Dana Blankenhorn

There Is No Pony, Kos

I was as gobsmacked as anyone else to see the rejection of the workout plan yesterday.

I know it was mishandled. I know it was mislabeled. I expected Republicans to turn on it for ideological reasons.

What I didn't expect was that people like Kos would turn on it.  When liberals make the perfect the enemy of the good we all lose. When liberals decide to act like petulant children in the process, they deserve to lose.

Earth to Digby, to Jane Hamsher, and to the online cocktail party over at Huffpo.

There is no pony.

That is, there is no magical plan that can pop up here to please you, pass the Congress, and win the President's signature. And by January it will be too late.

Let's recapitulate:

1. This is a problem caused by Americans. Americans created phony money which could not be priced once foreclosures started, because you couldn't be sure which CDO had how many bum loans in it.
2. The $700 billion is not a bailout. The money would be used to buy up this paper, determine its value, repackage it, and resell it. We should make money on this. We're Mr. Potter, picking up some bargains.
3. So long as these trillions of dollars we created are seen as worthless, foreclosures will rise and the value of the same paper will go down. The profit we can expect on the conversion could turn into a loss.
4. This is a worldwide problem. We are doing more damage to other countries now, every day,  than the terrorists did on 9/11, especially to poor people, who are always hit hardest by hard economic times.

I've compared this bill to a laxative, meant to clear the big shitpile from the colon of the world's financial digestive system. Sometimes it takes strong medicine to clear such an obstruction. But if you don't clear it you die.

Barney Frank & Co. knew they had Paulson and Bush over a barrel. They were able to spend a week forcing the Republicans back on every point. The final bill was as good as it was going to get. It had everything your party leader, Barack Obama, said he wanted.

I can understand a doofus like Kucinich voting no. I can't understand the Netroots following him over the cliff.

A Grieving Process on CNBC

The failure to pass a work-out plan, based on Republican votes, has begun a grieving process on Wall Street similar to what Clintonites went through this spring.

Denial was the order of today. This was especially the case with Republican reporters like Charlie Gasparino  (right) and the traders being interviewed throughout the afternoon. None could believe that the Republican Party they had sunk their political souls (and fortunes) into could be turning them down.

Anger, bargaining and depression are the next stages of the process, and these will come quickly as the week wears on. (Acceptance comes on the morning of November 5.)

Treasury Secretary Hank Paulson delivered a veiled threat from the White House, saying he would work with "anyone" to get a package through Congress. That means if Nancy Pelosi and Barney Frank can come up with some price that will draw 11-15 more votes, Paulson will sign on and provide them the political cover. (Even Republican Senator Judd Gregg was repeating Democratic talking points this afternoon as he pleaded for more votes.)

Meanwhile Wall Street was reacting as expected, falling 777 points (nice number that) on light volume. Everything was taken out and shot -- even Google. The interest rate on 3-month treasuries fell to .17%, practically nothing, because people who have money to invest are scared to death. Banks are refusing to lend to one another, and business lines of credit for things like salaries are already being cut-off.

Responsibility

Regardless of your politics, these truths are self-evident.

• Americans ran the world economy off the rails.
• Americans created trillions of dollars worth of paper which could not be properly valued once our real estate market tanked and foreclosures started.
• Americans in the private sector were allowed to do this by Americans in the public sector.

What these Americans did has reverberated worldwide.  The Russian stock market melted down completely over the last few weeks. We probably did more damage to them with CDEs than we ever did with the Cold War.

If this damage were limited to Russia I'm certain some Americans would cheer. But it's not. Every market has fallen, because American dollars are (like it or not) the world's reserve currency, and because Americans created phony ones to the tune of trillions of dollars.

Caveat emptor, you say? Maybe.

But will anyone, anywhere, ever trust the American dollar, or Americans again, if we let the economy go down on our cupidity? (No.)

I'm an American. I'm just as responsible for this as every other American. I don't care if you're a Republican or a Democrat or a Libertarian or someone who never voted in your life. We are collectively responsible for what has happened here. You are responsible. Nothing you do will wipe the guilt from your hands.

So we have a civic duty, as citizens of the world, to set it right. Otherwise the world will be right to turn its back on us, and your children, and your grandchildren. You can let world markets fall, you can let this crap be written down to zero, but none of the victims will ever forgive you for it.

One more thing. You'll be one of the victims.

Strategy over Tactics

The most remarkable point about Friday's debate, about the whole week, has not been remarked upon enough.

That is the difference between strategy and tactics.

Barack Obama has gone after everything strategically. He has a long-range vision, of Democrats and Republicans getting along even when they disagree, of consensus that starts with agreement and moves outward, a vision driven by Internet values that has been as controversial among Democrats as among Republicans.

Obama won that argument narrowly in his own party and this week he hit John McCain over the head with it.

Obama deliberately treated McCain with respect, even some deference, beginning many responses by saying he agreed with McCain on some point. Then he hammered home a strategic vision which, whether or not you agreed with it, was at least coherent, different from the way we have been going, and fairly easy to understand.

The talking heads exploded. No knockout blows, they said. No sound bites, they complained.

Well, exactly right.

McCain, meanwhile, was all about tactics. Everything was tactical, obviously tactical, from picking Palin to "suspending" the campaign to coming back to Mississippi. And the way he debated was tactical. He treated each question like a separate event, rather than as part of some larger whole.

The key point came when discussion turned to "the surge." McCain kept hammering away that this "strategy" proved "we will win" in Iraq, that Obama was unfairly disparaging "our troops" and "General Petraeus." Obama refused to be drawn in, stating repeatedly that the surge was "a tactic," that the strategy of focusing entirely on Iraq was the mistake, and that McCain was confusing strategy and tactics.

This went right over the heads of the TeeVee Talking Heads, just as it went over McCain's head. But it was clear that the American people got it. Just as it was clear they understood why he was being deferential, why he was starting his sentences with "I agree with John" or "Senator McCain is right" about something. He was using those phrases as a digression to discuss his disagreement, laying out common ground before moving to the basic choice. Most people understood that.

How The Paulson Workout Works

How does a $700 billion injection of your money act as a laxative on the Big Shitpile, and why is this a good deal for you?

If done right, you the taxpayer make a killing. Everyone is selling. You are buying. Remember "It's a Wonderful Life," the bank run scene (above)? The famous line from Jimmy Stewart's George Bailey. "Potter isn't selling. Potter's buying. He's picking up some bargains."

Well in this version you're Potter.

You walk into the market and offer to buy these CDOs, now priced at zero, at some price set by an auction.

Then you take those securities apart. You can do this. You're the government. Bankers can't do this. Only you can do this.

You crack open these little piggy banks and look at what's inside. The reason these securities are worth nothing is no one knows what is inside. Some of these are loans that have foreclosed already. You set those aside. Most are mortgages which are still current.

Now you take a bunch of the best loans, some fixed-rate mortgages, all current, with an average interest rate of, say, 6%. You put them into a new security and you sell them. These are good loans, paying 6%. They're worth a lot of money.

Then you look at the rest. Maybe you've got some adjustable rate mortgages where the holder is unsure if they can make the payments. You go to those holders and offer them a new deal, a new fixed rate mortgage through the government, at a rate somewhere between the souped-up rate they are currently having trouble with and that good 6% rate you just sold. Package these together, figure there might be some defaults, but because of the higher interest rate you can still get a good price for them.

Then you have the crap. As many as one in ten of these loans may have to be foreclosed on -- I'm actually being pessimistic here. OK, you foreclose. And you sell that real estate to bankers.

Now you've raised a bunch of cash from selling these good notes, so you go back into the market and buy more bad notes. Private bankers see what you're doing and they enter the market as well. Gradually the backlog of mortgage-backed securities clears.

Act Like A Grown-Up

Think of this as Volume 11, Number 39 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

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One of the local sports stations had a gasoline wholesaler on this morning.

He had bad news. Don't go to the UGA-Alabama game in Athens this weekend. There's no gas on Highway 316. You'll be stuck out on the highway, stranded.

The hosts were apoplectic. Set us up with something, they demanded. How dare you tell us we can't go to a football game.

The wholesaler was adamant. If you don't start out with a full tank you will be sitting by the side of the road. He couldn't get through to these bozos.

It's the same everywhere. Each of the last two days, in my YMCA parking lot, I passed parked people sitting in SUVs, engines running, chatting on cellphones. The roads are still mobbed, but when I decided to get a little gas myself, I faced lines of angry people, and a price at the pump of $4.40/gallon. (Could have been worse, right.)

How can ordinary people be grown-ups when a 72-year old man is acting like an 8-year old drama queen. He talks about doing a deal, then walks in and blows it up with silence. The press and regular Republicans let him get away with it, Charlie Gasparino of CNBC saying "maybe it will work" when he knows the markets he covers will tank without a deal, and all the people he talks to for a living will go broke.

Don't think this is entirely an American problem. Other countries are being broken on this wheel as well. Markets around the world are tanking while we dither.

What about the Left? Any adults there? Nope. Just pony plans, class warfare, taxing stock transactions (that will improve liquidity).

The Panic of 2008

If J.P. Morgan came down from heaven this evening, with a $700 billion check to buy mortgage securities, conservatives like Jim Bunning would be shouting hallelujah and liberals like Chris Dodd (right) would be muttering about a "single individual taking over the economy."

Well, as I explained yesterday you and I are J.P. Morgan. We are the only folks who can play the part. So the roles are reversed. Conservatives are calling this "socialism," and liberals like Dodd are reluctantly going along.

The Panic of 2008 is just like the one 101 years ago, seen through a funhouse mirror.

There is no doubt among market makers that, without new investment, the "big shitpile" will kill the economic patient. In this case the name is apt. The market is constipated. The money is a laxative.

What does the shitpile consist of? Mortgages, and complex instruments based on mortgages. Some of these are bad mortgages, or mortgages that are going bad. Many are not, although if jobs are lost or prices keep falling they might become bad. But because of how these securities were constructed, and what traders were then allowed to do with them, they are all currently worth zero dollars.

What is needed to find a price? Liquidity and time. A buyer willing to step up sets a price for these securities, injecting money into the accounts of the sellers. The buyer can then look at the securities and see what is what, where the real value lies and, following this audit, take losses on the bad parts and sell off the good parts. The person who got the money is not going to stuff it under a mattress. They are going to reinvest it in something. Maybe new mortgages. Maybe the new securities created by the people they sold the initial securities to. Maybe in windmills.

Without this buyer emerging the securities remain worthless. You may continue to make your mortgage payments but the holder may still call the mortgage, trying to get some cash. Even if your home is worth more than the mortgage principal (and given the present state of the market, with all those foreclosures and all, that's unlikely) you then have to enter a non-liquid market and find a new loan, or you lose the house.

This is what Democrats fear, and this is why most Democrats are stepping up to the plate. (There are exceptions among Netroots Democrats who fear this is all a big scam on the part of the Bush people to take their last dimes and run off to Dubai with them.)

This is what many Republicans are conveniently ignoring. This is something investors need to remember on November 4.

You Can Be J.P. Morgan

That's the bottom line on this "bailout."

You, the American taxpayer, are being given the opportunity to do what J.P. Morgan did during the Panic of 1907. No one is buying valuable assets. Step up to the plate, buy enough to liquify the market, and you can make a killing.

You are offering cash for assets that are worth far more than the cash, because you have the time to wait for a return. That was the Morgan way. You, the American taxpayer, now have the opportunity to do what Morgan did, and feel what Morgan felt. I find that opportunity delicious.

The bankers are scared. Screw them to the wall. Offer just enough for the assets to set a floor price and then, as the prices rise, sell back at your leisure. Make it Wall Street's contribution to the Iraq War, a stupidity tax to take back some of what Bush gave them.

Obama-Buffett 2008

As I expected Warren Buffett has put John McCain east of the rock and west of the hard place, practically assuring the election of his favored candidate, Barack Obama.

Buffett did this by putting $5 billion into Goldman Sachs (at a usurious rate on behalf of his Berkshire Hathaway) and then stating that, if could get his hands on $700 billion he'd do the whole bail-out.

With ideological Republicans standing foursquare against any bailout, the Bush Administration is forced to craft a deal Democrats will accept. Despite the blathering coming from CNBC, the Democrats will get everything they want -- because Paulson has no one else to deal with.

Thus Barack Obama will get a deal he can agree to. And McCain? If he votes aye he angers his own voters. If he votes no he angers Wall Street.

Checkmate.

Leadership

The difference between the ordinary and the extraordinary is calm in the center of the storm.

• We see it in athletics, where the pitcher or the quarterback or the point guard is able to somehow control their emotions, stay in the moment, slow down the game and deliver the victory.
• We see it in business, where a trader or CEO keeps his head while markets are falling and scoops up assets at a fraction of their "real" price.
• We love to see it in Las Vegas. It's what the great gamblers have. It allows them to bluff and take pots when they have nothing, because they separate themselves from the emotions of the moment and take advantage of others' normal weakness.
• We see it on the stage, in the movies. We see it in religion. The greats all have it. That ability to be still, to hold a mirror to the audience and let themselves be the hero the viewer wants them to be.

We're seeing it in politics this week, in the person of Barack Obama.

It is an extraordinary talent.