Whatever else you think of it, there is an awful lot at stake
in manipulating the collective mood of those who traffic in capital.
Beneath the momentary fugue of triumphalism, markets have never been so
distressed in the lifetimes of most of us living. It's not just the
folks in charge of things whose legitimacy is at stake, but the system
itself. When the markets really do start to manifest their true state
of extreme disorder, many will blame "capitalism," not the swindlers
who have been gaming it in recent years.
I would pause to remind readers how I regard capitalism in the
first place: not as a belief system or a political ideology, but merely
as a set of laws describing the behavior of surplus wealth and the
"money" that represents it. Compound interest has worked for communists
and Republicans alike. The trouble in our case today stems not from the
inherent defects of capitalism which, like gravity, exerts its laws no
matter how people think or feel, but from cavalier indifference to its
laws. One of these is the idea that capital markets will perform
credibly -- within reasonable limits of risk -- only if there is
agreement that its tradable paper has some value. When markets work
properly, fortunes are made and lost on the basis of relatively slight
differentials in notions of value. In other words, people must have
some idea what they are trading.
This is referred to as "transparency," meaning that those
working the markets can see through the blur of daily action and know,
for instance, that IBM common stock is fundamentally valuable (as back
in, say, 1969) because every single office in the nation was buying IBM
Selectric typewriters and paying for the service contracts that went
with them. Nobody doubted that IBM had value, only whether it was worth
$57 or $63 a share in a given week, or about how many Selectrics IBM
might sell in the next quarter.
The action in the markets now all hinges on how certain species
of "derivative" paper -- certificates based on the value of other
certificates -- are valued. The certificates in question are
mortgage-backed-securities (MBSs), collateralized debt obligations
(CDOs), and other instruments based on debt rather than equity, that is
loans rather than wealth. Of course, one problem associated with these
things is that they exist now mainly in the forms of electrons in
computer systems, represented by pixels on screens, not in paper
contracts or promises to pay. Thus they are abstracted not just in
derivation but in representation. The further and more crucial problem
is not that there is necessarily disagreement over their value, but
that, in fact, there's a growing consensus that their value is close to
zero. And there is enough of the worthless crap to choke banks all over
the world.
The current distress in the markets derives from the
frightening recognition of this problem and perhaps even more from the
efforts to conceal it. There was a ton of action on that front last
week, which ignited the fools' rally in stocks. For instance, Citicorp,
like many other big banks, is choking on scores of billions of dollars
denominated in pixels derived from bad loans. Citicorp is in the
unhappy position of not being able to cover its losses on this dreck.
It appears to have liabilities exceeding its capital assets. It is even
having trouble "papering over" these losses -- i.e. borrowing more
money to appear solvent. The loan of $7.5 billion it got last week from
Abu Dhabi's sovereign investment fund (a nationalized enterprise) came
at the cost of 11 percent interest, a rate more commonly associated
with New Jersey racketeers than legitimate bankers.
The event was greeted with triumphal sighs of relief on Wall
Street. My guess is this was so only because the managers of money
think it will keep appearances pasted together just long enough for
them to crawl over the Christmas bonus finish line. It seems to me that
there is still plenty of room left for things to go awry.
Another big spur to last week's engineered rally was the chatter about
a distressed mortgage bail-out scheme by Secretary of the Treasury Hank
Paulson and others. It would be nice, perhaps, if some honcho-wizard
could wave his magic wand and command the adjustable mortgages to
magically stand pat for an indefinite period -- say, long enough to
sort out the value of all those dubious MBSs and CDOs -- but despite
the appearance of good intentions, such a program has no practical
viability whatsoever.
For one thing, nobody really knows where the actual ownership
of the individual mortgages has actually landed. This is a major awful
consequence of the scheme to disperse risk so widely in the creation of
these derivatives. The scheme was so successful that now nobody knows
which mortgage belongs to whom and how to begin renegotiating it. So
any talk about restructuring these mortgages is absurd, since to do so
would require agreement between the borrowers and the lenders. All the
lawyers who ever lived would not be able to sort out this mess, and
most of the money at stake would end up going to the lawyers now living
if the process were to go forward.
All this is apart, by the way, from the question as to whether
insolvent homeowners could keep up with their payments whether the
rates were frozen or not, not to mention the further unsettling
prospect that the interest deferred would only end up being added to
their principal even while the market value of their houses spiraled
ever-lower in the ongoing bubble bust.
A blanket freeze would further degrade the legitimacy of
contracts between all borrowers and lenders, making it impossible to
price in risk for any future lending contracts -- since they would now
be susceptible to arbitrary changes-in-terms by authorities in charge.
In the meantime, a court in Ohio has already ruled that one major bank
(Deutsche Bank) which thought it held mortgages there, had no legal
standing to foreclose on non-performing properties (STORY).
Also meanwhile, public investment funds from Florida to Norway are
hemorrhaging because of mortgage-associated derivatives clogging their
portfolios. Meanwhile, moreover, credit markets have seized up because
those supposedly holding capital can't say how much they really have,
and are now terrified of loaning out "money" that might actually not be
there, not in accounts receivable, not on or off any books, just...
not... there... anymore....
The recognition is growing that our financial markets have been
subject to mischief so egregious that there will be hell to pay. The
current "distress" is the inability of the markets to function -- no
matter what the Dow Jones Industrial Average appears to say at any
given moment. The legitimacy of the markets and those now pretending to
preside over them hangs in the balance as we slide sickeningly into the
holidays.
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