A Uruguay - Greece Story

Marcello, his wife Sylvie and their three kids lived in Montevideo, Uruguay in 2002. They were in their early 30’s and life was pretty good. Sylvie had a license to practice dentistry. It is a different standard then what we know. But she had education debt and she borrowed to build an office. She also borrowed $10,000 to pay for “license” required to open a business.

They borrowed money to buy cars, they had credit card debt. They did not look much different than your average American family. Their income was close to $100k; they had debt of $50k. A problem, but not a crisis.

Nearby Argentina had “Dollarized” its economy a decade before. Uruguay did the same. For years there were big benefits from linking to the dollar. Inflation collapsed. The availability of credit expanded dramatically, the economy prospered.

Sylvie and Marcello earned $100k in Uruguayan Pesos. The debt was in dollars. As long as the exchange rate of the UPeso was fixed there was not problem. But in 2002 there was a big problem. The charade of tying a local currency to a reserve currency at a fixed parity ended very badly. The Argentine Austral and the UPeso ended up devaluing by nearly 80%.

Think of Sylvie and Marcello, they went to bed one night owing $50,000 and woke up in the morning owing $400,000. (It actually took a year) They were busted. What could they do to get out from under? The whole family left the country and came to the US on a tourist visa. And Marcello worked off the books seven days a week to earn the dollars he needed to support his family and try to pay back the dollar debt.

These people weren’t dead beats. To me they were like any middle class family that got squeezed. They wanted to honor their debt and get back to living. The only choice to do that was to get an income in dollars. Their Peso income would no longer cover the debt.

A few years after they got here I got involved and negotiated a settlement with the various Uruguayan banksters that had lent them the dollars and put them at risk. We paid 25 cents on the dollar, so that meant the debt was cut to $14,000. Sylvie left with the kids. Marcello stayed for a while longer so he could pay me the 14k. A solid guy, he settled with everyone. They are all back home now. Life is okay again. They will never borrow money in dollars again.

There are similarities to Uruguay in 2002 and the PIIGS in 2010. Both converted/pegged their domestic currency to a much stronger reserve currency. The same benefits of reduced inflation and economic growth have followed as a result. But so has debt creation. Both in the public sector and the private sector.

The CIA puts Spain’s external debt (mostly Euro denominated) in 2004 at $780B. Six years later the same source put the number at over $2 Trillion. And that is why we have a problem today. CIA link.


The pressure is mounting for “something” to be done. The argument, “Greece should float out of the Euro” or, “There should be a two tiered Euro” is gaining some traction. While this process will ebb and flow throughout the year, it really has only one direction to go. It’s going to get worse. The idea that the PIIGS will work this out with budget cuts is just wrong headed. That is not going to happen. The development today where it appears that a lifeline may be extended to Greece is going to backfire on Germany. There will be too many hands sticking out requesting a soft loan. The steps that may come in the next few days may serve to defuse the problem. But the fuse will get re-lit before too long. At that point it will be a short fuse and nearly impossible to put out.

It is impossible to predict what will happen at this point. But if the resolution of this results in some fundamental realignment within the Euro Zone there is going to be a lot of pain. The end result will not be anywhere near as extreme as what happened in Uruguay. But we could end up with a two-tiered Euro that has a 20% or more premium from the Strong to the Weak.

Should something like that happen there will be millions of Sylvie and Marcello’s. The banksters will get stuck again, the economies will suffer, and like in Uruguay there will be a reversal of fortunes for many.

At the moment that still seems to be the most likely outcome. We will find out in the next few days. If the lifeline to Greece is actually just a thin thread and a quid pro quo promise of major budget cuts in Greece then this is going to end badly. There will be tractors all over Athens. They love the German tourists, but there is no way the Germans are going to dictate to the Greeks.

Hank's Book - My Take

If the financial history of the globe is a topic of interest to you Hank Paulson’s new book, On The Brink is a must read. Tim Geithner and Ben Bernanke were central parts of that part of our history, but after reading this book you come away with the conclusion that it was Paulson who was pulling the strings every inch of the way.

There were some aspects of the book that I found to be not credible; there was one critical section that I thought the facts were a bit distorted. I think there was one part of the story that was omitted. As a result I was left questioning how many other aspects of this story were ‘skewed’.

Start with what I think is an indisputable fact. Hank Paulson is one of the smartest financial guys in the world. He is one of the top investment bankers; he knows debt and corporate finance as well as anyone. Throughout his book Hank demonstrates his knowledge and establishes the fact that he knows everyone in the game on a first name basis.

Given that as a backdrop I have issues with the credibility of the following sections of the book:

I) What did he know (suspect) and when did he know it?

On August 17, 2006 the newly appointed TSec. Met in Camp David with president Bush and his economic team. At that meeting Paulson said


“If you look at recent history, there is a disturbance in the capital markets every four to eight years”.

Hank added in the book, “I was convinced we were due for another disruption”.

Hank was a very much a hands on CEO at GS before becoming TSec. He was a big risk taker, but he was very measured in his bets. I think it is important to look at GS’s record in the years preceding 2006 as a clue to Paulson’s thinking.

In the 2003-2006 periods Wall Street was coining money in originating/packaging and distributing Sub Prime and Alt-A mortgages. In those same years GS consistently ranked last or next to last on the league tables of how much of this business was done. If GS wanted to be #1 in this business they could have been. They had the brains, the balance sheet and the moxie. So for me this is a sign that the senior management at GS took a hard look at a big money making operation and said, “This one is going to stink, let’s keep a low profile”.

I think that Paulson was a big factor in steering GS away from the junk mortgage pitfall that ended up killing the competition. He had made up his mind on this issue years before the August 06 Camp David meeting. He saw on a daily basis the absolute junk that was coming from Wall Street. I maintain that when he spoke he knew in the back of his mind that the source of the “next financial crisis” he was warning about was going to be bad mortgages.

If in 2006 Hank had sounded the alarm bell as he had inside of GS there would have been a different outcome in 08 and 09. There were plenty of people (including myself) who were looking at the debt that was being created from the junk and saying, “This is just getting silly”. Paulson was too smart and too connected to have not seen this. He does not acknowledge this in his book. He claimed that he smelled trouble, but did not know where it would come from. I find that hard to believe.


II) The TARP debt for equity Flip Flop

Anyone who knows corporate finance knows that equity is worth 10X’s more than debt. Paulson knows this from forty years ago. With this in mind the time line of how the TARP program was shifted to one of buying distressed assets to buying the equity in the banks is important.

The TARP program was sold to the public and to Congress as a program to buy toxic assets that were “clogging” the system. Congress agreed to the $700b program on October 2, 2008. It contained a provision whereby Treasury could use the funds to acquire equity if necessary, but the expectations by all were that Treasury would be buying toxic assets and not common or preferred shares. Ten days later on October 12th Paulson changed the game and switched from buying trouble mortgages to buying equity in the banks.

In the book Paulson gives credit to two unlikely sources for the change in his thinking. Warren Buffet and Ben Bernanke. I think he just used those two as the basis for the change in plans. They just confirmed what he wanted do all along. Paulson makes reference to a discussion on September 30th 2008 with Bernanke:

“Ben Bernanke told me that he thought that solving the crisis would demand more than illiquid asset purchases”. In Bernanke’s view, “we would have to inject equity capital into financial institutions”.

So it was Ben that planted the seed for the massive flip flop on the use of TARP funds. I think the seed was already there and Hank used Ben to support what he had already concluded.

Nine days after TARP was passed (October 11) Paulson had a phone conversation with Warren Buffett. During that call Buffett urged Paulson to consider investing the TARP money in low coupon preferred stock in the banks as an alternative to buying assets. Paulson describes this as a ‘eureka’ moment. The point where he became convinced that this was the right way to use the money. He said of this phone call, “I was convinced Warren’s was the best way to make a capital purchase program attractive to banks”.

For me, this version of history does not pass the smell test. I believe that Paulson was well aware of the leverage that could be obtained by investing in equity versus debt. He describes in the book how $70b of equity could cover $700b in debt at a bank. Hank knew the value of equity. I maintain that his plan was all along to acquire equity, but he knew he could not sell that plan to Congress, so he masked his plans with a debt buyback. That the TARP legislation was drafted to give him the ability to buy equity was not a mistake of history, it was a part of a plan that Paulson had considered from the very beginning.

After the decision had been made to change the use of Funds and the money had been committed, Paulson continued to have Neel Kashkari (visibly) chasing after a methodology to implement an asset purchase program. This was done as a smoke screen to Congress to demonstrate that the original intent of the legislation, to buy troubled assets, was being pursued. No TARP money was ever used to buy the assets it was intended for.


The James Lockhart, OFHEO/FHFA Connection

A significant part of the book is spent relaying the facts leading up to the conservatorship of the GSEs, Fannie and Freddie. I think there was a significant misrepresentation of the facts in the book. On page 6 Paulson says:

“I had spent much of August working with Lockhart. A friend of the president’s since their prep school days. Jim understood the gravity of the situation, but his people, who had said recently that Fannie and Freddie were adequately capitalized, feared for their reputations”.

This is not factually correct. It was not ‘some of Lockhart’s people’ who made the statement that F/F were adequately capitalized. It was Lockhart himself. In the days that followed, both Paulson and the president* repeated Lockhart’s words. Headlines and links on this:

Link: Here

Link: Here

The fact that the president*, the TSec. and the chief regulator of the GSE’s all made misleading public statements regarding the health of the GSEs just months before they were put into conservatorship is an important part of this history. We now know, both from the book and other information, that there was a very high level of concern regarding the Agencies at exactly the time that these statements were made. These were listed companies with a big stock float; misleading information on their health was made public. Our highest officials repeated that information.

This aspect of the story was not put in the proper perspective. The implications of Lockhart’s words along with Paulson’s and the president’s role were glossed over. It is my opinion that a mistake was made with these statements. Paulson did not acknowledge that. This puts a taint on the entire narrative. If I can’t trust this aspect of the story, I have trouble believing in the rest of the information as well.

A Missing Link?

In numerous sections Paulson makes clear that as TSec he actually did not have much power to commit money toward fixing problems. He had no Bazooka and he wanted/needed one. To do anything,  he had to have the prior permission of Congress. TARP ultimately became his congressional bazooka. Hank and his staff knew early on that they needed the ability to act decisively and without the consent of Congress. They looked endlessly for ways to fight the battles without having to go to the Hill. They even used the 1934 Exchange Stabilization Fund to guaranty the money market funds. This step was effective; it showed how resourceful they were. It showed how far they were willing to push the envelope.

One unused arrow in Treasury’s quiver was the Federal Financing Bank ("FFB"). This is a doghouse bank owned by Treasury. It finances government agencies like HUD and the Post Office. It makes long-term loans to rural electrics, it provides financing for foreign arms sales. The FFB has made big loans to the FDIC in the past. It has a mandated ceiling on its balance sheet of $500 billion. In 2008 it had assets of only $50b, it had $450b of buying bower. So this bank had to have been considered as a tool for Hank to use. He left no other stone unturned. I, for one, can’t believe that he did not consider FFB when he was looking for a bazooka and he didn’t want to ask congress for a new one. There is no mention of the FFB in the book. I found that odd.

The following is not based on facts that I can deliver to you. Therefore treat it as such. **

I wrote a piece sometime ago on the FFB. Later on someone who claimed to have the minutes of the FFB May 2008 Board minutes contacted me. (The minutes are not public) I did not review this; portions of it were read to me on the phone. There was one comment that struck me. I do not recall the exact language. The essence was that in the minutes there was a reference to a meeting that took place outside of the Board Meeting and at that meeting there was some discussion of using FFB to acquire significant quantities of mortgage related assets. No details of that meeting were included in the minutes. As TSec. Hank Paulson was the Chairman of the Board of the FFB, he had to be part of those discussions. FFB was his “baby”.

My thinking on this has always been that the idea of using FFB to acquire assets was a continuation of the ‘Break the Glass’ plan that was developed by Treasury in February/March of 2008. This was the blue print for TARP. The missing link to the break the glass plan was where does the money come from? FFB was a possible candidate given that it was controlled and run by Treasury and had the capacity to buy a lot of assets. FFB was not designed to do this. My assumption was that it was looked at and it was determined that there were legal (political?) restrictions on FFB that would not allow it to be the bazooka that Hank wanted. (Note: FFB did go on to buy $400mm of worthless Hope Now bonds. So it was used as a popgun not a bazooka.)

There is another more speculative side to this. What mortgage assets were being considered for purchase? The toxic ones or was there consideration back in May of 2008 to acquire the MBS of Fannie Mae, Freddie Mac and Ginnie Mae? We will never know. There is no discussion of this in the book and the details of that meeting back in May of 08 will remain a mystery.

In the Author’s Note, Paulson says, “I have been blessed with a good memory”. I wonder why his memory is not so good on this aspect of the story.


Notes:

*On July 10, 2008 I was asked to draft a question re: the GSEs that would be posed to President Bush by a FOX business reporter. I did that, and the question was asked. Bush totally dodged my question and responded, “Their (F/F’s) regulator (James Lockhart, his childhood friend) has said, ‘they are adequately capitalized’”. End of interview. I don't have a clip of this, but Roger Ailes at FOX does. Someday it will be re-aired as part of this history.


**I write to government agencies all the time. I ask them questions. They often say, ‘Buzz off”. Sometimes they say, “Here’s the info you wanted.” It is rare that I do not get a response. I didn’t get any from these:


12/3/2009 to FFB
Hello, I am a journalist. I write about financial matters.


Can you provide me with the Email link that has the minutes of May 2008 FFB board meeting?


12/14/2009 to FFB
Hello again. I am disappointed at the lack of response on my request. Possibly I should put some cards on the table.


I have reviewed the May 2008 board minutes. I took notes but do not have a copy. I know that you have given this link to other journalists. I learned of this from them. They contacted me to help with a story on this. I know that there is a reference in the minutes to a secret meeting. I know that the topic of this secret meeting was a discussion as to the feasibility of the FFB acquiring Mortgage Bonds. This meeting is an important part of that history. I would like to know more about it. I believe my readers (2mm this year) would also like to know about it.


Please reconsider my request. Thank you.

FX Intervention an Option? - Maybe

Coordinated currency intervention may not be far off. I am not making a prognostication that this will happen. That is far to complex an issue to make a ‘call’ on. I want to make a case that the conditions are either presently with us or soon will be upon us for currency intervention to become an option that is exercised.

In my opinion there were at least a half dozen times in the past 18 months where currency intervention could have been an option to provide stability to a global financial system that was cracking up. But there was no coordinated intervention in the FX market. There was an unprecedented amount of fiscal and monetary actions taken by nearly every country in the globe, but it never came down to FX intervention as a policy option.

I bring up this history to re-enforce my point that intervention is impossible to call and is, based on recent history, a remote possibility. That said, should it come in the next few days and weeks it would be a measure of just how much pressure is building up and how unstable the system is.

Central bankers know they can’t control the value of their currencies. The markets are far bigger than they are. They best the can do is slow a process. A checklist for decision-making on coordinated intervention would include some of the following:


- How quickly is the market moving? Is the rate of change orderly?

 The movement in the $/Euro has not been disorderly. We have a 10% recent peak to trough move. That is big in currency land but it would not by itself be a justification to intervene and provide temporary stability.

A different way to measure how much stress there is out there is to look at the Euro/CHF rate. The Swissy has strengthened by 3+% of late. That may look like peanuts compared to the moves in the dollar. But it is actually a big deal. The SNB has been intervening to hold the 1.51 parity to the Euro. They gave that up after a long fight. Now they just look silly for having drawn a line in the sand then backing off. The Swiss just hate what is going on.

If you want to look at stress look at the move in the $/Yen and the Yen/Crosses today. The two big figure move might be considered disorderly. I am sure that there are some Yen traders that are puking in the garbage pail. The Japanese CB hates this. They don’t want a strong Yen and they hate when it gets moving too fast

-What is the cause of the capital movements?
It’s the sovereign story that is driving this. This is a bizarre factor that is driving the Euro/$ rate. The GDP of France and Germany are many multiples of that of Greece. Think of this as if the state of Utah was having a budget crisis. You wouldn’t dump the dollar just because of that. Yes we have Portugal and Spain to consider (Italy, in my opinion should be taken out of the PIGS). So go back to the US comparison and you have Utah, Georgia and Connecticut to worry about. But step back a bit, we are trashing the Euro based on this. The real comparison to the US and the EU is not Georgia or Utah; it is California and New York. The deficits and problems in these two states balance the problems in Athens and Madrid on the currency scale.

There is nothing rational about our markets. But moving massive amount of money around the globe because of problems in Greece is not rational. I say, “Never fight the tape”. Central bankers can’t say that. There is a good excuse for them to fight this tape.

-Is the rapid change in FX rates creating collateral damage?
Boy is it. Just look at the tape. This Greece story has gone global. It is raining deflation on us. VIX on everything just shot up. A few more weeks of this and you start taking points off of global GDP.

-What is the implication to the US?
The big Boss made a speech a week ago and said that we had to export our way out of trouble and export to create jobs. Well you can kiss that plan goodbye if the dollar keeps rising. You think this is good for John Deere, Cat, IBM, Microsoft, Apple, Boeing, Cisco or Intel? This is not good at all. It is one of the reasons the DOW is getting smacked so hard. A strong dollar is a decidedly brown shoot. Go ask Disney or Mike Bloomberg. How much do they make on foreign tourism? The White House knows this. I doubt Geithner does but there are plenty of others (Volker/Summers) who understand the implications of this. Bernanke knows this. He has bet his career on something. It could get derailed if the dollar gets too strong too fast. Everyone in D.C. hates what is going on. They are looking for solutions. Intervention is the one thing that is on the shelf.

-If left unchecked where could the instability lead?
This is a slippery slope we are on. The markets seem to have Greece in their cross hairs. But this will pass and those with loaded rifles will point elsewhere. This sovereign story could spread very quickly. It could jump out of Europe and go to Mexico overnight. It could go to Asia and make a mess of Indonesia, Philippines and Korea. Once it gets started it will be very difficult to stop. It is already moving fast. It could go global in a week. The worst possible outcome is that it goes uphill to the “stronger” countries. Like France, Germany, UK and of course the USA. If this disease is left unchecked and it spreads to some of the “Big Boys” it is an absolute lights out event. It would take years to recover from that. This is the most compelling reason for coordinated intervention


-Could currency intervention achieve anything in the larger picture?
No. And for that reason it probably will not happen. The best intervention could accomplish is buying some time for things to settle down. But if things remain unstable for much longer the utility of a short-term fix becomes larger.


-Are their any other considerations that might come into the decision?
I think so. Four come to mind.

a) The CDS market has been LEADING this market move. The Central Banks HATE the CDS market and the role that it plays in our economies and in the policy choices. The Central Banks can’t stop that. They have no power. But they could intervene in the currency markets. Because of the way things are connected, a jump in the Euro would also mean a narrowing of the PIG CDS spreads.

b) Central Bankers have studied the impact of Coordinated intervention for years. The biggest conclusion is that intervention can re-establish “two-way risk.” This condition is vital to restoring stability. There has been “no risk” to being short Euros and long PIG CDS spreads. As long as the perception is out there that there is little or no risk in these directional bets they will continue to move in one direction. Intervention can reestablish the notion of two-way risk. They do that by punishing market players that are constantly pushing the bet farther. CBs hate speculators. They would like nothing better than to catch them off guard and whack their pee pee.

c) China is a spectator to this in most respects. But their currency is tied to the dollar. Therefore their currency has just gone up in value by 10%. They hate that. Don’t assume that they have no say in the outcome of this. They would love to see currency intervention solve their problems.

d) If Paul Volker were running the show I think he would say, “Nip this one in the bud”. But Big Paulie is not in charge. Is he?


Will we see this headline?

EU, UK, Swiss, Japanese and US Central Banks Join in Coordinated Global Currency Intervention

Global Markets Rally

The odds are not good based on history. These things do not happen very often. But many of the pieces are in place for a CB response to this winter’s instability. Let’s put it this way. If they don’t intervene the trend will continue and markets are in for one hell of a set back.

Another Reason Why RE Defaults Will Explode This Year – IRS Form 4506

The government is flooded with loan modification requests at this point. They have been working through this disaster at an ever increase rate. They are now doing close to 100,000 per month. But the bad news is the pipeline is full. There are at least 3 million homeowners who need/want some form of adjustment on their mortgage cost.

The word is out on this one in every corner of the country. If you want a break on your mortgage the first step is you have to stop paying for at least three months. I know for a fact that this is correct. I have seen it in a half dozen cases in just the last year. The banks/servicer will tell this to you on the phone. “You don’t qualify for debt relief, you’re not 90 days late”. In my experience the person on the other end of the line hears this and says to their spouse, “Honey, I have good news! We’re going to get the break we need. All we have to do is stop paying the bills”.

We have created incentives for default. And they are powerful incentives. Tens of thousands of dollars a year are at stake. Most Americans will walk by a nickel lying on the ground. But they will stoop for a quarter and if it is a bill they will move quick.

The deciders in D.C. are well aware of this reality. One logical response is to accelerate the process of ReFi’s. Borrowers who start skipping payments would get attention earlier in the process. The length of time a borrower is in arrears would be shortened. This helps the lenders, which in this case is the taxpayers. Borrowers who get 6+ months behind almost never survive. The property goes into foreclosure. The hole is too big to patch after 7-8 months. While in some cases this is an inevitable outcome, a significant number of the problems could be cured if dealt with early. Foreclosure rates are killing us. It just devalues the housing stock more and sustains the cycle of default.

So the good folks in D.C have come up with a number of methods to accelerate the restructuring process. On balance I think they will prove to be successful. But in this case we have to be careful on how we define success. The new rules that will go into effect on June 1 will streamline the process. The guidelines have been established for getting debt relief. I think it comes down to this.

I) Show me yours and your spouse's tax return. We add those numbers up and multiply by 31%. That will be the targeted debt service for you.

II) If your income is equal to 31% or higher take a hike.

III) If your income is less than 31% you may apply. But if your income is only 24% (example) then there is nothing we can do for you, Sorry.

The eligibility for a ReFi has been narrowed substantially by these steps. The introduction of the requirement to provide IRS form 4506 (permission to disclose IRS tax data) is going to accelerate the process. How many people that are contemplating this are going to comply with that request? As of June no application will be accepted without it. No one wants to provide that information. This will cut the ReFi line quit a bit just by itself.

From my experience we are going to get three reactions to the changes that are coming:

A) “ I called the bank and they said we had to give them access to our IRS records. Screw that. I’ll show them. I am just going to stop paying until they throw us out”

B) “We are just at the 31% level so we get no break. We are under water by at least 100k. We are now paying 3k per month and there is no upside anymore. We could rent the place next door that is just as nice as this place for $1,500 a month. If we send the bank the keys and sign the deed in lieu papers the most it will hurt our credit is for a year. No big deal, our credit is shot anyway. Let’s take the extra $1,500 a month and go on a cruise and get back to living. This home ownership thing is not what it was cracked up to be.”

C) “The bank says we make too little to afford a reasonable ReFi. They don’t care that I drive a cab on the side and make a few extra bucks. They won’t knock down the principal to a level that we can afford. So we are up against it. We are going to lose our home. We are not paying a cent from now on. It will take them at least a year before they throw us on the street. I loved this place but now I am mad. Before we leave I am going to rip the copper out of the walls and steal the refrig, washer and dryer and anything that can be moved. I’ll show them whose boss.”

In my opinion the new streamlined process is going to be effective. It will do exactly what it intended to do. It will have the exact opposite effect of the “pretend and extend” policy. Many will argue that it is high time we did that. The sooner the better.

But there is a downside to this. The implication is that starting sometime in July and continuing for some time thereafter there will be a very big wave of new defaults, jingle mail, short sales, DIL transactions and foreclosures. It means RE will suffer and prices will likely have to fall. The timing for this could not be worse. At about the same time this will be developing the life support we have been getting from both fiscal and monetary policy will be in reverse.  Coupled with this, the government lenders are all tightening the terms for new mortgage credit. Think of this as a stool. All the legs are shot. It's not safe to stand on.

A Good Guy in D.C.?

Edward DeMarco, the acting head of FHFA, wrote a letter to some heavy hitters in Washington. Sen. Dodd-Banking, Sen. Shelby-Banking, Congressman Frank-Financial Services and Bachus-Financial Services. The letter was a cry for help. I sincerely hope that these important legislators do not ignore this SOS. If they do, some irreversible damage will have been done. Hundreds of billions of dollars are at stake. Even more significant, the direction of the government's future role in the mortgage market is going to be shaped by the corporate Exec’s at Fannie and Freddie. There could not be a worse outcome.


DeMarco laid it all on the line. He described the terrible mess that Fannie and Freddie are in. His words: “These calls on taxpayer funds are troubling to all of us.”

There was a significant amount of information provided regarding all of the new management at F/F. Those that are dirty from the past are all gone. Both Fannie and Freddie have new private sector Boards of Directors that meet regularly. There was a discussion that it had been agreed that both F/F would not do anything “new”.

As I was reading this I was getting the sense that in some ways DeMarco was mocking the charade that is happening. We have two ‘private sector’ entities with all of the trappings of Boards and high priced corporate talent. And at the same time these two dogs are sucking down taxpayer money at the rate of $10B a month. Losses are now expected to exceed a half a trillion. Why do we need fancy Boards and big buck talent to accomplish that?

The important sentence comes in the summary:

“The only (alternative) FHFA may implement today under existing law is to reconstitute the two companies under their current law”

That is polite Washington speak. What Mr. DeMarco said between these lines was”

“If you guys don’t get off your ass and pass some new legislation I am going to be forced to take us down a road that we should not go down. I don’t have a choice in this. I think this is a big mistake. Please do something to stop this. I don’t want to be the guy that puts the mortgage giants on a path that will end very badly. We have made this mistake before with the GSEs. I don’t want to make it again. Please help, before it is too late”

Mr. DeMarco should have addressed this letter to Tim Geithner. Nothing can happen with the GSE’s without strong leadership from Treasury. And we have a nincompoop running the shop. On the urgent need to address the problems with the D.C. lenders Weak Tim said on NPR recently:

"I don't think we're going to be able to legislate that until that process can start, until next year, because it's just a complicated thing to get right."

This problem is too complicated for the current Treasury Secretary? The head of the FHFA is urgently calling for help; Congress is frozen over health care and the changing political reality. Where is the leadership that is needed? There is none. There is a reason for that and that reason needs to be addressed. This letter points to one of a dozen issues that need attention from an effective T.Sec.

Here’s a plan for Tim, Chris, Barney, Rich and Spence. Finish the job. The conservatorship is a joke and a private sector GSE approach has already proved a disaster. Privatize these dogs. Get it over with. Then merge the two of them. Create a good bank and a bad bank. Do what you have to with the bad bank and don’t ever, ever make the mistakes of the past with the good bank. Get rid of that high priced talent that is costing so much and doing so little. De-list these deadbeats. That would save $20mm a year. Get rid of those big Boards and their “do nothing new” meetings. And if you’re looking for someone to run this mess, consider Edward DeMarco. He’s the only one who has spoken the truth about the Agencies for years. Listen to him.

Advance Read on Q4 GDP

Big number due out on Friday morning. The 4th Q GDP is coming and it most likely will move the markets. The consensus read is for a big up number. Last I heard the Street estimate was for up 4.7%, more than double the annual rate of growth for the 3rd Q.

My own read of the numbers is for a slightly smaller number. Something a tad over 4% is my guess. But this number is not so easy to get right. Even worse, it will be revised a few times before we really know what happened. I look at this number and try to anticipate how the market will react if we get a surprise versus the consensus.

This number has potential to cause a stir if it comes in south of 4% or north of 5%. The numbers in the middle are ‘baked in the cake’.

If the number comes in at 3.5% (or less) I would expect:

-Stocks will fall.
-Bonds prices will rise.
-Gold will rise.
-The dollar will fall.
-A number of economists will be scratching their heads.
-There will be renewed talk of a ‘double dip, starting sometime in the 4th Q.
-Larry Kudlow will misread the number and will hail the day as a triumph of capitalism and the free market economy.
-The White House will make a statement that they are responsible for the turn-around.

If the number comes in at 5% (or higher) I think the following happens:

-Stocks will rise.
-Bonds will get crushed.
-Gold will be steady.
-The dollar will be steady.
-A number of economists will be scratching their heads.
-There will be talk of the economy over-heating; some will express concerns over inflation.
-Larry Kudlow will hail the day as a triumph of capitalism and the free market economy.
-The White House will make a statement that they are responsible for the turn-around.

I think a graph of the actual GDP numbers is helpful in trying to understand these big numbers. Note: The 4th Q number is a forecast based on the consensus estimate.

While I will be happy to see a big number tomorrow, you have to look at where we have come and where we are. Looking at this you see that the growth in the economy is about where we were two years ago. What did we pay to get back to 07? About $2 trillion in additional debt, the socialization of the financial system and the expectation for trillion dollar deficits as far as the eye can see.

A hypothetical question to ask might be, “What would we look like today if we had not had a train wreck in 08”. Another graph:

Of course we did have a wreck in 08, so it is sort of useless to play the game of “if coulda shoulda “. However there are hundreds of programs, retirement plans and dreams that are off track as a result. We will not catch up to where we might have been. We need to adjust to where we are, I can’t imagine how that can happen.

Some on the Street are putting 4Q GDP north of 5%. If we see a number with a five handle, take note of it. It will be the last time we see one that big for a long time.

Alan Blinder on Ben Bernanke – Phooey!

I understand that it’s a bit of a stretch for a low rent guy like me to take on a former Fed Governor and world class academic. But I’m going to try. Mr. Blinder wrote an Op-Ed in the Times today in support of his “friend and colleague” Ben B.

In a weak attempt at creating balance to his praise of the ‘man of the year' AB points to a few areas in the past where a mistake or two had been made. Possibly. He dismisses even those with a suggestion that it was Greenspan’s fault. On the failure of Bernanke to see the wave of problems before it was too late AB brushes it off with the excuse, “Who did?” Well Mr. Blinder, I did. I have been writing and talking about this for years. I saw Sub-Prime and 100% LTV ‘enhanced’ loans for what they were. Junk. I make investments and read prospectuses. I saw the crap that was being sold. I’m no oracle. There were thousands of us shouting into the wind when this was happening. I guess you did not hear us, being so isolated down in Princeton.

I loved this line:

“His job performance since October 2008 has been superlative.”

AB, I know you are ‘good buds’ with this guy, but really, “superlative”? What does that word mean in this context? Is that like a 10+? Why did you feel it necessary to write this Op-Ed? The answer is because your boy has not done a superlative job at all. There are Senators and Congressmen all over Washington that think he has not been superlative. There is a good many that have the academic status as you that think he has done a rather poor job. If this were put to a vote of the people your guy is finished. You think he is the guy that saved us. What you are missing is that more than half the population thinks he is the Prince of Darkness

AB: “He led the Fed to lower interest rates to virtually zero, and to hold them there.”

Please. What is hard about that? You make an announcement that says, “As of tomorrow we are lending at a ¼%”, and then you call the NY Fed desk to change the O.N. rate. Doing it is easy. Managing the consequences is a whole other matter. AB gives credit where none is due. I wonder if AB considered the consequences to people who are trying to save a few dollars? Unless you gamble in the stock market those savings have a negative future value because of the “0” stuff AB and BB are so fond of. Lousy incentive you are creating for a nation that needs savers.

AB: “(the Fed) breathed some life into the moribund MBS market”.

I’m sorry, what are you talking about? “Breathed some life?” The Fed has purchased $1.1 TRILLION of MBS. That is not a breath of life. That is a step that has no precedent in modern history. Your ‘best bud’ has just monetized $2 T bucks. Of course that is going to work. For a while. You throw gas on a fire, it burns. No trick to that.

AB: “The plain truth is that, as bad as the recession was it turned out less horrific than expected, and Ben Bernanke is one of the reasons”

Mr. Blinder is far too good a historian to make that statement and mean it honestly. Yes Ben wrote a biblical sized check. And yes that check avoided some things that would have happened. But it is far too soon to say that we have ‘won’. This comment reminds me of George Bush on the aircraft carrier with the banner “Mission Accomplished”. AB is drinking champagne a little early. Wait a few years until we see and feel the weight of what has been done. The easiest part of this was writing the check, paying it back could cripple us.

What prompted me (pissed me off) to post this was the last sentence of the Op-Ed. AB was clearly addressing his comments to just 100 people. The Senators who actually have a say in this. He reminded them that in 1983 there was a bit of a squeaker on the nomination of then Fed chairman Paul Volker. That vote went 84-16 in favor of Volker. Mr. Blinder concluded with:

“Those 16 Senators look pretty foolish in the eyes of history. There may be a lesson there.”

Mr. Blinder could have said it more bluntly, but left the same meaning:

“If you don’t vote for Bernanke you’re stupid and history will prove it so”.

Well the vote is in. 70 30. Some of those 70 were no doubt influenced by the kind words by AB. Thirty Senators stood up and voted against this nomination. In ten years history will not judge them harshly. This will not be a repeat of 1983. They will be looked at as the ones who made a vote at critical time and were ignored.  They will not look stupid as Mr. Blinder has suggested.  At some point I will remind Mr. Blinder that it is always a mistake to judge history before history has been made.