M&T is off over 15% too.

Nothing wrong here, though. The economy has been "provided ... with a booster shot" which will have an "impact over the coming months" so that growth will be "weak but still positive".

And don't worry. Hank himself isn't too concerned about recession. He's just "not focused right now on what you call it".

I always liked flapper girls anyway...

Just as a fun number, it looks like the last time National City (National City is a super regional bank, incidentally, if you've never heard of it) traded this low was almost 25 years ago.

... will soon by buying shares of a company that's only going to survive because the rest of your money is quickly becoming worthless.

Wow....

So, Fannie and Freddie now have more credit and, maybe, you as an investor.

What's that? You think FNM and FRE are too risky, so you didn't buy shares? Well, the Treasury thinks that's just a darn shame and you should have some, whether you like it or not. They're going to ask Congress for the ability to purchase shares of Fannie and Freddie - with your money - if their "pay one credit card with another" style bailout doesn't get other investors on board the Titanic.

Don't get me wrong, I realize that an outright failure of Fannie and Freddie could spell disaster for the banking industry, and that would effect all of us, but there's still that feeling I can't shake... that feeling as if someone is jingling around the change in my pocket and it's not me...

For decades now the fed has been very vocal about the fact that they're not obligated to bail out the GSEs, but everyone has known for a long time now that if something like the current crisis ever came (actually, Freddie and Fannie have been in trouble before when housing values contracted, and they took a nasty hit in the S&L scandals too) the government would step in with our money and make sure they stayed solvent.

So, drink up, friends. If the fed's almost-free money handout - which devalues the currency already in your bank account and makes things harder for you indirectly - doesn't save these behemoths, they're ready to make the ultimate sacrifice in one last ditch attempt to rescue them: your money, your wallet, your future.

If nothing else, there's a lesson here: just spend all your money as you get it, because you're going to be penalized for other people's bad behavior if you don't.

.... looked like? Look no further than the IndyMac collapse.

IndyMac Bank was taken over by federal regulators yesterday after a week that saw Charles Schumer (D-NY) publicly announce, in effect, that IndyMac was collapsing. This triggered a run on the bank that withdrew nearly $1.5 billion dollars in liquidity (cash) from the bank's coffers.

Oops.

It's hard to feel bad for the collapse. When the mortgage crisis is discussed, it's often pointed out that figuring out who is responsible for originating any particularly bad loan is difficult. IndyMac originators, however, made it their job to give out "bad" loans (in theory, they were for the repair of single family homes or first time purchasers with less than excellent credit histories).

If the managers who ran IndyMac, and the originators who worked there, all wind up on the street selling apples off a cart and eating out of garbage cans, I won't feel bad in the least.

If you've been getting your financial news from major media outlets - especially Murdoch-owned media - you don't have a full appreciation for just how dangerously unstable our whole economy is right now. People have been arguing on the networks about whether or not we're going into or are already in recession, but if they told the truth, they'd be warning people to prepare the very real possibility of depression.

At this point, the only string holding us back from one is the little bit of yarn that's managed to relegate most of the destruction wrought by the mortgage crisis to the financial sector. If that poison seeps into our already-weak manufacturing, retail or tech sectors, we'll be in for a loooooong ride down and an even longer stay at the bottom.

At this very moment, Freddie Mac is down more than 48% on the week, and Fannie May is down over 46%.

If you're an American taxpayer, and that doesn't scare the ever-loving hell out of you, you have no idea where your money goes each April.

The ostensible purpose of these two behemoths is to allow a government-sponsored private entity to absorb some risk in the mortgage market by allowing that entity to pick up the risk of losses on mortgage securities by guaranteeing certain types of "conforming" loans. In short, if a bank picks up a loan and sells it, the bank gets the profit, Mac or May collect a guarantee fee to assume the risks, and those risks are transferred to ignorant taxpayers (Bernanke and Paulson will say otherwise, and it technically true that they're not government-backed, but we'll get to that later).

I've seen it put, thusly: the profits of the transaction are privatized, while the risks are socialized.

We may be on the verge of seeing just how much of a catastrophe this twisted little shell game can cause once the game goes tits up on the casino floor. Fannie and Freddie hold enormous portfolios that they've built up by purchasing and packaging mortage-backed securities. These portfolios are so weighted down by these sorts of securities, in fact, that they have become ridiculously more leveraged than any investment bank out there. Basically, if those mortgages turn sour, Fannie and Freddie are history.

And that's just what has people spooked this week. As values of homes have plummeted in some areas and stagnated in others, and as the results of corrupt lending have crept through the industry and exposed on the surface like some sort of horrible disease, Fannie and Freddie's solvency has come into question. If they're too heavily leveraged, they may well be insolvent already, and that means nobody wants to touch their stock with a ten foot pole.

Which brings us around to Hank Paulson. The Treasury has been taking a lot of care in tip-toeing around the issue recently, partly trying to downplay the notion that FNM or FRE are insolvent and partly trying to remind everyone, ever so gently, that the government is not obligated to bail either company out.

He's right, they're not obligated, but there's little reason to believe that the government would be stupid enough to let them fail.

Here's the problem: MAC and May hold such obscenely large debts now that if they fail, they could bring the entire market down with them. They have become one of those businesses that are derisively called "too big to fail".

Basically, if Mac or May fail, they'll bring mortgage lending to a screeching halt. Few banks are willing to assume the full risk of a loan up front and prefer to transfer "conforming" loans to one of the GSEs. Without being able to do that, they can't purchase a guarantee, and they're FAR less likely to make as many loans. If that happens, entire banks may fail (some banks, like the old Bear Stearns, foolishly leveraged themselves heavily in real estate), and other institutions will see massive losses in revenue. The entire financial sector would be blighted and investors would see their investments in public financials almost completely erased in a matter of days, crushing the value of the banks and leading to a chain reaction of multiple bank failures.

In a worst case scenario, these two companies failing could pitch the U.S. deep into a full-blown depression and that could even spark a worldwide depression.

But, here's the problem: if the government bails out Mac or May, or both, who do you think eats the bad loans that are weighing the companies down?

Yep: you.

You effectively wind up taking on the risks associated with the loans that two large, private enterprises accepted, but if those risks turn out to be overinflated, you won't see any of the profit:

Socialize the risk, privatize the profit.

It's unfortunate that this sort of thing never becomes common knowledge until it's too late, but people are so wrapped up in their own lives that they don't pay attention to the minutia of everyday governance.

It's funny, however, how all sorts of little "not-so-bad" rule changes and legislative matters can add up to a sudden, screaming catastrophe.

Update: "Helicopter" Ben Bernanke says that Mac and May can use the discount window to stave off insolvency.

What this means is that the Fed will happily print billions in currency for Mac and May to borrow so they can meet their financial obligations. While not a direct bailout in the sense of taking taxpayer money, printing money like this to "solve" problems devalues all the existing currency, pushing up inflation, and causing other problems.

I don't know if this is better or worse than an outright bailout, but it's not good.

.. do you know where your 401k is going today?

As I type this, all the major indexes' futures are off by at least 1% and oil futures are up, nearly at $147 a barrel (so much for that "big" $9 selloff earlier this week), with less than half an hour before the U.S. markets open. To top it all off, European indexes are all down more than 1% so far.

If some good news (good can be conveniently redefined as "bad news that meets expectations" when it comes to the markets, though) doesn't come out today about earnings or M&As, we could be facing a pretty steep decline by the end of the trading session. Take my predictions with a grain of salt, but, barring some surprise good news, we could see a 2% or more plunge today. We may even see a testing below 11,000 on the DOW. If that happens, we've broken a major psychological barrier to further selling, and it could plunge even lower.

The one "bright spot" might be the dollar: it's still holding steady compared to the Euro, down a good deal from its peak earlier in the year.

.. the real news was the volume and the non-mobility of light crude.

Although it may seem odd, what the market really needs - and what it seemingly wants to do - is to crash a good 10%-15% in a single day. One good selloff could potentially purge much of the markets illness and get it back on track to a healthy, if not rapid, recovery.

Think of it like this: have you ever eaten something that just sort of "sits in your stomach" and leaves you feeling a general malaise? If you stick your finger in your throat and get it out, you feel better. That, crude as it may be, is what the market really needs.

So, why isn't it happening?

Well, there are three major problems right now:

1. The real-estate scamfest still isn't over

When all those bad mortgages were packaged up, maliciously overrated, and resold they wound up being flung far and wide all over the markets, and now nobody can figure out where they're at. The financials like BAC (Bank of America) and C (Citigroup) hold a lot of them, but to what extent any single financial institution holds bad loans is a great big unknown. This effectively means that holding any given financial institute's stock across trading sessions is like playing hot potato and it creates a great deal of volatility in the sector which often leads to the sector being battered and the DOW driven down.

2. Crude is in serious flux

That light sweet crude is currently overpriced is practically a given. Even if you believe supply and demand is all that's working on the price, it's overpriced by many tens of dollars (though, this wouldn't be unexpected since significant shocks in supply or demand of a commodity will typically send the price see-sawing until it settles where it should be).

However, regardless of the cause, it wreaked havoc with markets. As the prices rose, so did consumer costs, which shrunk buying power and soured consumer moods. When people don't buy, companies suffer, miss their bottom lines, and people bail out of their stocks for things like gold, currency, and..... oil.

3. Too many people with too much to lose

A lot of baby boomers are coming up on retirement right now, and even if they've shifted heavily into fixed income investments, they've probably still lost several percentage points on 401ks in recent months. Coming up on retirement and watching your 401k lose $30,000 or more, even when you've done the right things, is pretty jarring and tends to cause you - and your fund managers - to try and correct things in the short term rather than continue to think long term (times like this are one of the many reasons I generally view 401k plans with contempt).

If the market does ultimately purge, a lot of people are going to get badly hurt by it, but I fear there may not be any choice for a long term recovery but to accept that it must happen.

... in film always has either a foil to drive a purpose, or some imbued purpose from the get-go which ultimately turns him or her into a self-redeemed anti-hero or tragic hero? Max Fischer, Donnie Darko, and the ultimate tragic hero, Travis Bickle (tragic, at least, if one accepts the interpretation of a dying Bickle, or a Bickle who almost immediately regresses into depression upon the reintroduction of Betsy in his cab at the end of the film).

Somebody should write a screenplay revolving around the tragic or anti-hero who is never given his purpose or foil. I'd wager there are far more of them on this planet than there are Travis Bickles or "Hancocks".

Of course, I'll bet one would have a hard time seating a theater for a ninety-five minute display of a fat, aging, middle-management schlub on the verge of a drinking problem and who is only two more words away from a divorce.

Today as in, today it taught me, not, it taught me about today's world. In other words, in the sense of the current state of the world AND what I learned about it, but only today... got it? Clear? Good.

Through Fark.com I found a link to a NY Times blog about the movie Wall-E and the valiant fight of two National Review Online writers against its subversive left-wing ideologies. An appropriate Wikipedia entry comes to mind.

Speaking of Wikipedia, thanks to the XKCD webcomic for pointing out that Wikipedia has a "List of problems solved by MacGyver". How can you not love an "encyclopedia" that devotes more page space to MacGyver's antics with chewing gum and twine than it does to the first President of the modern free world?

Speaking of presidents, the House is eyeing up a new S-CHIP bill. You may remember that bill as the popular bipartisan legislation to increase children's health funding to keep up with rising costs. Or maybe not since George W. Bush vetoed it. Sorry, kids, smokers need love too (oh, and it helps if you strain the point about middle-class families falling under S-CHIP coverage without bothering to cross-reference that data with the increase in healthcare costs and the decrease in covered dependents well into the "moderate" income range... besides, $82,600 in New York is the same as $82,600 in Alabama, right?).

All that, and it's only 6:30 in the morning. Time to go to work.

Christopher Dodd, for those who aren't aware, is the Democratic senior Senator of Connecticut. He has been in the Senate since 1981, and he served in the House before that beginning in 1975.

He is currently the Chairman of the Senate Banking Committee.

Dodd has come under fire recently regarding some sketchy loan terms he obtained in 2003 from Countrywide on two houses he owns. The CEO of Countrywide, Angelo R. Mozilo, maintains a blurry set of special terms for people deemed to be a "Friend of Angelo", and Dodd is, apparently,
within the blurred lines of the unofficial program.

Some people, myself included, might conclude that a man who heads the Senate Banking Committee maybe shouldn't be quite so cozy with people he's in the position to help immensely.

Dodd has received $21,000 in campaign contributions from Countrywide since 1997, and about $70,000 from Bank of America during the runup to the breaking of the scandal.

On the surface, this is probably not particularly surprising. The rich and powerful get special treatment - especially the powerful - and politicians are, usually, rich and powerful. What makes this particularly egregious, however, is a set of claims made by the Heritage Foundation regarding a bill Dodd introduced in June 2008.

First, a little background for those who don't follow financial news very closely.

Countrywide mortgage was the biggest mortgage lender in the country during the real estate boom that led up to the subprime crisis of 2007-2008. The lender was also one of the hardest hit by the collapse of shady loan dealings and is currently sitting on hundreds of billions of dollars of potentially bad loans.

In January 2008, Bank of America agreed to obtain the beleaguered lender for a paltry $7 per share. Countrywide has numerous assets and positions that would make such an acquisition an amazing deal, if not for the bad loans that come along with it.

In June 2008, Dodd introduced the Dodd-Shelby Refinancing Proposal to the Senate Banking Committee. Ostensibly, the plan allows people with bad loans to refinance through the FHA under more favorable - and affordable - terms (initially there were few stipulation, but additional amendments were eventually added to, among other things, limit the ability of people who lied on applications to partake in the bailout). The idea is that the FHA would assume the risky mortgages and provide a more affordable plan to limit the foreclosure crisis to some extent.

Unfortunately, there's a much dimmer view one can take of it, especially in light of the claims by the Heritage foundation and some anonymous Senate staffers that Dodd's bill was essentially written by Bank of America.

If Bank of America acquires Countrywide, they will assume hundreds of billions of dollars of dangerously sketchy loans that are liable to result in huge losses when the lendees either just walk away from unaffordable houses, or declare bankruptcy. However, under Dodd's plan, many of these people could be refinanced through the FHA. What this means is that most anybody who received an unfavorable subprime loan through Countrywide - those loans now being owned by Bank of America - could apply for a more favorable loan through the taxpayer-funded FHA (there is a provision to raise about half a
billion dollars a year to fund the program, but if the bad loans remain bad on the FHA's balance sheet, as they were on Countrywide's, it becomes a moot point). If approved, the FHA would refinance the homeowner and assume the risk of the loan.

In other words, Dodd's plan effectively offers the chance to take Countrywide's bad loans off of Bank of America's hands (actually, it does this for any bank's bad mortgages) and puts them in the hands of the taxpayers, using the FHA as a pawn.

To really pound the point home, if you haven't quite seen the whole picture yet: Bank of America would acquire the valuable resources, positions, and assets of Countrywide for $7 per share, and taxpayers would eat hundreds of billions of dollars of bad loans so Bank of America doesn't have to.

The only tiny glimmer of light in this whole mess is that the overall bill is so amazingly flawed that it's becoming increasingly obvious that few people would actually be helped anyway. At last estimate, only about $85 billion of bad debt would be refinanced. If 75% of that debt failed, taxpayers would only" eat about $64 billion in losses for Bank of America and other lenders who failed in their fiduciary duty.

I don't know whether to take solace in the fact that Congress's incompetence is apparently limiting the damage of its corruption or not...

[1] The Dodd-Shelby Housing Bill: A Bad FHA Refinance Plan Hijacks Good GSE Reforms (The Heritage Foundation)
[2] Countrywide Corruption (National Review Online)
[3] Did Bank of America write the Dodd bailout bill? (LA Times Blog)
[4]The VIP Treatment: Countrywide CEO Offers Better Rates for Prominent Few (ABC News)

And then, kick 'em when they're down
If all of that wasn't enough to set your pacemaker off, consider this: Bank of America's purchase of Countrywide's equity might be entirely footed by you, the taxpayer. In fact, CEO Kenneth Lewis is counting on it.

According to an article on Bloomberg, Bank of America may be buying Countrywide primarily because the tax writeoffs that come with the purchase will offset the cost of actually paying the $7 per share bid they entered for the company. If the FHA absorbs enough of the bad loans due to the Dodd bill, and the losses Bank of America incurs on the remainder of the bad loans is high enough, Bank of America may pay effectively nothing for the equity in Countrywide. In effect, they'll gain all the equity of Countrywide, and only take a tax-deductible writeoff that has to be funded later by taxpayers (or budget cuts) for the pleasure.

How's that for a real kick in the pants?

It seems that there's a lot of angst floating around in relation to high oil prices. Regular folks are hurting at the pumps and grocery stores, oil explorers are pointing the finger at speculators, and speculators are pointing the finger at consumers.

I've noticed that those speculators are becoming increasingly shrill lately.

One thing that rich people don't seem to understand is the derision that is heaped on them by the other classes. This becomes especially harsh in economic downturns where the other classes are hit hard by fundamental shifts in economic realities while the wealthy are merely inconvenienced.

To some extent, certainly, the ill will toward the wealthy is influenced by jealousy and a desire to identify a material cause for the harsh economic climate. However, that only explains part of the psychology, and to simply pass all the derision off as the sniping of the underclasses is both dishonest and willfully ignorant.

The wealthy have much more influence on American politics, economics, and social mores and taboos than the other classes. Designers influence fashion, pro-corporate lobbyists influence law, and media moguls influence opinion on those and all other facets of society. To simply shove aside those realities and act as though the wealthy don't shoulder more of the burden of economic downturns - and the credit for upswings - is simply foolish or, more likely, intentionally deceptive.

The problem becomes that you have certain wealthy individuals who value only greed. While there are obviously many wealthy individuals who are engaged in countless charitable activities and who pass billions of their own hard-earned dollars to those same charitable causes, there are also many unscrupulous individuals and businesses who prey on the underclasses or manipulate economic rules and markets for their own gain, usually by profiting from the loss of others. We're still unraveling, for example, the twisted web of corruption surrounding the subprime lending scandal that kicked off our current economic woes with nothing less than a bang.

The wealthy and their apologists must understand that, while the underclasses do often berate them for their success out of jealousy or resentment over problems their targets didn't really cause, the resentment is often born out of material grievances.

Oil speculators are the current crop of "wealthy scum" who are drawing the ire of the other classes. It should not be unexpected, either. Speculation in the markets serves a valid purpose - ask any farmer how much nicer it is to lock in prices for crops that are still growing in the field, or any buyer who enjoys the added liquidity that speculation brings to a futures market - but, like most anything, it must be done in moderation. When speculation gets out of hand, as it has in oil, prices become a positive feedback loop. People buy contracts with no intent to take delivery because they believe prices will go higher, and prices go higher because people buy contracts that they roll over - because they never intend to take delivery. The wealthy who can afford the contacts - and especially the wealthy who can afford media exposure to start the process with a few well-timed press releases - become wealthier, but everyone else has to suffer hyper-inflated commodity prices on a product that is not nearly as scarce as it's cost suggests.

Joe Millionaire becomes Joe Billionaire without doing any real work, and Joe Sixpack loses his house without doing anything wrong.

Is it really unfair of Joe Sixpack to be just a little bit peeved?

-------------

This journal is a set of random musings from a guy who probably doesn't really know what he's talking about. He's a software engineer by trade, not a political analyst, market analyst, foreign policy expert, legal expect or anything else. He's just a guy who likes cold beer, loud music, and shooting his mouth off on the internet. Don't get too worked up over what he has to say, and you'll probably live that much longer for it.