Not so far from the madding crowd...

“Never follow the crowd.”

—Bernard Baruch  (1870 – 1965)

American financier, speculator, & public figure

¢ $ ¢ $ ¢

Gratuitous embedded music video of the day:

“Who wants honey, as long as there’s some money?”

B¡lly C0rgan of the Smash¡ng Pumpk¡ns,
“¢herub R0ck,” S¡amese Dream  (1993)

¢ $ ¢ $ ¢

Here are two token positive quotes about market investment and speculation.

“A speculator is a man who observes the future, and acts before it occurs.”

—Bernard Baruch

“If there were no bad speculations there could be no good investments; if there were no wild ventures there would be no brilliantly successful enterprises.”

—Francis W. Hirst  (1873 – 1953)

British economic journalist

¢ $ ¢ $ ¢

In keeping with the times, the rest of the observations I include are inevitably more circumspect, cautionary, or outright negative.

“The main purpose of the stock market is to make fools of as many men as possible.”

—Bernard Baruch

“There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”

—Mark Twain  (1835 – 1910)

iconic American writer

“Another great evil arising from this desire to be thought rich; or rather, from the desire not to be thought poor, is the destructive thing which has been honoured by the name of ‘speculation’; but which ought to be called Gambling.”

—William Cobbett  (1762 – 1835)

British journalist & reformist thinker

“[T]he stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing [2005], in the mid-20s, far higher than the historical average. … People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes.”

—Robert Shiller  (b. 1946)

prominent American economist,
Irrational Exuberance, 2nd ed.  (February 2005)

This graph shows the recent housing hypervaluation
that helped to dramatically inflate 2000s securities values,
as derived from data included in Shiller’s 2005 book.
(The graphic was skillfully assembled by Wikipedian “Frothy.”)

“October.  This is one of the peculiarly dangerous months to speculate in stocks in.  The others are July, January, September, April, November, May, March, June, December, August, and February.”

—Mark Twain

The hunt for dread October...

I cannot find the original context for Twain’s quip.  Of course, he never lived to see the most spectacular stock market crash of the twentieth century, spanning October 24 – 29, 1929, (or the “roar” that preceded it, which he likely would have laid waste to with his wit).

However, the 1907 stock market panic, which traced many of its roots to the previous year, unfolded dramatically in an October.  It also overlapped with a sudden monetary contraction and a widespread banking panic.

If you mention the “Panic of ’73” today, some baby boomers may think of the supply shock crisis that began in mid-October of 1973 when OPEC began waging a campaign of punitive crude oil pricing against the U.S.  From its period peak in January 1973 to its relative nadir in early December 1974, the DJIA lost almost half of its value.
[ (577.60_12/6/74 – 1047.59_1/5/73) / 1047.59  =  –44.86% ]

The “Black Monday” nose dive of October 19, 1987 was the largest single-day percentage market loss.  (Oddly, the related recession didn’t set in until a few years later.  Even now, the reasons for the speculative volatility of the latter ’80s and subsequent late-onset stall in the economy remain opaque, especially compared to other recent recessions.)

“Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.”

—Henry Ford  (1863 – 1947)

American industrialist

“The speculation economy is one in which business management focused on production is replaced with business management focused on stock price.”

—Lawrence E. Mitchell

business/corporate law expert,
The Speculation Economy: How Finance Triumphed Over Industry  (2007)

“The short-termism of the late 1990s and early twenty-first century simply is an exaggeration of a quality that was embedded in the American economy a hundred years ago.  The typical public corporation we know today, what I will call the giant modern corporation, was created during the merger wave of 1897 to 1903.  It gave birth to the modern stock market.  As it did, it transformed speculation from a disruptive game, played by a few professionals and thrill-seeking amateurs that from time to time erupted into a major frenzy, into the very genetic material of the American stock market, American business and American capitalism.”

—Lawrence E. Mitchell

The Speculation Economy ...  (2007)

“Now, speculation — in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it — is neither illegal, immoral nor un-American.  But it is not a game in which [the vice chairman] and I wish to play.  We bring nothing to the party, so why should we expect to take anything home?

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs.
Nothing sedates rationality like large doses of effortless money.  After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball.  They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice.  But they nevertheless hate to miss a single minute of what is one helluva party.  Therefore, the giddy participants all plan to leave just seconds before midnight.  There’s a problem, though:  They are dancing in a room in which the clocks have no hands.”

—Warren Buffett  (b. 1930)

American executive, investor & philanthropist,
FY2000 Chairman’s letter to Berkshire Hathaway, Inc.

“In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do.  We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

—Charles Mackay  (1814 – 1889)

Scottish journalist & writer,
“National Delusions,” Extraordinary Popular Delusions and the Madness of Crowds  (1841)

“Money, again, has often been a cause of the delusion of multitudes.  Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

—Charles Mackay

“National Delusions,”
Extraordinary Popular Delusions ...

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!”

—Charles Mackay

“National Delusions,”
Extraordinary Popular Delusions ...

“Some in clandestine companies combine;
Erect new stocks to trade beyond the line;
With air and empty names beguile the town,
And raise new credits first, then cry ’em down;
Divide the empty nothing into shares,
And set the crowd together by the ears.”

—Daniel Defoe  (ca. 1660 – 1731)

English writer,
orig. publ. context unknown
(quoted by Mackay)

“If a man walks in the woods for love of them half of each day, he is in danger of being regarded as a loafer.  But if he spends his days as a speculator, shearing off those woods and making the earth bald before her time, he is deemed an industrious and enterprising citizen.”

—Henry David Thoreau 
(1817 – 1862)

American naturalist &
Renaissance man, Life Without Principle  (1854/62)

Absorbing more economic punches...

Econocratic brains everywhere recoil in fear as the zombie smorgasbord continues in Washington.  The administration persists in deflecting and downplaying criticism that it is coddling the investment banking industry and rewarding its reckless practices.  Instead, the president and his advisers seek to focus media attention on upcoming regulatory reforms.

But many of us still feel that the White House is essentially saying to Wall Street:  Don’t worry, we’ll cover your assets.  In unsettling ways, the federal government is taking over where AIG left off, assuming much of the risk burden produced by pooled toxic assets, while inviting sanguine investors to play the game with too little to lose.

What should we nickname this pool of little orphaned assets now being pushed by the U.S. Treasury?  The Federal Fools’ Fund (FFF)?  Shall we call these new arrangments Debt Unlimited Miscellaneous Public-Private Partnerships (DUMPPPs)?

Meanwhile, the U.S. GDP contracted by 6.3% in the 4th quarter of 2008, while the national unemployment rate will likely hit ~8.3% by the end of the current quarter.

* * *

Here’s a flashback from last fall, when the economy seemed a lot more intact, even if the credit system was on the rocks:

“Credit markets do not function.  Why not?  Because the word ‘credit comes from ‘credibility.’

The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left.  But they are equal to each other.  So accounting-wise we are fine.

Transparency is ‘what you see is what you get.’  And what you don’t see gets you.”

Now who was the witty wiseacre behind this wry wordplay?  Why that would be the AIG vice chairman entertaining his financier friends at a luncheon on October 11, 2008.

The hoi polloi have mostly stopped calling for the heads of these AIG goons.  For now, their righteous rage is subsiding as popular sentiment retreats to more familiar territory — seething impotent outrage, frustrated disgust, and reluctant resignation.

But quiet terror simmers, particularly among those who distrust the exuberant overtures of obscurantist optimists.

By the way, if you still want your zombie fix, check out cartoonist Mark Fiore’s “Zombie Bank” animation.

* * *

De bankier en zijn vrouw (The Banker and His Wife)  [cropped]
(after Quentin Matsys)
oil on wood, date unknown
Marinus Claesz van Reymerswaele, ca. 1490 – 1567
Netherlands
collection of the Musée des Beaux-Arts, Valenciennes, France

Instead of continuing the zombie theme, I’ve included an early Northern Renaissance painting.  Bankers, money-changers, and other monetary specialists were often regarded with suspicion and wariness back then, too.

* * *

Today I recommend a very thorough and eloquent piece written by a thoughtful liberal-leaning progressive:

“This Crisis Is Way Bigger Than Dead Banks and Wall Street Bailouts”
(AlterNet.org / Washington Monthly,  3/23/2009)

James K. Galbraith :

Lloyd M. Bentsen Jr. Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin

senior scholar, Levy Economics Institute

author, The Predator State:  How Conservatives Abandoned the Free Market and Why Liberals Should Too  (Free Press, 2008)

For focus on the banking industry debacle, skip down to the 11th paragraph in the article and/or search for the lead sentence:

The chance of a return to normal depends, in turn, on the banking strategy.

Here Galbraith joins the chorus of people who insist that the current financial crisis resembles the banking system failures of the 1930s more closely than the credit stumbles of the previous three decades.

He reminds us of the current plight of middle class Americans who have to rely on our government entitlements safety net now more than ever.

Galbraith also adds to the colorful metaphors enlivening the debate by characterizing the recent wanton behavior of Wall Street speculators as a “poisonous game of abusive mortgage originations followed by rounds of pass-the-bad-penny-to-the-greater-fool.”

He points out that the FDIC could justifiably take over distressed Wall Street institutions by placing them in full receivership.

He also implies that a “state of denial” that began in the waning days of the Bush administration persists within the current Treasury leadership.

Galbraith also reminds us of why former SecTreas Henry Paulson eventually began to back off the throw-the-money-in-the-hole approach.  First there was the sheer scale of the potential losses involved (as suggested by the ravenous appetites of certain cash-flow-starved financial institutions feeding at the TARP trough).  In addition, the task of discovering the true value of these mysterious assets was highly arbitrary and rife with risk and wishful thinking.

He is blunt about so-called “troubled assets”:

“The reasonable inference would be that many more of the loans will default.  Geithner’s plan to guarantee these so-called assets, therefore, is almost sure to overstate their value; it is only a way of delaying the ultimate public recognition of loss, while keeping the perpetrators afloat.”

He also implies that delaying the inevitable may lead us into further financial and economic hazards while sidelining “normal prudent banking.”

For example, instead of soundly restructuring, reforming and restoring our lending systems to health, delay and enabling may provoke investors to wreak havoc in other risky markets or indulge in additional rounds of klepto-capitalism.

Galbraith also cautions us that the shortsightedness of the plan signals that the White House’s economic brain trust fails to recognize that we are faced with “a true crisis -- an integrated, long-term economic threat.”

(Many of us felt similarly when we heard Fed chairman Ben Bernanke utter the following prediction/prescription on CBS’s “60 Minutes” ten days ago:  “We’ll see the recession coming to an end, probably this year.  We’ll see recovery beginning next year.”)

As a liberal, demand-side economic thinker, Galbraith challenges the primacy of what I’d call “mechanical” or “system flow” economics.  He stresses the importance of “creditworthiness” anchored in consumer economic fundamentals such as asset prices.  He also states that Americans who find themselves suddenly asset- and cash-poor don’t tend to rush headlong into more credit, even if the lending spigot is set at full blast again.  He argues that this reluctance to spend and borrow will dampen any multiplier effects triggered by cash and credit injections into consumer markets.

And then Galbraith ventures into that misunderstood decade of our economic history, the 1930s.

He quotes a December 2008 paper (“Time for a New ‘New Deal’” [PDF, 59k]) by economist Marshall Auerback.  (Interestingly, Mr. Auerback appears to be a global portfolio manager fluent in areas like equities trading.)

Again, I encourage you to read Galbraith’s piece.  He argues for public investment and relief initiatives that borrow the most productive and redemptive aspects of FDR’s New Deal.  However, like many others, he credits the war mobilization, not the New Deal, for helping to stoke enough consumption, investment, and trade to propel the United States out of the rut of the Depression.

The current thinking among many social liberals is that a millenial “Newer Deal” could revive our economy.

However, many of us believe that this assumption is fatally flawed.  We fear that such an audacious undertaking could yield few immediate results, while plunging our country further into debt.

Such programs should be supported as standalone public relief and investment measures, without being hitched to false hope and inflated promises.

* * *
To be continued ...

Zombie Bankers Feast on Brains of White House Economic Brain Trust

Night of the Living Dead (1968)

Bankers at major living-dead Wall Street investment firms have continued to graze on the gray matter of prominent members of the new administration’s economic crisis team.

Among the reported victims are:

• Timothy Geithner, SecTreas

• Larry Summers, NEC Director

• Neel Kashkari, Interim Asst SecTreas for Financial Stability

Financial jocks jumped on news of Geithner’s proposed “public-private partnership.”  Investors delighted, noting that the plan preserved the sanctity of business-as-usual investment market culture without any threat of significant “change.”  High fives were heard everywhere throughout global trading floors and boiler rooms.  Whether they were genuinely grateful for the plan, or just looking to make a few gratifying long sales before Friday, Wall Street profiteers rallied and the Dow climbed 500 points on Monday.

Mainstream media talking heads rejoiced, then promptly phoned their brokers for updates at the bottom of the hour.

* * *

In other news, marginalized economists and scholars successfully thwarted the zombies by donning lampshades and sitting in the corner while the weekday party took off.  However, a few of them snuck out earlier this week and reported their close call with the financial undead on various op-ed pages, blogs, and public broadcasts.

* * *

Okay, kidding aside, here’s a sampling of various experts’ reactions to these recent developments:

First we have Paul Krugman’s early rejection of the plan as details were leaked over the past few days:  “Despair over financial policy” (The Conscience of a Liberal [NYT blog], 3/21/2009).

He declares, “The zombie ideas have won” and repeats the refrain that the Treasury Department is tempting fate by preserving a systemic moral hazard.

Then we also have other reactions of disappointment and disbelief, like those aired Monday morning on NPR’s Boston-based current affairs program, On Point.  I excerpt some of the discussion below, representing typical objections to the plan from both the left and the right:

“[Geithner, Summers, et al] have decided that the way to get private money, to rescue these toxic assets, is to double down on the same kind of strategy that Hank Paulson unveiled back in October that didn’t work, which was to have the government put up guarantees — in this case [the] government’s providing as much as 94% of the capital.  I think there’s an echo chamber effect going on where Larry Summers and Tim Geithner are talking to each other, and they’re talking to the likes of Goldman [Sachs] and Citigroup.  They’re talking to the very same people who created the mess, and they’re not talking to the critics of this approach.  My sources say they’re not even talking to Paul Volcker — who nominally heads a task force appointed by the president, that has never met — who’s a critic of this.  They’re certainly not talking to Joseph Stiglitz, the Nobel Prize laureate at Columbia [University], Nouriel Roubini at NYU, Paul Krugman — well-informed people who think this whole approach of having government put up a lot of the capital, guarantee almost all of the loss in the hopes of bringing hedge funds and private equity — the least transparent part of the system, the most underregulated and prone-to-abuse part of the system — back to the party, to do the same kind of convoluted deals that helped cause this mess.  And it’s incredibly risky, it’s incredibly expensive, it may well not work, and there’s also the risk of political backlash.”

“Let me just say:  If this were to work and a lot of rich guys got even richer, I would hold my nose and say, ‘If that’s the price that it takes to get the banking system running again, I can live with it.’  My concern is more that it’s not going to work and furthermore that it’s rife with potential for abuse.  Let me give one little example and I hope this is not too technical:  So, a hedge fund — or private equity company — comes in and says, ‘We will buy this toxic asset at fifty cents on the dollar.’  It’s a pool of loans.  Then [the company] buys a credit default swap.  So, it’s ‘heads I win, tails you lose.’  If the value of the asset goes up, [the] hedge fund makes out.  If the value of the asset goes down, the government eats the loss, and the hedge fund collects on the credit default swap.  There is all kinds of potential for these gains.  And make no mistake about it, this was not designed [in] the best interest of the U.S. taxpayer.  This was designed on Wall Street, by Wall Street, for Wall Street.  .... If you look at the transition from Paulson to Geithner, it’s the same team.”

“This [current approach] is the worst of both worlds.  The Treasury, which does not have the resources to do this properly, is intervening in an episodic and ad hoc way.  If you're going to have this degree of government involvement, it’s better to do it with your eyes open, with some transparency there.”

“[Hedge funds and private equity firms] exist to do deals — complicated, highly leveraged deals.  This [plan] gives them a chance, gives them a new lease on life.  Better yet, it’s guaranteed by the government.  Hedge funds — people are deserting hedge funds in droves — this gives them a new lease on life.  And I think the administration is underestimating the populist backlash against using taxpayer money and taxpayer guarantees, so that a whole new round of rich guys — in some cases the same old rich guys — can get even richer, at taxpayer expense.  I also think that the government is going to need more money one way or the other and, if you do it via an RFC, where you don’t enrich private speculators but you help ordinary people and you do it directly, there’s going to be much more popular consent for spending taxpayer money and putting taxpayer loan guarantees at risk, if you don’t do it by enriching a lot of middlemen, but you do it more straightforwardly.  And, you know, Citi, what Citigroup worries about — since they are, I mean, if anybody’s insolvent, Citi’s insolvent, right?  The government has put about 65 billion dollars into Citi.  You can buy the thing by buying up all of its shares for 17 billion right now.  If that’s not insolvent, I don’t know what’s insolvent, because if it weren’t for all this government money, they’d be out of business.  So we’re really not talking about 12,000 banks.  We’re talking about a handful of large banks — Citi, maybe Bank of America, possibly Wells Fargo — that would have to go through some kind of receivership project and come out the other side.  [It’s] much better to do this straightforwardly.”

—Robert Kuttner

co-founder & co-editor, The American Prospect

distinguished senior fellow, Dēmos public policy research and advocacy organization

columnist, The Boston Globe

“Any time we subsidize the banks, like this plan does, we are giving some money to those long-term debt holders and to the equity investors in the banks.  If you forced the long-term debt holders to convert into equity — which is sort of a receivership, sort of a Chapter 11, but could be done somewhat differently so that the government wasn’t necessarily running things — you get a private sector solution and the banks become potentially quite solvent, ’cause there’s a lot of long-term debt out there and it doesn’t cost the government anything.”

“I have to agree with Bob [Kuttner] — which I don’t often do — on most of what he said.  This is not a good solution, there are better solutions out there, and the plan is flawed.  ... I think that the thing to understand is [that] there are two possible scenarios:  The scenario number one, which the administration is banking on, is that the toxic assets — and they are ‘toxic’ assets, not ‘legacy’ — are undervalued, and that the banks are fundamentally solvent.  That was the assumption in the original Paulson plan; that is the assumption here.  The other scenario is that the toxic assets are correctly valued and the banks are not solvent.  This is where Paul Krugman is [coming] from, this is Nouriel Roubini, on the right you got Luigi Zingales, one of my colleagues, Ken Rogoff — former chief economist of the IMF — and in my view that’s probably the more likely scenario.  So now let’s look at what happens in this plan under those two scenarios.  If the scenario is that the toxic assets are correctly valued, and the banks are not solvent — meaning they don’t have enough equity to support their business — this plan is not going to help.  ’Cause the banks won’t sell, ’cause if they’ve got these things marked at a particular point, if the value that the hedge funds pay is not above those marks, this doesn’t help because it doesn’t give them more equity.”

“The whole idea here is to get the banks solvent, to get them more equity.  .... that I think is the most likely scenario, ’cause remember [that] the economy has deteriorated substantially since the first Paulson plan, and, you know, we were in trouble at that time [too].  Well, ... they take that gamble [under the current plan] and now you’ve created a situation where it’s heads, the hedge funds win, and tails, the government loses.  And this becomes a very, very expensive program.  And that’s also the case, by the way if we’re in the situation where it is a liquidity problem, not a solvency problem.  The hedge funds will either make a lot of money, which will create outrage at the other end, or the government will end up losing a lot of money, neither of which is great, and there are better solutions.  The government really doesn’t get anything here.”

—Steven Kaplan

Neubauer Family Professor of Entrepreneurship and Finance, The University of Chicago Booth School of Business

To be continued...

“State unemployment at a glance” (3/11/09)

The Associated Press released this historical unemployment data a week and a half ago.  For some reason they didn’t bother to format it in a table; it just looks like their journalist smart alecks exported the data from a spreadsheet or something.

Maybe this is what happens when the newspaper industry fires too many of its key IT people.

Here I’ve performed a humble public service by putting this information in a table for your edification and analysis.  Enjoy, fellow armchair labor economists.

(DC-metro states are shown in medium blue; regional neighbors in pale blue.)

A:  “rank of each state based on the January 2009 unemployment rate, with a lower number indicating a lower rate”

B:  “state's unemployment rate for January 2009”

C:  “[unemployment] rate for December 2008”

D:  “[unemployment] rate for January 2008”


E:  “the month and year unemployment peaked [from January 1976 onwards]”

F:  “peak unemployment rate since January 1976”

State	A	B	C	D	E	F
Alabama	31	7.8	6.5	3.9	Dec. 1982	14.4
Alaska	34	7.9	6.8	6.4	July 1986	11.5
Arizona	24	7	6.6	4.4	Feb. 1983	11.5
Arkansas	17	6.4	5.7	4.8	Mar. 1983	10.2
California	48	10.1	8.7	6.1	Feb. 1983	11
Colorado	19	6.6	5.8	4.3	Nov. 1982	9.1
Connecticut	27	7.3	6.6	5	Jan. 1976	10
Delaware	21	6.7	5.7	3.9	Jan. 1977	8.2
District of Columbia	44	9.3	8.2	5.9	Mar. 1983	11.4
Florida	37	8.6	7.6	5	Mar. 1976	9.7
Georgia	37	8.6	7.5	5.2	Jan. 2009	8.6
Hawaii	15	6.1	5.1	3	Mar. 1976	10.2
Idaho	19	6.6	6.1	3.7	Feb. 1983	9.4
Illinois	34	7.9	7.2	5.8	Feb. 1983	12.9
Indiana	43	9.2	7.8	4.8	Nov. 1982	12.8
Iowa	6	4.8	4.4	3.9	May 1983	8.5
Kansas	13	5.8	5	3.9	Sept. 1982	7.4
Kentucky	40	8.7	7.6	5.5	Dec. 1982	12.1
Louisiana	8	5.1	5.5	3.8	Sept. 1986	12.9
Maine	31	7.8	6.5	4.8	Mar. 1977	9
Maryland	16	6.2	5.4	3.6	Aug. 1982	8.3
Massachusetts	29	7.4	6.4	4.6	Jan. 1976	10.9
Michigan	51	11.6	10.2	7.3	Nov. 1982	16.9
Minnesota	30	7.6	6.6	4.8	Nov. 1982	9
Mississippi	40	8.7	7.8	6	May 1983	13.7
Missouri	36	8	7.1	5.5	Apr. 1983	10.5
Montana	12	5.6	5	3.9	May 1983	8.7
Nebraska	3	4.3	3.9	3	Feb. 1983	6.8
Nevada	45	9.4	8.4	5.3	Dec. 1982	10.7
New Hampshire	8	5.1	4.3	3.5	June 1992	7.7
New Jersey	27	7.3	6.8	4.6	Feb. 1977	10.6
New Mexico	8	5.1	4.7	3.7	Apr. 1983	9.9
New York	24	7	6.6	4.7	July 1976	10.5
North Carolina	46	9.7	8.1	5	Feb. 1983	10.2
North Dakota	2	4.2	3.3	3	Mar. 1983	6.9
Ohio	42	8.8	7.4	5.7	Jan. 1983	13.8
Oklahoma	7	5	4.6	3.3	Aug. 1986	9.4
Oregon	47	9.9	8.3	5.3	Nov. 1982	12.1
Pennsylvania	24	7	6.4	4.6	Mar. 1983	12.9
Rhode Island	49	10.3	9.4	6.3	Jan. 2009	10.3
South Carolina	50	10.4	8.8	5.7	Jan. 1983	11.4
South Dakota	4	4.4	3.7	2.7	Oct. 1982	5.9
Tennessee	37	8.6	7.6	5.3	Dec. 1982	12.4
Texas	17	6.4	5.6	4.4	Oct. 1986	9.3
Utah	5	4.6	4.1	3.2	Mar. 1983	9.7
Vermont	22	6.8	5.9	4.3	June 1976	9
Virginia	14	6	5	3.4	Jan. 1983	7.8
Washington	31	7.8	6.5	4.6	Nov. 1982	12.2
West Virginia	11	5.3	4.5	4.1	Mar. 1983	18.2
Wisconsin	23	6.9	5.9	4.4	Jan. 1983	11.8
Wyoming	1	3.7	3.2	2.7	May 1983	10.1

Banking on a song and a prayer...

This past Sunday, CBS’s “60 Minutes” ran a segment about FDIC / Office of Thrift Supervision (OTS) bank takeovers.  I think I heard or read somewhere that they’re calling in retired bank takeover specialists who are veterans of the S&L collapses of the ’80s.

Not surprisingly, the “60 Minutes” correspondent emphasized the overall stability of the retail banking sector, the continuity of customer service and asset guarantees once distressed banks are taken over by the feds, and the security of deposit accounts, now insured up to $250k as of 2006.

The piece didn’t really focus on which banks are vulnerable and why they have become insolvent.  However, Maryland was mentioned as the site of a recent bank failure, which prompted me to look up the story of Crofton-based Suburban Federal Savings Bank, whose employees now pledge fealty to a bank based in Virginia’s Tidewater region.

A revealing follow-up story on the bank that ran in the Baltimore Sun shows us how this formerly modest and conservatively operated “community” bank mutated into a mortgage wholesaling monstrosity.

We learn about Maryland minister Samuel Burrow, Jr., who claimed in his loan documentation that he made something like $350k in annual earnings when he actually brought in an amount below the state median income of ~$65k.  Nevertheless, this self-styled man of the cloth goes on to sue the bank for seducing and trapping him in a loan he couldn’t afford.  Perhaps the good reverend was a proponent of prosperity gospel; he certainly ordered up a very worldly custom mega-McMansion.  Unless this man was speaking in tongues or drooling on the loan documents in the Title office, his lawsuit looks pretty baseless.

However, this “community” bank was wildly irresponsible as well.  After 2004, Suburban Federal grew very profligate very quickly while it aggressively fought for a piece of the action during the mid-decade asset commodification frenzy.  Perhaps the old hands from the elder generation of this family of bankers should not have handed the reins over to junior so eagerly.

“Court papers say that in April 2005, Burrow was constructing ‘a palatial, seven bedroom residential home on over five acres of property with amenities including a movie theater, recording studio, gym, and media room.’  Suburban agreed to refinance his existing $872,000 mortgage and give him $389,000 more to finish building.  Two months later, Burrow settled a loan for $1.3 million, bringing in $41,000 in points and fees to the bank and the mortgage broker.

[....]

“What burned Suburban more than anything - not just on that deal, but on scores of loans - was that the value of houses and construction projects dropped when the real estate market cooled, often to less than the amount of the loan, [Baltimore-based loan broker Sidney P.] Levin said.  Burrow's house was once appraised for $3 million.

“‘As long the value is going up, it doesn't matter,’ Levin said.

“Indeed, [deputy director of the Treasury Department’s Office of Thrift Supervision Timothy T.] Ward and other regulators say Suburban might have endured its foray into no-documentation lending if the real estate market hadn't crashed.  But as values dropped, the amount of bad debt on Suburban's books soared.  With capital of around $30 million, Suburban could not afford to have many large loans go into default.”

—“Suburban Federal’s short, sharp fall,”  Baltimore Sun,  February 22, 2009

The bank “might have endured if the real estate market hadn’t crashed”:  Wow, this statement makes me wonder how many people are still laboring under the delusion that this comprehensive “market correction” wasn’t inevitable, given the massive quantity of counterfeit wealth that was manufactured at so many levels of the American economy before the financial market collapse of ’08/’09.

The New Mandate: “Thou shalt OBEY”?

I was a dutiful registered Maryland Democrat until January. I still support many Democrats, particularly the ones that think for themselves and stand up to their own party machinery at the risk of being politically/socially exiled by their fellow party members.

As for the hypocrites and sell-outs, that’s another thing entirely. Right now I can only conclude that most leading Democratic incumbents are either drunk on their own power, in an all-out panic about the global economy, or both. The almost trillion-dollar “stimulus” package (full title: American Recovery and Reinvestment Act of 2009) is bewildering and massive, and the Dem leadership machinery seems insistent on ramming it through both chambers with a minimum of debate or compromise.

The full text is here on the HR website. Personally, if I want to read 647 pages of inscrutable text, give me Faulkner or Joyce instead. I think I need to look to independent academic / think tank types for insightful interpretation of this behemoth and its potential consequences.

How funny is it that Pelosi is co-sponsoring this bill with a Rep. “Obey” (D-Wisc.)?!