The Market Ticker

Here we go again.

Even though the press claims that it is "unlikely" that The Fed (or the Treasury) will put in "money" toward a Lehman acquisition, you can't believe a word of it.

In fact, you can't believe anything you read or hear from these clowns in DC. 

Slowly, piece by piece, they are dismantling what used to be Free-Market Capitalism.

And how does freedom (both to succeed and fail) die? 

To thunderous applause.

Certainly, when Bear Stearns failed, you got thunderous applause. 

When The Fed summarily declared the financial system in "crisis", thereby granting itself powers that it arguably did not have (including lending to non-banks acquiring equity interest!) the markets roared with thunderous applause, and Congress clucked with approval.  The people yawned and reached for another beer.

When the TAF, PDCF, and TSLF, all "alphabet soup" means of pumping extra liquidity into a financial system that was in trouble as a direct consequence of previous excess liquidity fed into it by Alan Greenspan, the market roared with thunderous applause. 

When Treasury instantaneously doubled the federal debt, we heard the roar of thunderous applause.

And last afternoon, when a rumor started floating around that The Fed was going to once again intervene, this time to "take under" Lehman Brothers, we once again heard the market roar with thunderous applause, rising by more than 1% in - literally - less than 5 minutes.

We are truly an idiot nation. 

We are being led to the economic gas chamber - quite literally - and cheer on the way. 

Anything to prevent home prices from being.... gasp.... affordable! 

Anything so the stock market does not go down. 

Anything, including licking the boots of the Japanese and Chinese, who we now know threatened our nation's Treasurer if he did not back up debt with the explicit full faith and credit of the United States - debt they bought knowing it lacked that guarantee.

The Truth is that these institutions - all of them - got in trouble by writing paper in an imprudent manner.  They loaned money to people who couldn't pay it back.  As bankers, it is their job to know whether their customer can in fact pay, but that all went out the window in the "New Era of Finance", where you can shovel off your crap to someone else, forcing them to be the bagholder when it all goes "boom" rather than you.

What these geniuses forgot is that in real life it doesn't work this way, even if you think it should or might.  What happens in real life is that people get greedy, and this is shortly followed by a bout of stupidity, where you lend out money on looser and looser terms, until finally you reach the point that the only real qualification is that you have a pulse.

At the same time there is always a backlog of this paper in your shop, and when the inevitable gravy train of suckers runs out, you find yourself sitting on a sizable number of these nuclear weapons - and they're all ticking.

Never mind that there's a matter of ethics here, in that these bankers knew the paper was bad.  This no different, really, than selling Pintos that you know will explode if struck from behind.  It was and is a defective product, and whether it "booms" on you or someone else the fact remains that these bankers knew these loans were unsound when they wrote them.  They simply didn't care.

Lehman is just the latest, but not the first or last, of a long line of institutions that has or will explode. 

There are no "maybe" involved in this, and if there were two firing neurons in the heads of most stock traders the market would tank every time we discover a new victim of self-immolation, for it would be yet another tick-mark in the contraction of credit, another tick-mark in the lack of diversity of business, and another tick-mark proving that the "smartest guys in the room" - in truth - have an IQ lower than Forest Gump's.

But the institutions that bail people out, including Hank Paulson and Ben Bernanke, continue to come to the microphone and pronounce that "life is like a box of chocolates".

And there we stop listening, having stuck our fingers in our ears for the "you never know exactly what you're going to get, and we may have inserted some arsenic" part of the sentence.  Oh no, we hear "chocolate!" and instantly a sugar-high flows through the arteries of the market. 

Like Pavlov's dogs we mash the "buy buy buy" button with a mighty roar.... of thunderous applause.

Step back for a moment folks and think about what these failures really mean to American business, and to you as an American.

They mean that the "bastions of capitalism" were in fact either knowingly committing felonies on a many-per-second basis for nearly 10 years, robbing you (collectively and in many cases individually) with each one, or were criminally stupid.  It is simply not possible for a hairdresser making $8/hour to afford a $500,000 house, but many of them bought one in California. 

How did they get the money?

They mean that the so-called "regulators" - The Fed, the OCC, the OTS, Congress, Treasury and the SEC, for starters, were either bribed, blackmailed ("got Client #9?") or were too blind to be able to see past the end of their noses.  Banks and brokerages are regulated entities; they do not get to sell any product to any person they wish without government oversight. 

Many of these banks, including but most certainly not limited to WaMu and Wachovia, were offering "nuclear-size debt bomb" mortgages as recently as May of this year, more than a year after we knew they were exploding!

The regulators were and are today either intentionally asleep or grossly incompetent.

If you are a thinking individual this instantaneously calls into question the safety and capability of the FDIC to pay your "up to $100,000" should the bank where your money is immolate itself, especially as the FDIC is now losing over 20% of the assets for each bank it takes over.  The historical average, by the way, was in the single digits until this last year.  What happens when the FDIC's money runs out?  One single large bank and their entire fund is gone.  And before you say "Congress will just give them more money" (of course they will) please understand that Congress doesn't actually have any money - the government gets its funds from you via taxes, so in effect you are stealing yet more of your own money in order to pay yourself back when your bank goes under!   In other words, there is in fact no insurance since the party paying the check is, in fact, you once the FDIC fund runs out - and run out it will.

The FDIC has historically charged very low insurance premiums, essentially zero in the case of some banks, both because banks rarely fail and because recovery when they do has, historically, been quite high.  Neither of these "old paradigms" is necessarily valid any more.

Not that the FDIC failing and having to be bailed out would be new.  Does anyone remember the S&L crisis?  The FSLIC blew up as a direct consequence of the same regulatory failures in the S&Ls, and when the "insurance fund" imploded Congress was forced to step up and inject huge sums of money into the system.  In fact, S&L depositors didn't have FSLIC insurance "make them whole"; they had the government reach into their pocket, extract the money to "pay them", and then give it back to them.

The people roared with thunderous applause. 

Now we're living the same nightmare a second time.

None of this should have happened, and we the people should make damn sure that (1) it doesn't happen again, and (2) the people who caused this mess bear "first loss" - loss of their job, loss of their boats, loss of their mansions, loss of their wealth and loss of their freedom - in that order.

We should not and must not bail out any more banks, lenders, or other institutions, and we must insist that the regulators intervene early and often, shutting down those institutions that pose "systemic risk" now if they can't (or won't) take down that "systemic risk."

Today, as you contemplate that CNBC is reporting that "everyone wants the same deal Jamie Dimon got - and they're not going to get it" in the context of "bailing out Lehman" (meaning that all the potential acquiring banks all want you the people to eat the losses - again!) you may wish to consider whether that beer and NFL is such a good idea - or whether a more appropriate response is the (figurative) tar and feather treatment that we the people have the right (and duty) to impose upon our elected and appointed officials via the ballot box.

Don't let freedom - and capitalism - die to thunderous applause.