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Tuesday, 30 September 2008

Some lightening

Buy on historical bottoms, any such excuse, and sell on anything else, or Graham, Templeton, and Buffet's buy on fact and sell on rumour ? All sounds like a predominantly see-saw ratchet continuing this week profit-taking on the ups or downs (oops) - a game for insider professionals only. The FTSE100 in September has fallen further (-13%)than for any month since October 1987 (other markets similarly - some commentators estimate $18tn in lost equity values globally over the past year?). It is 25% down on the year, 16% down over 2yrs, and roughly 25% up over 5yrs - so technically most probably a good time to buy. Except for the unravelling expected this month of much of the $54tn in CDS outstanding, we may have a White October following a Black September.
A number of Asian equity markets recovered this morning after financial stocks were boosted by hopes of an emergency rate cut from the Federal Reserve after US government efforts to bail out the US financial system were blocked, but will be revived. Irish banks staged a dramatic rally today after Ireland's government said it would guarantee all deposits and bank debt for two years, following the previous session's record losses in which Ireland's stocks slid to their lowest level in 10years (see earlier blog). London equities rose as investors began to bet that indices have reached their nadir turning point after the first attempt failure of the TARP bad bank bail-out. Trade in bank stocks remain uncertain. Wachovia was sold to Citi very cheaply excpet for Citi's $49bn provision against potential losses when it unwinds Wachovia's balance sheet. Lloyds TSB was higher but merger partner HBOS fell again, but their merger remains more on than off. Eurozone inflation is on a downward trend (if oil resumes a long run fall), but not enough to change the view that ECB will keep its main interest rate on hold, with a first cut not expected before December. The dollar advanced against the euro and the yen again as US investors actually repatriated funds following the failure of the US government to pass TARP. US stocks opened higher after a brutal sell-off during the previous session, on hopes that Washington would revive a plan to rescue the financial sector from collapse. This should mean oil price going down, but oil staged a rebound after a sharp fall in the previous session while gold lingered at the $900 level after US equities tumbled yesterday following TARP's rejection by Congress.


A week ago I wrote about an Exchange-bsed solution to take OTC structured products that are illiquid and toxic on-exchange (writing here and in FT Economists Forum and to some influencers in the US to take fuller advantage of TARP on top of the Fed's and Treasury's admin takeover of Freddie, Fannie, and AIG, and the reduction of CDS that is going on as firms merge and eliminated exposures to each other - part of the M&A/takeover price, including Citi AND Wachovia or JPM and Bear). I expand below on the original idea:
1. Establish a regulated EXCHANGE (owned by the Fed & US Treasury, with possibly BoE and ECB, and operated by the CME/CBOT/CBOE or equivalent) to trade structured products transparently (with protocols for tradability of commoditised asset backed products) based on cyclical (hold-to-maturity) economic cash-flow (IFRS-7) valuations plus tranche-based risk-hedging. Absolutely no trading would be allowed over-the-counter or otherwise on any of the eligible-securities specific pricing models or indexes. Products must be easily valued and rated on an exchange using for MBS sovereign ratings models to reflect national economy variations in mortgage protection and borrowers’ rights. Create a class of "eligible (mortgage-related only) securities" that are ‘toxic’, leaving all eligible securities on the books of existing holders. Central banks can buy in ABS (RMBS, CDOs etc.) or sell ABS holdings to maintain a target over the cycle price floor as per the TARP objective.
2. Have eligible security holders identify to the Exchange every eligible security by CUSIP and face amount. Only the Exchange will know institutional and investor positions. This will allow the Exchange internally to correctly assess the risks at hedge funds and others with "significant operations" without exposing their positions to competitors. Create a new accounting domain in-between "held-to-maturity" and "available-to-trade" where only eligible securities, as of a predetermined valuation date, can be accounted for at their value on the predetermined valuation date and not further subject to fair-value (marked-to-market) accounting while held for trading (something short of held to maturity).
2. Establish standard ratings on a "pooled-income revenue basis," whereby all issuers and holders that want (or are required) to be rated, pool funds on a per-volume, pro-rata basis and ratings providers are paid blindly for rating services.
3. Immediately stop issuance of CDS (credit default swaps) without mandatory reserve requirements and safeguards typical of what regulations already require of legitimate (Solvency II regulated) insurers. Netting of all existing CDS to tighten counterparty risk and unwind positions not secured by issuers meeting reserve requirements, and to eliminate virtual insurers. Allow issuance of CDS only up to the actual outstanding value of the underlying to ensure legitimate hedging only (eliminating undue pressure on debt issuers).
4. Mandate all holders of eligible securities mark-to-market inventories on a predetermined valuation date, the date that the Exchange expects all eligible securities to be registered with it. Those who recently marked their securities have already taken write-downs; those who haven’t will have to. If the results match bona-fide peer-group comparisons, investors and speculators may bid up eligible securities to own them before the predetermined valuation date, using new accounting definition(IFRS-7) advantages for holding eligible securities.
5. Reduce the haircut on the reserve requirements for all eligible securities covered. Since valuations have already fallen steeply, reducing reserve requirements on eligible securities additionally enhances their value as balance-sheet assets with upside potential. The Exchange may buy distressed assets at the behest of the Fed, Treasury (FDIC), or other authorities who have determined an administration outcome for holders suffering insolvency as a result of accurate mark-to-market values whereby their holdings on the predetermined valuation date (in the event of bankruptcy) may result in systemic problems. This scenario would meet TARP objectives of preventing exposing the financial system to disruptions.
6. The Exchange (backed by central financial authorities) will have a firm quality of market handle on all eligible securities and a transparent-pricing process through which any and all eligible securities may be accepted as collateral against Fed and other central bank discount windows and/or dealer and swap facilities.
7. "Servicers," (usually the originators) who manage the underlying asset pools (mortgage books etc.) on behalf of conduits (trust entities) under which securitised pools are issued, must be empowered to alter and modify terms and conditions of underlying mortgages as (or in conjunction with) the originating banks or lending institutions on the same risk mitigating (prudential + customer service) basis as their on balance sheet books with actions reported to and by the Exchange (and/or secured by first loss contracts) to incentivise banks and lending institutions to modify existing mortgages and to incentivize homeowners to stay in homes with negative equity or high LtV, taxing all capital gains on appreciation of newly appraised homes if and when they are sold by either homeowners, banks or lending institutions. And create tax-advantage scenarios for banks and homeowners partnering in the orderly reduction of delinquent obligations whenever loans can be brought back into a performing status. Lenders have various techniques for minimizing delinquency such as mortgage payment holidays, equity release and insurance cover (including Federal or other equivalents).
* with inspiration from R. Shah Gilani (trader, 29 Sept), Ronald P. O’Hanley, Vice Chairman, The Bank of New York Mellon and Charles. J. Jacklin, PhD, President and CEO, Mellon Capital Management (FT 26 Sept.) and Prof. Gilad Livne, and Prof. Alistair Milne at Cass Business School, City University London (FT 24 Sept.), and others writing in the FT mainly.

Irish response

In the first Presidential debate, Sen. McCain said US corporation tax is too high, compared for example to Ireland (zero tax rate on exporters in the '70s and now only 12.5% on multinationals). Apart from this being like an elephant envying the flexibility of a rodent (Ireland being economically equivalent to only one of the smaller of the USA's 90 major conurbations, or economically the size of Iowa) it is officially the first EU15 state in recession (though that estimate is subject to revision).
Now, it is also leading the way in making a unique response to the financial crisis. This follows after Irish banks suffered their biggest one-day fall in shares for 20 years, yesterday, Monday. Anglo Irish, the specialist property lender, fell 45%, Irish Life & Permanent (a bancassurer and Ireland’s largest mortgage provider) fell 34%, and Allied Irish dropped 16% and Bank of Ireland lost 15%. Further to a recent tripling of depositor protection at all banks to €100,000, this protection is today extended to guarantees of an estimated €400bn of liabilities (about double Ireland’s GDP), covering not only retail, but also commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.
This is aimed at easing the banks’ short-term funding, which had seized up. The deposits covered (until Sept. 2010) are at Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and Educational Building Society Shares in the 3 biggest banks rose sharply in early Dublin trading - Allied Irish up 20%, Anglo Irish up 41.3%, and Bank of Ireland up 19.3%. ”The guarantee is being provided at a charge to the institutions concerned and will be subject to specific terms and conditions so that the taxpayers’ interest can be protected,” the government said in a statement. Brian Lenihan, the finance minister, said the guarantee would make it easier for Irish banks to access funds. ”Since the collapse of several institutions in the US, it has been very difficult to access funds on international markets for Irish banks,” he said. “This will present real problems for the Irish economy if it is not addressed.”
In much larger economies the authorities sometimes allow a bank to fail pour encourager les autres, but that is not likely here. The public is also exposed via falling house prices of course, via the stock market (pensions etc.) and direct and indirect as bondholders. Most Irish equities are foreign-owned and so the market is vulnerable to the global bigger picture, which is confused and hence it became necessary for Ireland to make its own decisive move. No governments elsewhere have offered protection for bondholders and investments in shares in banks’ bonds by pension funds etc.; shareholders remain at full risk. I have every confidence in the government and the financial regulator, why 20% of my liquid portfolio continues to reside in Irish banks.
The Irish government is finalising its October Budget. It is mindful of the idea that a failed banking system is a failed state and that there was some cricism of the fact that Irish banks required as much of the ECB's liquidity window as Spain! Ireland recognises it has to find a solution of its own when the rest of the world appears to be stumbling from one intervention to the next, hence the innovation of a wider deposit cover (albeit that the banks have to also pay towards this). The Irish Government has one of the lowest Government Debt/GDP ratios in the EU (one benefit of being in the EU currency zone, albeit that private external debt/GDP may be relatively high?). Ireland has a high soverign credit rating, but credit ratings, as we have seen, are vaporous in a liquidity crisis, and like everywhere else banks' liquidity, despite ample credit risk grades, is in precious short supply. It also has, in common with other credit boom economies, a high trade deficit of 8% ratio to GDP, compared to UK at 6%, Spain and 5%, but Greece at over 10%!

Monday, 29 September 2008

The Great D word is in play.

It's my working assumption that a new agreement will be reached in the U.S. and/or the Fed, US Treasury, the ECB, BoE and other central banks will now work on an international/global version of the TARP concept. The international dimension was lacking anyway, and might not require any parliamentary scrutiny, debate and votes?
Equity values are a major part of the 'own capital' of publicly quoted financial institutions. Banks, especially publicly quoted banks, need to replenish sizeable chunks of their capital (regulatory reserves) urgently, ideally by replacing toxic own assets with AAA government treasuries, any OECD governments' treasuries.
Assuming some global scheme can be cobbled together over the next few days, I would then expect the stock markets to recover substantially from this week's sell-off and end the year in positive territory. Equities are also now getting to extreme valuations where fundamentally there is an awful lot of value for those prepared and sufficiently flush to buy on or below book values.
Meanwhile I bet many millions of private and institutional investors will be crowding into Treasuries, Gold and other safe harbour money protection funds such as the bigger most reputable money market funds, just as Hedge Funds have done, by parking sums equivalent in size to what TARP envisaged investing. Millions too will be looking up the 1929 Crash and the Great Depression. Few experts believe that is where we are headed now, at least not any distance downwards beyond the initial crash ratios. In 1924-'29 stocks rose by 120% and then in two days in October (Black Tuesday and Black Thursday) lost 30% and then continued sliding so that by 1932 a further 60% was wiped i.e. 90% of stock market indices gone.
I recall from my economics studies that Irving Fisher, the leading US economist was heavily invested and bullish, but lost his entire wealth (including his house). In the UK, JM Keynes also lost heavily. Were lessons learned? Samuelson admitted half a century later that "playing as I often do the experiment of studying price profiles with their dates concealed, I discovered that I would have been caught by the 1929 debacle." Hence, then and since, market collapses (almost by definition) were not foreseeable, whether or not they were inevitable! Moreover, that big brain economists, then and now, can neither anticipate the timing nor explain big market drops, the idea that stocks were obviously overpriced and had to fall to regain true value is a myth, and yet one of the objections by US legislators as well as the IASB accountants is that today's mark to market valuations of toxic assets are their true values? This was a major objection to the US Treasury's TARP scheme; the idea that it is not a waste of tax dollars to buy assets at prices above their current (distressed) market valuations.
What most people do not understand is that asset values are all market values and market values are produced by the economic system, its total circular, recycling of money stocks and flows plus confidence plus expectations, not by factory production productivity, or fundamental commodity or labour values. Wealth is not created by individuals or firms, but by all people and all firms within a gaming system of rules governed by expectations of how these apply normally.
If we take a casino analogy, Governments are 'the house' and they have to do whatever they can to attract everyone to remain winning and losing at the tables, rich and poor, all cosseted by their expectations and their confidence in the system and the rules, and with a few safety nets so that rich get taxed and the money recycled to the poor to keep them playing too, otherwise the rich will become poor too. A small majority of Congressional legislators ignored such circularity and all were attracted or compelled by the idea of changing the odds dramatically so as to protect Main Street versus Wall Street, and too by conservatives who identify freedom with the laws of chance operating freely with only minimalist government intervention. Some of them also want to replay the political-economic game of The Great Depression, this time without FDR's New Deal, which is their by-word for Socialism; to this time round prove that pure capitalism works.
If economic history taught me anything, I learned that Capitalism to survive needs Socialism in the engine room, just as Communism or Socialism need Capitalism in the engine room!

On the floor

"We need to put something back together that works," Hank Paulson said after he and Federal Reserve Chairman Ben Bernanke joined an emergency meeting at the White House. On the Hill, Democratic leaders said the House would reconvene Thursday, leaving open the possibility of a TARP salvage version as all sides promised further efforts, but clearly there is confusion between saving bankers and saving the financial system. One third of Democrats and two thirds of Republicans and many or most of those up for re-election in 5 weeks' time voted against TARP, impressed by thousands of phone calls and e-mails fiercely opposing the measure. The House Web site was overwhelmed as millions of people sought information about the measure through the day.
Hoping to pick up enough GOP votes for the next try, Republicans floated several ideas. One would double the $100,000 ceiling on federal deposit insurance. Another would end rules that require companies to devalue assets on their books to reflect the price they could get in the market. As a digital screen in the House chamber recorded a cascade of "no" votes against the bailout, Democratic Rep. Joe Crowley of New York shouted news of the falling Dow Jones industrials. "Six hundred points!" he yelled, jabbing his thumb downward and a lot of partisan finger-pointing followed the vote. The Dow fell to 777 points down, far surpassing the 684-drop on the first trading day after 9/11.
"What happened today was not a failure of a bill, it was a failure of will," said Dodd, the Banking Committee chairman. "Our hope is that cooler heads will prevail, people will think about what they did today and recognize that this is not just scare tactics — it's reality." Republicans blamed Pelosi's scathing speech near the close of the debate — which assailed Bush's economic policies and a "right-wing ideology of anything goes, no supervision, no discipline, no regulation" of financial markets — for the defeat. Rep. Roy Blunt, R-Mo., the whip, estimated that Pelosi's speech changed the minds of a dozen Republicans who might otherwise have supported the plan. Rep. Barney Frank, chair of the Financial Services Committee said of those Republicans, "Because somebody hurt their feelings, they decide to punish the country."
McCain said his rival Barack Obama and congressional Democrats "infused unnecessary partisanship into the process. Now is not the time to fix the blame; it's time to fix the problem." Obama said, "Democrats, Republicans, step up to the plate, get it done." Campaign politics could not be removed from this, no more than Pelosi could resist attacking conservative ideology in what was supposed to be bipartisanship!
There was enormous pressure from angry emotional public opinion and powerful voters' groups giving notice they considered TARP a "key vote" when rating members of Congress. "Make no mistake: When the aftermath of congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen," said R. Bruce Josten, of the U.S. Chamber of Commerce, in a letter to all members. The conservative Club for Growth made a similar threat to supporters of the bailout. "We're all worried about losing our jobs," Rep. Paul Ryan, declared in an impassioned speech in support of the bill before the vote. "Most of us say, 'I want this thing to pass, but I want you to vote for it — not me.' We're in this moment, and if we fail to do the right thing, Heaven help us."

Politics wins

Would you adam and eve it, turkeys vote for Christmas 228 to 205? There will be another attempt tomorrow to hammer out some new ideas, but nothing on the floor of Congress before our teatime on Thursday - Congress is adjourned. The debaters in the House of Representatives had fair value warnings of the abyss
Nasdaq down 9%, Dow down 7% (biggest one day drop), S&P 500 down 7%. Wachovia (down 90% overnight) and other banks are now teetering. Treasury yields down and interbank liquidity lending rates remain very dry. Central banks led by the US Fed are tripling money market liquidity windows. Citigroup shares fell, and shares of financial stocks traded lower. Morgan Stanley fell 11 percent and Goldman Sachs was off 8% and ticking down. European stocks, already 3% down at the New York open, fell more after the falls on Wall Street. London and Paris down over 5 %, Frankfurt -4%, Asia, Hong Kong ditoo.
Slides are bound to continue tomorrow, maybe all week; could a 40% fall to long term p/e rates in the US and 25% in Europe be far off? Maybe the House Republicans didn't realise they could defeat the bill, wanting only to lay down a strong protest marker. We'll find out from TARP's media autopsy. It will be unusual if various alternatives, PLan Bs, do not get an airing. After all, half of US households have stock investments.
Willem Buiter says in the FT Those whom the gods would destroy, they first make mad "Opposition to the proposal came from two different sources. A few remaining libertarians and believers in unfettered free enterprise voted against. Even when they recognise the risk that a calamitous collapse in economic activity may result, they view this as a form of creative destruction that is an integral part of a Darwinian market economy. I don’t know anything about Gresham Barrett, a Republican congressman from South Carolina but his statement fits the bill: “My fear is the government will be forever changing the face of the American free market. Because I believe so strongly in the principles of the free market and the belief in freedom, I will be opposing this bill.” Those who genuinely hold these views are mad, but honest and principled. I wish them a good depression."

Toxic pricing

TARP is one thing and global stock markets are all looking at a hefty 5% fall (US & Europe indices back to where they were a year ago) led by oils (oil futures off by oer 7%) and banking sectors down together. Central banks announced more co-ordinated action to combat the credit crisis and boost dollar liquidity, and the US Fed will more than double its swap lines with the ECB and other central banks from $290bn to $620bn (why not $700bn?) and it's expanding its Term Auction Facilities programme.
The FT suggests that one of the hardest to do aspects of TARP will be pricing somewhere between current firesale and hold to maturity valuations. It is not that hard to calculate between firesale and through the cycle fair value; the hedge funds are making those analyses, and have been doing so for months. They are supremely confident that they can profit by them. The bigger problem for TARP is answering why a bank or investor would seek to sell to TARP given the penalties of doing so, which may be more deadly to the value and risk grade standing of the asset seller than the funding boost is beneficial! Therefore, what may happen is that others (the shady shadow bankers, of types known as prime brokers, AI, Distress Real Estate, Global Macro, Vulture, Hedge, and Raptor, funds) will copycat TARP minus the reputational risks in return for a softer price that discounts TARP's prices.(note: those asking what is a Raptor Fund may like to know that raptors are birds of prey characterized by a hooked beak, sharp talons, and keen eyesight such as buzzards and sparrowhawks that prey along our hedgerows for rabbits and smaller birds and vermin, a type of fund that I believe will soon catch on. Raptor is also the Lockheed Martin/ Boeing F22 stealth fighter aircraft that entered service in December 2005 just as house prices began falling!)

TARP Day 1

The House votes today, the Senate today or tomorrow? TARP is assumed to be deeply unpopular. FTSE100 is down 2% (11am) with HBoS -10%, Europe -3%, after Asia fell 3%. In the US, Wachovia and Wells Fargo stocks are bullish, but the test will come on market opening. It seems the credibility of political and regulatory governance is being doubted. In the UK, B&B's takeover by a combination of Government (N.Rock) and Santander, and of Fortis by the three Benelux governments, and Hypo Real Estate handed €35bn credit guarantees by the German government and other banks, are discomfiting and so banks' shares are down again.
Fortis returned an excellent 2007 with ample assurances and yet has been massacred - disbelieved, shorted, rumoured to be under regulatory pressure, cash-flow weak (liquidity mismatch on assets to deposits and equity) though otherwise solvent? I know a lot more about this (and other banks) than I am legally entitled to reveal. Suffice to say such problems are not unique and Fortis is fundamentally a good and great bank staffed by honest diligent professionals who (as the CEO himself said) cannot comprehend why what is happening to them?)
All banks without exception have experienced enormous difficulties in designing and implementing systems to comply with Basel II; there is only so much true expertise available and not nearly enough to go round. Everyone has been on the steepest possible learning curve that inevitably results in errors. This is the first generation of Basel II solutions. Second and third generations will be orders of magnitude better. Similarly, the originate-to-distribute business model and all its structured credit product derivatives was a first generation nascent market that outgrew all expectations (of those who first invented it) at an unforeseen speed. Market corrections of earlier new derivatives markets were severe and some of us expected and warned that this would happen to CDOs etc. but no-one predicted the systemic scale of such a collapse.
Some of us could forecast the impact on banks' capital of economic recessions requiring up to 90% of banks' capital reserves to be replenished, but none I know foresaw that banks' equity capitalisations would fall by 70-95%!
Official figures on who is or is not experiencing recession right now have to be discounted. Core GDP data is subject to major revisions for up to two years. There is a historical pattern to the world's economic and credit cycles in terms of the knock-on lags from one to the other e.g. first the USA, then UK&I two quarters later, then the rest of Europe 6-8 quarters after that. But, equity markets and banks' liquidity risks do not walk in precise tandem with macro-economic cycles. These matters, the shocks that disrupt firms' economic capital models cannot be precisely forecast. Flawed human judgement is necessary and time needs to be bought to climb out of shock events. That is the essence of Government intervention, buying the time, not in weeks or months but years, for financial firms, their clients and customers, to win through to recovery, to regain near normal orderly markets. This requires confidence, realism and fortitude. For this, we can only rely on past recovery experience.
We know that property falls bottom out when they hit their long-run growth rates. The only reliable buy signals come from cyclically adjusted (over-the-cycle fair value, not through-the-cycle aggregate fair value, and not point-in-time or marking to market) i.e. price/earnings ratios that adjust for cycles such as profits/wages shares in the macro-economy. The US equity market is 40% above its long term fair value. Some argue this is because recession has been postponed by the governments' liquidity infusions, while others say this is belied by unemployment data i.e. equity fundamentals have already run over the cliff edge but values not yet recognised this? Elsewhere, the MSCI emeging markets index trades at an earings multiple 25% below the world index and FTSE-Eurofirst at below half the multiple of the S&P500 i.e. both much cheaper than the USA. Therefore, as John Authers (FT 27 Sept.) concludes the idea that resolving the banking crisis "will lead to a new bull market should be tested".
In my view, if TARP restores confidence in US financial assets without an equivalent intervention immediately in Europe, the dollar/Euro rate may recover its rise that began in July. Sterling today has its worst intra-day against the dollar for 15 years and the euro is also down; £ falling 2% to $1.8022 and euro lost 1.2% to $1.4346, on hopes of the TARP plan. World oil (& other commodities including Gold?) prices that rose briefly in recent days after a prolonged weakening may again soften and fall, even continuing to do so as we enter Winter demand, and thereby underpinning a fourth quarter general rise in market confidence (and Obama victory at the polls, Nov.4?), and then I expect turbulent volatility to be disruptively back in play by late January until Spring. Oil prices fell today by more than $3 a barrel while gold prices dipped and base metals retreated. But, what can I know - I was predicting a bank sector bounce, but maybe that has first to wait on TARP being voted through?

Sunday, 28 September 2008

Compromised TARP - likely to fail ?

Reuters reports (lunchtime EST & teatime GMT) that (after 9 hours including some through the night and "into the wee hours of Sunday morning") US Congress leaders (both parties) emerged to announce TARP agreed (with provisos to protect Main Street). "We've made great progress," said Speaker Nancy Pelosi (just in time for the opening of East Asia's stock markets). Agreement is subject to a House and Senate vote (Monday). And some further adjustments might appear by then. (The only alternative to not agreeing TARP, or this baby Son of TARP (my take on this sub-version of the original plan), was a back-of-the-envelope insurance proposal by House Republicans, which by Friday's 'Presidential debate #1' had been heaped with derision such that Sen. McCain was in some shock and now recognising that he has to be seen as a promoter not an obstacle to agreement. Nevertheless as a sop to McCain and his party the insurance deal survives as an add-on to TARP! But that's not the only watering-down. Re-election sensitive legislators have been intimidated by constituents' mails on a ratio of about 50-1 against the bail-out.)
As you will see below, I doubt the financial system will be adequately stabilised by this TARP (Troubled Asset Relief Program), even though the lawmakers consulted Warren Buffett (who confirmed his view that markets are verging on melt-down. Note that his $5bn investment in Goldman Sachs may have a clause dependency on TARP, but it now seems Goldmans may not access TARP directly, nor need to,having reduced its sub-prime exposure to a very trivial amount? Instead it is setting yup a $50bn fund to buy distressed financial assets!) There are seven parts to TARP, that are likely to dilute market confidence and undermine the overall purpose of TARP?
1. The first $250bn will be issued on TARP's enactment at US Treasury's discretion but with additional oversight, while another $100bn as The President decides, and $350bn subject to Congressional review. 'troubled assets' will be bought on a partnership basis with the warrant issuing institutions and small banks whereby the Fed/Treasury gain the upside and the warrant issuers bear any net loss.
2. Institutions selling assets (toxic) under the plan will issue stock warrants giving "taxpayers an ownership stake and profit-making opportunities with participating companies," . "Institutions" means pension plans, local governments and small banks. This may leave some big banks who are at the centre of the crisis bereft, to say the least!
3. Given the clamour of the Sans Culottes for de-capitations of executives' bonus-pay, no execs at participating companies may be allowed to get multi-million-dollar severance pay and CEO pay will be capped (a boost for shareholder activism and court cases e.g. "you should have issued stock warrants, but didn't just to defend your salary!", and Boards will have the whip hand over CEOs by threatening to vote to go to TARP and bang goes most of the CEO's pay).
4. An oversight board of top officials, including the Federal Reserve chairman, will supervise the programme, while its management also will be under close scrutiny by Congress' investigative arm and an independent inspector general (independent meaning what, from where?). What is extraordinary about this is that the current oversight of the Fed and US Treasury seem forgotten about and this additional oversight is only for the first $250bn at their discretion, while Congress gets discretion over half the money, $350bn.
5. The deal also requires "meaningful judicial review of the Treasury secretary's actions," which suggests to me that Hank Paulson won't be staying on after January!
6. the Government could use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans (which will require an immense amount of inter-firm database look-up computing when a cleverer deal might have been to create an exchange plus clearing house, but that could still materialise?)
7. Institutions selling toxic assets to the TARP fund can have a supervisory board imposed on them and in an case thereby signal publicly that they are in a condition bordering insolvency, in which case they risk a run on their equity, loss of creditor confidence and probable ratings downgrade. These reputational risk factors will prevent firms from applying to TARP until they have no other choice, in which case the dire implication of the conditions become self-fulfilling!
Meanwhile elsewhere in the forest another tree crashes. Wachovia Corp, the sixth-largest U.S. bank, is in merger talks with potential partners after a 27% drop in its shares on Friday. (US Investors worried about a contagion effect have been shifting funds to Japan and into Europe. But, in Europe big banks are also wallowing, especially Fortis NV whose fate is infecting the Belgian political crisis and lies in the hands of the Dutch National Bank who has the right to cancel its takeover of ABN-AMRO Netherlands in Q3 next year if it has not already had to be taken over before then by possibly ING and a French bank?
In London, regulators are parcelling off Bradford & Bingley. And in Switzerland banks may be capped on both proprietary trading and assets in ratio to equity - a dramatic restriction if it catches on across Europe and/or across the Atlantic!)
The TARP bad bank bailout bill ends a dramatic two weeks (or one week as one banker opined, in which markets have changed more than in the past 70 years, which seems absurdly dramatic and ignorant to me).
On Friday, on Capital Hill at in and out of the Oval Office some involvees were saying presidential politics and politics per se must be kept out of this. But as the caveats above show, politics is in the mix, albeit bipartisan. WAMU's collapse, the classic Main Street bank, concentrated minds as to the idea that Main Street could be protected from Wall Street. The New Deal (ooops) on Tarp looks to be far more biased to saving Main Street than saving the wholesale interbank liquidity crisis. In this respect, it may be that the deal is now 90 degrees off-kilter and will not do at all what Hank Paulson and Ben Bernanke need and want? Remember, we still do not know where all the toxic ABS is held?
And, unbelievably as a final further sop, House Republicans won support for a provision that would create a privately funded insurance programme for mortgage-backed securities.
As with any big money programmes, there are many pigs at the trough but not all get fed. Democrats barred proposals to put money into a trust fund for affordable housing and the idea of allowing court judges the right to alter the terms of mortgage contracts for bankrupt borrowers.
The big shocker (if it is surprising really?) is that the new deal reflects not only popular suspicion of the Bush Administration, but also represents an extraordinary demotion for the Fed and the US Treasury (with all their various arms, Comptroller of the Currency, FDIC, Fannie & Freddy, AIG, regulatory authority, management of the Federal Debt etc.) This may not matter that much to 'TarPaulson' as he may now depart when the Bush Presidency hands over in January, but must be a blow to Ben Bernanke whose authority and prestige are vital to financial market confidence and monetary management, even though he will chair the TARP oversight board.
Paulson and Bernanke have recently spend hundreds of $billions including at least $30bn extended to Europe. This may not be permitted so easily again! The politicians have exacted a mighty price to pass TARP. I would not be surprised if the Fed and the US Treasury would, if they but could, ideally wish to go back to the drawing board and conceive another technical solution that removes the necessity to go forward with politically-motivated provisos, except too late for that?

What's new news?

In the FT, John Authers makes an excellent point, hesay, "Writing anything about this financial crisi is nerve-wracking. People may be reading how financial journalists wrote about this crisis decades from now, and things we now accept as unquestioned orthodoxy may come to be ridiculed. I am acutely conscious of this..." He goes on to report how nearly a decade ago analysts were penalising banks (such as WAMU, now the US's biggest traditional bank failure) if they did not leverage their mortgage lending to the hilt.
Reading the weekend press, there is righteousness galore about the irresponsible activities of banks etc. over the past decade. No one is asking what were the warnings and who did not heed them? Not much mea culpa, though plenty of bankers bewailing that the future will be a very different place for them. Yet, we've been here before and not just 70 years ago, but 10 and 20 will do. In the late 80s early 90s 1,500 financial institutions failed in the USA alone. Many household names have disappeared, been merged, consolidated, broken up since then. Financial management is an eminently moveable feast. Every economic downturn has seen as many brands disappear as property developers, and new ones spring up like daisies after each time the lawn is mown. Were banks and bankers especially bad? It is easy to make general condemnations in public about matters that are not discusssable in detail in public, matters that were they discussed in detail most general readers would not have the patience or comprehension to absorb. But I'll try again, as this is the purpose of these 50+ blogs in a month, to explain to the uninitiated.
When banks packaged up their loanbooks and securitised them as bonds (providing risk protection, underwriting and insurance) mainly for sale to non-banks who clamoured for more (the so-called originate-to-distribute model), this was deemed prudent risk managementm and even a great way to disover a market price for the assets that banks carry. The foreign demand for banks' asset-backed bonds was very great; somewhere to invest dollar surpluses when in North America and Europe governments balanced budgets and borrowed less (issuing far less bonds). Banks were encouraged to grant mortgages to the poor, thus savings governments almost all of their previous spending on social housing. More poor got assets and could borrow. Credit boom economies boomed and the rest of the world grew exports and also boomed, not least China and India. Everyone seemed a winner.
What had not been reckoned with, except by relatively few Cassandras, was that the extreme imbalance in world trade could not continue rising, ditto house prices, consumer debt and governments evermore balancing their budgets. Additionally, the high AAA to AA- investment grades attached to asset backed securities issued by banks became very desirable to non-bank financial services firms such as hedge funds (and other active funds) because they were excellent collateral for further borrowing and could support 20 or more times their amount in short term loan facilities for trading with short term in the financial markets. The risk of losses day to day are (or were) accepted by everyone as relatively tiny so long as markets behaved relatively normally. At the same time as thousands of trading firms employed these assets to balloon the size of speculative positions they could take in wholesale financial markets, at the retail end thousands of brokers blossomed to market and sell mortgages (and other retail investment products). This is the era of the guinea-hunter, the commission agent, the financial intermediary. The idea of capitalism was founded on sub-dividing production tasks in the industrial age, on 3 month retail and trade credit, on bonds, and on property and unearned property income as collateral and that, in recent decades, was now reproduced into professional services, increasingly specialised, everyone, each process, could be disintermediated, contracted out, a firm for every identifiable task, from the bottom turning 50% of social security cheques into interest-only mortgages that could leverage credit card balances to the very top end of turning lowest paying triple-A bonds into 38% returns via short term capital borrowing. In fact the model of capitalism is not the factory; it is the city, urbanisation, the building of mega-cities in which every transaction requires money.
At both end of this spectrum the game was volume because volume meant higher fee and commission income for the long chains of intermediaries; never mind value now today, all real values are what in the short term can be traded on long term expectations of future values - and for Heaven's sake why not. In a world of fleas (where 90% of animal life by weight is insects) where even the smallest fleas have lessers fleas and everyone is a flea on something bigger, all fleas have to get their share?
The banks in the middle felt they were losing out if hey didn't join the circus and so they too pushed to grow their investment banking and especially their own proprietary speculative trading using similar leverages as the hedge funds (even though they were using the deposits of far more risk averse and vulnerable customers) while also, at the same time, in retail banking all aggressively pushed at mortgage business growth. No zero sum games; everyone a winner. Equity markets boomed too and corporations borrowed less from banks (as banks also became less interested in lending to them anyway), and the corporations issued more bonds (secured on their rising equity values). In this apparently virtuous, accelerating, global self-multiplying circle of money and values much general good appeared to be generated, but who could control it if matters went too far, and when and where is too far? Could governments risk cutting back on growth in an increasingly competitive world, or hold down house price rises somehow?
Ideologues said that growing the world's free trade is an immense benefit, and so what if the US deficit is almost everyone else's surplus, that's good too, surely? Bank regulators issued warnings about diversification and balanced risk-taking, but that is what the banks believed they were doing, mostly, and the non-banks like hedge funds were in any case biased risk-takers and their investors knew that. Economists too, the naturally gloomy party had given up largely on macro-economics and joined the party to earn fees building profit forecasting models and getting more handsomely paid than ever for micro-economics studies. Along the way, firms of all kinds rose like rockets and crashed, so this was not a risk-free one-way bet world, not entirely.
What went wrong began to do so when the first signs of a coming recession began to be predictable three years ago (in 2005) and the first US house price falls began (but only in a handful of states, yet despite half of all US mortgages already being Federally insured) and various holders of the original securitised bonds and related credit derivative sought tried to sell them on as interest rates rose and raw material commodity (especially oil) inflation pressure built. As with all new assets or tradable instruments that are tested for the first time by their first market correction, suddenly the leveraged holders found themselves vulnerable to knock-on discounts rippling through long chains of financial dependencies. Banks, as they always do, were in the middle of the money flows as they dtuttered and hiccupped. The banks had grown far faster that the general economies in which they operated. Goldman Sachs for example in only ten years had grown its assets forty-fold. Many others had similarly spectacular growth. But they were not the only ones, not the only institutions to be to blame. Everyone, including regulators and governments were caught up in the new paradigm economics. And arguably economics itself had failed to publicly address what was happening. In any case who wanted to listen to them? It was all like the catch-phrase, "it's above my pay-grade to answer that or take responsibility for that." Many firms have failed, retail depositors and many mortgage holders are quite secure and several hundred financial officers have been arrested and about 40 firms are under criminal investigation. More arrests, more investigations and hundreds of court cases are pending. If all it takes is a few $trillions to get us out of this mess and out of a potentially much worse one, and if the government debt required to do so is largely or totally recoverable (see WA WA WA MU blob below that shows the US Government potentially making a profitable gain for itself or taxpayers from the $700bn TARP of over $500bn), then so what, let's do it? It is hard on the ideologues, however. They too were sold a fanciful deram. The ill-disciplined House Republicans who tried to stymie TARP because suddenly they feared for their neo-liberal, small is better government, lower taxes, free market, let's privatise everything capitalist model - they had a panic attack. Their Euro-centric, multi-polar world, counterpart rivals are also panicking because Europe is not disconnectable and remains economically interdeoendent with the USA. All this is in the weekend papers. What a great time to be a student again returning to college for the Michaelmas Term - new thesis research topics in abundence and the prospect of redefining (not just re-callibrating) the financial (and macro-economics) landscape. We are now in a world without a dominant economic growth model or a dominant financial banking model and if we don't watch out at intervene now we may soon lose some cherished industrial business and urban development models as well! Which thought takes me back to my work for tomorrow - more principles and precepts for EU economic impact audit models!!

rumination on emotion in markets

I'm new to the blogosphere, but one thing I've learned is what weekend blogs are for, when one has nothing better to do - ruminating aloud about the long-run before voting instead for a short walk. Of my 50+ readers, I'm amazed none complain about the length or the blogs (only grammar & spelling); widespread agreement - so far, so good. So, emboldened, I ruminate on about emotion and gut-feel in the markets. One reason young traders are given a lot of money to play with is that they are better at short term returns, more profitable generally, in part because they don't ruminate and ask themselves why? Gamblers lose as soon as they try to analyse luck. Older heads underperform once they try to understand the big picture. Dealers are like cartoon figures running off the edge of the cliff, flying high until they look down! Markets and banks too may be accurately caricatured to behave like this. Recall Bradford & Bingley, one of the first banks whose Internal Capital Adequacy Assessment and Regulatory Capital provisions were formally approved by the FSA under CRD/Basel II, as it began falling off the cliff its Chairman and CEO said, by way of excuses, that they did not know the true position they were in; the accounting system was inadequate. B&B was not alone. Similar admissions came from other banks such as UBS and Bear Stearns. Many more banks are under pressures from the regulators to fill gaps in their risk accounting including profitable and eminently solvent banks such as Lloyds TSB (provisioning for its Life arm) and Fortis that has suffered from shorting and rumours of liquidity problems and additional capital buffer proisions insisted upon by the Dutch Regulator, DNB. Many banks have suffered from their accounts being disbelieved i.e. gut instinct emotions.
There is a literature about whether markets have emotions that is akin to that in zoology about whether animals have emotions. Commonsense says, of course they have, in fact that's often all they have. In animals, emotion overlaps with instinct. Instinct is tacit knowldege, what we know to do without thinking about it. For decades this is what computerisation means, automating tacit knowledge into decision-taking systems. In financial markets, chief dealers, market-makers, brokers have been disintermediated by algorithmic trading systems, and by chartism, risk gradings and general risk analysis, much of it supporting intra-day arbitrage. Chief dealers, in my opinion, remain far superior to automated trading strategies. But, do not underestimate the latter. The markets are staked out with kneejerk response trading algorithms that when TARP is passed will swarm over the up-tick (market pheromones) like ants on an apple-core, bees to honey, flies to shit or piranha to blood. The result may be instinct or emotion or both. But, gravity also rules and what goes up most sharply also invites a tacit response to take profit and expect a severe downward correction. Regulators and central banks may have to seek to choke off and try to stabilise the rate of rise to ensure general confidence is not again punctured and the I-told-you-so doubters claim the whole thing as merely a giant flash-in-the-pan. TARP's $700bn will not be an instant liquidity release, not if hedged about by disincentives such as penalties on bonuses and governance. TARP may take months to filter through bids and acceptances. But, if interbank and equity markets rise and remain on an upward ratchet, then I fully expect the shadow banking players to seek to deprive the Fed of as much of the medium term 'hold to maturity' price profits as possible (e.g. Goldman Sach's $50bn distressed assets proprietary investment fund). I do not expect more than 68% take-up of TARP's bad bank fund - that's my Fibonacci ratio forecast.

4th quarter seasons

Mid-week, I broke from finishing a report on evaluation audits of EU spending programmes to entertain a group of grouse shootists (bankers) who couldn't help but dispense with the etiquette of not talking shop. Strong etiquette rules prevail in grouse shooting. These are designed to encourage prudential risk-taking; aerial shooting is a dangerous sport, though safer than fox-hunting. Most rules are common-sense ground rules that apply to shooting of any type, such as keep the safety on or barrels 'broken' while walking and never point it outside your field of vision or at another human. The season begins on the Glorious 12th (August) and ends 10th December. I was informed that the game-bird season is a classic Kress turning point in the markets that Kress said was all Fibinoacci sequence as in a deck of cards; 52 cards (weeks), four suits (seasons), 13 cards in a suit (weeks in a season), numbers begin with two (weekly GDP and typical daily and weekly market shake, the basic prime, up to 10, a decade). The width of a conventional deck is 5/8 of the length (Fibonacci ratio and the 38% maximum to be expected in market rises and falls), counterpart to the 62% odd infinitum ratio of shots on target, birds bagged versus birds winged or missed i.e. Fibonacci numerology is evident in various aspects of life and investment banking. Whenever a bear market or economic downturn, the blame game is futile exercise for “it's all in the deck.”
On the glorious twelth, start of Q2 results season (equity funds outperform bell-weather indices, and inflation, cash reserve ratio and repo rates spike, and oil turns south, and banking stocks, credit & debt markets, fall of a cliff. By December 10th, just as the Christmas office party season kicks off, markets have recovered, we are awash with banking risk conferences, and portfolios are on hold trying to end the year in positive bonus-significant territory. Bang thump bang, the stirrup bottles are emptied and the assembling wax jackets conclude all such theories to be twaddle. When times are tough it is investment bankers' etiquette to celebrate as if they've all outperformed the rest and there's always tomorrow. Tomorrow (or tonight) we'll here if the TARPaulin has been pulled and secured resolutely over the toxic heap of the world's credit backed securities, and then we can look forward with relish to the Autumn Season, the balls, dinner parties, theatre nights and large charity events! If TARP is diluted, over-caveated with restrictions on bonus-pay, or fails to pass, I think I'll cancel grouse-breeding for next season and put my money into raptors.

Saturday, 27 September 2008


An Indian Sadhu said to me "the way of all paradox is the way of all truth!" This aphorism has never seemed more true! After a long wet Summer, there is some dry sunshine, but the estate rabbits are not venturing out of their foxholes. Do they know I'm stalking with a new rabbit gun? Peasants and grouse are darting for cover, less visible than for years! My cherry trees were all stripped bare by the birds and now (apple-picking today) of all my apple trees, only one is groaning with red delicious (American) while my Romes, gravensteins and cooking greens are small and too few to pick. Zero on giant puffballs - usually a rich crop!
The giant combine had 2 good days despite the liquidity problems in the silage bales and the mud; collapsed field drains. Our cattle and sheep are very quiet; bulls and rams positively somnambulant! From last week the battery-rescued hens stopped laying, and the feral flock won't leave the barns! There is no cock-crowing! The dawn chorus sounds nervously tentative! This Autumn's bird migrations are late, except for honey buzzards along the coast and the smallest of species, pippets and warblers (in from Scandinavia)! Is it the relentless wet weather fronts or climate change? The Autumn potato plants have suddenly withered and the dogs are off their porridge and begging for bones! After millions of years to get acquainted do animals know when humans have got the wind up them, or is the credit crunch just another symptom of a shift in the earth's magnetic field?
In the markets too, perplexity rules. What is volatile is at least liquid, therefore lower not higher risk. Banks targeted for takeover are seeing their shares collapse not rising on expectation of a takeover battle. Bradford & Bingley may be given away or absorbed into EN Wreck (Northern Rock). The BBC this morning enquired into whether the credit crunch altered retail habits? Premium and organic brands down in favour of cheap processed; traditional cuts like skirt and belly instead of sirloin or leg (we've tried to bring back mutton) and pig's trotters are this season's delicacy. JM Keynes's Thrift Paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population. McDowell's paradox: If everyone only saves themselves all may become lost! Is this a good time for the UK to be the first EU state to impose graphic images of diseased lungs and gangrenous feet on cigarette cartons? Is this a sensible time for the Yen to rise as money flows into it as a safe-haven because the $700bn financial rescue package has stalled, and just when Japan announced its first trade deficit in 25 years and Seiji Sugiyama (Japane Bankers Association) said today Japan's economy is in recession; consumer sentiment and capital investment falling faster than at any time since 2001 (Japan's GDP shrank 3% in the quarter ended June 30).

Touching the Elephant

"Shanghai is the largest city in China in terms of population and one of the largest urban areas in the world, with over 20 million people in its extended metropolitan area." -- "Ch'ung-ch'ing is the largest of ...China's four provincial-level municipalities, and ...has a registered population of 31,442,300 (2005)" These contradictory statements are in Wikipedia, which is more Factually reliable than many give it credit for. But, how many of you have heard of Chongqing (with today a pop. of c.35 millions - now the biggest megalopolis in the world, bigger than Tokyo (33m), and Seoul, Mexico City, New York, Mumbai, Dehli, Sao Paolo, and Shanghai, all with populations over 20m.
Even after the massive earthquake in Chongqing's region attended by the world's media, Chongqing is even now still totally off the global urbanism map; it is like a great hidden secret (google it).
After a year of credit crunch coverage and enquiries into shadow banking and credit derivatives markets, they too remain incomprehensively beyond the understanding of the vast majority of people, including even the vast majority of bankers and other financial experts. My sister in law says it is like watching a lot of blindfolded suits trying to pin the tail on the donkey. Actually, that's what she said after watching the McCain-Obama debate.
Shadow banking (meaning off balance sheet investment banking or what many might now choose to re-name shady banking) has been dragged into an incomprehending limelight. Hank Paulson repeats over and over how sincerely agitated, disgusted, annoyed, infuriated, angered, embarrassed, and irritated he feels personally about asking for hundreds of $billions, or any money at all. If investment banking, shadow banking especially, is the ultimate invisible hand of capitalism, it has now become very visible but only like in the parable of the blind men and the elephant, and so I would judge most people are still in denial and refusing to accede to experts who say this is really important stuff, a huge elephant, the ultimate elephant in the room! Hence, some politicians, some Congressmen etc., can brazenly say no, bailouts are wrong, it's a retail insurance problem only; let's just insure the mortgages - and of course the fact is that they don't even understand the costs and consequences of that either. And, do the bankers? Fact is, there has been so much specialisation in investment banking, silo-thinking, semi-detached self-serving businesses (and financially self-sufficent like prime brokerages, e.g. Lehman, re-hypothecating clients' margin collateral to play their own proprietary trading games) that precious few bankers have an integrated view of the big picture; a lot of blind leading the blind down dark alleyways that only now are getting spotlighted and daylighted. Therefore, is it any wonder nearly everyone is in denial? Media discussion about banking talks of the basics of 'normal' customer service banking as capitalism's plumbing and how what we the need is to get in a plumber to unblock the furred up pipes and clean out the sewer?
The most basic principle of the 'transmission' mechanism of converting savings into loans and future expectations into credit-worthiness are not understood. Most people do not know how capitalism works, no more than they know how a car engine functions or what electricity is, why the sky is blue, or the universality of gravity? (Though, actually, definitions of gravity are dividing even standard cosmology astro-physicists just now, hence the super-collider experiments at CERN!)
The European Parliament looked at the crisis in great detail very intelligently half a year ago, reading a fat report from Cambridge, but who noticed? US Congress is another matter. Its learning curve is as steep as can be. Right at this moment, in an attempt to prevent a catastrophic global meltdown beginning Monday, Congress is locked in a last-ditch to agree a bailout before Sunday evening when Asian markets open. To succeed or fail, three things are uppermost:
1. The U.S. credit engine and interbank funding globally is in melt-down, almost at a virtual standstill. Any businesses that depend on unsecured cash based only on their creditworthiness are at risk of instant bankruptcy.
2. The markets are now coiled so tight in nervous expectation that once the TARP bailout is passed, equities may rise so precipitously that it will only be sustained for a short period after which the inevitable correction (given the built-in kneejerk models) will be another shock to general confidence, and the respite to credit meltdown will be short-lived. This is despite the sensible and all-round profitable logic of TARP, a logic that many bankers and equity analysts may not yet appreciate, and may never get to appreciate?
3. Anxiety is so endemic in the banking industry, with a host of negative risk factors to be overcome, just like fences on the steeplchase course at Aintree, many investors will take profits early and, insofar as they can, pull out of the financial system entirely, shifting from weak to strong brands perhaps, in which case more bankruptcies and consolidations are yet to come regardless of Congress's decision. Any behavior that presupposes most market participants are ignorant and emotional as well as any kneejerk better-safe-than-sorry cynicism will be dangerous even when rational and irrational, both.
Hence, as soon as, assuming TARP is passed, much has to be done in educating investors and bankers. Politicians, central bankers and regulators will all need to rush into the broadcast studios and issue powerful messages of reassurance, all singing from the same US Treasury hymn sheet, and (not unlike educating everyone to the existence of the world's biggest city Chungqing) how hard can that be! Bankers may look like Cassandras and their critics like Jeremiahs. Who will be trusted above all others to tell the naked unvarnished truth of it; G.Brown, G.Bush, B.Obama, J.McCain, N.Pelosi, A.Merkl, JC Trichet, H.Paulson, B.Bernanke, C.Cox, M.Sarkozy, J.McCreevey, W.Buffett, G.Soros, who, or maybe N.Mandela or Bono? I'm on tenterhooks.
Plan B back-stops need to be in place. These include taking the caps off government borrowing limits, fully funding the lifeboats for the possibility of multiple bank failures occurring simultaneously, depositor protection scheme financing, liquidity windows, policyholder and bondholder insurance i.e. maximum short term funding all round. What scale are we talking. Well, take the case of WAMU. Over the 8 business days before its takeover by the regulators and instant sell-on to JP Morgan, depositors removed $16bn. We can conservatively multiply that a hundredfold as the precautionary support needed even if TARP is voted through!
A major factor may well be the $600bn that hedge funds have waiting in the wings to swoop vulture-like over the enxt weeks to convert this massive crisis (now that it has hit bottom and may be on the turn) into a massive profit opportunities of buying distressed assets and brands dirt cheap.
All is now coming to a head very quickly, a White followed by a Black October for stock markets and then the Alpine climb to Christmas. I'm personally in triple A bonds and AA- cash deposits plus 95% occupancy properties and thinking of taking an Autumn sunshine holiday in Chungqing (bigger population than Canada and Australia combined, though at $2,000 per capita GDP it is but the same size as England's City of Manchester - must be good place to create a thriving new business?) Good night, Good Luck and to all my American friends I hope you have a happy thanksgiving!

Friday, 26 September 2008

What have we learned?

The financial crisis and recession indicators have dominated the front, middle and financial pages for a year. Neither candidate wanted to say anything technical that could be construed as directly influencing the Congressional debate and negotiations about TARP. Clearly, McCain has been warned about seeming obstructionist. And Obama was told to remain above the fray so as not to be tainted by any sign of intimacy with Wall Street's shiny suits.
Both candidates were uncomfortable yet content to project themselves as less knowing than anyone except the average know-nothing. Did they stick to the scripts drummed into them by their respective coaching teams, or each lose the plot somewhat and stumble off-message? So long as matters are knife-edged on Capitol Hill (where both candidates are returning to directly) it seems that neither would seek publicly to influence the debate. Instead of seeing this issue as the slug-fest quick route to winning on Nov.4 they may have both learned or been told or taught that the best thing to do with toxic matters is quarantine them and keep well clear. Obama mentioned the word "responsibility" more than once in place of where he might have said "change" and must have listened to PM Brown's UN speech (or read it, since it may not have had US teevee airing, but Brown was talking to Obama's biggest campaign contributors) announcing the new Era of Global Responsibility. Responsibility may be the new catch-phrase term of enlightened politics?
On the economy (not a separate issue) they both tried (total contrast to banking crisis) to be seen as savvy and wise for all their years, experts even, on tax & spend budgeting. They both interpreted the economy to merely mean Federal spending and taxes. McCain seemed to think the only essential might be freezing all spending bills except for the military and veterans while cutting waste such as paying for studies of the DNA of bears in Montana so that business taxes could be cut (to compete with those of Ireland) and that something must be done about dependency on foreign oil! Obama countered twice by saying McCain is absolutely right, but... and that he cares about helping the middle class and he will take a scalpel to work not a hatchet and no, he did not vote for whatever increases McCain says he voted for, repeating twice "that's not true" (so there!) but believes in personally scrutinising each line item, line by line, and that McCain's idea of tax cuts just means giving $billions to big oil.
No mention by either candidate of key words such as unemployment, inflation, deficit, recession. It was like asking two non-executive directors about business prospects who turn out to be only versed in the need to cut costs. And this too was their angle on the financial crisis; yes, a deal if it is matched by cost-cutting. Obama accepted the idea that TARP's $700bn would constrain spending on essential social programmes. McCain wants to protect the military budget at least because the War in Iraq is being won. Obama says the war is not being won... er, that's it?

Main Street versus Wall Street: Hatchets or scalpels?

LEHRER: Gentlemen, at this very moment tonight, where do you stand on the financial recovery plan? First response to you, Senator Obama. You have two minutes.
OBAMA: Well, thank you very much, Jim, and thanks to the commission and the University of Mississippi, "Ole Miss," for hosting us tonight. I can't think of a more important time for us to talk about the future of the country. You know, we are at a defining moment in our history. Our nation is involved in two wars, and we are going through the worst financial crisis since the Great Depression. And although we've heard a lot about Wall Street, those of you on Main Street I think have been struggling for a while, and you recognize that this could have an impact on all sectors of the economy. And you're wondering, how's it going to affect me? How's it going to affect my job? How's it going to affect my house? How's it going to affect my retirement savings or my ability to send my children to college? So we have to move swiftly, and we have to move wisely. And I've put forward a series of proposals that make sure that we protect taxpayers as we engage in this important rescue effort. No. 1, we've got to make sure that we've got oversight over this whole process; $700 billion, potentially, is a lot of money. No. 2, we've got to make sure that taxpayers, when they are putting their money at risk, have the possibility of getting that money back and gains, if the market -- and when the market returns. No. 3, we've got to make sure that none of that money is going to pad CEO bank accounts or to promote golden parachutes. And, No. 4, we've got to make sure that we're helping homeowners, because the root problem here has to do with the foreclosures that are taking place all across the country. Now, we also have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain, a theory that basically says that we can shred regulations and consumer protections and give more and more to the most, and somehow prosperity will trickle down. It hasn't worked. And I think that the fundamentals of the economy have to be measured by whether or not the middle class is getting a fair shake. That's why I'm running for president, and that's what I hope we're going to be talking about tonight.
LEHRER: Senator McCain, two minutes.
MCCAIN: Well, thank you, Jim. And thanks to everybody. And I do have a sad note tonight. Senator Kennedy is in the hospital. He's a dear and beloved friend to all of us. Our thoughts and prayers go out to the lion of the Senate. I also want to thank the University of Mississippi for hosting us tonight. And, Jim, I -- I've been not feeling too great about a lot of things lately. So have a lot of Americans who are facing challenges. But I'm feeling a little better tonight, and I'll tell you why. Because as we're here tonight in this debate, we are seeing, for the first time in a long time, Republicans and Democrats together, sitting down, trying to work out a solution to this fiscal crisis that we're in. And have no doubt about the magnitude of this crisis. And we're not talking about failure of institutions on Wall Street. We're talking about failures on Main Street, and people who will lose their jobs, and their credits, and their homes, if we don't fix the greatest fiscal crisis, probably in -- certainly in our time, and I've been around a little while.
But the point is -- the point is, we have finally seen Republicans and Democrats sitting down and negotiating together and coming up with a package. This package has transparency in it. It has to have accountability and oversight. It has to have options for loans to failing businesses, rather than the government taking over those loans. We have to -- it has to have a package with a number of other essential elements to it. And, yes, I went back to Washington, and I met with my Republicans in the House of Representatives. And they weren't part of the negotiations, and I understand that. And it was the House Republicans that decided that they would be part of the solution to this problem. But I want to emphasize one point to all Americans tonight. This isn't the beginning of the end of this crisis. This is the end of the beginning, if we come out with a package that will keep these institutions stable. And we've got a lot of work to do. And we've got to create jobs. And one of the areas, of course, is to eliminate our dependence on foreign oil.
LEHRER: All right, let's go back to my question. How do you all stand on the recovery plan? And talk to each other about it. We've got five minutes. We can negotiate a deal right here. But, I mean, are you -- do you favor this plan, Senator Obama, and you, Senator McCain? Do you -- are you in favor of this plan?
OBAMA: We haven't seen the language yet. And I do think that there's constructive work being done out there. So, for the viewers who are watching, I am optimistic about the capacity of us to come together with a plan.
The question, I think, that we have to ask ourselves is, how did we get into this situation in the first place? Two years ago, I warned that, because of the subprime lending mess, because of the lax regulation, that we were potentially going to have a problem and tried to stop some of the abuses in mortgages that were taking place at the time. Last year, I wrote to the secretary of the Treasury to make sure that he understood the magnitude of this problem and to call on him to bring all the stakeholders together to try to deal with it. So -- so the question, I think, that we've got to ask ourselves is, yes, we've got to solve this problem short term. And we are going to have to intervene; there's no doubt about that. But we're also going to have to look at, how is it that we shredded so many regulations? We did not set up a 21st-century regulatory framework to deal with these problems. And that in part has to do with an economic philosophy that says that regulation is always bad.
LEHRER: Are you going to vote for the plan, Senator McCain?
MCCAIN: I -- I hope so. And I...
LEHRER: As a United States senator...
LEHRER: ... you're going to vote for the plan?
MCCAIN: Sure. But -- but let me -- let me point out, I also warned about Fannie Mae and Freddie Mac and warned about corporate greed and excess, and CEO pay, and all that. A lot of us saw this train wreck coming. But there's also the issue of responsibility. You've mentioned President Dwight David Eisenhower. President Eisenhower, on the night before the Normandy invasion, went into his room, and he wrote out two letters. One of them was a letter congratulating the great members of the military and allies that had conducted and succeeded in the greatest invasion in history, still to this day, and forever. And he wrote out another letter, and that was a letter of resignation from the United States Army for the failure of the landings at Normandy. Somehow we've lost that accountability. I've been heavily criticized because I called for the resignation of the chairman of the Securities and Exchange Commission. We've got to start also holding people accountable, and we've got to reward people who succeed. But somehow in Washington today -- and I'm afraid on Wall Street -- greed is rewarded, excess is rewarded, and corruption -- or certainly failure to carry out our responsibility is rewarded. As president of the United States, people are going to be held accountable in my administration. And I promise you that that will happen.
LEHRER: Do you have something directly to say, Senator Obama, to Senator McCain about what he just said?
OBAMA: Well, I think Senator McCain's absolutely right that we need more responsibility, but we need it not just when there's a crisis. I mean, we've had years in which the reigning economic ideology has been what's good for Wall Street, but not what's good for Main Street. And there are folks out there who've been struggling before this crisis took place. And that's why it's so important, as we solve this short-term problem, that we look at some of the underlying issues that have led to wages and incomes for ordinary Americans to go down, the -- a health care system that is broken, energy policies that are not working, because, you know, 10 days ago, John said that the fundamentals of the economy are sound.
LEHRER: Say it directly to him.
OBAMA: I do not think that they are.
LEHRER: Say it directly to him.
OBAMA: Well, the -- John, 10 days ago, you said that the fundamentals of the economy are sound. And...
MCCAIN: Are you afraid I couldn't hear him?
LEHRER: I'm just determined to get you all to talk to each other. I'm going to try.
OBAMA: The -- and I just fundamentally disagree. And unless we are holding ourselves accountable day in, day out, not just when there's a crisis for folks who have power and influence and can hire lobbyists, but for the nurse, the teacher, the police officer, who, frankly, at the end of each month, they've got a little financial crisis going on. They're having to take out extra debt just to make their mortgage payments. We haven't been paying attention to them. And if you look at our tax policies, it's a classic example.
LEHRER: So, Senator McCain, do you agree with what Senator Obama just said? And, if you don't, tell him what you disagree with.
MCCAIN: No, I -- look, we've got to fix the system. We've got fundamental problems in the system. And Main Street is paying a penalty for the excesses and greed in Washington, D.C., and on Wall Street. So there's no doubt that we have a long way to go. And, obviously, stricter interpretation and consolidation of the various regulatory agencies that weren't doing their job, that has brought on this crisis. But I have a fundamental belief in the goodness and strength of the American worker. And the American worker is the most productive, the most innovative. America is still the greatest producer, exporter and importer. But we've got to get through these times, but I have a fundamental belief in the United States of America. And I still believe, under the right leadership, our best days are ahead of us.
LEHRER: All right, let's go to the next lead question, which is essentially following up on this same subject. And you get two minutes to begin with, Senator McCain. And using your word "fundamental," are there fundamental differences between your approach and Senator Obama's approach to what you would do as president to lead this country out of the financial crisis?
MCCAIN: Well, the first thing we have to do is get spending under control in Washington. It's completely out of control. It's gone -- we have now presided over the largest increase in the size of government since the Great Society. We Republicans came to power to change government, and government changed us. And the -- the worst symptom on this disease is what my friend, Tom Coburn, calls earmarking as a gateway drug, because it's a gateway. It's a gateway to out-of-control spending and corruption. And we have former members of Congress now residing in federal prison because of the evils of this earmarking and pork-barrel spending. You know, we spent $3 million to study the DNA of bears in Montana. I don't know if that was a criminal issue or a paternal issue, but the fact is that it was $3 million of our taxpayers' money. And it has got to be brought under control. As president of the United States, I want to assure you, I've got a pen. This one's kind of old. I've got a pen, and I'm going to veto every single spending bill that comes across my desk. I will make them famous. You will know their names. Now, Senator Obama, you wanted to know one of the differences. a million dollars for every day that he's been in the United States Senate. I suggest that people go up on the Web site of Citizens Against Government Waste, and they'll look at those projects. That kind of thing is not the way to rein in runaway spending in Washington, D.C. That's one of the fundamental differences that Senator Obama and I have.
LEHRER: Senator Obama, two minutes.
OBAMA: Well, Senator McCain is absolutely right that the earmarks process has been abused, which is why I suspended any requests for my home state, whether it was for senior centers or what have you, until we cleaned it up. And he's also right that oftentimes lobbyists and special interests are the ones that are introducing these kinds of requests, although that wasn't the case with me. But let's be clear: Earmarks account for $18 billion in last year's budget. Senator McCain is proposing -- and this is a fundamental difference between us -- $300 billion in tax cuts to some of the wealthiest corporations and individuals in the country, $300 billion. Now, $18 billion is important; $300 billion is really important. And in his tax plan, you would have CEOs of Fortune 500 companies getting an average of $700,000 in reduced taxes, while leaving 100 million Americans out. So my attitude is, we've got to grow the economy from the bottom up. What I've called for is a tax cut for 95 percent of working families, 95 percent. And that means that the ordinary American out there who's collecting a paycheck every day, they've got a little extra money to be able to buy a computer for their kid, to fill up on this gas that is killing them. And over time, that, I think, is going to be a better recipe for economic growth than the -- the policies of President Bush that John McCain wants to -- wants to follow.
LEHRER: Senator McCain?
MCCAIN: Well, again, I don't mean to go back and forth, but he...
LEHRER: No, that's fine.
MCCAIN: Senator Obama suspended those requests for pork-barrel projects after he was running for president of the United States. He didn't happen to see that light during the first three years as a member of the United States Senate, $932 million in requests. Maybe to Senator Obama it's not a lot of money. But the point is that -- you see, I hear this all the time. "It's only $18 billion." Do you know that it's tripled in the last five years? Do you know that it's gone completely out of control to the point where it corrupts people? It corrupts people. That's why we have, as I said, people under federal indictment and charges. It's a system that's got to be cleaned up. I have fought against it my career. I have fought against it. I was called the sheriff, by the -- one of the senior members of the Appropriations Committee. I didn't win Miss Congeniality in the United States Senate. Now, Senator Obama didn't mention that, along with his tax cuts, he is also proposing some $800 billion in new spending on new programs. Now, that's a fundamental difference between myself and Senator Obama. I want to cut spending. I want to keep taxes low. The worst thing we could do in this economic climate is to raise people's taxes.
OBAMA: I -- I don't know where John is getting his figures. Let's just be clear. What I do is I close corporate loopholes, stop providing tax cuts to corporations that are shipping jobs overseas so that we're giving tax breaks to companies that are investing here in the United States. I make sure that we have a health care system that allows for everyone to have basic coverage. I think those are pretty important priorities. And I pay for every dime of it. But let's go back to the original point. John, nobody is denying that $18 billion is important. And, absolutely, we need earmark reform. And when I'm president, I will go line by line to make sure that we are not spending money unwisely. But the fact is that eliminating earmarks alone is not a recipe for how we're going to get the middle class back on track.
OBAMA: And when you look at your tax policies that are directed primarily at those who are doing well, and you are neglecting people who are really struggling right now, I think that is a continuation of the last eight years, and we can't afford another four.
LEHRER: Respond directly to him about that, to Senator Obama about that, about the -- he's made it twice now, about your tax -- your policies about tax cuts.
MCCAIN: Well -- well, let me give you an example of what Senator Obama finds objectionable, the business tax. Right now, the United States of American business pays the second-highest business taxes in the world, 35 percent. Ireland pays 11 percent. Now, if you're a business person, and you can locate any place in the world, then, obviously, if you go to the country where it's 11 percent tax versus 35 percent, you're going to be able to create jobs, increase your business, make more investment, et cetera. I want to cut that business tax. I want to cut it so that businesses will remain in -- in the United States of America and create jobs. But, again, I want to return. It's a lot more than $18 billion in pork-barrel spending. I can tell you, it's rife. It's throughout. The United States Senate will take up a continuing resolution tomorrow or the next day, sometime next week, with 2,000 -- 2,000 -- look at them, my friends. Look at them. You'll be appalled. And Senator Obama is a recent convert, after requesting $932 million worth of pork-barrel spending projects. So the point is, I want people to have tax cuts. I want every family to have a $5,000 refundable tax credit so they can go out and purchase their own health care. I want to double the dividend from $3,500 to $7,000 for every dependent child in America. I know that the worst thing we could possibly do is to raise taxes on anybody, and a lot of people might be interested in Senator Obama's definition of "rich."
LEHRER: Senator Obama, you have a question for Senator McCain on that?
OBAMA: Well, let me just make a couple of points.
LEHRER: All right.
OBAMA: My definition -- here's what I can tell the American people: 95 percent of you will get a tax cut. And if you make less than $250,000, less than a quarter-million dollars a year, then you will not see one dime's worth of tax increase. Now, John mentioned the fact that business taxes on paper are high in this country, and he's absolutely right. Here's the problem: There are so many loopholes that have been written into the tax code, oftentimes with support of Senator McCain, that we actually see our businesses pay effectively one of the lowest tax rates in the world. And what that means, then, is that there are people out there who are working every day, who are not getting a tax cut, and you want to give them more. It's not like you want to close the loopholes. You just want to add an additional tax cut over the loopholes. And that's a problem. Just one last point I want to make, since Senator McCain talked about providing a $5,000 health credit. Now, what he doesn't tell you is that he intends to, for the first time in history, tax health benefits. So you may end up getting a $5,000 tax credit. Here's the only problem: Your employer now has to pay taxes on the health care that you're getting from your employer. And if you end up losing your health care from your employer, you've got to go out on the open market and try to buy it. It is not a good deal for the American people. But it's an example of this notion that the market can always solve everything and that the less regulation we have, the better off we're going to be.
MCCAIN: Well, you know, let me just...
LEHRER: We've got to go to another lead question.
MCCAIN: I know we have to, but this is a classic example of walking the walk and talking the talk. We had an energy bill before the United States Senate. It was festooned with Christmas tree ornaments. It had all kinds of breaks for the oil companies, I mean, billions of dollars worth. I voted against it; Senator Obama voted for it.
OBAMA: John, you want to give oil companies another $4 billion.
MCCAIN: You've got to look at our record. You've got to look at our records. That's the important thing. Who fought against wasteful and earmark spending? Who has been the person who has tried to keep spending under control? Who's the person who has believed that the best thing for America is -- is to have a tax system that is fundamentally fair? And I've fought to simplify it, and I have proposals to simplify it. Let's give every American a choice: two tax brackets, generous dividends, and, two -- and let Americans choose whether they want the -- the existing tax code or they want a new tax code. And so, again, look at the record, particularly the energy bill. But, again, Senator Obama has shifted on a number of occasions. He has voted in the United States Senate to increase taxes on people who make as low as $42,000 a year.
OBAMA: That's not true, John. That's not true.
MCCAIN: And that's just a fact. Again, you can look it up.
OBAMA: Look, it's just not true. And if we want to talk about oil company profits, under your tax plan, John -- this is undeniable -- oil companies would get an additional $4 billion in tax breaks. Now, look, we all would love to lower taxes on everybody. But here's the problem: If we are giving them to oil companies, then that means that there are those who are not going to be getting them. And...
MCCAIN: With all due respect, you already gave them to the oil companies.
OBAMA: No, but, John, the fact of the matter is, is that I was opposed to those tax breaks, tried to strip them out. We've got an emergency bill on the Senate floor right now that contains some good stuff, some stuff you want, including drilling off-shore, but you're opposed to it because it would strip away those tax breaks that have gone to oil companies.
LEHRER: All right. All right, speaking of things that both of you want, another lead question, and it has to do with the rescue -- the financial rescue thing that we started -- started asking about. And what -- and the first answer is to you, Senator Obama. As president, as a result of whatever financial rescue plan comes about and the billion, $700 billion, whatever it is it's going to cost, what are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan?
OBAMA: Well, there are a range of things that are probably going to have to be delayed. We don't yet know what our tax revenues are going to be. The economy is slowing down, so it's hard to anticipate right now what the budget is going to look like next year. But there's no doubt that we're not going to be able to do everything that I think needs to be done. There are some things that I think have to be done. We have to have energy independence, so I've put forward a plan to make sure that, in 10 years' time, we have freed ourselves from dependence on Middle Eastern oil by increasing production at home, but most importantly by starting to invest in alternative energy, solar, wind, biodiesel, making sure that we're developing the fuel-efficient cars of the future right here in the United States, in Ohio and Michigan, instead of Japan and South Korea. We have to fix our health care system, which is putting an enormous burden on families. Just -- a report just came out that the average deductible went up 30 percent on American families. They are getting crushed, and many of them are going bankrupt as a consequence of health care. I'm meeting folks all over the country. We have to do that now, because it will actually make our businesses and our families better off. The third thing we have to do is we've got to make sure that we're competing in education. We've got to invest in science and technology. China had a space launch and a space walk. We've got to make sure that our children are keeping pace in math and in science. And one of the things I think we have to do is make sure that college is affordable for every young person in America. And I also think that we're going to have to rebuild our infrastructure, which is falling behind, our roads, our bridges, but also broadband lines that reach into rural communities. Also, making sure that we have a new electricity grid to get the alternative energy to population centers that are using them. So there are some -- some things that we've got to do structurally to make sure that we can compete in this global economy. We can't shortchange those things. We've got to eliminate programs that don't work, and we've got to make sure that the programs that we do have are more efficient and cost less.
LEHRER: Are you -- what priorities would you adjust, as president, Senator McCain, because of the -- because of the financial bailout cost?
MCCAIN: Look, we, no matter what, we've got to cut spending. We have -- as I said, we've let government get completely out of control. Senator Obama has the most liberal voting record in the United States Senate. It's hard to reach across the aisle from that far to the left. The point -- the point is -- the point is, we need to examine every agency of government. First of all, by the way, I'd eliminate ethanol subsidies. I oppose ethanol subsidies. I think that we have to return -- particularly in defense spending, which is the largest part of our appropriations -- we have to do away with cost-plus contracts. We now have defense systems that the costs are completely out of control. We tried to build a little ship called the Littoral Combat Ship that was supposed to cost $140 million, ended up costing $400 million, and we still haven't done it. So we need to have fixed-cost contracts. We need very badly to understand that defense spending is very important and vital, particularly in the new challenges we face in the world, but we have to get a lot of the cost overruns under control.I know how to do that.
MCCAIN: I saved the taxpayers $6.8 billion by fighting a contract that was negotiated between Boeing and DOD that was completely wrong. And we fixed it and we killed it and the people ended up in federal prison so I know how to do this because I've been involved these issues for many, many years. But I think that we have to examine every agency of government and find out those that are doing their job and keep them and find out those that aren't and eliminate them and we'll have to scrub every agency of government.
LEHRER: But if I hear the two of you correctly neither one of you is suggesting any major changes in what you want to do as president as a result of the financial bailout? Is that what you're saying?
OBAMA: No. As I said before, Jim, there are going to be things that end up having to be ...
LEHRER: Like what?
OBAMA: ... deferred and delayed. Well, look, I want to make sure that we are investing in energy in order to free ourselves from the dependence on foreign oil. That is a big project. That is a multi-year project.
LEHRER: Not willing to give that up?
OBAMA: Not willing to give up the need to do it but there may be individual components that we can't do. But John is right we have to make cuts. We right now give $15 billion every year as subsidies to private insurers under the Medicare system. Doesn't work any better through the private insurers. They just skim off $15 billion. That was a give away and part of the reason is because lobbyists are able to shape how Medicare works. They did it on the Medicaid prescription drug bill and we have to change the culture. Tom -- or John mentioned me being wildly liberal. Mostly that's just me opposing George Bush's wrong headed policies since I've been in Congress but I think it is that it is also important to recognize I work with Tom Coburn, the most conservative, one of the most conservative Republicans who John already mentioned to set up what we call a Google for government saying we'll list every dollar of federal spending to make sure that the taxpayer can take a look and see who, in fact, is promoting some of these spending projects that John's been railing about.
LEHRER: What I'm trying to get at this is this. Excuse me if I may, senator. Trying to get at that you all -- one of you is going to be the president of the United States come January. At the -- in the middle of a huge financial crisis that is yet to be resolved. And what I'm trying to get at is how this is going to affect you not in very specific -- small ways but in major ways and the approach to take as to the presidency.
MCCAIN: How about a spending freeze on everything but defense, veteran affairs and entitlement programs.
LEHRER: Spending freeze?
MCCAIN: I think we ought to seriously consider with the exceptions the caring of veterans national defense and several other vital issues.
LEHRER: Would you go for that?
OBAMA: The problem with a spending freeze is you're using a hatchet where you need a scalpel. There are some programs that are very important that are under funded. I went to increase early childhood education and the notion that we should freeze that when there may be, for example, this Medicare subsidy doesn't make sense. Let me tell you another place to look for some savings. We are currently spending $10 billion a month in Iraq when they have a $79 billion surplus. It seems to me that if we're going to be strong at home as well as strong abroad, that we have to look at bringing that war to a close.
MCCAIN: Look, we are sending $700 billion a year overseas to countries that don't like us very much. Some of that money ends up in the hands of terrorist organizations. We have to have wind, tide, solar, natural gas, flex fuel cars and all that but we also have to have offshore drilling and we also have to have nuclear power. Senator Obama opposes both storing and reprocessing of spent nuclear fuel. You can't get there from here and the fact is that we can create 700,000 jobs by building constructing 45 new nuclear power plants by the year 2030. Nuclear power is not only important as far as eliminating our dependence on foreign oil but it's also responsibility as far as climate change is concerned and the issue I have been involved in for many, many years and I'm proud of the work of the work that I've done there along with President Clinton.
LEHRER: Before we go to another lead question. Let me figure out a way to ask the same question in a slightly different way here. Are you -- are you willing to acknowledge both of you that this financial crisis is going to affect the way you rule the country as president of the United States beyond the kinds of things that you have already -- I mean, is it a major move? Is it going to have a major affect?
OBAMA: There's no doubt it will affect our budgets. There is no doubt about it. Not only -- Even if we get all $700 billion back, let's assume the markets recover, we' holding assets long enough that eventually taxpayers get it back and that happened during the Great Depression when Roosevelt purchased a whole bunch of homes, over time, home values went back up and in fact government made a profit. If we're lucky and do it right, that could potentially happen but in the short term there's an outlay and we may not see that money for a while. And because of the economy's slowing down, I think we can also expect less tax revenue so there's no doubt that as president I'm go doing have to make some tough decision. The only point I want to make is this, that in order to make the tough decisions we have to know what our values are and who we're fighting for and our priorities and if we are spending $300 billion on tax cuts for people who don't need them and weren't even asking for them, and we are leaving out health care which is crushing on people all across the country, then I think we have made a bad decision and I want to make sure we're not shortchanging our long term priorities.
MCCAIN: Well, I want to make sure we're not handing the health care system over to the federal government which is basically what would ultimately happen with Senator Obama's health care plan. I want the families to make decisions between themselves and their doctors. Not the federal government. Look. We have to obviously cut spending. I have fought to cut spending. Senator Obama has $800 billion in new spending programs. I would suggest he start by canceling some of those new spending program that he has. We can't I think adjust spending around to take care of the very much needed programs, including taking care of our veterans but I also want to say again a healthy economy with low taxes would not raising anyone's taxes is probably the best recipe for eventually having our economy recover. And spending restraint has got to be a vital part of that. And the reason, one of the major reasons why we're in the difficulties we are in today is because spending got out of control. We owe China $500 billion. And spending, I know, can be brought under control because I have fought against excessive spending my entire career. And I got plans to reduce and eliminate unnecessary and wasteful spending and if there's anybody here who thinks there aren't agencies of government where spending can be cut and their budgets slashed they have not spent a lot of time in Washington.
OBAMA: I just want to make this point, Jim. John, it's been your president who you said you agreed with 90 percent of the time who presided over this increase in spending. This orgy of spending and enormous deficits you voted for almost all of his budgets. So to stand here and after eight years and say that you're going to lead on controlling spending and, you know, balancing our tax cuts so that they help middle class families when over the last eight years that hasn't happened I think just is, you know, kind of hard to swallow.
LEHRER: Quick response to Senator Obama.
MCCAIN: It's well-known that I have not been elected Miss Congeniality in the United States Senate nor with the administration. I have opposed the president on spending, on climate change, on torture of prisoner, on - on Guantanamo Bay. On a -- on the way that the Iraq War was conducted. I have a long record and the American people know me very well and that is independent and a maverick of the Senate and I'm happy to say that I've got a partner that's a good maverick along with me now...