Shouldn’t have let us have anything valuable

Otter : Flounder, you can’t spend your whole life worrying about your mistakes! You effed up – you trusted us! Hey, make the best of it! Maybe we can help.
Flounder : [crying] That’s easy for you to say!

Last week, at his company’s annual meeting, JPMorgan Chase CEO Jamie Dimon let loose with a scalding critique of the Federal government.  As reported in American Banker:

I believed I would be fairly treated by my government

JPMorgan Chase & Co. chief executive Jamie Dimon said during his company’s annual investor day Thursday that he has been turned off by the “capricious, arbitrary and punitive behavior” of regulators since his company accepted $25 billion in aid as part of the bailout of the financial industry in 2008.

Ever since the global capital crunch, we have seen periodic outbreaks of irrational populism.  It’s understandable, of course – finance is abstruse, bankers make money and therefore are easy targets, and elected or appointed officials sometimes find it convenient to flog a helpless whipping boy, such as the absurd spectacle of Congress seeking to overturn AIG executive bonuses payable to the people who would be disarming the latent financial bombs left over from the crunch.  Meanwhile, in a classic case of “do as I say, not as I did”, the government was promulgating executive pay rules that it proposed to apply to anyone whom it did not need, and to exempt from anyone it did. 

“We think to this of this, gentlemen, as a line-up“

Even the President has occasionally lapsed into illogical populist language, justifying a proposed new tax with the specious sound bite ‘we want our money back’ … at a time when the government had already been repaid.  Indeed, the government has generally reaped net profits from the TARP repayments, via not only the dividends but also the buyback of the mandatory share options.

Even more bothersome to Mr. Dimon was the implied libel on his bank for having taken TARP in the first place:

While the company has since returned that aid with interest, JPMorgan Chase has been lumped in with all of the troubled institutions that may have acted irresponsibly in the run-up to the financial crisis, Dimon said. It is also facing a slew of new accounting rules, federal fees and other regulatory changes that could sap its bottom line.

As I’ve posted before, government and capital have asymmetric doomsday devices. 

Ze are zo many zings a goffernment can do

Government has the sovereign power, which inherently cannot be bound, so that government can if it chooses abrogate contracts with relative impunity, or repudiate its debts via sovereign bankruptcy, or more subtly, it can devalue its currency through inflation, the young’s revenge on the old for their previous profligacy.

Capital can flee, faster than government can grab it.

This is how much we’ll put at risk on your integrity

Economies work – and therefore nations work – when capital and government each see the other as a reliable counterparty operating according to consistent rules of long standing and with a shared interest in maximizing the common wealth.  It’s quite clear Mr. Dimon doubts the government’s integrity:

If he could do things again, Dimon said: “I don’t know if I would” accept aid. “But then again, when you are in that situation, and your country calls, it’s hard to say no.”

It wouldn’t be hard for him to say No now; in fact, his stockholders would probably demand it as a matte of his fiduciary duty.

At the least, he said, he would have tried to find some way to avoid the “vilification” that came from accepting federal aid. 

Good luck, Mr. Dimon; the sovereign cannot be bound.

So I discovered

When Dimon speaks, though, the Administration ought to listen:

Dimon has assumed the role of the country’s most credible banker and outspoken banker since JPMorgan Chase has emerged from the recession as perhaps the healthiest and most powerful commercial bank in the U.S.

“I didn’t have to be here, you know”

For that matter, the world ought to listen, as Mr. Dimon’s additional remarks echoed AHI’s concerns:

“We want to see employment go up consistently for several months,” Dimon said. “If we’re lucky, it will happen some time this year.”

Unfortunately, the global recession will linger like a bad cold.  The stimulus legislation hasn’t stimulated; if anything, it’s impeded economic recovery.

The company doesn’t expect to lose a lot of money should interest rates rise, as it has been focusing on reducing its rate exposure. 

In other words, Mr. Dimon is taking out insurance against Ben Bernanke raising rates – which of course he must and he will – and against inflation coming back.

A 100 basis point increase would translate into a $500 million loss, which he described as “mostly noise in our company.” 

He’s also hedged JPMorgan’s sovereign exposure elsewhere:

JPMorgan Chase also doesn’t have a lot of exposure to the debt woes plaguing Europe. “Greece itself wouldn’t be an issue for this company. Neither would any other country, in my opinion,” Dimon said. 

If anything, Greece’s troubles – and those right behind it of Spain and Italy, much larger economies – will sink the Euro, not the dollar.  Which is why the Euro’s suddenly in free fall.

No worries, Europe

He said JPMorgan Chase is actually more concerned about California’s deficit troubles, which could actually pose a higher default risk than the sovereigns in Europe.

Of course – because not only is JPMorgan all over California, California’s part of America, so that if California collapses – a bleak prospect looking more likely with each passing day of inaction – then the American economy will have another infection to fight off.

Mr. Dimon, therefore, is keeping huge capital reserves:

Dimon said the company also has no timeline for winding down its $40 billion in loan-loss reserves, which some industry watchers say could deliver a jolt to earnings in coming years.

I like being protected from a very rainy decade

In other words, the analysts believe that JPMorgan has over-reserved against loan losses, meaning that at some future point, JPMorgan could boost its earnings by deciding that it had previously been too conservative.  Such moves verge on ‘earnings management,’ if they are used to manipulate results and game bonus formulas rather than as exercises in disinterested judgment.

He said the bank’s reserves should be considered some $10 billion to $20 billion of excess capital that it will have at its disposal when things improve. “We’re going to keep them as high as we can keep them,” he said. “We think it protects the company.”

There’s another way to view those reserves – as a cushion against government unreliability.  That’s a lot of capital to sit on the sidelines because government has proven itself unreliable.

And let there be no mistake: having once been burned – as the bank sees it – by trusting government, it is fully ready not to trust again:

Regulatory pressure is another issue, [Investment banking division head Jes Staley] said, although the company is confident it can thrive in the face of any regulatory changes as long as they impact the industry equally.

Staley will play on any field that’s level

Hear the fear?  With the government not just regulating markets but owning large chunks of industries, it is easy to see government self-interested motivation behind its actions.

JPMorgan will also pass onto customers higher funding costs that may result as tighter regulation.  “We’re going to reset the price of credit globally, and in a dramatic way, if the regulators go beyond the bounds that they should,” Staley said.

That, my friends, is an unmistakable threat – and should be heard as such. 

You really want to take us on?

Altogether this is a totally damning report card on the state of governmental integrity:

Flounder : Will that work?
Otter : Hey, it’s gotta work better than the truth.
Bluto : [thrusting six-pack into Flounder's hands] My advice to you is to start drinking heavily.
Otter : Better listen to him, Flounder, he’s in pre-med.
D-Day : [firing up blow-torch] There you go now, just leave everything to me.

Why am I not confident?

They’ve lied and used me every time … maybe this will be different!

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When everyone else gets sick, even the healthy start having symptoms too.

Oh, I should never have gorged on those ‘07 and ‘08 loans

As one of only three stores left open, still selling single-family and multifamily long-term financing, the Federal Housing Administration – the GSE from the right side of the blanket, as it were, the one always acknowledged as part of the Federal government – is showing stresses in its portfolio of new loans.  As reported by The Washington Post:

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market’s recovery.

As I posted back in September, FHA’s loan losses will not ‘buffet’ the entity because it is a direct arm of the Federal government, and as such cannot go bankrupt independent of a Federal bankruptcy – and while sovereign bankruptcy is on the horizon for Dubai and Greece, we are not in that situation (thankfully) (yet).

About 9.1% of FHA borrowers had missed at least three payments as of December, up from 6.5% a year ago, the agency’s figures show.

Not only is a 9.1% serious delinquency rate high, that’s atop an already high 6.5% rate.  The homeownership arena is still hurting – now not because of declining property values, but rather because of the ongoing structural weakness that the so-called stimulus legislation has clearly done nothing to reverse.

Year-over-year delinquency rate change; it’s worse in the West

Although the FHA’s default rate has been climbing for months and eating into the agency’s cash, the latest figures show that the FHA’s woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008.

Loan defaults have an incubation/ contagion phase delay.  As we saw in the decade’s biggest invisible stories, during 2007 and 2008 originators like Countrywide offloaded swaths of their inventory onto long-term government players (like naive Fannie Mae).

Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

By now we know it’s regionalized: California/ Nevada, Florida, and the Upper Midwest

If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses –

Which I noted months ago:

The Federal Housing Administration, the original government lender and hence the precursor to Fannie Mae and Freddie Mac; as a forerunner, FHA’s government connection was and is more direct.  It’s an arm of HUD, hence its securities carry the full faith and credit of the United States, unlike its GSE heirs Fannie and Freddie, which borrowed money on the capital markets without direct Federal support.

[Uh, until recently.  – Ed.]

“It’s pronounced ‘feefa’ not ‘fiefdom’”

That means that unlike Fannie and Freddie, who are likely to return to a non-guaranteed state some day, the government is always exposed for the entire FHA portfolio.  And FHA has a further tool that Fannie and Freddie do not: in addition to making direct loan, it offers mortgage insurance. 

Now the piper may need to be paid:

– a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

Uh – except for that Great Depression thing we had during 1934, when FHA was created.

And back then, we had much lower homeownership rates

As these loans from 2007 and 2008 go bad and clear off of the FHA’s books, agency officials said, losses are expected to taper off, aided by the housing market’s anticipated recovery and an influx of more creditworthy borrowers, who have flocked to the FHA’s home-buying program in the past year.

We thus have a race of sorts.  Which will mature first – the capitalized value of the new insurance premiums, or the recognized losses from the recent vintages?  Fortunately, because FHA is already owned by the Federal government, it’s more of an academic and economic-efficiency question than one of national consequences. 

Agency officials said they have cracked down on poorly performing lenders and announced higher qualifying fees for borrowers. On Monday, the agency projected that the fees should generate $5.8 billion in fiscal 2011 [Which ends 30 Sep 10 – Ed.], up from $2 billion this year.

That seems highly plausible.  With Fannie, Freddie, and FHA the only games in town, they are all gulping new market share.

Two whose patrimony was only recently acknowledged

One who always knew who was its mother and its father

That would fatten the FHA’s cash cushion, used to cover unexpected losses.

An exasperating imprecision – FHA has no banks accounts of its own, it draws from the Treasury as required.  A better formulation is that the incoming premiums will significantly increase FHA’s net worth, giving reassurance to the check-writers at Treasury.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47% more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

Ouch!

Didn’t see that coming

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26% in the last quarter from a year earlier.

Ouch.  Foreclosure, though, is simply a lagging indicator of claims, as claims as a lagging indicator of serious delinquencies.  Neither is an independent variable in itself.

Nice dependent variable

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency’s troubles with the 2007 and 2008 loans in October, when he told a House panel that “rogue players on the margin” immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Oh, you think?

I don’t like being linked to a phrase like ‘rogue player’

Their aggressive lending tactics attracted borrowers with unusually poor credit profiles to the FHA. “That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today’s balance sheet,” Stevens said at the time.

Even so, at the time Mr. Stevens was optimistic, and no one was under any illusions about the essentiality of keeping FHA in business.  As I posted in October:                            

Would that elected officials and journalists could refrain from politicizing what should be bipartisan evaluations of entity performance and importance.

“FHA has stepped into the void left by the private market,” Representative Maxine Waters, Democrat from California, said at the hearing. “Let’s be clear; without FHA, there would be no mortgage market right now.”

Ms. Waters knows where she stands

Together with Fannie and Freddie, FHA is the credit backstop for about 80% of all US residential lending right now.  While it’s terrifying to think of that much lending being concentrated behind the government, it’s more terrifying to think of any one of the three stopping cold.

No more lending?

But [Stevens] acknowledged that some 20% of FHA loans insured last year — and as many as 24% of those from 2007 — faced serious problems including foreclosure, offering a preview of a forthcoming audit of the agency’s finances.

This shouldn’t be entirely surprising, recognizing that in 2008 FHA was the lender of last resort, and as we have chronicled, many of these refinancings were done hopefully.

“Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, FHA will not need to ask Congress and the American taxpayer for extraordinary assistance — we will not need a bailout,” Mr. Stevens said in his testimony.

That is a direct and clear statement.  Let’s hope it’s true. 

If I’m wrong, strike me dead

Is Commissioner Stevens rethinking his view?

With  new facts, I have no choice but to rethink

Plunging home prices have exacerbated matters by leaving some FHA borrowers unable to sell or refinance their homes because they owe more than their homes are worth. Yet with unemployment running high, many borrowers can’t afford to keep up their payments.

Adding to the trouble was a now-defunct FHA program that enabled sellers to cover the down payments of buyers. This meant many borrowers had no skin in the game and were more likely to walk away at early signs of trouble.

In May, 2007, I first wrote about this scandalous program, lambasting it:

It’s sounding more and more like the buyer is merely a patsy, and the non-profits are acting as the sellers’ paid agent.   Do the non-profits act as surrogates for the buyer, making sure prices are held down?

Sellers have tried to recover the cost of the fee they pay nonprofits by raising the price of the house an average of 3%, a 2005 study [text version here -- Ed.] by Congress’s nonpartisan Government Accountability Office found [also referenced here -- Ed.].  

So let’s keep score here:

In a cruder world, what the non-profits are doing might be called ‘procuring.’  In such a procurement, two entities get screwed: buyers and the Federal government (that’s us taxpayers).

This is for us taxpayers

By June, 2008, it was clear FHA was looking at $4.6 billion in losses, mostly from Nehemiah.  That number has now more than doubled:

The program resulted in excessive defaults before it was ended in late 2008, and it is projected to cost FHA an additional $10.5 billion in losses, Stevens said.

Every time I revisit this subject, I become more angry about it.  Congress birthed this atrocity, and Congress protected it against diligent and persistent Bush Administration efforts to kill it. 

For all these reasons, the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 – the worst rate in at least three decades.

A 25% claim rate is hideous – but fortunately, Risk = P x L, where P is Probability of default and L is Loss given default.  We can hope for improved recoveries, since the newer-vintage delinquencies are borrower weakness, not property weakness.

The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.

In any case, we can see FHA coming out the other side.

Dirty but still breathing

The FHA-backed loans made in 2009 tended to go to borrowers with higher credit scores than in previous years. These borrowers turned to the FHA when the mortgage market collapsed and other lending sources dried up. By then, reputable lenders doing business with the agency were already imposing tougher restrictions on FHA borrowers, further boosting the credit profile of those loans. The average credit score of an FHA borrower is now 690, up from 630 only two years ago, agency officials said.

These higher-quality loans are expected to result in lower losses, so the agency should make money on loans issued this year and over the next few years, according to an independent audit designed to gauge the agency’s health.

The audit, released in November, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53% of the value of all FHA single-family-home loans – far lower than the 2% required by Congress.

Certainly that is low, but compare that against the $3.8 billion “extra” premium FHA earned this year, and if you add that back, you’re at 1.06%, which is not great but is heading the right way.

Yes, I admit it’s getting better

It would become even rosier if, as most private lenders do (and the GSEs did), one counts the capitalized value of the future servicing rights as assets.

But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.

True enough, but with FHA mortgage insurance, the lender normally assigns the loan as quickly as possible, thirty days after the default.

Stevens said his agency has pored over its data to analyze risk and is taking steps to shore up its financial health. “You have a limited set of options under these circumstances: Raise fees [for borrowers] or make policy changes,” Stevens said in an interview. “We’ve done both.”

In short, tighten credit, limit losses, hence increase profits.

The agency banned 268 lenders from making FHA loans last year, more than double the total terminated in the previous eight years. The FHA suspended six other firms. Among them were some of the largest FHA lenders – Taylor, Bean & Whitaker and Lend America, both of which shut their doors soon thereafter.

The long-overdue cleanup continues.

You made the mess, you clean it up

The agency also proposed a rule that would require banks to hold up to $2.5 million in capital that they can use to repay the agency for losses if they were involved in fraud.

Absolutely!  Originators should always take first loss, and should have liquid capital to cover a substantial loss rate; otherwise the principal-agent risk is too great.

Banks are now required to hold only $250,000.

Not enough.  A ten multiple is a good idea.

Borrowers are also facing tougher scrutiny from the agency. People taking out FHA loans will have to pay higher upfront fees, perhaps as early as this spring. Those with especially weak credit scores will also have to put down at least 10% instead of the usual 3.5% down payment. The amount of money sellers can kick in toward closing costs and other fees will also be limited.

Another Nehemiah abuse being shut down.

Should have pressed the Nehemiah shut-down button a long time ago

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[Continued from yesterday's Part 1.]

When the court adjourned yesterday, I was representing my client Rumpelstiltskin, doing business as Uncle Sam’s Club financing,

“You pays your money and you gets your loan.”

Mr. Stiltskin is single-handedly keeping the American financing system flowing with liquidity, and –

[Your Honor, must I listen to these public-gallery outbursts about "record deficits," "mortgaging the next decade," and "drunken-sailor spending"?  However true, they are irrelevant to the matter at hand.]

–        and the court will recall, yesterday we met my client, who heroically rescued flighty maiden “Dolly” Miller (not her real name), who had via securitization claimed she could spin straw (unrated mortgage instruments) into gold (ratable securities), and whose retail brokerage arm, Pied, Piper & Company, had sold to Cassius King and his extended family around the world.

Don’t forget, when we got stiffed, we took your children

Parties at interest in this litigation

“Prince” Charles Miller (bank)

“Dolly” Miller [not her real name], the investment banker

Cassius King (representing the retail customers)

Rumpelstiltskin (Treasury, my client)

Yesterday, quoting from the Grimm Financial Times (a/k/a the Wall Street Journal), After the Bailouts, Washington’s the Boss, I made reference to this statement:

John Taylor, a former Bush Treasury official who is now a Stanford University economist, says the government’s role will be far greater than Mr. Summers suggests.  “We have a bailout mentality in this country.”

To which I reply, on my client’s behalf, yes, we do.  And probably will need to have a muscular role for my client’s credit enhancement for the next five to ten years. 

“Notice who is conspicuously absent when my client is doing all the work.”

Under my client’s previous Treasury Secretary, Hank Paulson, my client intervened massively to prevent the Second Great Depression.  Having now caught the credit-enhancement bus, my client’s customers and counterparties now face the enormously difficult challenge of disengagement:

One concern: Even if the government withdraws, business will expect bailouts in the next crisis, and that will inspire another round of cavalier risk-taking. “If we don’t re-regulate the banking system properly, we’ll either get very slow growth from overregulation, or another financial crisis in just 10 to 15 years,” says Kenneth Rogoff, a Harvard University economist and co-author of a new book on financial crises since the Middle Ages. 

Mr. Rogoff is a tremendous individual, who’s never shied away from confronting unpleasant truths or challenging pompous incumbents:

“Pushing money around is not banking”

The essence of the ‘this time is different’ syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply.

–         Kenneth Rogoff, Harvard Economist and Historian

He recognizes, as does my client, that having rushed in to save the foolish alleged virgin Ms. Miller, my client gains no thanks for doing so and now must endure brickbats for simply expecting its counterparties to live up to their bargains.

In finance, the recovery has been striking. Since bottoming on March 9, the Dow Jones Industrial Average is up 60%, and financial stocks have more than doubled.

While this by itself does not assure the economy will recover – there are many reasons to remain deeply bearish in 2010 – consider the alternatives.

Where would the Dow have been without our interventions, hmm?

Global capital is running to America, largely due to my client’s actions, and the major financial institutions like Mr. Miller’s banks, and their investment banking arms like Ms. Dolly Miller’s financial wizards, are once again able to make money and realize stock market gains – again a result of steps my client took at their behest.

Yields on junk bonds, issued by companies with the highest risk of default, have fallen from almost 17 percentage points above yields on Treasury bonds in March to about 6.5 points higher now.

Seventeen hundred basis points’ of risk spread is categorically insane; compared with that, 650 basis points of spread is merely gluttonous,

That signals both an improving economy and a renewed investor appetite for risk.

Capital cannot work unless the world has a rational risk appetite.  This is an essential recovery sign.  More significantly, my client’s aggressively experimental actions threw a safety tarp over the major financial institutions, a critical move of confidence that has definitely succeeded.

Most big banks appear back on their feet. Of the $245 billion invested in bank shares by the Troubled Asset Relief Program, more than $175 billion has been repaid. Since the Treasury tested the financial strength of 19 large financial firms in May, they have raised $136 billion in equity capital and borrowed $64 billion without U.S. guarantees.

My client saved the global capital system.  Has he been thanked?

Could I get thanked?  But nooooo!

But the strengthening of the big banks may be distorting the market. Although smaller banks have long had a higher cost of funds than big ones, the gap has widened. The gap averaged 0.03 percentage point for the first seven years of the decade, but it jumped to a 0.66-point disadvantage for smaller banks in the four quarters ended Sept. 30, estimates Dean Baker of the Center for Economic and Policy Research, a liberal think tank.

Your Honor, that is precisely the sort of Wall Street whining to which my client objects.  Having rescued the nation’s largest financial institutions, and charged a below-market or equitable risk premium for so doing, my client must endure this sort of carping.  Observe that the price of being a smaller bank has effectively doubled, from 33 to 66.

That suggests investors think the government would bail out big banks, but not small ones, if crisis erupted anew, he says.

Or that investors think big banks are less likely to need bailout. 

Not all of the rescues look successful. The U.S. had to redo its initial bailouts of giant insurer American International Group Inc. –

Man, that AIG acquisition went bad, didn’t it?

– and of GMAC Financial Services, which was once a car-finance and mortgage firm and is now a bank holding company.

Final answer?

Both remain unable to raise private capital.

GMAC was special case as it was tied to automakers. 

The intervention comes with long-lasting costs, among them huge budget deficits that could eventually push up inflation and interest rates.

Of course it will; see Predictions for 2010, Part 1.

The International Monetary Fund estimates U.S. government debt will swell to the equivalent of 108% of annual economic output in 2014, from 62% in 2007 –

[Your Honor, will you instruct the galleries to stop hooting in derision?  Thank you.]

Entitlements for all my friends!

– absent politically difficult steps such as raising taxes or cutting benefit programs.

[Must I listen to these catcalls?]

Only 21% of Americans polled by The Wall Street Journal and NBC News in December said they trusted the government to “do what is right,” versus 64% shortly after the attacks of Sept. 11, 2001.

In conclusion, your Honor, I wish to make clear that my client has no designs on Wall Street beyond their first-born child, as specified in the original contract.

I’m being shortchanged and I demand my rights

The nature of post-crisis capitalism will depend in part on how the administration and Congress wield their new power. Inside Washington, there is profound ambivalence about this.

Herbert Allison, who left the private sector to run TARP, says, “We can’t wait to get out of these investments. We don’t view ourselves as a long-term investor.” But in the here and now, the government is torn between its roles as shareholder and guardian of the public interest.

Having provided the gold, are we not now in a position to make the rules?

Remember the Golden Rule?

The disagreements over how to wield power over business are playing out both within the Obama administration and between the administration and Congress – as is happening now in the auto industry.

The White House forced out a CEO of General Motors in March, and crafted car-maker bankruptcy restructurings that drew howls from some creditors. But it later lightened its hand. It appointed a board of private-sector directors and let that board oversee GM. The board, six months later, was able to fire a subsequent CEO without getting prior White House approval, according to Treasury officials.

Allow me to leave the final word to my amicus curiae co-counsel, the distinguished litigator from the 535-person fractious law firm at the other end of Pennsylvania Avenue:

Who says we’re fractious?

Congress isn’t so willing to surrender its leverage. That was clear when GM and Chrysler decided to terminate about 3,400 dealers. Many turned to their lawmakers, and Congress got involved, prompting the companies to reinstate about 110. But the dealers felt that was insufficient.

GM’s frustration with the process boiled over at a mid-November meeting in the office of Sen. Richard Durbin (D., Ill.). GM’s usually cool-headed chief lobbyist, Ken Cole, was too agitated to sit, say several participants. When Tammy Darvish, an executive of a dealership in Silver Spring, Md., pressed Mr. Cole about whether it would cost the company any money to reinstate a terminated dealer, the GM team started to pack their briefcases and threatened to walk out, according to Ms. Darvish and a government participant in the meeting. They say the GM team stayed only at the insistence of congressional staffers.

Congress later enacted a provision giving axed dealerships broadened grounds to appeal in arbitration procedures – broader than the White House or car companies sought.

A spokesman for GM declined to comment on the dealers meeting or Mr. Cole. But the auto maker, now 60% federally owned, said the arbitration law will hurt its efforts to turn a profit and repay the government, which has invested roughly $50 billion in the company.

I’m in charge now, remember?

My client in no way associates with the peremptory demands being made by those other bodies.  Leave it to them and any plan will be lit up like a Christmas tree.

Go easy on the earmarks, big guy, okay?

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If it please the court –

Comes now my client, your honor, the United States government, affectionately known as Rumpelstiltskin – who having rendered a valuable, nay an essential, service to the fair maiden investment banks and her father the banking industry, is now being both cheated of the compensation which he demanded and to which the parties agreed, and libeled for doing so.

Lot of straw, little lady, and not a lot of gold here, is there?

The essential facts are not in dispute. 

Parties at interest in this litigation

“Prince” Charles Miller (bank)

“Dolly” Miller [not her real name], the investment banker

Cassius King (representing the retail customers)

Rumpelstiltskin (Treasury)

The defendant and alleged victim was an investment banker.  Under our financial privacy shield laws, her name must be withheld so we will refer to as Dolly Miller.  Dolly claimed that via securitization, she could spin straw (unrated mortgage instruments) into gold (ratable securities), which her father the miller (major public banks) sold to Cassius King and his extended family, at vast profits.

[I note for the record that we will be joining other parties, such as the rating agencies, in derivative actions.]

My client’s skill – credit enhancement – is exceedingly valuable, and Ms. Dolly Miller coveted it for her personal gain and that of her bank. 

Sure I can turn this into that … but it’ll cost you something

Unfortunately, so impressed was Cassius King that he shut Dolly up in a tower with a spinning wheel (investment banking division) and demanded she make gold endlessly.  This she could not do, but that did not stop her from enjoying the fruits of her claims.  When she realized that it was nothing but straw, she begged my client’s help. 

“Let the record show the maiden was glad at my client’s arrival”

He gave it freely (Bear Stearns), arranging for a first consignment of straw to be transmuted into gold and acquired by another miller (JPMorgan Chase).  Dolly professed thanks. 

Oh, she was lovey-dovey enough then

Then she asked again for her wayward non-identical twins Fannie and Freddie, and again my client wrote an enormous check. 

At Fannie Mae and Freddie Mac, where the Treasury holds warrants allowing it to acquire stakes of nearly 80%, the administration has put public interest first. It has instructed their regulator to have them administer efforts to cut monthly mortgage payments for millions of Americans to avert foreclosure.

[Your Honor, will you please remove those disgruntled shareholders form the gallery?  Again I call the court's attention to the evidentiary stipulation that nothing in this case may be used by the outraged shareholders of Fannie and Freddie as the basis for a breach-of-fiduciary-duty claim against my client.  We shall defend that action at the proper time.]

“My client opened the vault for us”

Now that my client has rescued Dolly Miller and her father’s millery (bank) – indeed, without  my client, the entire milling industry would be bankrupt – the Miller family is libeling me whenever and however they can.

As evidence, I introduce this article from the Grimm Financial Times (a/k/a the Wall Street Journal), After the Bailouts, Washington’s the Boss:

In 2008 and 2009, Washington strove to save the economy. In 2010, Americans will get a clearer picture of how Washington has changed the economy.

Only as the recession recedes will it become fully evident how permanently the state’s role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.

One thing is clear: The government is a much bigger force in today’s U.S. economy than it was before the financial crisis. “The frontier between the state and market has shifted,” says Daniel Yergin, whose 1998 book Commanding Heights chronicled the ascent of free-market forces starting in the 1980s.  “The realm of the state has been enlarged.”

Is it all downhill from here?

This is inevitable and predictable – indeed, I predicted it (Banks, paying your rescuer and Catastrophe is a precondition to financial reform). 

The histories of depressions show that a period of economic chaos is invariably followed by a period of extremely rigid economic controls – during which all the variables, the only partially controllable factors like commodity speculation, unlimited credit, free marketing, and competitive wages get shut out.  There’s a new imperialism starting where we used to be free.

– James Blish, Earthman Come Home, pages 421-422

Now this is coming to pass, and my client intends to claim his payment:

My client’s legitimate demands are libeled with this type of cheap visual editorializing

To prevent crumbling housing and credit markets from sinking the broad economy, the Bush and Obama administrations and the Federal Reserve spent, lent and invested more than $2 trillion on one initiative after another. If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you.

“Behind your card is my client’s card”

Not to put too fine a point upon it, my client is single-handedly holding up the global financial system:

“That’s a great deal of gold my client lent or invested against straw”

Washington pumped $245 billion into nearly 700 banks and insurance companies and guaranteed almost $350 billion of bank debt. It made short-term loans of more than $300 billion to blue-chip companies. It propped up life insurers and money-market funds.

It bailed out two of the three U.S. auto makers.

Now owned 70% or so by Uncle Sam

It lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending.

Uncle’s behind every one of them

Today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis.

“80% owned by my client, and rising”

Your honor, my client regulates every financial institution, and is expecting to close 700 or more banks this year.  This is hardly a trivial service being provided.  Nor has my client suggested in way that he has dreams of world domination:

Lawrence Summers, President Barack Obama’s chief economic adviser, says the intervention was essential, short-term therapy, not a reinvention of capitalism. “Our overarching goal was to save an economy that was near the abyss, where depression looked like a real possibility,” he says.

(Pay no attention whatsoever to the embarrassing self-interested internecine squabbles among Mr. Stiltskin’s administrative staff; these are irrelevant to the larger issue.)

The bailouts “were designed to be, and have proved to be, temporary,” Mr. Summers says. “There is no aspiration of any kind to change the private-sector basis of our economy.”

Your honor, please also disregard Mr. Summers’ last statement.  He is not the Fed chairman, and regulation is a set of values in itself, whether the regulator knows it or not.

“In charge of shooting down bad ideas?”

Even so, he says government won’t return to its pre-crisis form. “The way our financial system was operating was much more fragile than many had supposed. Those events point up a need for substantial changes in the way in which we regulate the economy and regulate finance,” he says.

An expansion of legislative authority and international standards regarding financial instruments’ structure, disclosures, and collateral is of course necessary, for capital has de-materialized and gone fully and instantaneously global:

Law enforcement always lagged behind law violation.  Thus, in the old days following the invention of the automobile, state troopers could not cross state lines.  … They had no authority beyond their own jurisdiction, while the public enemies flitted unhampered from place to place.  … A man could perpetuate any financial crime imaginable without fear of consequences, for in an hour his money could be so far away from the scene as to be completely beyond the reach of the law.

– E. E. Smith, Galactic Patrol, pages 14-15, slightly modified

Future financial regulators of the world, unite!

Any suggestion that my client is a megalomaniac bent on imposing a dictatorial rule of bureaucracy over the fair maidens like Ms. Dolly Miller is the sheerest calumny:

John Taylor, a former Bush Treasury official who is now a Stanford University economist, says the government’s role will be far greater than Mr. Summers suggests. “While we may be past the emergency, we’re still in a mode that will create similar interventions for quite a while, even for minor emergencies,” he says. “We have a bailout mentality in this country.”

Allow me, therefore, to rebut these scurrilous accusations.

“Let me say this about that.”

[Continued tomorrow in Part 2.]

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[Previous Months In Review here: Aug 09, Jul 09, Jun 09, May 09, Apl 09, Mar 09, Feb 09, Jan 09]

By: David A. Smith

Continuing our review of September’s posts, technology changes interpersonal dynamics and in so doing reveals aspects of human nature, in particular that what matters in crime prevention is not the phenomenon of seeing but that of knowing one is being seen, in The robocop on the beat: Part 1, seen being seen:

Are you clicking on images you shouldn’t?

Some years back I formulated a more general version of this as the law of the observant herd:

The herd observes how sinners are dealt with.  In this case, sinners are noticed.  Not arrested, mind you; curiously, not even threatened.  Just noticed.

Crime doesn’t like being noticed.  So crime relocates.

Hopefully, with as little swag as possible

The occupants moved out soon thereafter.

The armadillo does what the residents can’t: it observes, it witnesses.  And in a metallic Christian way, it turns the other cheek and it takes punishment.

and Part 2, seen as one seeing:

In yesterday’s post, innovative police chief Steven Settingsgaard parked a retired police car conspicuously in front of a suspected drug dealer’s house.  Overnight it was demolished, but then something striking happened:

The dealer left the neighborhood soon after the incident –

Flush a predator from cover and the animal becomes unsettled and nervous; easier to capture.

– he was later arrested and convicted on a gun charge.

Evidently the emotional disruption played a powerful role in the physical disruption.

Find me worrisome?

With the disoriented giddiness of one who has staggered off the rollercoaster without losing wallet, lunch, or life –

That’s a lovely bridge to jump off, isn’t it?

– I examined, with more sympathy than its authors did, our retrospective on how we got through the financial precipice of last, 2008, in The mad experimenters: Part 1, being still breathing is winning and Part 2, I must have known it all along:

Despite Chairman Bernanke’s brave words a while back – in this selfsame Wall Street Journal – we may talk about exit strategy all we want, but there will be no substantial exit any time soon.

President Barack Obama goes to Wall Street Monday [September 14, 2009 – Ed.], the anniversary of Lehman Brothers’ collapse, to deliver a cautious victory speech. 

With Wall Street executives, as well as government officials, in attendance, the president also will admonish “to avoid a return to the practices on Wall Street that led us to the financial crisis and to recognize their obligation to help produce a wider recovery on behalf of the American people.”

Sounds good, I suppose.

If you don’t like “admonish,” how about “chastise”?

With a modicum of hindsight now available, do governments and central banks deserve credit for preventing catastrophe? The early verdict from most scholars, executives and government insiders is yes.  [What are bloggers, chopped liver? – Ed.]

How about bloggers?  I said yes at each stage:

March 24, 2008, the shotgun marriage of Bear Stearns to JP Morgan Chase: Banking on value.

April 22, 2008, explanation: Banking on value: the explanation.

April 28, 2008, how the Bear Stearns transaction went down: Anatomy of a coup

September 22, 2008, explaining the Paulson Doctrine(s): Part 1, prevent the second great depression

September 29, 2008, explaining TARP: Bailout or bonanza?

October 20, 2008, converting TARP into preferred-stock injections: Paying your rescuer: Part 1, you *will* do it

January 21, 2009: The GSE’s future: Part 1, we need the eggs

March 23, 2009: The AIG Hearings: Part 1, “Now that we’ve killed all the bomb-makers …”

What, you think that counts as evidence?

On the question of which of dozens of extraordinary interventions — rock-bottom interest rates, surging government spending, billions of taxpayer dollars injected into banks, sweeping government guarantees — made the biggest difference, there’s less agreement.

Sometimes the answer is, All of them.

An impromptu discussion at AHI led me to write down Three key questions to give your ecosystem a physical: Part 1, follow the critters, Part 2, follow the ownership, and Part 3, follow the money:

In the same way, when we consider a housing finance ecosystem, the blood plasma is money, and its tracing is a time-honored investigative technique.

“Follow the money”

When it comes to housing, the money moves in three dimensions: homes, people, and money:

1. Homes.  Providers and consumers finding each other.

2. People.  Sellers and buyers exchanging money for consumption and use rights.

3. Money.  Capital providers and capital consumers financing a home purchase.

Understand these three dimensions and you go a great ways toward placing an ecosystem in its space.

Thus, if you come new to a housing finance ecosystem, either because you’re visiting a country and want to buy or rent a home, or as a student, researcher, or consultant tasked with designing a new program intervention, you can learn a lot about the ecosystem if you follow the money through each of its three dimensions.

These questions are valuable for two reasons:

They are worth inspecting

1. They are discoverable.  Since everyone who might be an investigator can imagine the sequence of finding an apartment, buying a house, or finding a loan, they create a natural and surprisingly comprehensive line of inquiry for investigators.  More particularly, the questions are non-judgmental – they just ask about what is, rather than what should be or what might be or isn’t.

Question 1: Owner-consumer value chain

If you have housing (to rent or sell) and I need housing (to occupy or buy), how do we find each other and what kind of tenure relationships could we establish?

You’re new in town, and you need a place to live.  Think of all the sub-questions you’ll have.

1.       Can I find plenty of places, or are they scarce?

2.       How much space can I afford?

3.       Can I buy or do I have to rent?

4.       If I want to buy, how far out of downtown do I have to be?

5.       Is there enough good-quality rental?

6.       Is the government in the business of providing housing?

7.       Is the government in the business of subsidizing the supply side (helping create more homes)?

Now I’m going to ask you a simple question – do you feel … lucky?

2. They are measurable.  The results can be quantified – search costs, occupancy costs, closing costs.  Those costs make comparisons possible across ecosystems, and also make possible measuring the ecosystem’s evolution over time.

Question 3: Financing a home purchase

If I need to get a lot of money to buy a home, where do I get the money, and what does it cost (up front and over time)?

In every society, owning urban housing costs many multiples of a normal persona’s disposable housing income; indeed, among my rules of thumb for gauging a housing ecosystem (yes, that’s a blog post to come) is the better the housing ecosystem, the longer the period of time over which a buyer must obligate himself or herself to acquire property ownership. 

How long do I have to keep paying for this house?

Seldom is a month complete without some tale from the cradle of US apartment living, and our second-most-formal city, New York, which despite its reputation puts up with a shocking degree of informal settlements in Temporary permanence?:

You elected me temporarily, but maybe I could be permanent?

In New York City, formalization of sheds is literally just around the corner:

But others have higher ambitions: They want an all-new sidewalk shed — airy and elegant. The talk among architects, in fact, is that the city is about to launch a competition to design one.

Given time, New York’s sheds may become formal arcades – if not rivaling Bologna’s, then maybe New Orleans‘ French Quarter.

Formalizing the pedestrian shed: New Orleans arcades

In this post, I came bury sheds, not to praise them – but when you think about it, making sheds permanent by arcading them solves everyone’s problem.  It claims more city space for pedestrians, and more air space for additional structures.  The city becomes more dense, yet more livable.  The informal leads the formal, and in that lead, it changes the city.

The future of New York City’s sheds?  Torino’s arcades

If you leave them there for fifty years, they’ll be historic and then you can’t tear them down.

They claimed this was historic and had to be preserved

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