Tuesday, September 30, 2008

My thoughts on the bailout and coverage of it

I am a huge Hugh Hewitt fan. I rarely get to listen to him live because of work but I have his podcast auto-loading into my iPod and I never miss a single hour of his show. Most of the time I agree with him but every once in a while he is totally wrong. As I listened to his show of 9/29 in the evening I sent him the following email in the middle of the night 9/29, I might add prior to a 485 point gain in the Dow 9/30. I believe it sums up my thoughts on the bailout nicely.

Subject: why the bailout is like Harriet Meyers
To: Hugh Hewitt


As a long time listener and one who usually agrees with you I must not only disagree with you today but point out some things you have not mentioned that are quite relevant

Some simple facts:

1. Paulson has been wrong about almost everything to come out of his mouth as Treasury Secretary. He was another terrible appointment by Bush. If he supports it you should be instinctively against it. A stopped clock is right twice a day but the odds of being right at any given moment are poor.

2. There is no - zero - zip - nada reform of the actual base cause of this problem in this bill (enhanced enforcement of the CRA put in place under Clinton). If you do not fix that problem you are simply enabling the finance industry to do 2 things, use Freddy & Fannie to fund Democrats' campaigns and make lots of money for themselves until the next bailout. Anyone who was paying attention when this happened, including myself, predicted something awful like this as a result. I was a computer geek with a business minor 6 years out of college when it happened and I predicted disaster from it then.

3. There is no magic in the $700B number that you and everyone else in a panic is talking about. Nobody, not me, not you, not Paulson, and certainly nobody in Congress has the first clue about the size of the problem or the amount of money required to give the needed liquidity in the market. The hairball that constitutes mortgage backed securities today is such a mess that I don't believe there is a soul alive today who can assess with any accuracy how many of those assets are massively or substantially overvalued. We know the amount of money needed to fix it is "a lot", but is that $100B done smartly (like the government has ever done anything financially smart) or $2T done stupidly (given that the government is in charge the more likely outcome). Nobody knows. That inherent knowledge in the financial institutions is the reason for the uncertainty that is causing the crunch. If THEY knew how under or overvalued the securities were there would be losses written off and the system would march forward. Instead, nobody will buy them at any reasonable price because they have no idea what they are really worth. The improvements the House Republicans drove to get the money put in play in increments requiring approval by congress was a very very good improvement for this reason and I give them great credit for that.

4. The "market" didn't speak today so much as people like you put a lot of people in a panic and they sold off when it made no sense to do so. You, my friend, are in this case, a part of the problem. We do need action but we need well considered action that is smart. The only thing worse than no bill is a bad one. If we don't get CRA reform it is definitionally a bad bill because in the current political climate this is the only chance we get to fix it. Although I will admit today's bill wasn't horrible and would likely have been a short and mid term win, it was a bad bill in the long run.

5. Yes, I lost a little money today, but very little percentage wise. As a person with more than 2/3 of his net worth in the stock market I certainly care about the health of the market. I would like to retire soon and the stock market is my vehicle to do so. That said, any person of 70+ like those you kept referring to today who has a majority of their assets in the market and doesn't have stop losses on it is crazy and should fire their broker. We have stop losses on all of our stocks and we are in our 40s. Exactly 1 stock, Apple, has sold on us through this whole downturn caused by the media, including you, and the politicians telling us that doom is around the corner. Doom is not around the corner. An ever tightening credit problem is upon us and that is a very serious issue but it is not a cliff we are going to fall over tomorrow if people like you would simply take a breath. This is not the viper whose bite kills in seconds, this is the constrictor who slowly crushes. Kill the constrictor at any point in the tightening and you live. Beat on it without killing it and it simply tightens its grip more quickly. The Paulson plan would have been a disaster and while the plan voted down today was a vast improvement to the original we are not dead yet and have a little time to pick the right instrument to kill the snake. Why aren't the people in the finance industry telling you that? Their personal jobs are on the block. Yours isn't and mine isn't so we should be able to step back and be a little more rational than those who rode this problem to their own personal wealth and now see that in jeopardy. I am sure your colleagues who are trial lawyers will balk at the idea of credible reform in their industry too.

6. If you don't believe we have any time then we are dead already. The Treasury has already admitted that it will take at least 2 months to get any substantive action once a bill is signed. This is not oil speculation, this is the credit market. There are quite tight rules around institutional lending that don't include waivers because the investment bank thinks the government is going to inject money 60 days hence. And that 60 is more likely 90 if you talk to people in the investment industry who are not paid to talk to the press, so if we were dead with no bill today we are most certainly dead already and just have not been informed.

There is no doubt that today's bill was a vastly better bill than the original Paulson fiasco. It had some genuine oversight, measured outlay, some reasonable protection for the tax payer in asset guarantees and no additional pork. I expected the bill to pass today and would not have been highly angered if it had. That said, any bill that does not fix the CRA cause is a band-aid. If you want to help, please use your great platform to explain to the politicians you have as guests and those who listen to your show that we appreciate the stripping of the earmarks and other protections put in, however, the single biggest thing any bill taking a crack at fixing the liquidity problem MUST have is a clause to revoke the horror that is the CRA. Putting the normal banking rule restrictions on Freddy & Fannie that the Republicans have proposed twice only to be filibustered by the Democrats would be nice too, but the revocation of the CRA is a must. As one of those taxpayers Nancy Pelosi and Barak Obama intend to soak some more if they have their way I am willing to go along with losing some of my real net worth in the form of the inflation any such bailout will impose once. I am at the same time young enough that I am aware that if the ultimate source of this catastrophe is not stopped I will be asked again my lifetime to bail out the congress' utter stupidity again. Fool me once.....

As a total aside, please continue taking only first time women callers for a while longer. I must totally agree that we are getting a perspective we rarely get that is valuable. It was a brilliant move on your part and one that I personally don't think has finished paying off for your listeners yet. You might even consider keeping a couple of hours a week that way forever.

your loyal listener,