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The repugnant bailout nation
There seems to be little outrage as the US, a country where free enterprise is supposed to reign, moves to nationalize losses without even contemplating reform.
By Bill Fleckenstein
We are at another moment when those of a bullish persuasion, whose financial muscle memory was developed under former Federal Reserve Chairman Alan Greenspan, are determined to put lipstick on the pig at every opportunity.
As soon as any facet of each financial minicrisis ends -- whether that be in certain subprime lenders, certain Alt-A lenders, certain monoline insurers or certain banks -- folks act as though all is well, even as financial institutions continue to implode.
At nearly every one, there's a lot more than meets the eye, because much of the surface strength centers on the perception that these institutions have correctly marked their mortgage-related assets. Recently, the portfolio of Cheyne Finance, one of the more infamous structured-investment vehicles, or SIVs, was sold at 44 cents on the dollar. I suspect that similar assets are not marked anywhere near that valuation on financial institutions' balance sheets. So, the game of "everything's contained" continues, albeit in a different form.
Of course, the fantasy has friends in high places -- namely the Fed, the Treasury and Congress, which last week engineered a huge bailout for Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), though Treasury Secretary Hank Paulson has tried to insist it won't be needed. Never mind what this portends for our economy -- Wall Street applauded legislation many of us find repugnant.
The government's efforts will not create a bottom for financial stocks because of the fundamental problem in this country: People carry too much debt against homes that are sinking in value, homes they really couldn't afford in the first place and homes that have become all the more burdensome due to the inflation that's ravaging their paychecks. That the implosion of the housing debt bubble is dragging the economy down with it will just put additional pressure on jobs and the ability to service housing debt.
Goldilocks in hock to her gold card
Exhibit A: American Express (AXP, news, msgs). In last week's earnings release, the company noted that it has now been hurt by the weak economy. AmEx described the weakness as much worse this quarter than it had been in January and said it expects that trend to intensify.
On June 4, the company had raised yearly profit expectations to a range of $3.51 to $3.61 per share, up from $3.32. On July 18, it changed that forecast drastically. Obviously, a lot went wrong over those six weeks.
AmEx noted that even some of its "superprime" card members are feeling the effects of the weak economy. Of course, if AmEx's customers are having problems, you can be sure that virtually every credit card company is seeing its consumers struggling to pay their bills -- despite help from government rebate checks.
The Fed's money-printing apparatus has been checkmated by roaring inflation. None of Paulson's cockamamie schemes, from super SIVs to bailing out Fannie and Freddie (after Bennie and the boys at the Fed bailed out Bear Stearns), will help the economy. Yet we must continually endure the cheering by stock market operators every time this country, the supposed bastion of free enterprise, "successfully" takes another step in its move to nationalize all losses that are inconvenient to those in power. As Jim Grant questioned in a brilliant Wall Street Journal article July 19, "Why no outrage?"
A birth that saw Fannie come out first
That brings me to an absolutely brilliant -- though nauseating, for what it revealed about our government -- article written by Paul Gigot in July 23's Wall Street Journal: "The Fannie Mae gang." This ought to be mandatory reading for everyone in America. It detailed the hardball thuggery, arm-twisting and insidious interlocking relationships among, for example, former Fannie Mae Chairman Franklin Raines, former Countrywide Financial CEO Angelo Mozilo and House Financial Services Committee Chairman Barney Frank that have helped create the monsters called Fannie and Freddie:
"I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. . . . The abiding lesson here is what happens when you combine private property with government power. You create political monsters that are protected both by journalists on the left and pseudo capitalists on Wall Street, by liberal Democrats and country club Republicans. Even now, after all the dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever."
That is a truly disturbing prospect because the same incompetence and greed that brought us this mess will lead to further troubles if the cabal that surrounds Fannie and Freddie gets more powerful, which appears to be the case from the legislation just foisted on U.S. taxpayers.
To Paulson, one of the cabal's powerful members, who last week described the legislation as sending "a very strong message to the markets," here is my interpretation of that message:
Yeah, we're willing to do anything to keep the status quo, as rotten as it is, because reform is too painful to contemplate.
At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column. |
