Bailout Bill

Well, the bailout bill bombed badly (say THAT three times fast....) today, and the world imploded (well, the market did, anyway!) I have very mixed feelings about the whole thing.

I work in the financial industry and tend to believe the situation is not quite as dire as described (call me Pollyanna...) The mortgage meltdown is a problem and will continue to be for another year or two, exacerbated by and exacerbating the home price meltdown. The real problem is the mortgage derivative market, which is a) amazingly stupid in design and implementation and b) mortgaged (no pun intended) to the hilt at every level of implementation.

What it boils down to is that Wall Street (and the banks, which are not the same thing, but incestuously related) bet big that the housing market would continue to boom at unsustainable rates, took their early winnings and bet them on continuing, and so and so on. At any point, a sneeze would knock down the whole house of cards. Unfortunately, they got not a sneeze but full-blown pneumonia. And with the leverage of the leverage, that pneumonia is in danger of becoing pneumonic plague.

I don't think this bill was the ultimately answer (God knows, the Paulson plan as offered wasn't!) but it was movement in the right direction. This is an excruciatingly delicate situation that needs to be unwound with skill and care OR we need to have the government backstop everything and just blow the current players up. There doesn't seem to be, to me at least, any real middle ground. Given the capablilites of government (or any large institution for that matter) to do delicate, skillfull, and/or careful, blowing them all up may end up being the answer.

Whatever we do is going to be painful in the short run and expensive in the long run. Yeah, yeah, yeah, the government might make up some loses (or even make a profit) on some of the assets down the road, but having lived through the RTC era while in the real estate industry, I damned sure ain't gonna count on it!

One thing that's obvious after today (and the last week (well, hell, the last thirty years) is that the Republicans, particularly the House Republicans, need to be completely left out of the process. Their behavior today was, as always, whiney, self-serving, and destructive to the best interests of everyone else on the planet. Brad Delong said it best: "This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt.

Several things MUST be addressed in any bill that comes out of this. First, in addition to bailing out the Street (who went in to this knowing they were playing with fire), there needs to some method of stanching the bloodloss of borrowers who are in trouble. Whether it's a national refinancing program, bankruptcy reform (back in the direction of the consumer), or some other program remains to be seen, but without fixing the root problem, the rest is academic. Second, there needs to be serious oversight reform of the financial industry (yes, this might screw me, but so be it). Slashed regulations need to be reinstated (bring back Glass-Stegall?) and the regulators need to grow a pair (or be forced to grow a pair!). Third, there needs to more regulation and oversight of the derivative markets (my partners are now storming my office!) Derivatives are a vital and important part of the market, functioning, depending on which ones and how used, as a pressure relief valve, insurance, or leverage vehicle. But, most of the problems arising out this situation are due to forming derivatives, then derivatives of derivatives, unto the n-th exponent, with additional leverage being layered in at each step. This needs to limited or eliminated (oy! I can't wait to read the inter-office email now!)

On the subject of executive compensation, I remain agnostic. At heart, I tend to be in favor of limits, but set by the stockholders (or at least making it mandatorily confirmable by them.) I'm entirely comfortable with the idea of the government setting up regs here. But, if they do, I can live with it. All the arguments against are basically bogus, but they have the currency of conventional wisdom, so movement in this direction is going to be difficult and noisy.

Anyway, on that note, I think the market is going up tomorrow, and, up, down, or sideways, I can't wait for the opening bell to get back in the game.