Restating the Obvious

Does Barney love you?

Let's get a few things straight. We can do it without saying anything nice about Rep. Barney, either.

First, the Community Reinvestment Act did not cause the mess. It may not even have made it a little worse.

How do we know? Because the second biggest German commercial real estate lender is in the tank for $69B. (2.3 bernankes in the metric used by Restating the Obvious, up from about 1.5 bernankes in just half a paulson.) An impressive amount considering AIG, the biggest insurance company ever, cost a mere $80B (2.6 bernankes 10 paulsons ago) to prop up.

We can all be sure that German bankers were not compelled to make funny loans by the CRA.

Second, it wasn't Fannie Mac or Freddie Mae, either. This one is more complicated. FMx2 certainly did contribute to the carnage, but they did not cause it.

The idea of securitizing mortgages looks now -- and looked earlier, too -- unwise, but Fannie Mae was around for two generations without crashing the residential mortgage market.

What FMx2, Barney, etc. did not do was dream up the idea of stripping interest from mortgage bundles and subdividing the strips and selling them off like lottery tickets. That one was a pure market invention.

Third, the Sarbanes-Oxley Act did not have anything to do with it. S-O was imposed to restore transparency in securities markets (although it does not cover the kinds of securities that are now labeled “toxic waste”), which you would have thought that free marketeers would approve of.

You'd be wrong, though. In their desperation to blame anybody but who is at fault, they are complaining about S-O, and particularly its “mark-to-market” requirement.

While you don't have to mark your house to market unless you plan to sell it, so it doesn't matter one bit whether you paid more or less for it than you could sell it for now, corporations and financial institutions work under a different rule.

They always have, too. Sarbanes-Oxley did not invent the concept of solvency. If I miss a mortgage payment on my domicile, or even two of them, I am not thereby insolvent (I may be of course, but maybe I have equity and am just a trifle short of cash), and the mortgage lender will not liquidate me. If I manage to catch up two or three months later, all will be forgiven and the only penalty I will suffer is to my credit reputation.

Commercial lenders and stock companies have always operated on a different principle (or principal). Although banks (or other big lenders) may choose not to call delinquent loans, their indentures usually allow them to do so either immediately or after a very short pause after a default.

Whether you're being required to mark-to-market or not, if you're illiquid, even if solvent, then your lenders can take over your property. This is what helped drive the Great Depression even deeper, as thousands of solvent firms were closed down for lack of access to credit.

People who have studied the history of corporations in the 19th century (very, very few such people are Republicans) are well acquainted with how this works. A capitalist like Jay Gould had to surrender his railroads to bondholders over and over, usually after guessing wrong in a series of market operations designed to goose his profits. More recently the rise, fall and rise of D. Trump illustrates the same practice, without the crazy attempts to corner the market, which have, thankfully, been made illegal.

Repeat: nothing novel in Sarbanes-Oxley.

A last point. The Dow average closed today at the lowest point in four years. The DJIA is not adjusted for inflation. There's been a lot of that in the past four years and even more in the last 12 or 14 months. The low point reached today is really the lowest in a long, long time, not just in four years.

I haven't bothered to calculate how long, since it seems likely it will go lower still.

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View Comments: | 1-2 | Post a comment

HarryEagar
10-07-08 1:16 PM »Report Abuse	First, the people in charge need to grasp the magnitude of the problem. I'll have more to say about that later today, but obviously they haven't a clue. Bankers expect to be bailed out because financial institutions, unlike producers, have the capacity to shut down the whole deal. The US economy got along with Enron, WorldCom etc. without much trouble. Their failure could drag down only a few suppliers. Banks (and non-bank banks) are foundational. You cannot remove them without the whole structure collapsing. Sweet for them, eh?
KulaKoa
10-07-08 3:42 AM »Report Abuse	There does not seem to be enough time to figure this all out. Why is it that bankers all over world seem to assume that the government is going to bail them out every time?

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