The Official Rick Bell Blog

Bailout Misdirection

Misdirection. As bailout billions fly around Washington DC, be wary of the frantically waving right hand. More likely than not, it’s pulling your attention away from the left hand that’s pulling off nasty little tricks.
 
After DC fanned the populist outrage over retention “bonuses” paid to AIG’s troubled Financial Products division, Congress has since been consumed with using the tax code to retroactively target those greedy executives and grandstanding to see which congressperson can express the most disgust.

The public’s focus is squarely on the $165 million paid to AIG executives and what on what the government can do to limit compensation at companies receiving bailout funds. And given the shenanigans surrounding the rest of the bailout funds, many in Washington probably prefer it remains that way.

Debating government oversight of compensation is a bit of a red herring. When Chrysler received government loan guarantees in the ‘70s, the necessity of cutting wages was agreed to before Congress voted. Similarly, when the Big Three automakers approached Congress late last year looking for a handout, few had an issue with the government asking for executive compensation and union contracts to be revisited.

 It’s a simple case of the Golden Rule: He who has the gold (or Chinese-financed deficit spending) makes the rules. Congress could have better addressed the AIG bonuses upfront if the legislation wasn’t so rushed.

So why is Treasury Secretary Timothy Geithner wanting to keep the focus on this topic by expanding it? “The issue of excessive compensation extends beyond AIG and requires reform of the system of incentives and compensation in the financial sector,” Geithner said Monday in testimony to the House Financial Services Committee.

In Monday’s committee hearing it seemed that Geithner opted to stoke the compensation furor rather than directly address the few brave congressmen and women who pressed him on where the bulk of the bailout funds were going.

Nice diversion.

Less than 0.1% of the $180 billion received so far by AIG went for bonuses—payments that Obama’s Treasury Department and Senator Christopher Dodd wrote language to protect in the so-called stimulus bill.  Though the campaign of “change” promised transparency, the White House, Treasury Department and majority of Congress seem hesitant to discuss the remaining $179,835 billion.

Like the stimulus bill, the bailout bill was hastily written and pushed through with negligible review, discussion or debate. Almost $335 billion in Troubled Asset Relief Program (TARP) funds have been committed to date and it doesn’t appear a single troubled asset has been removed from any bank balance sheet.

Where did the money go? Though the Treasury Department isn’t saying much, the Wall Street Journal is reporting that in the case of AIG, billions in TARP funds are being funneled to US banks, foreign banks and investment houses that used “naked” credit default swaps (CDSs) to gamble on the collapse of the housing bubble.

No wonder DC isn’t talking. The TARP bailout is essentially like using taxpayer monies to cover a Las Vegas casino’s house losses because the bookmaker got the line wrong.

Unmerited executive bonuses are simple to understand, so they make for an easy distraction. CDSs are a little more obscure… and those who profited from them, along with their lackeys in public office, seem intent on keeping it that way.

Basically, a CDS is a contract that allows an “investor” to bet that a credit instrument, like a bond or loan, will go into default. All the buyer needs to do is make a small (often less than 0.25% of the contract amount) annual payment to the issuer—one shiny quarter, well played, can earn you $100.00. These unregulated derivative “investments” even allow for betting that a company’s credit rating will be downgraded.

As it is for Amish folk vacationing on the French Riviera, the problem with these swaps is the rampant nudity. Since CDSs are basically unregulated, naked or unsecured swaps are allowed. An investor can purchase a CDS even though he does not own any of the insured instruments or have a stake in the company being bet against. Naked swaps aren’t about prudently hedging an investment; they are just cheap bets with long odds and a ridiculously high upside.

AIG’s Financial Products division was a major player in the CDS market that exploded to a notational value of $45 trillion by the end of 2007. Once considered sucker bets because defaults and bankruptcies are historically rare, naked CDSs exposed AIG to devastating losses because a number of institutions used the swaps to speculate correctly on the demise of the securitized mortgages that glutted the market. AIG bet otherwise, held no offsetting investments, and priced the swaps too cheaply. When the market went bust, the otherwise profitable AIG faced ruin because of one risk-laden business unit.

Before the dust could settle, billions in bailout out dollars where pouring into AIG. No one told the public anything other than “AIG is too big to fail.” When folks went in for a closer look… BAM! The bonus and compensation furor was ignited.

The truth, however, is that the billions being pumped into AIG were being paid out to speculators who arguably should have taken a haircut.

Goldman Sachs, for example, got an estimated $12.9 billion of the AIG dollars even though the Goldman noted on a March 20th, 2009 public conference call that their exposure was minimal if AIG had been liquidated.

AIG's other trading partners—such as Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, and Barclays—received $32.7 from AIG to settle the derivative contracts, essentially pushing more cash to the same group that had already received TARP money or foreign banks that taxpayers might take issue with subsidizing.

The dirtiest secret of all is that these institutions were fronting bets placed by hedge funds. Note that in 2008—the year that most investors realized staggering market losses—the top 25 hedge fund managers garnered a total of $11.6 billion in compensation because their funds reaped hundreds of billions by betting on the housing bust. TARP dollars insured that these bets were paid in full instead of being used to address “troubled assets.”

Hedge fund managers, as exemplified by George Soros who put up tens of millions in “soft money” to get Obama elected, are notorious for pumping millions into campaign coffers—65% to the Democrats and 35% to the Republicans in 2008. SNAP! Don’t look at that! What do you know, Soros—who personally made $2.9 billion using swaps to bet on the housing bust—just cropped up in the Wall Street Journal with an op-ed piece calling for CDS regulation… joined days later by Geithner expressing the same opinion. Kind of like Bonnie and Clyde calling for improved bank security… after they robbed the banks.

Was 'W' the Worst President Ever?

As orgasmic liberals sharpen their chisels and survey Mt.Rushmore to determine the best placement of Barack Obama’s head shot, their cohorts in academia are working overtime  to put a punctuation mark on the election of ‘08: Ensuring that George “don’t-call-me-shrub” Bush is recorded in the annals of history as “The Worst President Ever.”

Oh how the mighty have fallen. Following 911, George’s approval rating soared above 90%. But with an unpopular war, a ballooning deficit and a Dick for a vice president, George wound up his second term less popular than a website hawking used hemorrhoid cushions. In an informal History News Network  poll of 109 professional historians (academic “Doctors” who can’t prescribe the stuff that kept Anna Nicole Smith looking so lucid before she kicked) 61% rated Bush Part Deux as the worst in the nation’s history.

Granted, it’s hard to argue the ‘W’ will ever crack the top ten (or even the top forty) list of all time greatest presidents, but worst ever? This is America people. A man (for now) has had to sell his soul so many times over to get a sniff at the presidency that the office, by definition, has attracted some of the most questionable characters of all time.

With no universally-accepted metrics for gauging “worst ever,” the label is so subjective that, depending on your perspective, it can be slapped on just about any president. Consider this:

Worst President Ever – The Libertarian View:

As a closet Libertarian my philosophy is simple: Elect the person who will do the least--and by least I mean expansion of government. Every night I run to the TV set hoping that Obama will drop a Regan-esque: “In this present crisis, government is not the solution to our problem; government is the problem.” But alas, all I hear is “stimulus” and ‘investment.”

Poll my fellow delusional, took-one-too-many-political-philosophy-classes Libertarian party members and one name rises to the top of the worst: Franklin Roosevelt. While those not delusional enough to see limited government as viable, consistently rank FDR up with Lincoln and Washington (I suspect because he repealed prohibition) Frank New Deal-ed the federal government into the ever growing behemoth that frightens the bejesus out of Libertarians around the country.

Worst President Ever – The Economist View:

Since 1854 the U.S. economy was been through 32 cycles of expansion and contraction. It’s what free market economies do. Yet for some reason we give some president too much credit for the expansions and curse others for the contractions—and economists can’t agree on why.

For every economist who wants to blame Bush deficits and bank deregulation for the current fiscal crisis, you’ll find others that blame Clinton’s pressure on lenders to offer home loans to the economically disadvantaged. Randomly pick economist and you’re sure to find one that pegs Hooverat the worst because of his association with the Great Depression, Carter as the worst for his association with stagflation or Ford as the worst for his association with ever rising golf course green fees.

Worst President Ever – The Dove View:

The historians surveyed by HNN frequently slammed Bush for dragging us into a “totally unnecessary“ war with Iraq. As opposed to the totally necessary wars with Spain, Korea, Vietnam and Grenada? One can argue that Bush believed his own weapons of mass destruction argument. You can hardly say that for Lyndon B. Johnson who, according to recently declassified files, gave a false pretext for The Gulf of Tonkin Resolution which gave him the exclusive right to use military force in Vietnamwithout consulting the Senate.

Vietnam War American Casualties: 58,209. Iraq War American Casualties: 4,257+. (And Google “Filipino civilian casualties during the Spanish-American War” before playing that card.)

Worst President Ever – The “What Happened To My Beachfront Hacienda?” View

Speaking of a false pretext for war, let’s not forget James Polk. Rebuffed in his attempt to purchase the Mexican territories we now know as California, Nevada and Arizona, the mullet-sporting Polk goaded the newly independent nation of Mexicointo a war in 1846 so he could justify the annexation of those lands.

Realizing the great injustice that was done, it speaks well for the Holy Trinity of Liberal Saviors--Barbara Streisand, Susan Sarandon and Sean Pean—that they have collectively agreed to sign over the deeds to their California estates to the first (don’t-you-dare-call-them- illegal) ‘immigrants’ that can trace their lineage trace back to General Santa Anna.

Worst President Ever –The AndersonCooper Metrosexual View:

Tipping the scale at over 300 pounds and the last, to date, commander-in-chief to sport facial hair, no president screams “makeover” like William Taft. Would he even get a sniff in the era of television?

Worst President Ever – The Mormon View:

In 1862 Abraham Lincoln signed the Morrill Anti-Bigamy Act declaring that the practice of polygamy was illegal in all U.S. territories. The same woman every night? I think not.

Worst President Ever – The Anyone with a Shred of Integrity View:

“I want you to listen to me. I'm going to say this again: I did not have sexual relations with that woman, Miss Lewinsky. I never told anybody to lie, not a single time; never. These allegations are false…” “What do you mean do I remember a blue denim dress?”

Worst President Ever – The April 15^th View

After a 10 year trial run in the 1800’s, the Supreme Court declared federal income tax unconstitutional in 1872. Leave it to Woodrow ‘who-names-their-kid-Woodrow’ Wilson and the 16^th Amendment to make federal income tax a permanent fixture in the U.S. tax system. Every April we can celebrate the little amendment that gave rise to Roosevelt’s New Deal of the 1930’s, Johnson’s Great Society of the 1960’s and Obama’s And-You-Thought-Bush-Knew-How-to-Run-Up-a-Deficit Spendfest of 2009.

My worst president ever? Did I mention I am a closet Libertarian?

Lessons from the Recession

Recessions, in large part, are a result of waning consumer confidence. So at first glance it makes sense to look past the bad news and get people’s glasses optimistically half full again. Writing for The Daily Beast, Mark McKinnon urged President Obama to stop being so concerned with managing expectations and communicate enthusiasm. “You were elected because you are a walking, talking hope machine” writes McKinnon. “Plug that sucker back in and crank it up to ten.”

Not so fast there Mark. The U.S. has deep, systemic  problems that would only be temporarily masked if hope-crazed consumers blindly dipped into savings, ran up credit cards balances and took out new loans to spur another fleeting rise in the gross domestic product (GDP) of which 70% is driven by consumer purchases.

“Rule one: Never allow a crisis to go to waste,” Obama’s chief of staff Rahm Emanuel said in a recent interview with The Wall Street Journal. “They are opportunities to do big things.” Emanuel, though speaking of the fear mongering being used to push the Obama agenda, may be on to something. The economic crisis can be used to drive home some painful lessons that government, business and individuals are in desperate need of learning.

Government spending, which accounts for 19% of our GDP, has far exceeded revenues for years. Were we to address our national debt--which stands at $10.9 trillion dollars today--every man woman and child would need to cut at check for $35,809.65 And that staggering sum ignores the additional $56 trillion in unfunded liabilities needed to support social insurance programs such as Social Security and Medicare—programs that are set to implode.

Worse yet, the deficit continues to grow at the rate of $3.71 billion dollars a day and the Keynesians in charge of the government purse strings see cranking up that deficit to be the only solution to the current economic crisis.

Despite years of lip service concerning deficit reduction, politicians have shown that they can’t make hard choices. Our rate of indebtedness is so great that if were we to apply for membership in the European Union we would be rejected. The debt-to-GDP ratio for the U.S. is in the neighborhood of 76%, far in excess of the 60% maximum established by the European Union’s Maastricht Treaty.

Proving that the only thing worse than complete Republican control of the reigns of government is complete Democratic control, the three tax-and-spend horsemen of the Apocalypse--Obama, Pelosi and Reid—are out to prove that government, government and more government is the cure for what ails us. Perhaps the pain of a deep recession, coupled with the realization that government can’t magically make it dissipate, might be what’s needed to show Americans that the two party system is broken and real change in government is imperative.

What’s more, it appears that American businesses might need a little pain therapy as well.  In the past, recessions have served as the harsh taskmaster that forced businesses to cut costs, streamline operations, diversify their customer base, ratchet down inventories and focus on service. But in today’s climate of government bailouts, the only lesson businesses seem to be grasping is how to grovel and beg at the off ramp of the Federal government expressway.

Bankers, who in recent years hastily and irresponsibly wrote loans because they knew they could be repackaged as securities and sold off to investors, don’t need a bailout. They need to relearn the importance of writing solid loans that have a legitimate prospect of being repaid.

Automakers need to respond to changing market trends and build products that attract consumers who are concerned about the environment and who are still reeling from recent spikes in gas prices. Of course durable goods sales are down 28%, everyone is waiting to see the auto industry’s next move. The first round of automaker bailouts taught no lessons and only served to delay painful, but necessary restructuring.

Though socialist systems have failed for years, the U.S. seems hell bent on proving that to itself.  Having sunk approximately $70 billion into AIG, the government now a 78% shareholder.  What lessons has AIG learned under the government’s tutelage? According to The Wall Street Journal, AIG is now discounting offerings so heavily to attract new business that they are saddling themselves with policies that will be unprofitable for years. Bailouts don’t help businesses operate more efficiently, they just subsidize ineffective management.

If American’s weren’t so busy pondering important issues such as the merits of the octomom’s latest video blog or whether Rhianna should get back with her abusive boyfriend we might be able to learn some lessons from this recession as well.  

First, we need to unlearn the dangerous lesson taught by the housing boom: Don’t worry about the credit card debt you are racking up because house values only move in one direction—up. When you get saddled with too much consumer debt, simply refinance your house and pay down those balances.

Second, if the housing bust made one thing clear it’s that someone who has not learned to manage their finances well enough to put together a significant down payment probably has no business buying a house. Homeownership entails unanticipated costs. A leaky water heater, new roof or blown air conditioning unit can quickly overwhelm someone who only knows how to live paycheck-to-paycheck. Yet Obama and company feel the need to bail out these unfortunates as well.

Fortunately, it appears that the recession is teaching individuals one important lesson. Savings rates jumped to 3.6% in December 2008, 3 times the 2007 average and far above the 0.04% rate in 2004 during the housing boom. Fear apparently is an effective teacher.

Refined by their struggles during the Great Depression, my parents, Preston and Frances Bell, exemplify frugality, preparedness and living within one’s means. Values they had etched into their core during years of struggle and hardship. Though never wealthy, the current economic downturn has left them unfazed. Their house is paid for, bills are almost nonexistent, and cash is on hand. Contrasting my parents with the majority of Americans who have immediate gratification as their mantra, one can only hope that the current recession teaches some long overdue values.