“Miss anything while we were gone?” We often ask that question of colleagues upon returning to the office after lunch, a day off or a longer holiday. (Although in this age of Blackberries and iPhones, we never truly are “away,” are we?)
But maybe only today you have returned from that month-long vacation of a lifetime in, say, Antarctica, which may not be known for reliable cell-phone and internet service.
Where do we begin? While you were out, the country's – and perhaps the world's – entire financial system as we knew it was turned upside-down and inside-out, shaken viciously and, for the most part, changed radically and irrevocably.
While you were out, in the month of September alone, the Federal Government, with help from the Federal Reserve:
Nationalized the entire mortgage business by assuming control of Fannie Mae and Freddie Mac.
Effectively took control of AIG Insurance, one of those major “systemically important” insurance companies, by providing an emergency $85 billion loan facility.
Allowed Lehman Brothers, like Bear Stearns not systemically important, fail and file for bankruptcy.
Outlawed short-selling of more than 800 financial industry stocks.
Authorized use of the $50 billion Exchange Stabilization Fund to provide emergency lending to Money markets Funds threatened with “breaking the buck.”
Proposed FDIC-like shareholder insurance to restore confidence in the $3.6 trillion Money Market Fund industry.
Sent Merrill Lynch scurrying to the acquisitive embrace of Bank of America.
Suggested to Congressional leaders the nation was “literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally” to help drum up support for a bailout program.
Motivated Goldman Sachs and Morgan Stanley, the last investment banks standing, to apply to the Federal Reserve to become bank holding companies and raise more than $8 billion apiece in fresh capital.
Arranged the largest bank failure in U.S. history, Washington Mutual, a $300 billion savings bank folded into JP Morgan Chase.
Prompted Wachovia Corporation, a top-five U.S. bank, into a frenetic search for another firm to acquire it (which likely may happen to other top-50 banks as well).
Ballooned the Federal Reserve's balance sheet by nearly a third to $1.25 trillion in a matter of weeks to accommodate the feverish pace of its multi-layered system-stabilization efforts.
Proposed another increase to the national debt ceiling to $11.3 trillion, a $1.5 trillion increase since July, not counting the now-explicit guarantees of Agency (Fannie Mae/Freddie Mac) direct debt obligations of $1.8 trillion.
(Insert anything we may have missed in the last 24 hours here.)
And, finally, with some necessary input from Congress, pulled a $700 billion installment-plan TARP (Troubled Asset Relief Plan) over the smoldering wreckage of Wall Street and the nation's financial system in a critical attempt to jump-start a vital institutional recapitalization plan, averting a financial catastrophe represented to be only “days away.”
So that's about it, at least in this country. “Other than that, Mrs. Lincoln, how was the play?” We offer poor attempts at humor to mask our deep concern, and a sense of helplessness, as confluences of events of staggering proportions eddy and swirl around us, knowing, within days of this publication, the entire financial landscape may have changed yet again.
Even the Maestro, former Federal Reserve Chairman Alan Greenspan, upon whom some suggest a lion's share of blame for our current predicament should rest, while finger-pointing is fashionable, as it always is right before election day, was moved to observe in mostly understandable English that the U.S. credit squeeze has brought on a "once-in-a-century" financial crisis that is likely to claim more big firms before it eases.
Greenspan, who in February 2007 gave one-in-three odds for a recession beginning by last year's end, now believes those “odds of U.S. recession have gone up in recent months,” which certainly may qualify as an understatement of epic proportions. Until housing prices stabilize, which the former Fed Chief envisions happening in early 2009, this crisis “will continue to be a corrosive force.”
“I find it difficult to believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring," he said.
Meanwhile, the Wizard of Wall Street, beleaguered Secretary of the Treasury Hank Paulson, was furiously pulling levers and pushing strings behind his curtain of confidence and regaled the Senate Banking and the House Financial Services committees with lurid tales of imminent financial armageddon.
In two-and-a-half pages, breathtaking in both brevity and scope, Secretary Paulson asked Congress to bestow upon him (and his eventual successor) a carte-blanche “Authorization for use of Financial Force,” a sweeping $700 billion financial system recapitalization plan which would allow the Treasury to buy, at “near-maturity” prices, unloved, undervalued assets, of any kind, from financial entities, of any type.
Those entities included, presumably, banks, brokerages, investment companies, insurance companies, mortgage companies, foreign-owned financial institutions, hedge funds, pension funds, mutual funds, and, quite possibly, investment clubs, condo associations, benevolent orders and little leagues if seen fit by the Secretary.
The Troubled Asset Relief Plan, the TARP, might have sailed swiftly through Congress without a hitch if not for one provision upon which the entire proposal ran aground (which was not the sheer $700 billion magnitude of the Plan).
“Section 8” stated the “decisions of the Secretary (of the Treasury) pursuant to the authority of this Act...are non-reviewable and may not be reviewed by any court of law or any administrative agency.”
Oops. “Give me $700 billion and trust me,” the Secretary seemed to be saying to Senators and Representatives. Had such a provision been buried in a typical 1,200-page, tree-killing tome of legislation it never would have been noticed but because of the Plan's brevity, it literally jumped off the last page and said “look at me.”
In testimony, Secretary Paulson confused himself, exasperatedly suggesting to Senator Dodd the Plan was two-and-a-half pages brief because “the economy would not wait for the details to be worked out.”
“There will be time to create strong oversight, transparency and other protections, but the bailout must come first,” Paulson asserted, momentarily forgetting Section 8 of the Act would preclude any future oversight, transparency or other protections since any decisions of the Treasury were “non-reviewable.”
Sensing potential re-election difficulties with home-district constituents, and less than a month away from adopting a convention plank abhorring corporate bailouts, Congressional Republicans, balked, and rose up against the Adminstration of its own party affiliation.
Paulson had been joined in testimony by the former Princeton economics professor and Great Depression scholar who inherited the mantle of second-most powerful man in the world from Mr. Greenspan in 2006. Bearded “Gentle” Ben Bernanke, who during testimony often appeared as if he would have preferred undergoing an un-anesthetized root canal, and after nearly a year of dusting off and implementing numerous Fed facilities unused since the 1930s, at this point must be thinking “What was I thinking?” when he agreed to take the job.
Dr. Bernanke has an unenviable role as the nation's pre-eminent financial alchemist, manipulating the assets of the Federal Reserve System in a heroic battle to turn banking lead into balance-sheet gold to prevent the continuing failures of both systemically important and non-systemically important financial institutions from ruining the economy.
Messrs. Paulson and Bernanke understand an urgent need to recapitalize the nation's financial system at a time when participants are fearful of many more things than fear itself.
That is the essence of a credit crisis, into which the formerly “contained” sub-prime mortgage mess of 2007 has devolved, where even credit-worthy borrowers, both businesses and individuals, find they are unable to access loans for working capital or equipment or new homes as lenders become duly concerned with the timely and complete collection of existing credits.
In the last century we have experienced credit crises of both national and regional scope and magnitude, of which the Great Depression was the most severe example of a deflationary debt spiral. In more recent memory, the middle section of the country underwent such a credit lock-down when the 1980s oil boom busted.
At the time, one of the nation's largest banks, Chicago's Continental Illinois, failed as did hundreds of other oil-patch banks and energy companies, ushering in a decade-long recession in that part of the nation which, eventually, spilled over to the general economy as the Savings & Loan debacle unfolded by 1990.
Excesses were reined in, losses were taken, bankruptcies were filed, pieces were picked up, all without a federal bailout. The unanswerable “what if” questions, of course, are (i) would the regional economy have rebounded much quicker had banks and energy companies and farms and ranches and retailers been allowed to remain in business, and (ii) in the absence of the fear of failure, of “moral hazard,” of which we wrote about last month, would similar mistakes have been repeated, ultimately resulting in a more spectacular deflationary meltdown at some later date.
Judging from an outpouring of emails, phone call, faxes and letters to Congress the last two weeks, voters are adamant the nation's financial system must be salvaged with government assistance.
But they equally are adamant the solution must be structured in a manner that will instill “moral hazard” of future failures, avoid a repetition of past mistakes through regulation, provide significant oversight and accountability of the administration of the TARP and provide a mechanism for taxpayer recovery of losses via participation in future corporate gains, all without losing sight of the original objective to quickly shore up the banking system.
“If it ain't (a mess), it'll do 'til the mess gets here,” says Texas Sheriff Ed Tom Bell (Tommy Lee Jones) in recent movie “No Country For Old Men,” after a deputy describes the killing field of a drug-deal-gone-bad.
If the current state of global banking and finance isn't a mess, it'll do 'til the mess gets here. In the most important respect, however, the magnitude of the “mess” finally has the undivided attention of our Elected Representatives, the Administration, the Federal Reserve, the nation and the world. Everyone is watching – we must get it right.
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