Ump on a Blog

It’s easy to say, “Let them all go BANKRUPT!” when it comes to this current financial crisis. But people who say that don’t understand the underlying principles behind what’s going on. The reason everyone is freaking out so badly over this is, if they go bankrupt, we (as in, you and me) go bankrupt. It’s as simple as that.

The banks, brokerages, and other institutions that are currently in trouble are in the business of playing with OPM — Other People’s Money. For you experienced investors, the retail part of their business is the stuff you are familiar with: stocks, bonds, mutual funds, etc. But for institutional and wholesale clients, the game is much, much different, and represents a much, MUCH bigger portion of the business these Wall Street firms deal with.

For those clients (and the BUH-illions of dollars they have in their accounts) the drill isn’t so much buy-this-sell-this, it’s give-us-your-money-to-invest-and-we’ll-take-good-care-of-you-no-really-we-will. Customers such as pension funds who hold assets that are so diversified it would be impossible to try to track them all down, rarely spend the time or energy to do so. They put faith in the big name on the front of the building they are investing with, and enjoy the sweet double-digit returns that roll in every year. Barely a thought is given to where those dollars are invested.

This gives the financial institutions free reign as to where to put a given client’s money, and subsequently a lot more zeroes on the fee they get to scrape off the top. The bigger the returns, the bigger the fee they are going to bring in. So it is in their best interest to look for the grand slam home run, regardless of the risk involved. All the customer needs to know is, their money is invested with (*insert big-time Wall Street investment firm here). Our name is our guarantee.

Well, as it turns out, not so much.

Do the brokerages have their own money invested in these mortgage-backed securities? Enough to rack up tens of billions of dollars in losses over the last 18 months. But that’s nothing in comparison to how much OPM they have invested in these worthless notes. And that means, whatever losses are incurred as a result of these bonds going belly-up are actually incurred by the entity holding the security: the pension fund, the teacher’s union, the institution that *thought* the money was safe and sound. They’re the ones who are going to be left holding the bag.

What does that mean? That means the pension fund or 401K you thought you had, you don’t have anymore — or if you do, the value of your shares just took a nose dive. That means the pool of funds your company uses for its medical self-insurance is now empty, or close to it. That means the cash the company you work for thought it had, it doesn’t have, meaning they have to liquidate assets or reduce staff in order to meet current obligations — leading to job losses, or the sale of physical plants, or both.

That is the end result of us simply letting these Wall Street fat cats bend over and squeal for a change. We end up squealing too.

But more than that, what is the long-term result? American business is resilient, and adapts quickly to environmental conditions. We can weather a storm, even a big one like this. We exploit opportunities when they appear. Companies who didn’t get bitten by the mortgage-backed securities bug will scoop up personnel and fixed assets at fire-sale prices and expand to meet pent-up demand where competitors have had to contract. Why can’t we just let them collapse and tough it out?

Because of the long-term effects on world capital markets. The U.S. dollar is the bell-weather currency against which most others are compared, and many others are directly pegged. A collapse of our capital markets without government intervention will cause two net effects. One, investors (mainly foreign governments) holding U.S. Treasury securities will dump them on the open market to try to recoup their investment before they lose their value. The more sellers on the market, the lower the price goes, and as such the comparative value of the dollar along with it.

And two, investors will be reluctant to invest in securities denoted in U.S. dollars for a long time, fearful that the currency will drop even further in value and eliminate any gains they might realize. Foreign investors expect the U.S. government to “protect” their investment with intervention such as this. Not doing so now will spook the market away from U.S. investments and into Euros, a currency that has enjoyed remarkable stability during a time when the American dollar has been plunging in value as a direct effect of Bush Administration policy aimed at boosting U.S. exports. That flight to Euro currency and investments may never reverse itself, and our position as the center of the world economy may be permanently lost.

That would have a devastating effect on energy prices, food prices, and durable goods prices to name a few, reduce our ability to manipulate inflation through Fed policy, and plunge the American economy into a recession the likes of which have not been seen since the 1930’s. The net effect could be unemployment affecting nearly one-half of American families to some degree. That means between you and me, one of us will lose our jobs.

It would do our hearts good to see the CEO of Merrill Lynch, for instance, with his Bentley in a government impound while he sells pencils on the corner of 5th and Broadway. And the government should take steps to see that the billionaires that got us into this mess help to pay the price for the recovery. But simply cutting these guys loose is, unfortunately, not in anybody’s best interest, least of all yours or mine.

It’s important that we have a soft landing for this crisis, or preferably a gust of wind to keep the ship aloft. A government bailout, though not ideal, is the best quick solution at our disposal. I am confident that the end result will set things on a course that will help to finally re-establish the confidence in the American financial sector that has been lacking for so long. When the dust settles we will have a new President. Hopefully that individual will possess the wisdom to implement regulation and independent oversight in a measure strong enough to prevent this type of thing from ever happening again.

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This morning I saw the first of what will no doubt be many sleazy Republican congressman go on CNN with the following message: the crisis was caused by government regulation in the first place, government needs to get out of the way — eliminate all regulation on the capital and financial markets and let the situation resolve itself.

The parade of idiots has begun.

This guy was one of two things: either a dim-witted cookie-cutter conservative who believes whatever he’s told by his Republican party bosses because he’s too stupid to think for himself; or a Wall Street whore waist deep in financial sector political donations, with his head so far up some lobbyist’s ass that he can’t tell the difference between caviar and dog sh*t.

I have outlined this concept in a prior blog: trying to slam a deregulation bill through Congress while the country is begging for something (ANYTHING!) to be done, and done fast. It is impossible for me to stress to you how important it is that we resist these brainless twerps with ulterior motives. The very future of our nation and the stability of the world economy depends on us implementing real change that will not only correct the current situation, but also put enforceable constraints on a financial sector whose culture has bred a generation of salivating dogs just waiting for the next opportunity to tear at the flesh of any investor that walks too close to the cage.

Morons like this morning’s CNN guest, South Carolina Republican Senator Jim Demint, are the problem, and we need to make sure his voice is drowned out in what history will remember as the most crucial debate of the new millennium. We will get through this mess, we always do, but it will get resolved much faster if we ignore the free-market evangelicals (pronounced, “cheats and liars”) and let common sense dictate our course of action. That means reasonable, enforceable regulation with tangible punishment; that means independent oversight, free of influence from both the government and the private sector; and that means breaking the capital markets free of the paralysis they are currently in with an infusion of cash.