depth first search

As complex as all the finances are, the politics aren’t hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future.

Does the economy need the shadow banking system?

Okay, so I’ve been bailout obsessed. I used to work on Wall St. Well, midtown anyway. This will be the last bailout post for awhile.

Some sensible analysis of the bailout.

UPDATE: Deep thought — What if markets actually are functioning, and we just don’t like what they are saying?

Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.

This is one of the few articles that treats “toxic” waste for what it is, not loans, but structured products and derivatives, most of which is not risky any more on account of it being worthless. The bailout is a handout. You want liquidity – capitalize new banks.

My congressman on the bailout.

Here’s an idea: capitalize a couple of new banks with clean balance sheets under a new and intelligent regulatory structure. Treat these banks as safe havens for deposits transfered in from the FDIC from other failing banks. Let everybody else fail.

Key advantages:

1. Eliminates moral hazard.
2. No secret handouts or price inflation.
3. This is a market based solution – government merely introduces new competitors.

The new banks proceed with an implicit government guarantee until things settle down. Then they can privatize (and hopefully make the government some money).

One thing that is continually missing from the debate is any true understanding of what all the “toxic” waste actually is. The Federal Reserve should release the books for Maiden Lane LLC so we can all find out. If you read pro-bailout pundits, you get a lot of napkin math that fundamentally misunderstands structured MBS. Samuelson assumes that if half the loans default, then the bonds lose half their value. Believe me when I tell you, if half the loans stop paying, the “toxic” waste is likely to be worthless.

Disagree? Happen to be the Fed Chairman? Prove me wrong. Release the books for Maiden Lane.

I came up with my own bailout plan. It’s the same as Senator Dodd’s plan, except that the first 10 billion dollars must come from private individuals who have profited from the private financial sector over the last ten years, and furthermore, Paulson himself must put up over 80% of his personal fortune. These people must pledge to buy and hold the toxic assets they purchase under the same terms as the government.

Hey, to hear them talk, they’ll make money on the deal. Put up or shut up.

UPDATE: I just want to go on record that this entire “value-to-maturity” is nonsense. When I worked at Bear Stearns I had a chance to look at the kinds of “securities” that were kept on the books. They were residuals of residuals of residuals. Keep in mind that the last tranche to get paid in a deal is the residual. The residual of a residual is a structure where the underlying collateral is already a residual. Even a 1% drop in home prices (or a corresponding increase in foreclosures) would guarantee that these “assets” would lose all value. The “value-to-maturity” is zero. We’re looking at home price declines and foreclosure rates far more than what would be needed to eliminate all value in these assets.

Think I’m wrong? Demand that the fed open the books on Maiden Lane LLC. Lets have a public accounting of what these toxic assets really amount to.

One name keeps coming up when pundits discuss who accurately predicted the current crisis. Does he pick lottery numbers?

Example One. Example Two.