Ben Stein - The Gloomsayers Should Look Up
BEFORE I start on this little tour d’horizon, I just want to say that a good, fresh Taco Supreme from Taco Bell is more tasty than just about anything at any fancy-pants restaurant anywhere in the world. And they didn’t pay me, and they don’t even know me. Just for perspective.And really, the whole story about the economy, credit, morality and rescues is about perspective. Start with the good news about perspective: The economy is basically in fine shape. Not perfect, but darned good. Almost all mortgages are not in default. Almost all workers in the labor force who care to work are not unemployed. The largest percentage ever of American household units, what were called “families” in the old days, own their own homes.
The stock market, in both absolute terms (the number on the Dow) and relative terms (the relationship of price to earnings), reflects optimism and an extraordinary, robust level of profits.
On a more sophisticated note of analysis, the spread between the interest rate paid on risk-free Treasury issues and on the Merrill Lynch master junk-bond index is far, far less than it was in the dark days of the tech meltdown from 2000 to 2002. (This data comes from Marty Fridson of FridsonVision, le dernier cri when it comes to junk.) This is a sign of less than horrific fear about high-risk debt.
Newspapers (which often sell on fear, not on fact) talk frequently about a mortgage freeze. However, for all but the least qualified buyers, mortgage money is plentiful, and in fact the potential borrower is bombarded with offers. Hotels and airplanes are full. Casinos in Las Vegas are jam-packed. There is still a long waiting list for Bentleys in Beverly Hills.
This country does not look like a country in economic trouble. Nevertheless, some extremely worrisome things have happened and are now being revealed, and worse are to come.
As everyone knows, we have a housing correction on a large scale. True, it’s a correction from a high level, but it’s still a big correction. There has been a spectacular upsurge in mortgage delinquencies among subprime borrowers. While the sums involved are tiny, compared with the dimensions of our lusciously huge economy, they are unfortunate in many ways, as we will see.
There has been a stupendous wave of fear washing over Wall Street and the large “money center” banks because of commitments to finance mergers and leveraged buyouts that now look questionable. The large banks and investment banks are committed to lend hundreds of billions of dollars for deals that looked sweet when deal guys were playing musical chairs but look dicey now that the music has stopped. Some people think that the game won’t start again for a while (although I happen to think it will restart very, very soon — the fees are just too good for this game to stop).
In recent weeks, there has been another tsunami of fear about money tied up in so-called conduits. These are basically incredibly risky and foolish instruments in which money is borrowed short to be lent long. Every finance student in the world is taught to be wary of this deal because when it goes bad, it goes really bad, but nevertheless, there are many big players in Europe and the United States who have done these deals.
There is deep worry that lenders caught up in bad loans to subprime borrowers, failed conduits and Wall Street deal makers will have to take big losses that will impair the capital of the lenders and shake the foundations of the nation, credit-wise.
Now comes the “and there is worse to come” part. It certainly looks to little me as if the top dogs on Wall Street made some staggering mistakes. They took on very risky loans. They tried to juice returns in a low-interest-rate world by maneuvers so dicey that the maneuvers would not survive scrutiny and had to be hidden on off-balance-sheet entities, sometimes outside the country.
All those titans of the Street at Merrill Lynch, Citigroup and elsewhere can fire their underlings and blame them for their losses. But the C.E.O.’s are paid big bucks to know what’s happening and to run their companies prudently (as Goldman Sachs and JPMorgan apparently did). Clearly, with immense losses in a wide variety of investments, prudence was not used in the last several years at some of our most esteemed money houses.
As I have said for 20 years, it’s basic when you are lending to subprime borrowers to take substantial reserves for likely defaults. Obviously, this was not done. When you borrow short and secure and lend long and risky, you take huge reserves for the day when the trade turns sour. This was apparently not done. If it had been done, there would be no problem.
Those at the top can blame anyone they like for their companies’ imprudence, but they are ultimately responsible. Why are they still in their jobs? Not one C.E.O. of a major commercial or investment bank has lost his job despite some staggering write-downs. Why? Is this the board of directors’ old buddy system at work? Sure looks like it.
Now, the ultimate Wall Street player and insider, Henry M. Paulson Jr., the Treasury secretary, has bestirred himself to take serious notice of the credit problems faced by some very big lenders. He wants to create a bailout fund in which banks that still appear sound buy some of the debt of the troubled players like Citigroup.
THE deal, as far as I can tell, is that they buy the most secure levels of debt that Citigroup and others own, get large fees and allow Citigroup and the others to keep the debts off their balance sheets. But there are at least two giant issues here.
One is that it’s a bit too predictable that Mr. Paulson would basically pooh-pooh the subprime problems until major Wall Street powers got in trouble and then — presto! — swing into action. It might have been inspiring had he stepped up to the plate when smaller players like home buyers were getting burned, but that’s not really his style.
The other is that it’s hard to see what good the maneuver would do. Suppose Citigroup or some other lender has a perfectly good loan to sell. Why does Citigroup need a big Treasury-sponsored organization to sell it? They can sell it to anyone right now. The problem is with the questionable loans. And they seemingly are not part of the plan from the Treasury.
The Treasury plan is either just plain foolish (an explanation not to be sneered at) or it’s the thin edge of the wedge: what may follow is to have a government fund to buy the slightly less fragrant parts of the portfolio. Indeed, that would seem inevitable to me, and I’ll tell you why.
The goal is to keep Citigroup and others from taking large losses on bad loans. If the loans are sold to supershrewd buyers of debt like Leon Black or David Tepper or our resident megagenius, Warren E. Buffett, those buyers will demand a big haircut on the deal. Losses will have to be taken. The only buyers who might step in to pay full price are — drumroll, please — you and I, the taxpaying suckers.
I could easily be wrong, but I suspect that at the end of the day, you and I will be bailing out the hundred-million-a-year finance titans who messed this up in the first place. This is what happened with the savings-and-loan disaster. The S.& L. chieftains — very often connected with Michael R. Milken and Drexel’s junk-bond world — became multimillionaires and billionaires by wheeling and dealing with government-insured money. When the loans went bad, you and I picked up the bill while the bankers went shopping for their Bentleys.
NOW, let me go back to my role as Little Benjy Sunshine. None of this will sink our glorious economy. The losses are nothing compared with the losses in the tech debacle. They will be nothing like the numbers bandied about in the fear-mongering media. If there is a questionable $200 billion pool of loans, that means a small percent will be lost, not all of it. This big, strong economy will sail on through.
But the vicious, cruel truth is that some very greedy, selfish and, yes, stupid men made fortunes on deals that were economically and/or ethically wrong. (Why else hide them off balance sheet or abroad?) They got immense fees, stunning paychecks and the inheritance of maharajahs. Their great-grandchildren will be rich from their deeds and misdeeds. As far as I can tell, they are not being called to account in any major way. The ones at the top aren’t fired or, if they are fired, are fired very rich. (Never mind that silly mouth music from Citigroup about “the year of no excuses.”) Despite what looks to me like a breathtaking lack of disclosure, I have not seen any lawsuits by the Securities and Exchange Commission against any of these big money-center princes or principalities — not to mention criminal investigations from other law enforcement authorities.
And we stockholders and taxpayers foot the bill, of course. But even this is not the worst part: there are still lots of people who can say with a straight face that the world of finance is overregulated, that we should trust the power players to do the right thing, that if we put finance under a microscope, or allow financial miscreants to be sued for misconduct, America will be harmed. There are still people, and I know many of them well, who believe that old myth that you can trust the markets to fix everything — that old magical thinking that some thieves will stop other thieves from robbing the sheep like us. That’s the really sad part. Some babies never learn.
But in the meantime, try that Taco Supreme. It’s awfully good. Wall Street hasn’t figured out how to ruin that one yet.
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posted by UncommonBusiness @ 12:30 AM
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