Posted By thestatedtruth.com on January 21, 2010

Well, listening to Barney Frank suggesting it will take 3-5 years to engage separation or reform; that would give time for lobbyists to water-down the inhibiting of what for a period of years we’ve considered extracurricular activities by the banks. Recent new members may not realize that the importance of our emphasizing the Fed ‘waivers’ to the banks in 2007 (triggering our ‘epic debacle’ coming call) comes down to allowing the banks comingling of funds between banking and brokerage operations (because the securitized derivates and CMO’s were not investment grade and thus qualification as ‘net capital’ for the brokerages was nullified). That was taking down a firewall just I thought as the fire was starting. A firewall has no purpose if deactivated in presence of a fire. We suspected that would eventually occur all the way since Glass-Steagall was repealed; something we slightly cynically thought would come back to bite later.

Not only did it bite; but now the ‘fire sale’ pitch is being given for why they won’t be in a reform mode very quickly. Could that be to talk about it all the way through election time, and thus hold the jobs for Congressmen until later, and then water things down a bit? Perhaps; but we’ll hold off on some of the politics, as now it becomes clearer of course that to keep their jobs, politicians had better support the centrist politics we’ve embraced, but so many have eschewed in favor of unsustainable political extremes of the left or the right. As the Obama Administration departed from early campaign or other promises, and it became clearer that the ‘Chicago sausage’ style would prevail in shoved-through politics for awhile, we actually suggested repeatedly that over time a movement back to the center would develop, because most Americans really want a fair and balanced Government; not one that advocates on behalf of either extreme.

As I mentioned yesterday and before (and today after hearing the President’s speech this morning), I think eventually this restraint will be as good for the Nation long-term, as the lack of restraint in spending and financial combinations has been short-sighted and bad in the intermediate term. It’s taken a generation (through both parties errors) to get to where we are, and it may take the better part of a generation to emerge from it in good shape; but one has to start, and the kickoff at least officially may be today. I hesitate to think that if Scott Brown had not won the Massachusetts Senate seat we’d be looking at more of the same from the Congress and the White House; but suspect the handwriting’s been on the wall for some time with respect to popular frustration. If so this is what we like to see: ‘regression to the mean’ not only in stocks, but in life as well; given a predilection to view extremes as unsustainable temporary anomalies. At the same time (and we’re glad it’s not completely squashed by media) our initial take on the Chinese espionage and targeting of U.S. companies through Google is terribly sobering about the risks of becoming too dependent on trade with a particular entity. Not to even mention the prospect of a broad disengagement with that regime; which it strikes me might engender some (whether heard or not) internet upheaval in China; who also knows how important (and symbolic elsewhere) their relationship with the U.S. is from a broader context. Plus we owe them too much money for them to try to fiddle with us beyond a point. Remember my saying; if you owe your banker let’s say a hundred thousand dollars, you have a problem. If you owe your banker let’s say a million bucks, he has a problem.

Finally, there is the argument that the President’s outline hit all the wrong triggers in today’s statement. Actually I think that’s off-base. He didn’t hit enough of the triggers might be more accurate. While ‘private equity’ did not have much to do with the panic or what led to it, ‘hedge funds’ were involved, whether directly or indirectly with banks in some cases. Many hedgers saw this coming after our projections of 2007 (typically in 2008 and at the start of 2009) and either limited their business or simply exited it. It is also the case that those who stuck around actually did well especially in leveraging financials in the past 8 months or so; until the distribution began actually in late Fall in that category. However my point here is that profligate lending and political pressures to facilitate that lending, were at the root cause of the problem; and the derivatives as such became an effort to offload risk to other unsuspecting parties. The banks were unable to accomplish that task once everyone wised-up, and got stuck with worthless (or nearly so) inventory; and it was downgraded so not able to be investment grade in an important way for those to whom qualification as ‘net capital reserves’ mattered. In this area I’m simply saying that those suggesting the President is off-base are wrong; but that there were more bases to cover, would be a reasonable way to approach it.

I fear that you’re not going to create reforms that’s truly tailored-for-the-situation, until or unless they acknowledge the myriad aspects of contributing factors to the fiasco. If they do, then it’s like an air tragedy investigation which hasn’t truly yet-occurred; find all the dots to connect which allowed this to occur. We projected that back in 2007 to greater accuracy than even we suspected; and since then hindsight books affirmed a majority of what was then for us a forecast. However nobody talks specifically about the waivers, with only hints of Fed knowledge (from a Geithner tidbit at a Hearing that he may not have meant to acknowledge) in advance of the panic (typically they deny it; but the waivers of course proved that they were embroiled right in the midst of it).

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