The Curious Capitalist, Justin Fox, Economy, Markets, Business, TIME

More bailout questions, more sort-of answers

My attempt to answer a reader's long list of questions about the bailout has been condensed into an article in the new TIME (with the soup line on the cover). Barbara also has a piece in the magazine about current consumer credit conditions, which is also condensed from something that ran first online. Meanwhile, the magazine also features an all-star lineup of articles on the crisis from Niall Ferguson, Michael Grunwald, Nancy Gibbs, and Dan Kadlec.

In the meantime, the reader with all those questions--her name is Charlene, and she's from a suburb of Grand Rapids--has some more questions. And so do lots of other people. I don't think I can possibly answer all of them, but here's a selection culled from several reader emails. The first two sets are from Charlene:

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Bailout bill passes, financial crisis continues, Part II

On the topic of the how, even with the bailout bill (sorry, the rescue package), all of our problems won’t be solved overnight, I offer a story I wrote for today. It starts:

To understand how the credit crunch is hitting American business — and, in turn, you — look no further than The Dog Shop, a pet supplies and grooming store in Washington, D.C. This holiday season, owner Jane Huelle will only stock four varieties of Christmas-cookie dog treats, instead of the usual six. That's because a month and a half ago she got a letter from her credit card company saying her line of credit was being docked by thousands of dollars.

You can read the full thing here.


Bailout bill passes, financial crisis continues

So this time it passed, and it wasn't even all that close (263-171). After turning down a $700 billion financial bailout plan on Monday, the House turned around and this afternoon approved an even more expensive one--loaded with tax cuts, an expansion of federal deposit insurance, and a now infamous tax exemption for certain toy wooden arrows.

What happens now? Financial consultant Howard Glaser says Treasury hopes to conduct its first reverse auctions for mortgage securities in a few weeks, and will start buying whole loans from troubled regional banks and thrifts soon as well.

But the financial crisis has now gone so global, and the economic situation at home is worsening so quickly, that it has become pretty clear that the TARP, as Treasury calls its plan (for troubled asset relief plan), is just part of the solution. The leaders of Britain, France, Germany and Italy are meeting in Paris Saturday to see if they can come up with a joint plan of attack to deal with the crisis. And here in the U.S., it's hard to imagine that we won't still be struggling with tight credit, bank failures, and a worsening economy two or three or four months from now.

The upside is that TARP gives Treasury Secretary Hank Paulson more resources with which to battle the meltdown. Of course, that's also the downside if you either (a) don't trust Paulson with that kind of power or (b) think buying mortgage securities is the wrong approach. I'm okay on (a), but I don't think even Paulson is absolutely sure he's right on (b).

I'll leave you with a cheery forecast from Paul Kedrosky:

Some time after the U.S. presidential election, with credit markets still a mess, banks failing all over the landscape, and no real end in sight, we will likely see the new president pull together some sort of TARP II commission. What should we do, post-Paulson, to prevent this crisis from further deepening and continuing? Top of the agenda will be further fiscal stimulus, and, in all likelihood, an explicit recapitalization of the banking system, with government picking favorites.

A whole new sort of moral hazard?

So now federal regulators are in a bit of a bind. If they let Wells Fargo ride in and snatch Wachovia out from under Citigroup, they get a better deal for taxpayers—an industry-on-industry solution with no government backstop.

But that might send a dangerous signal to the market. Setting aside the issue of whether or not a Wachovia-Wells deal would be illegal under the terms of the agreement Wachovia made with Citi, we’re still left with the situation where deals made under the direct supervision of the feds are subject to change. Citi came to the rescue of Wachovia in the middle of the night. If the deal they reached is allowed to be shoved aside, what happens the next time Citi, or another potential white knight, gets the call for help?

I’ve already been having some shaky feelings about how comfortable we are at changing the rules of the game these days—short selling bans, mark-to-market accounting rule rewrites, discussion about letting judges adjust first mortgages in bankruptcy court.

Desperate times call for desperate measures, I know. But when it comes to something like the enforceability of contracts, isn’t that bedrock to the whole notion of capitalism?


The House bailout countdown

The House is expecting to vote on the big bailout (oh, sorry, rescue) bill around 12:30. Jay Newton-Small has a story up on explaining that the fiscal-conservative Blue Dog Democrats in the House, who mostly supported the bill on its first go round but are ticked off at all the junk the Senate added to it, may be crucial to its success.

Blue Dog chairman John Tanner got up and spoke on the House floor a little while ago. He said he was filled with "disgust" at what "the other body" (the Body-That-Must-Not-Be-Named) had done, but he still voted yes.

Then one of the Nunes boys from Tulare got up and said something about how when times were good the Wall Streeters wanted Washington to leave it alone, and now that times are bad they want Washington to nationalize their debts (I had typed out the exact quote but deleted it by mistake). Which is absolutely correct. And I'm not just saying that because I was a reporter for the Tulare Advance-Register when Devin Nunes was a sophomore at Tulare Union High. He's voting no, by the way.

So is Pete Stark, a former banker who was elected to Congress in 1972 on the strength of his opposition to the Vietnam War (I remember his bank HQ in downtown Walnut Creek, Calif., used to have a big peace sign painted on it). Although he used the whole this-is-the-Iraq-war-all-over-again argument, which I think is pretty silly. I don't care which way you vote, I just want you to make cogent arguments, people!

Ooh, but Republican Gresham Barrett of South Carolina is changing his vote to yes.

Anyway, there's no point in doing a blow-by-blow. I think this is gonna pass. Not that I know anything.

Update: Barney Frank, after a Jeb Hensarling warning about the bailout's socialistic tendencies: "Ever mindful of the danger that George Bush will lead us down the road to Socialism, we will be monitoring this very closely."

Update 2: Wisconsin Republican Paul Ryan has a big chart of the TED spread next to him as he speaks! So cool!

Payroll data: Yeah, we're in a recession

Can we stop saying now that financial troubles "might" tip us into a recession? As this morning's employment numbers (and a lot of other data in recent days) make clear, we're in a recession. I'm still betting that the arbiters of such things will eventually decide we've been in a weird, mild recessiony kind of thing since last fall. Now the weird and mild (and the y) appear to be disappearing. We're in a recession. The question that remains is how bad it's going to be.

Wells-Wachovia: That's $270 billion less we're on the hook for

In a fascinating turn of events that we'll surely all learn more about over the course of the next few days, Wells Fargo--which had been about to buy Wachovia a week ago and then backed down, forcing the FDIC to bankroll a shotgun acquisition by Citigroup--changed its mind and agreed to pay $15 billion for the giant bank.

This time the FDIC isn't part of the deal. So that $312 billion Wachovia loan portfolio that the FDIC agreed to share losses on with Citi (Citi agreed to take the first $42 billion) is now completely Wells Fargo's responsibility. Although of course we taxpayers are all on the hook for Wells Fargo's losses in the same way we're on the hook for any bank's.

The encouraging part here is that instead of a combination of two ailing banks engineered by a government agency we get an outright takeover by one of the healthiest big banks in the country. A big bank whose biggest shareholder is Warren Buffett (who bought in during the country's last banking crisis, in 1990). And a bank whose chairman, Dick Kovacevich, is widely thought of as the smartest guy in the banking business.

The deal would leave a competitive landscape with three giant national retail banks--JP Morgan Chase, Bank of America, and Wells Fargo--leaving Citigroup as a sort of odd man out, with big global and investment operations but not nearly the domestic branch network of the Big Three. Oh, and it leaves Kovacevich, who left Citi in 1985 after losing out on a promotion, thoroughly vindicated.

For now at least. The one thing about the Wells-Wachovia deal that worries me is that it creates an entity awfully exposed to California real estate (it was Wachovia's acquisition of California thrift Golden West--a.k.a. World Savings--that got it into trouble in the first place).

Oh, and one thing about the new Big Three that I find interesting: Their names are all brands they picked up along the way from banks they acquired. If I've got it right, they're really Chemical, Nationsbank and Norwest.

Update: Charlie Gasparino is reporting on CNBC that Citi is very ticked about this. Will it try to block the deal? We'll see.

Update 2: The WSJ reports that Citi may sue, or may make a new bid. A bidding war! In the middle of a financial meltdown! That's pretty cool.

What he said, except the part about bloggers

There was a reader Q&A; this Wednesday morning on the Washington Post site with business columnist Steven Pearlstein, who won a Pulitzer for his 2007 coverage of the financial crisis and has continued to write great stuff (via Romenesko). I link to it mainly because I'm getting asked more questions these days than I can ever answer, so when I find someone whose answers sound a lot like mine I'm more than happy to outsource (as I did with Tyler Cowen yesterday). A sample:

Savage, Md.: I'm sure this has been asked a million times, but I don't remember the answer. Why did lenders ever think highly variable and exotic products like ARMs with artificially lower teasers or interest-only options were ever appropriate for subprime borrowers with bad credit? I can understand the existence of subprime mortgages -- higher rates reflect higher risk, just like with jumbo mortgages -- but if the lender had wanted to minimize risk, wouldn't the only sensible thing be a constant payment schedule?

Steven Pearlstein: I have never explained it because it is simply inexplicable, other than by the conclusion that the people making and brokering thse loans knew full well that it was stupid but that (1) it wasn't their money at risk (2) the fees were great and (3) the borrower would get into trouble and then simply get out of trouble by refinancing the loan (with another set of fees) later, and using the higher price and added equity to get into a more reasonable loan. When the prices stopped rising and refinancing was no longer possible, the Ponzi scheme ended.

The one part of the Q&A; I didn't like was when he responded to a question/complaint about the bailout bill being "rotten to the core" thusly:

Steven Pearlstein: The left wing bloggers are out in force on this one -- they see this as a seminal issue, like the Iraq war vote and the vote on warrantless searches. But other than not really understanding the problem and not really having studied the proposal, you guys are doing just great! Thank God there is a mainstream media out there that actually does reporting and has people who understand thing, because if the flow of information and news to the American people were left solely to bloggers, we'd be in a big mess.

Can't we just pass some kind of law decreeing that people at mainstream media organizations are no longer allowed to make sweeping statements about the bloggers? Maybe it could be part of the bailout bill! The Paul Wellstone Emergency Economic Stabilization, Non-Laminated Wooden Arrow Excise Tax Exemption and Mainstream-Media Undiscriminating-Blogger-Denigration Prevention Act of 2008, or PWEESNLWAETEMMUBDPA.

I mean, I've criticized the same silly this-is-the-new-Iraq argument that Pearlstein is talking about. Guess what: So have some lefty bloggers! The lower barriers to entry of the blogosphere do mean that more unadulterated, uninformed nonsense is spouted there than in the pages of the Washington Post or Time magazine. But they also mean that the blogosphere produces huge quantities of more specialized, more informed, more intelligent commentary (and on occasion better reporting) than much of what you find in the Washington Post or Time magazine. I know the comments to this blog often contain far more intelligent and informed discussion of the affairs of the day than I can muster.

Okay, off my soapbox. I still think professional media are indispensable, although there's no law saying they have to look like our existing mainstream media. I just hate the whole bloggers this or bloggers that line of discourse. It's so 2005. Criticize the "the idiots" or the "the lunkheads" or the "the zealots" all you want, Pearlstein. Just not "the bloggers."

There are enthusiastic investors out there. Today they had lunch uptown

A bunch of value investors got together at Columbia University today for the annual celebration of Graham and Dodd—those Columbia B school profs who wrote the 1934 tome Security Analysis and inspired generations of investors (Warren Buffet among them) with the philosophy that the way to make money is to buy good companies on the cheap and then let the market, over time, discover how much those companies are actually worth.

By some measures, it's the perfect time to be a value investor. Thanks to the whole financial tumult/market freak-out situation, there's a lot of cheap stuff out there. "Everything we buy goes down every day, but we look at the economics and the price and they're some of the best opportunities we've ever seen," said David Abrams of Abrams Capital Management. More than one of today's panelists has gotten into distressed debt. Seth Klarman, who runs The Baupost Group, said that "it's sad" to be buying from panicked, out-of-their-mind sellers—including some of the "best trading desks on Wall Street"—who are being forced to unload assets because of plunging valuations and redemptions. But he's doing it, they're all doing it, because this is how value investing, in the long run, comes out on top.

Emphasis on long run.

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Forget Glass-Steagall repeal. It's the Securities Acts Amendments of 1975 That Really Did Us In

Regular readers of this blog are aware that I'm extremely dubious of the argument that the 1999 repeal of the Glass-Steagall Act, which separated banks from securities firms, is to blame for today's financial crisis. But it keeps coming up, so let me try to smack it down again.

First, I think it's fair to say that 90% of the people who blame today's troubles on Glass-Steagall repeal have no idea what they're talking about. It's just that the whole thing has a deregulatory sound to it--and deregulation is bad. That, and one of the names on the law that repealed Glass-Steagall, the Gramm-Leach-Bliley Act, belongs to John McCain's Treasury-Secretary-in-Waiting Phil Gramm, who is not just Satanic but Texan. Nobody seems to care that another of the names on the law belongs to saintly Iowan Obama supporter Jim Leach. Or that Bill Clinton signed it. But whatever: Let's focus on the 10% who do have some idea of what they're talking about.

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About The Curious Capitalist

Justin Fox

Justin Fox is TIME's business and economics columnist. This is his blog.  About the Authors

Barbara Kiviat

Barbara Kiviat just celebrated her 5-year anniversary covering business and economics for TIME magazine.  About the Authors

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