Wednesday, September 17, 2008

How'd We Get Here?

Like those who touch Rumi's elephant in a dark house, it seems a whole mess of people are running around pontificating on the basis of a surreptitious feel of one portion of the pachyderm's anatomy. It's Bush's, no, Clinton's fault. It's a failure of regulators. It's those greedy Wall Street types. It's us.

Your erstwhile correspondent, knowing that these situations are invariably complex, has been investigating. I have no pretensions to great knowledge. This much is evident to any one who takes the time to read about the current situation. It would seem to implicate a whole host of characters. In 1999 President Clinton signed the repeal of the Glass Segall Act of 1933 which had previously separated banks from brokerages and left a regulatory open window, so to speak. In the race to get in on the scads of money from the Real Estate bubble, the instrument of choice was the bundled mortgages. The bundles contained all sorts of mortgages and were not easily quantifiable, obvious in hindsight. Mortgages were given to people who most obviously could not afford them. People got way in over their heads, taking on mortgages they could not afford, figuring they would hit a payday before their interest only ended. The present government coming off of the tech bust did nothing to staunch the flow. Let the good times roll. Alas, it had to end. The banks got hit; the mortgage companies got clobbered.

That would be bad enough, but the situation was further exacerbated by those bundled mortgages, now debt instruments, MBS's. Here it gets really complicated. There's them who bought them, and then there's them who insured them. Suffice to say, there were two problems. One, those mortgage bundles were essentially a pig in a poke. Second, things were so good that many a financial giant got a bit carried away in leveraging. In other words, they invested way more than even whatever they value they placed on the debt instruments.

Here's where the fear part of the fear and greed equation come in. As it became obvious that there were problems with the mortgages, their imputed worth plummeted, leaving the giants in the lurch, as in they didn't have the resources to meet their increased obligations. It's even more complicated still, but my point is that this is one failure that has many fathers. And before the Dems get all holier than thou, they, too, have been complicit. Take a look at the top five recipients of the largess of Fannie/Freddie. One's initials are B.O., pardon the double pun.

Now what is really scary is that the vultures are circling. Remember oil speculators? Now we have the shorts. Here's greed. We now have rampant rumor mongering, driving down the price of a company's stock and lining the pockets of those who have shorted it. At the same time, the declining share price forces the company to come up with yet more money to cover the difference. So in essence, a viable if not robust company can be trashed. They are systematically working their way through the weak and weakened. Lehman, done. Merrill Lynch made a deal with Bank of America. AIG had to be rescued by the Government. Now they're after Morgan Stanley. Washington Mutual is auctioning itself off, and Goldman is probably next. They're even after GE.

I go through this exercise because to use the current financial crisis as a Rorschach blot for a particular political point of view does the country a disservice and solves nothing. And because too often the news these days gives us slogans instead of facts.


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