to see Harry Potter naked?  Twisted, I know. 

All my sons - is what I call a good combo of talent, hottness and curiousity. 

Seagull - how will Kristin Scott Thomas and Peter Sarsgaard compare to Dianne Wiest and Alan Cumming in last spring's off broadway production at the Classic Stage?  I will see for myself on Sunday. (update - it was very good.  Kristin Scott Thomas was phenomenal but unfortunately Peter S didn't quite match the performance by Alan Cumming, in my opinion.  Maybe I was also distracted by the fact that he was speaking in an English accent, which is a recipe for disaster for most American actors..)

Margaret Cho - just love her.  LOVE her.  Saturday night she better shine!

August: Osage County - it won the TONY for best play and was called "the most exciting new American play Broadway has seen in years" by the Times  for a few good reasons (among them Deanna Dunagan and Amy Morton.. the former of which has unfortunately left the show after pocketing her own TONY).. and even though I already saw it, I have to hit it one more time before it closes!  Takers??

Fall for Dance at City Center - all sold out, damn!
Alvin Ailey - the secret sauce for this one is the $25 "orchestra pit" seats, where you can see the dancers up close.. wanna join me 12/14 at 3pm?

Paul Taylor Dance Company - when the weather gets REALLY cold, this will keep me warm.

BAM's Next Wave - I'm sure there is a ton here, but haven't really distilled it yet..

To be updated as I find more interesting stuff..

EAT: VeganMOFO 2008!

I will be participating in Vegan Month of Food organized by the PPK (a website/ community which played a significant role in my conversion to veganism.. as can be seen in this entry on my old blog..).  For those of you visiting from PPK, welcome and hope you enjoy my food-related entries as well as all the rest.  

READ: The "C" Words

Cancer.  When I meet people through work they are typically middle aged overweight white guys exploiting the latest scheme to make money off of government funded healthcare programs.  But today I met someone different.  Her name is Dr. Chang and she is a radiation oncologist - in short, she treats cancer with radiation.  She described her work at the radiation center - patient assessment, care planning and then actual treatment - emphasizing the importance of empathy and making the cancer patients feel well informed, cared for, and.. hopeful.  That, in combination with her intelligent yet humble, sweet voice was so disarming and inspiring.  At some point it hit me - this woman encounters so much suffering and pain - and helps heal much of it - and you could never tell.  

Change.  In another meeting, 2 lobbyists from a prominent DC law firm discussed the legislative outlook for healthcare.  One point they made put the election in a whole new light for me:  every company in healthcare that depends on government funding should pray for McCain to win the election.  Why?  There is no better way to guarantee the status quo - and no disruptive healthcare reform happening - than by having one party control of the Congress and the other one in the White House.  Here's a perfect example of how that pans out in practice.  Conversely, put the democrats in charge and suddenly the prospect of laws being passed without a veto makes everyones stomach contract a little.  Taking that little observation a step further - and this is not an opinion but rather a procedural observation - the only way to achieve "change" - is to elect a democrat into the White House.  Similarly, the best way to accomplish paralysis in these critical times, is to have an expanding Democratic majority in the congress - which seems all but certain come November - presided over by a Republican.  Good luck getting anything done in that mad house.

And so, here I am, constructing a case for veto-proof single party rule.  Ugh, I hope I won't have to regret it.

READ: Another One Bites The Dust

Monday was certainly a day of observation and reflection.  As one old-school Wall Street bank went under and another one was acquired, we are nervously awaiting the next chapters in the saga that this slowdown / crisis / meltdown / recession has become, while John McCain believes, that the economy is fundamentally sound.  I am wondering how profound this decline will be and this little bit of info about 1929 spooked me out quite a bit: "The Dow did not return to pre-1929 levels until late 1954, and was lower at its July 8, 1932 level than it had been since the 1800s."  Of course we have no idea if there two are comparable or not, but good to keep that in mind as a possibility, I suppose.  I am also wondering what will be the impact on life in New York.  The cynics outside of finance are experiencing a major case of shadenfreude after being priced out of every apartment, bar, club and restaurant in Manhattan by men in striped shirts; but I worry. Each job on Wall Street directly creates anywhere between two to four jobs in the city, not to mention the effect of big patches of wealth vanishing suddenly on real estate, tax revenues, services, etc.  Will New York slump back into the 80s (e.g.. this) or will the purchasing power of eurotrash and petrodollars hold it up?  

EAT READ PLAY: Friday Metapost

Not much has really happened since the last entry but somehow I still accumulated a lot of material.  First there was the Century Bike Ride last Sunday.  Unfortunately I didn't take my camera, so here are some crappy shots I made with the iPhone.  Apart from feeling great from the 40 mile bike ride in unbelievable weather, it was a further expansion of my NYC horizons.  Highly recommended as a sight seeing tour of places you will probably never go otherwise.  Also the last straw for me in my decision to get a new bike.  It's just insane how many options there are.. I need someone to hold my hand in the store.

Then, another week - another fun work trip!  Last week was LA, the city - this week was LA, the state, as in Louisiana.  The picture above is a shot of the river in Baton Rouge.  Kind of pretty, I guess.  The whole town felt deserted since they were just recovering from Gustav and there was still a curfew in place.  The culinary aspect of the trip would have been probably amazing, if I ate fish.  Alas, even heavy layers of southern hospitality and niceness couldn't hide the annoyance on the waitress' face when I told her I can't order anything on the menu.  A whole lot of drama later, they ended up making me an amazing dish out of their sides.  I hate to admit that the totally not vegan white chocolate bread pudding looked so good that I couldn't resist taking a bite, only to spend the rest of the trip with a giant stomach ache, fueling my suspicion that at this point I am probably lactose intolerant.  The bright spot, if there was one, was that on the way back to civilization, I saw the most amazing sunset from the plane - I am really such a sucker for them.  Here's a pretty week attempt to capture it.

On the campaign front, not much to comment on since not much actually happened if you don't count pigs with lipsticks, but quite a bit of good commentary (or maybe that is all I read while travelling..). Especially enjoyed Herbert's reminder that the fasionable derisive use of word "liberal" completely disregards that it is liberal values that have made this country better.  Great article from congressman Frank about Palin and family values.  Well not much happened until yesterday, when Palin spoke for the first time since her nomination acceptance speech and did reasonably well, that is, if you standard of "reasonably well" is that she can answer questions without hesitation and with confidence.  Clearly we are well beyond applying the same critical standard to her than we would to anyone else who ever thought of being involved in this election.  I do have one major gripe, however, which I posted today as a comment responding to Krugman's sharp column.  

Another significant case in point is last night's ABC interview with Ms. Palin. What I am referring to here is her response to the question of her readiness and her initial reaction to being approached by Mr. McCain's team. Every normal human being would have a moment of hesitation or self-reflection and - if formulated properly - it is a perfectly understandable emotion, something one should not be afraid to admit. But no. She chose to claim that she "didn't blink". The idea we're supposed to get is that she is determined and sure of herself.

But really, in the world we're living in with all its complexity and all its problems she expects us to believe that she didn't stop for a moment to think if she can handle the task, if she is ready? I can confidently say I don't know anyone who could honestly say that. I can't help but think that Ms. Palis is either lying or completely naive.

In fact, I would take this even further and suggest that her inability to even so much as recognize why she _should have_ hesitated (i.e. that she actually acknowledges the difficulty and complexity of governing this country AND that she possesses the critical thought to assess her own readiness) in and of itself makes the prospect of her being the VP truly scary.

(update- the Saturday editorial in the Times sort of picked up on the same theme "This nation has suffered through eight years of an ill-prepared and unblinkingly obstinate president. One who didn’t pause to think before he started a disastrous war of choice in Iraq. One who blithely looked the other way as the Taliban and Al Qaeda regrouped in Afghanistan. One who obstinately cut taxes and undercut all efforts at regulation, unleashing today’s profound economic crisis.  In a dangerous world, Americans need a president who knows that real strength requires serious thought and preparation.")

Finally, how could I forget the anniversary of 9/11?  On that note, here's a photo tribute and a good book I started reading this week on my way from Louisiana that deals with the post 9/11 world and the role of the US in it: "Hot, Flat, and Crowded" by Thomas Friedman.  Love the idea of Chapter 18 - see here.

Meanwhile, two more strike outs in alternative careers:  first a reminder that going back to school isn't just about passionate discussions of politics and economics even if Krugman is your professor; later, a blog which provides enough details about the life at CIA to turn a reasonable person off from culinary school.  So, so much for being a chef.. but at least this looks like a promising read!

PLAY: Californication Nostalgication

Maybe it's the jet lag striking again or maybe my body is simply refusing to spend precious free time in bed.  Either way, I am sitting in front of TV in the middle of the night, watching the new 90210, DVRed from earlier this week, remembering the excitement with which I watched the original show back in my elementary school days.  Back then watching Brenda and Dylan kiss was the emotional highlight of the week, even when I still had no clue it wasn't Brenda I had my eyes on.  Not to mention that was the show that formed my early image of the US, only to be replaced by Friends a few years later.. both images so tragically off.

Ironically, that was not the only instance of California creeping up in my life this week.. As chance would have it, I also flew to LA this week for an annual work trip to visit a few companies headquartered in the area.  It was the same trip which 2 years ago I conveniently attached to a long weekend in San Francisco, in order to reunite with my long-distance boyfriend at the time - and took the chance to peacefully agree that we shouldn't be, anymore.  Even more concidentally, that ex apparently got engaged some time in the past week .. In other words, in the span of a week I have relived the memories of one of my significant relationships as well as those of my early formative childhood years, with California being the common thread to all this emotional baggage.  

I am too tired at this point to draw any meaningful conclusions out of all this, but that's a whole lot of California and a whole lot of nostalia for a week.