THE ECONOMY ON HOLD.....MASS MOUTHING OFF

If you're looking for venture capital funds to help you start a new business, you might as well take a vacation instead. Or go to bed. Because until Thursday -- and even then only if an already demonstrably suicidal Congress decides that it prefers LIFE to DEATH -- you will get nothing. There simply is NO money changing hands out there, beyond the cash that people have in their hands.

If you're looking for an auto loan, or to buy some furniture on credit, you too might as well move on to Plan B. Because there is no money available for credit purchases.

If you're expecting your pay check from your job this Friday, you too might as well keep your fingers crossed. Because if Thursday brings us another Suicide Vote in Congress, many payrolls will not be funded -- most depend upon overnight borrowing into payroll accounts.

Here I think I need to explain a little. You work for a company, let's say, that pays its employees weekly. It sounds automatic; but it isn't. The only reason that your weekly pay check gets paid weekly, every week, is that your company has sufficiently good credit to be able to borrow overnight funds to the extent needed to meet payroll. Why does your company need access to overnight money ? Simple. Most companies bill their customers on a 30-day invoice basis. Some weeks a lot of money comes in; some weeks, not so much. Some weeks maybe almost nothing. Of course most of your companies customer invoices are solid credits. They WILL be paid. But there is no requirement that they all be paid in the same time frame. Thus the overnight borrowing is needed. It's called "managing your cash flow."

All of this "automatic" convenience is now at risk thanks to the House's Suicide Squad. We're back to the 18th Century now, or even earlier, before the time when commerce created overnight and short-term borrowings for companies needing to meet regular obligations. For the Suicide Squad, it's CASH ONLY. Your company lacks cash, you don't get paid, end of story.

Granted that things may well not get this bad. The Federal Reserve Bank still controls the U.S. money supply. It still makes money available to all banks that have a right to apply to the Fed's "window" -- and all federally chartered banks have that right. The Fed can still schedule auctions of Treasury bonds -- and right now Treasury Bonds are very, very much in demand. Thus the Federal Reserve has tremendous powers to infuse the financial system.

What the Fed does NOT have, however, if the Paulson Rescue Plan is not voted favorably by the Suicide Squad, is the authority to buy up the trillion-plus dollars of bad mortgages that are now choking the entire U.S. financial system. May I explain ? Simple: the Fed's rules require that a bank reserve the full face value of a bank's non-performing (defaulting) obligations. Thus, if a bank holds $ 100 billion of mortgages, and 20 % of them are in default, the bank must reserve $ 20 billion in cash. Yet the Fed requires a bank to reserve only 8 % of its outstanding NON -DEFAULT obligations. If Bank A's $ 100 billion in mortgages were entirely not in default, it would need to reserve only $ 8 billion.

In other words, if Bank A has 20 % of its mortgages in default, this would completely wipe out its entire reserve cash AND obligate the bank to come up with $ 12 billion more, at a MINIMUM. In actuality, Bank A would need to come up with a lot more than that. It would need to come up with the $ 12 billion to reserve its defaulted mortgages; but the bank also holds $ 80 billion of non-default mortgages. These require asn additional $ 6.4 billion in reserve capital.

Thus Bank A, holding 20 % of its mortgages in default, needs to come up with a MINIMUM of $ 18.4 billion in cash money. If not, Bank A is insolvent and subject to seizure by the Federal Reserve.

This is how things now stand. The Suicide Squad thinks that if Bank A gets seized, it's only a just desert for bankers who didn't manage their money properly. But today it is not just Bank A that is at risk, it's the ENTIRE financial system. Because about $ 1.5 trillion of mortgage obligations are in default. And who but the Fed has $ 1.5 trillion ? Or, to put it the Paulson way, who but the Fed has $ 700 billion to buy defaulted mortgages at a default price? And thus get them off the books of banks and thereby free up bank capital to flow through the economy again ?

Or does the Suicide Squad have this money ? Yeah right...

THE HOUSE VOTES TO HURT AMERICA

Today at 1:30 P.M. the U. S. House voted to hurt all Americans. In doing so, the majority of members, supposedly elected to pursue the National interest, rejected the pleas of President, both candidates for President, and the Senate and House leadership of both parties. Whatever happens to the U. S. financial system now -- and it could be dire -- is going tgo be THEIR doing. Their TAINTED GIFT to the American people, who they evidently disdain.

One is tempted to blame especially the House Republicans, who voted 66 to 133 against the Financial Recovery bill; yet what is to be said also of the Democrats, who voted in favor by only 139 to 94 ? How did Speaker of the House Nancy Pelosi only manage to win the votes of 60 % of her Democrat caucus ? How did 94 Democrats vote against a bill which can only hurt the little guy struggling to keep his home, or to obtain a small car loan, personal loan, or line of credit ?

The Housde leadership promises to bring the Financial Rescue bill back for a second v0te, on Wednesday: but why should the result be any different ? Those who don't give a damn about you or me on Monday, why are they suddenly going to give a damn on Wednesday ?

The likelihood, rather, is that the following will happen:

1.the Federal Reserve bank, acting in conjuncdtion with Bank of America, Wells Fargo, Goldman Sachs, Citigroup, JP Morgan Chase, and Morgan Stanley -- as well as overseas investors -- will buy up distressed mortgages at the source, taking over entire banks, with now nol oversight, no taxpayer accountability, no limitation on compensation for executives of failing financial institutions.

2.Private pools of investors will buy up other distressed mortgage paper in the open market, at giveaway prices, making themselves huge profits, with no give-backs.

3.John McCain's campaign looks a bit futile. Why elect a maverick, outsider Republican, if the quintessential Republicans (George Bush, Judd Gregg, John Boehner) can't get a vitally important deal done ? Why elect a man who puts Country first when the majority of the U.S. House shows it puts Country last ?

4.Barack Obama, who deserves nothing and has earned nothing, and who wants to vitiate America's strengths and apologize to the workd, can likely now slide coolly and non-committal-ly into the Presidency, whence he can direct huge Federal funds to ultra-lefct, socialist, even criminal enterprises like Acorn,m MoveOn, and Kos.

It is a sad day for America. To think that I have lived to see this. A day as infamous as that back in 1920 when a petulant Senate defeated Woodrow Wilson's League of Nations bill and the Versailles Treaty and thus set world history on a direct line to World War II.

JOHN McCAIN: A NATIONAL TREASURE

Yes. You read the headline right. John McCain is in fact a national treasure -- tough but humble; honorable and willing to put his career (and life) on the line; committed to the ideals that motivate America; ready to partner with any American of good faith, no matter of which political party. He really DOES put country first. His life and his political dynamic testify to it.

He should be our President. As far as I'm concerned, he already is. It is HIS ideals, his dynamic, his character, which is driving the change in this election year.

He is impulsive -- but his impulses are strong and usually correct.

He is a Republican's Republican -- and has already begun the tremendous revitalization that the Republican party badly has needed.

No, I am not an objective observer. I've admired John McCain tremendously for a long, long time. Again and again I have found myself cheering him on as he took a stand for what is right no matter the temporary political cost.

This is a man you should thank the times for putting into our midst.

But if all that I've said is so, why is John McCain running a few points behind in most polls ? Why isn't he a landslide leader at this time, after the first debate, in which he established his strength and his insight so clearly ?

Good question...

Senator McCain is running behind for three reasons:

1.His oppponent is an engaging speaker with a clear message: "throw the bums out." And a lot of Americans agree that in fact the Bush administration has been eight years of bums and blunders.

2.The mainstream media is dominated by the political Left -- and Mr. Obama won his party's nomination as the most Left of all the Democrat candidates. Thus the media is doing everything it can to stamp the message of his "superiority" on the viewing and reading public.

3.In a year in which BIG CHANGE is wanted by almost everyone, John McCain has the harder task: to convince the voters that though he's a Republican, and has supported many of the better initiatives of the Bush administration, he can "throw the bums out" just as completely as Mr. Obama promises to do.

John McCain has about 40 days left in which to convince voters of the following:

1.That his administration really WILL bring change -- bi-partisan change -- whereas an Obama presidency will simply substitute the Democrat establishment of insiders and influence peddlers for the Bush establishment of insiders and influence peddlers.

2.That however the past informs, and gives gravitas, to John McCain's politiucs, it is the future that motivates his seeking the Presidency. In June he gave a speech in whijch he outlined what he hoped Amnerica would look like in 2013, at the end of his first term. HE SHOULD GIVE THIS SPEECH AGAIN. AND AGAIN. AND AGAIN...

3.That he will take his case for significant change TO THE COUNTRY, ON THE STUMP, after the election as he is doing during it. That he will INVOLVED THE ENTIRE COUNTRY in his drive to change Washington's ways, priorities, and commitments.

If he does these things, he will be elected with room to spare. I'm counting on him to do it.

ANALYZING THE HENRY PAULSON OFFER...

The media refers to Secretary Paulson's$ 700 billion request as a "bail out," but it is no such thing. Not at all. Here's what Secretary Paulson's proposal REALYS is:

It is an OFFER. An offer to buy. An offer to buy distressed assets at a rock bottom price.

Under Secretary Paulson's proposal, the Treasury will have available to it UP TO $ 700 billion with which to buy distressed mortgages and mortgage-related assets at a price of its, the Treasury's, choosing.

Current holders of those assets, which have no present marketatall, will offer to sell them to the Treasury at a price. The Treasury can decide to buy at that price, or to offer less instead. The principlewill be "The Treasury buys at the lowest price it can." By doing this, the Treasury revives the market for thesesorts of assets in two ways:

1.The Treasury becomes a buyer for assets for whioch right now there is NO buyer.

2.As the ONLY buyer, the Treasury establishes a bottom price for these assets. A bottom price is at least A price. Better A price than NO price.

The Treasury as Only Buyer, establishing a bottom price for these assets, establishes a baseline from which the price for these assets can rise. Therewill be at leastsome investors who will be ready to offer a buy price higher than the price at which the Treasury as sole buyer bought. These new buyers will allow the Treasury, as seller, to recoup taxpayers' money. They'll also allow some institutions who dared not sell to the Treasury at a rock bottom price to sell to these new investors at a slightly better price.

Once the Treasury's buying establishes a markjet price for these distressed mortgage assets, risk managers at other investor firms can finally put numbers on their appraisals of the woirth of assets which now have NO value that can be estimated.

So far, so good. This is an excellent plan, one that will indeed re-boot the mortgage markets.

Less good is the call by some to put a cap on what can beearned by investment firms seeking to sell distressed assets to the Treasury. These investment executives are NOT -- repeat, NOT -- federal employees simply by reason of theirselling assets to the Treasury. Limiting their salaries to $ 400,000 or less will either cause these executives to leave -- ande to NOT be replaced by anyone with sufficient marketplace experience to make informed risk decisions -- or else the institutions facing salary limits will simply not offer to sell distressed assets to the Treasury. That would defeat the entire purpose of the Treasury proposal !

Not to mention that is a very, VERY bad idea for a government in a capitalist economy to be telling people what they can or cannot earn. That's for the market to decide. Wage and price controls have been tried before, and they are almost always self-defeating.

Nor should the Treasury proposal be an occasion for legislating at agenda of regulatory reform. That can come later, if needed. Right now what is needed is for the market to operate again. Treasury Paulson's proposal should almost certainly be approved AS IS, with all the customary disclosure systems, but with no further regulatory anvils attached....

GOLDMAN SACHS and MORGAN STANLEY DECIDE TO REGULATE THEMSELVES !

How often does THIS sort of thing happen ?

Today the NEW YORK TIMES announces that Goldman Sachs (GS) and Morgan Stanley (MS), America's last two independent investment banks, are going to reorganize as bank holding companies -- thereby subjecting themselves to all the Treasury (and Comptroller of the Currency) regulation & oversight that they did NOT have to endure as investment banks.

Clearely GS and MS are doing this because investor confidence in their investment-bank business model has vanished. So far, so good: "the customer is always right," and thus you please the customer, whatever it takes. The even better news is that, as bank holding companies, GS and MS will be required to limit their LEVERAGE to about 11 to 1 -- which, as the NY TIMES points out, is the present leverage ratio maintained by Bank of America. (Actually, Treasury regulations require banks to reserve for at least 8 % of their debt obligations, but there's no harm in a bank reserving more than the minimum, is there ?) Reaching this level of reserves will require GS and MS to retrench substantially: the TIMES reports that GS's leverage ratio is 22 to 1, MS's 25 to 1. Amazingly, in the workd of U.S. investment banking, these leverage ratios are conservative. Lehman Brothers's leverage ratio on its bankruptcy day was repoorted to be 40 to 1...

I am unable to comprehend how a banking institution can rationally maintain a leverage ratio of 40 to 1. Even the merest fluctuation in the quality of its debt holdings would wipe out such a pittance of capital. Why so ? Let's do the math:

The Fed requires a bank to reserve 8 % of its debt holdings but 100 % of its NON PERFORMINMG debt holdings. Thus if 1 % of a bank's debt holdings are non performing, 1/8 th of all of its capital is used up, reducing its reserve on debts not in default down to 7 % and thus forcing the bank to raiuse some new capital.

Now suppose that a bank has $ 100 billion of debt holdings and $ 8 billion -- the minimum -- of cash reserves. Suppose that THREE percent of its $ 100 billion debt portfolio is in default. The bank must now set aside $ 3 billion of its $ 8 billion reserve, leaving only $ 5 billion to cover its other $ 97 billion debt portfolio: the bank must now raise about $ 2.8 billion in capital to not be in violation of Treasury rules.

That is bad enough; but for Lehman, with a reserve ratio of 40 to 1, even a 2 % default rate on itws debt would wipe out its capital entirely. And the mortgfage-related debts that Lehman was heavily committed to was at least 20 % in default !

If a bank with $ 100 billion in debt holdings has 20 % of them in default, its reserve requirement just for its defaulted loans equals 250 % of its minimum Treasury reserve minimum !

I think you see the problem now. Which is why GS and MS have a TON of work to do. Raising capital, selling off bad debt, reetreating from the outer reaches of risk to something like rational risk assessment. No wonder that they have, by becoming bank holding companies, FORCED themselves to change their ways -- and FAST.

This is a good move. It lets us know that the folks on Wall Street recognize that they have been smokin' an awfully goofy brand a financial weed and that they feel strongly the need to GET STRAIGHT -- before Secretary Paulson and the Coingress impose straightness painfully on them.

As JOHN McCAIN so beautifully put it in his Acceptance Speech, "my friends, CHANGE IS COMING!"

IT'S THE LEVERAGE, STUPID

The huge financial freeze-up that has everybody spinning, politicians wind-bagging, and Treasury Secretary Paulson going sleepless essentially amounts to ONE THING: ABUSE OF LEVERAGE. Yes. It really IS the leverage, stupid. Address the leverage issue and for the most part you correct the problem.

Hence The Mass Mouth's solution:

let the Federal Reserve Bank -- which regulates the use of money in the financial system -- apply its MARGIN RULES, which now govern what percentage of the purchase price of stocks and bonds a buyer can borrow from broker accounts, to the purchase of mortgages and mortgage-derived securities.

Please allow me to explain. And first of all, a little history: the Fed's margin rules were first adopted back in 1913 when the Federal Reserve system was established by law. At first the rules were very liberal. Buyers of stocks were required only to post 10 % of the purchase price of a stock and as little as 1 % of the price of a bond. The remainder of the purchase price could be borrowed. Buyers of stock thus took on a leverage ratio of 9 to 1 -- 10 % the buyer's money, 90 % borrowed from a lender (most often, the broker holding the buyer's stock account). Then came the great stock market crash of 1929. Stock prices quickly declined much more than 10 %, leaving the buyer with a "margin call" -- a demand that he post additional cash. If he could not post it, stock was sold sufficient to "meet the call." Those stock sales then depressed the market yet further, leading to more "margin calls," and so on to the bitter end, by which time the US stock markets had declined about 90 % from their highs and practically every buyer of stock -- and his brokerage house, and a great many banks too -- were totally wiped out.

As a result of this financial disaster, many new regulations were put in place; as significant as any was that the "Fed" set much more conservative margin guidelines. Well into the 1970s the Fed's margin rule was 50 % -- a buyer had to post 50 % of the buy price of a stock -- and 10 % for purchases of bonds. Then came the "dot-com" craze, and as bad as its wipe out was of stock buyers, it had limited impact on financial institutions because early on in the craze's bull phase the Fed set margin requirements for 'net stocks at 70 %, evedn 100 %.

Now I'm suggesting that the Fed do the same for purchases of mortgages and mortgage-backed securities, including insurance contracts tied to those mortgage-backed securities.

I suggest that the Fed require buyers of such instruments to post at least 20 % of their buy price and, in the case of instruments evidencing significant risk, as much as 40 % , 50 %, even 70 % of the purchase price.

Granted, that such restrictive margin requirements severely limit the buyer's profit potential; granted, that if a buyer who understands risk and has significant net worth (I'm referring here to the "suitable investor:" standards as defined in the Securities Acts of 1933, 1934, and 1940) wants to risk all of his money he should be allowed to do so. The problem, however, is that the securities in question are almost all of them bought by institutions, who are using money that belongs to shareholders, many of whicfh are institutions investing depositors' money. It is not simply John Q. Capitalist investing his own stash ! And so my first point is made.

Applying the margin / leverage rules to mortgage investments also reflects the already changed reality of the mortgage world. Today, 20 % down is the general rule. In addition, income to mortgage expense qualifying ratios have retreated back to the fairly conservative standard -- 33 % to 40 % of gross income -- as set by FNMA and Freddie Mac and adhered to until about 1995.
It makes sense to apply to mortgage purchases the same level of leverage limitation that thge mortgage industry itself is now insisting on.

The new realism about leverage in the transacting of real estate reflects acceptance that real estate prices come down as well as go up. Real estate is a market. It is NOT a stairway to heaven. Unrealistic real estate prices are...unrealistic no matter how many thousands of brokers, appraisers, loan offricers, and lending company executives insist on thinking otherwise. It is time now to close the mortgage market to people who think that mortgage lending and mortgage investing are an oportunity to get high on financial LSD.

NEXT: Secretary Paulson's proposal evaluated "THE MASS MOUTH WAY."

WHY THE POLITICAL LEFT WILL LOSE...AGAIN

It's hardly a secret to readers of "The Mass Mouth" that I dislike the Left and its politics. Thus this commentary is going to sound anything but objective in its analysis. Nonetheless, I submit it:

The Left is going to lose this election. It will do so for all the usual reasons and for some unusua ones besides. Most importantly, it will lose because it believes that it's smarter than you. Last I looked, people do not like being told that they are dumb, especially when they're not. Yet because the Left is the politics of so many academics and media types, whose stock in trade is learning and knowledge -- difficult to acquire and long time acquiring, the Left has what it considers good reason for its high opinion of itself. Leftists also feel certain that they seek a better world and that their view of the better world is an urgent objective, and that they thus have a mission to impose it on everyone else. Unhappily, everyone else actually lives his or her own life and acquires his or her own view of what the world is like and should be; and in a democracy, these everyone elses are entitled to have their priorities counted.

The superiority point of view would, by itself, put the Left at a disadvantage in a democracy with universal suffrage. Yet the Left goes further. When challenged, it doesn't merely respond, it attacks the challenger's right to be heard, or to be believed. Worse still, because the Left always knows that it is correct, it always knows that it should win every election: and that if it does NOT win, it can only be because those who vote against it are stupid, craven, dishonest, hypocritical, even criminal -- or are all of these.

Naturally, those voters who choose to vote for candidates and programs not arising from the Left do not believe that they are acting stupidly, or in a craven manner, or dishonestly, etc. For some unaccountable reason, non-Left voters actually feel pretty O.K. about their choices. And more often than not, their candidates win.

As we're seeing in this election, the Left can NOT deal with the prospect that non-Leftists might win. Destroy, demean, denigrate -- the Left doesn't respond, it goes to war. Dirty war. But in politics, the other side does not get wiped out. It lives on. And, living, it goes its own way all the more determinedly on accountv of the outrages thrown at it.

The Left at this time is watching John McCain and Sarah Palin surge and surge some more, drawing huge crowds, energized and energizing, with a mesage of reform, freedom, and "country first" that enrages the Left. This was supposed to be THEIR time ! How DARE these folks, these "McBush" types, these "more of the same" guys, actually approach to victory ? After all, THEIR candidate is THE MAN OF DESTINY. He's the MORAL choice. He brings tears to the eyes of SO many! He is so ARTICULATE ! He is THE ANOINTED. America wants faith-based politics ? OK, says The Left, HERE HE IS. Moses parting the Red Sea...

But what if he isn't ? What if John McCain is the man of destiny ? Plain-spoken, earnest, stolid, man of honor John McCain ? What if a Maverick and a Reformer with an actual record of being so wins, in his own, very steady, undramatic way, this important election? What will the Left then do ?

Simple. It'll say that the election was stolen.

They WOULD say that, wouldn't they ?