Forget about "Recovery"

At the risk of confirming my critics' dumbest charge -- that I am a "doomer" -- the mandate of clarity requires me to ask: to what state of affairs do we expect to recover? If the answer is a return to an economy based on building ever more suburban sprawl, on credit card over-spending, on routine securitized debt shenanigans in banking, and on consistently lying to ourselves about what reality demands of us, then we are a mortally deluded nation. We're done with that, we're beyond that now, we've crossed the frontier and left that all behind, and we'd better get our heads straight about it.

I maintain that there are countless constructive tasks waiting to occupy us on a long national "to do" list for rebuilding a national economy, but they are way different than the ones currently preoccupying government and the mainstream media. The Obama White House, Congress, and The New York Times are hung up on exercises in futility -- "rescuing" banks and insurance companies that cannot be rescued (because they are hopelessly trapped in "black hole" credit default swaps contracts), and re-starting a "consumer" binge that was completely crazy in the first place, based, as it was, on a something-for-nothing standard-of-living.

Meanwhile, if the buzz on the blogosphere is a measure of anything -- and I think it is -- then a new consensus is forming out there about where to start doing things differently. Unfortunately after less than two months in office, President Obama finds himself awkwardly behind-the-curve on this. It begins with the understanding that a general bank rescue is hopeless and, going a step further, that the people who caused the train wreck of "innovative" securities have to be prosecuted. The public's collective voice on this is muted but growing. It has been muted by the general air of blackmail that the banks have used to enthrall policy and opinion -- the "too big to fail" idea -- in effect holding the nation's future for ransom.

Last week, New York State Attorney General Andrew Cuomo hauled Bank of America chief Ken Lewis into his office to explain who, exactly, received an aggregate several billion dollars in bonuses late in 2008 after the US Treasury forked over billions of dollars in TARP money to his bank. That was a good start. Mr. Lewis, being lawyered-up to the max, had the temerity to reply that answering the question would compromise his ability to keep talented people in his employ. For that impertinence alone, Mr. Lewis ought to be dragged over fifteen miles of broken chardonnay bottles behind a GMC Yukon -- but that is not how we do things in American jurisprudence. To be more realistic, a simple indictment would be in order, and then Mr. Lewis can answer this question, and a few others, in the comfort of an air-conditioned courtroom. Ultimately, that might lead to Mr. Lewis becoming the wife of a bodybuilder in one of New York State's houses of correction -- a just outcome that would go far in rejiggering the nation's expectations about how people in authority ought to behave. And such an outcome might lead to the conviction of many other brides-to-be from the Wall Street debutante pool.

Now it has come to light, just last week in the wake of AIG's latest bail-out, that previous AIG bail-out money to the tune of $50 billion was distributed to a set of banks including Goldman Sachs (former employer of then Treasury Secretary Hank Paulson and then New York Federal Reserve Governor Tim Geithner), plus Morgan Stanley, Merrill Lynch, Mr. Lewis's Bank of America, and a long list of European banks with operations in the USA. Since the transactions took place in New York State, the investigation of these irregularities alone could solve the unemployment problem here if NY Attorney General Cuomo were given a free hand in hiring staff to depose everyone involved -- including the hiring of caterers to bring in coffee and meals for round-the-clock proceedings.

All of this raises another awkward question: where is United States Attorney General Eric Holder in this situation? Surely the federal statutes offer some grounds for inquiring about the misuse of Treasury funds -- and many other issues arising from Wall Street's stupendous orgy of misbehavior. What I'm hearing out in the blogosphere is a growing clamor to call people to account before we are really able to move on to the massive task-list that awaits us in rebuilding our economy.

The bigger question for now is whether any of these authorities will act effectively before the public simply goes apeshit and starts burning down Greenwich, Connecticut. The dangerous shift in public mood is liable to occur with shocking swiftness, in the manner of "phase change," where one moment you see a bewildered bunch of flabby clown-citizens vacuously enraptured by "American Idol," and the next moment they are transformed into a vicious mob hoisting flaming brands to the window treatments of a hedge funder's McMansion. The moment of opportunity for avoiding that outcome is looking sickeningly slim right now.

Another thing that President Obama can set into motion anytime -- and pull himself back to the head of the curve of leadership -- is to either by executive order or by proposal to congress, shut down the credit default swap system for a period of time while procedures are drawn up to place all these dubious contracts in a "clearing" market, where the holders of them will have to come clean about what they're sitting on. The lack of this procedure is allowing zombie banks to hold the United States hostage for never-ending bail-out ransoms. None of these banks are going to survive another six months anyway, so the basic blackmail motif that the whole money system will collapse if ransoms are not paid is a bluff that has to be called sooner or later in any case. So Mr. Obama might as well get on with it.

Once these two matters are dealt with -- an earnest start-up of prosecutions and disabling the credit default swap blackmail racket -- then perhaps a stressed-out and impoverished public might be induced to not go apeshit and instead get on with the mighty task of rebuilding our nation along lines that have a plausible future.

My problem with your post?

Credit Default Swap regulation is treating a symptom, not the virus, not the bacteria, not the bug that started the problem.

Toxic Debt starts at ORIGINATION!

The regulation we need?

NO mortgage can be securitized unless, at the time of securitization, there is at least a 10% equity position in the underlying property, and no securitization is allowed on any adjustable rate mortgage!

Then, the credit default swap and CMO business would be just fine.

The crisis has to do with alot more than CDS’s. They were doing all kinds of derivatives, bets on the stock market or other arbitrary thing, bets on those bets, and trading them so they have a market value to put on balance sheet, when they really have no real value. They are contracts, not realized as any other legal thing and can be tied up in court for years.

Many of these firms had been technically bankrupt for years and made up alot of this stuff to hide it, with nothing illegal about it, all thanks to Mark to Market.

Perhaps
But, my idea would stop securitization of risky mortgage debt.

THAT is far more important than trying to figure out how to regulate the securities, after the fact.

I do not want to prohibit legal contracts, but contracts that the public can NOT research, such as contracts which include private debt and private credit rating information issues -— those contracts should be limited to those who have “skin in the game”.

“Then, the credit default swap and CMO business would be just fine”

LOL. 10 % of what? The property, or the CDS? Cause if they arent paying 10 % of the CDS and the derivitives, that dosent solve the problem.

CDS is an integral part of the structured finance model.

The model calls for that asset your calling for a 10 % equity stake in to be securitized out at 30-50 times it’s paper value. Then the CDS contracts are piled on top of each new layer of paper structured on top of it, so 30-50 rounds of CDS contracts being written between multiple counterparties.

That 10 % equity stake in the underlying asset eventually represents about 1 10th of nothing percent of the total contracts spun off from the original debt note.

It dosent back up the ‘real deal’, the complete package of deals that rely on the underlying asset, so 10 % of the underlying asset is pennies backing up millions.

Sorry.

IF you require that the mortgage holder has, at least, the financial stability to either have put down a substantial down payment, on the mortgage, or that the mortgage holder can not have that mortgage sold, or repackaged, in the securities market, until such time as the HOMEOWNER holds at least a 10% equity in the home -— it will solve a great many problems.
If this had been the law, the last 10 years, I dare say that the situation that we are in now would not be nearly so bad.

It would have prevented the “birth” of the “toxic debt” in the first place.

It would have cut off the funding for many of the bad loans.

This reform would have vastly improved the credit quality of all the other securities that were based on these loans.

"The lack of this procedure is allowing zombie banks to hold the United States hostage for never-ending bail-out ransoms. None of these banks are going to survive another six months anyway, so the basic blackmail motif that the whole money system will collapse if ransoms are not paid is a bluff that has to be called sooner or later in any case."

This is not the first article that mentions that my bank is going to fail.

Plus, the FDIC does not have enough money to cover deposits.

You are correct and most do not understand how bad of shape a lot of the financials are in, especially AIG. This is Enron style accounting on steroids. They were taking liabilities, bundling and insuring them and calling them AAA securities. Then AIG would buy the worst at a discount and use that for collateral for the next round of insuring more bad dept and calling it securities.

At this point God knows how little real collateral is behind all this toxic debt...

A 10 % equity stake on a 250 k house is 25 k.

Most americans could pull that together after a few years of extreme saving and a 5 grand loan from Grandma.

It dosent stop most people from buying a house, but that is really beside the point.

The point is that a 225 debt note is still going to be flipped and sold as millions worth of bank-issued paper. So the 10 % equity stake in the underlying property is nothing, literally nothing. When millions in paper are structured on top of the original debt note, the 10 % equity stake comes to represent a 1 10th of 1 percent equity stake.

It dosent mean anything and it dosent stop anything.

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