Sunday, January 04, 2009

Sunday Reading

There is some good stuff out there to talk about today. First off, Michael Lewis (of Liar's Poker fame) and David Einhorn (kingpin at Greenlight Capital) co-authored a lengthy piece in today's NY Times which takes another look at the financial crisis. Part one begins a little slowly, looking at how attempted Madoff whistle blower Harry Markopolos's claims could have been ignored by the SEC, and segues to the completely incompetent actions of the ratings agencies (Moody's, S&P) and the bond guarantors (MBIA, Ambac). They also mention the SEC's gross incompetence and backwards logic:

"Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)"

For those of you who are not aware, Einhorn drew wrath and ire in 2007 when he explained in detail why Lehman Brothers had major problems with their balance sheet, and why he was shorting the stock. As a short seller of Lehman's stock, he was accused of having ulterior incentives to see the stock go lower. Of course, Einhorn didn't cause any of Lehman's problems, and was really just a messenger of how they could be fixed. If he'd been listened to instead of attacked, Lehman might still exist today. Needless to say, Einhorn was correct about Lehman.

In part two of their article, Lewis and Einhorn take issue with the Treasury's disbursement of funds, and put the $306Billion government guarantee of Citigroup's questionable assets in perspective:

"The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.” Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined."

I especially liked their observation, which I have made previously, that the government needs to "Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices...The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission"

Lewis and Einhorn's piece is long, but worth reading.

Clusterstock referred me to a great article from the Wall Street Journal about how to better understand the mortgage crisis. The must read story tells of how an unemployed alcoholic woman managed to take out a $103,000 mortgage on her 576 square foot shack in suburban Arizona. It's an absolutely sick story about the gross negligence at every step in the chain: mortgage broker, home appraiser, lender, borrower - which ends with her shack being sold in foreclosure for $18k to her next door neighbors - who no doubt over payed just to remedy the eyesore that her home had become. Wait until you see the pictures.

I also enjoyed Clusterstock's sarcastic story "Economists Who Blew It Agree: Prosperity Just Around Corner."

Finally, although Karl Denninger is a bit of a zealot, I can't really disagree with his logic, and I think it's worth pointing out that he continues to do a good job of explaining why the government's solutions to this financial crisis cannot possibly work. I'm going to leave it in his boldface type, because I think it's simple, accurate, and worth emphasizing.

"The problem is that there is too much debt in the system; adding more debt to the system simply makes the problem worse at an exponentially increasing rate.

It is impossible to fix a problem that is best explained as "too much" of something by adding more of that same thing.

This is true whether the "too much" is a drunk who wants a bottle of whiskey, a crackhead who wants another hit, or a heroin addict who begs for another shot.

You can't solve any of their problems with more of what ails them any more than you can solve a debt problem with yet more debt."

You can also check out Denninger's predictions for 2009. I only include them because his 2008 predictions were pretty darn good, and I tend to largely agree with him on his 2009 outlook.

until next time,



Anonymous said...

Ya, good old pump and dump Henry Blodget. "But everyone was doing it and why shouldn't I be as rich as Quattrone?" I shouldn't be to hard hard on Henry I guess, he did fork four large.....

Michael Stein said...

Great article, I agree. What I don't understand is why on one hand they are okay with the idea of letting these big financial firms fail, but want to help homeowners who were too greedy/stupid to live within in their means. Those people should be allowed/forced to fail as well, so that the housing market can self-correct. I'm sure we'd all like to have our loans re-negotiated for the value of the asset, especially our car loans...