Wednesday, November 26, 2008

Solving the Subprime Mess

Slate has an excellent opinion on how to solve the subprime mess: Sue the hell out of the subprime lenders.

No, its not that difficult.

Bank of America settled a suit quietly for $8 Billion dollars for predatory lending. That means the lending was illegal.

So what to do? Sue each such lender and get the loans declared illegal. Let the predatory lenders foot the bill instead of the stupid taxpayers.

Once Countrywide, Citi and BofA realize they need to forgo bonuses and commissions, plus face the wrath of shareholders for losses, they will curb any such tendencies in the future PLUS bear all the losses so far. What do you say?

Saturday, November 22, 2008

This crisis is not 1929

The comparison between today & 1929 is strong. Anywhere you go you read "uncanny" similarities between 1929 and today's Gold prices (see the chart on right).
The now-defunct Merrill Lynch's CEO states that today's economic environment compares with 1929 in terms of being "catastrophic".
Nothing could be more far from truth.

Go back further: to 1873. The year of the Real Great Depression. There are some strong conclusions from how it was resolved. The panic of 1873 was the result of esoteric mortgages, land values climbed and climbed, and Europe was beseiged by the cheap grain and goods from USA.

  1. When banks fail in Wall Street, the traffic in Main street stops for a long time.
  2. British banks hold back funds because they are not sure which recepient is safe and which is not. Of course the chancellor of Exchequer has threatened to nationalise banks if they don't start lending money. Let's see how that comes to pass.
  3. Banks with largest capital reserves were able to ride the panic in 1873. The same holds good today too. The banks with largest capital today are Wells Fargo with 8.5% capital ratio and HSBC with 8.8% in clean deposits are by far the strongest on record. Of Course, Citi claims it has a 10.4% ratio with $55 Billion of deposits, but, the fact remains is that it is bringing a portion of its $1.2 Trillion failed assets chucked away off the balance sheet back into its balance sheet. Even assuming it brings only 10% of its OBS failed assets into its balance sheet, that amounts to $18 Billion. Which means its capital ratio falls to 7.4% The lowest for any Retail bank which can survive.

Bernanke may have earned ridicule and Paulson may be the most hated person in Main Street for bailing out bad banks, but in hind sight their quick action may prove to be the most calming effect so far.

Because as history has shown in 1873, 1879, 1929 and 1987(SLA Debacle), when Banks fail, Main Street stops. Period.

After lobbying hard for 50 years to get the government off their backs, Citi now wants the Government to help it states that Citi is looking forward to the Government to bail it out since their share prices are falling and their top management stands to lose a TON money.
Am beyond amazed. For 50 years since 1933, Citi has fought against the Steagall Act for so long that they celebrated its demise with a bottle of the costliest champagne.
That act, which could have prevented them from sliding into their worst situation today was anathema to Citi which essentially is a free hand in markets.
Citi has always hated government interference whether it is to regulate their border-line legal doings or trying to control their rampage in new markets.
After all Citi was the one who duped the Govt. of Norway by making it invest in junk bonds and later settled the case.
Now, when the FREE market has found out the true value of Citi and is displaying it in its stock price, Citi has come running to the Government to "comfort" its top executives that their multi-million shares are truly worth their weight in Gold.
It wants the Government to give the same treatment to Citi that the government gave to FreddieMac.
Total buyout by Government, and let the congress and president worry about the economic mess Citi has made and die in it while Citi's executives fly off to their Caribbean island resorts.
The sad thing is Government will oblige them, how much ever voters protest, because they have been long bought over. So now Citi is collecting the profit on its investment in Congressmen, Senators and Presidents.
UPDATE on Nov 23rd Nov: As predicted, Citi has begun collecting on its long-term investment in congressmen by making congress and Paulson back Citi's bad loans with Government Tax Payer money to the tune of $306 Billion!
Wow! Call that the BEST investment Citi has ever made!
Goes to prove that it pays to have a congressman/senator on your payroll.

Who's a Liberal? Who's a Conservative? raises an interesting question: Is it fashionable to be a Liberal again?
My viewpoint:
In the past eight years US has been bombarded by the likes of O'Reilly and Ann Coulter who think the Religious Right is Right for US.
To be a liberal was to be branded a traitor.
To be a patriot one has to necessarily do the following:
1) Fly the flag
2) Attend church. Not just follow any religion, but christianity only.
3) Hate anyone who follows any other religion or faith or is an atheist.
Of course, Bush helped the situation a bit by putting the formidable financial strength of US Govt. behind faith-based initiatives for education and preventing teen pregnancy.
Now liberalism is becoming fashionable again it seems: Obama's election showed the younger generation hates being called religious nuts by their peers.
Of course, O'reilly is as usual spinning it as the younger generation hates God and hence they elected Obama...(the man never tires i guess).
But What is conservatism?
Well, in actuality conservatism refers to the pre 1890s era in US when conservatives stood for the following:
1) Little or no government control over private affairs: marriage, children, money.
2) Fiscally responsible government and citizens: no budget defecits, no bailouts, no credit cards
3) Private faith: The founding fathers especially were careful in this one: faith is private and a person can have faith in any God or Gods. The government MUST not interfere with that faith or lack of the same.
Take a look at what Bush, O'Reilly, Palin or even Cheney stand for:
1) BIG Government. I mean not big, but B-I-G Brother. Cheney must be salivating at Britain for its ubiquitious cameras, etc.
2) Unfettered power to Government to interfere in ANY facet of individual's life. There is nothing private anymore. The logic is if you have nothing to hide then why bother hiding? (The same does not apply to the government it seems).
3) Budget defecits are a MUST. Fiscally responsible has been cast as fiscally poor. The year 1913 was a watershed in many ways. It allowed politicians for the first time to overcome the limitations of traditional monetary policy and actually allowed them to spend more money than they had! The Fed backed them up.
4) A citizen MUST follow any faith as long as Christ is worshipped.
5) Abortions are disallowed under any condition. Even medical or forced pregnancy.

What is a Liberal?
A liberal generally stood for the following:
1) Multi-faith or atheist
2) Sound money backed by Gold or Silver
3) The government must be fiscally irresponsible for the people to prosper.
4) The people must be fiscally responsible for them to save money.

So where do they stand as per today's definition?
1) A liberal is a coward: per O'reilly definition
2) A liberal hates government and hence is not a patriot. (Did not Franklin say the a Patriot is one who loves the country and hates the government?)
3) By saving money, he is a hoarder which is bad.
4) Hates US being victorious anywhere!

So where do you stand today? Modern Liberal or Traditional Conservative?
or Traditonal Liberal or Modern Conservative?