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3 SUBPRIME ICEBERG A YEAR
LATER And the band played
on By
Julian Delasantellis
Abu Dhabi Investment
Authority, the world’s largest SWF, paid $7.5
billion for a 4.9% stake in Citicorp (see Selling the US by the
dollar, Asia Times Online, Nov 29,
2007.)
However, this investment has not
proved particularly prescient; Citicorp’s stock
has declined almost 33% since the Abu Dhabi
purchase. China’s $3 billion investment in the
initial public offering of the private equity
titan Blackstone Group has also not gone rather
well; that stock is down over 55% from its first
day of trading in June.
Maybe the SWFs,
already mostly underwater with the $100 billion of
investments they made in the US financial system
last fall, are
just
being cautious; they’re waiting for lower prices
to initiate another round of buying. Maybe they’re
waiting to see if the US Presidential election
leads to another round of financial nativism and
xenophobia.
But perhaps they’ve realized
that they just have better things to do with their
money, like maybe using it to improve the lives of
their rapidly growing populations, than to lose it
on the currently dysfunctional bedlam that is
today’s Wall Street.
If foreign
governments aren’t going to save American finance,
and the private sector can’t, who’s left? Maybe -
get this - the American government?
Fed
to the rescue Various proposals are
floating around the public policy wonk world that
call for a far greater role by the US government
in saving the subprime/structured finance world.
Most of these call for some branch of the
government to, in effect, take the subprimes out
of the hands of the private sector, by buying
these mortgage securities from the banks. Since it
would take these rapidly declining in value
securities off their hands, in exchange for cold,
hard, rock-solid (as long as you’re not comparing
its value to that of the surging euro) American
cash, the banks would love this. Bank of America
advanced a plan to do just this in late February.
President Bush has come out flatly opposed
to this proposal. To him, having the government
save the financial system in the last innings of
his Presidency would undoubtedly be seen as a
devastating challenge to the supposed economic
success and prosperity of the first seven years of
his term. Even if a legislative initiative calling
for such could emerge from out of the deadlocked
and gridlocked Congress, it would undoubtedly not
have enough votes to override a certain
Presidential veto.
Most of the Republicans
in Congress are running from safe seats in the
West and South; they know that they do not have to
worry about having the blame pinned on them for
the developing economic calamity. They can always
find a ready audience out there in the white
suburbs willing to believe that it was all the
fault of the blacks, the Latinos and the Clintons.
If the supposed government won’t act to
save the economy, what about what many say is the
real government, the US Federal Reserve Bank?
Could they enter the market to buy up the subprime
paper, to, in essence, effect a one-time temporary
nationalization of the US financial system? More
importantly, would they be willing to do that?
The Federal Reserve is like a US
government agency - except in the areas which it
isn’t. Although its board members are appointed by
the President and subsequently ratified by the US
Senate, the regular branches of the government
cannot exercise their standard functions with the
Fed - the executive branch cannot order the Fed to
raise or lower rates. As for the Congress, their
main role vis-a-vis the Fed is to act like island
savages in awe of the great white man in his
gleaming ship whenever Bernanke or another Fed
official deigns to address them.
The Fed’s
main method of affecting the economy is through
entering the short term money markets to buy or
sell Treasury security repurchase agreements (see
Central banks' easy virtue, easy
money, Asia Times Online, August 14,
2007). If they suddenly desired to refresh their
palate with some subprime security hors d’oeuvres
along with their standard main course faire of
Treasury repos they probably would be OK - at
least on legal grounds.
In their hands-off
ethos towards the Fed, the Congress wrote the Fed
charter very broadly, and rescuing the US
financial system by buying up the subprimes would
certainly fall under the category of, as the
mission statement on the Fed’s website puts it,
"maintaining the stability of the financial system
and containing systemic risk that may arise in
financial markets".
The recent
establishment of the Fed’s Term Auction Facility,
for banks who feel that using the traditional
option of the Fed’s Discount Window for emergency
funding is too much like being a criminal
perpetrator being frog-walked out of the
courthouse with a trenchcoat over their shoulders,
proves that, when it wants to, the Fed can move
very decisively, in just about any manner they
choose .
Freedom first? But do
they want to? That’s a tougher question.
Technically, the Fed’s balance sheet shows a
positive balance of around $33 billion, not really
enough to make a big dent in the subprime mess
anymore. However, the numbers on the Fed’s balance
sheet are massively fudgeable. Almost $800 billion
of liabilities listed on the Fed’s balance sheet
represents the value of all the cash and bills in
circulation; there’s probably very little worry
that the public will be clamoring at the Fed’s
door wanting to exchange that into another
currency, another storehouse of value, anytime
soon.
Besides, if you can’t trust a check
from the US Federal Reserve, like the really big
one they might write to buy out the subprimes, who
can you trust?
But do they want to?
Swooping in to rescue the markets this
dramatically would massively eschew the Fed’s
traditional role as acting behind the scenes, not
going for all the publicity, being the puppet
master behind the curtains pulling the strings at
the child’s birthday party. From then on, the Fed
would thereafter receive all the credit if the
subprime crisis, and then the economy as a whole,
turns out well, all the blame if it doesn’t.
Maybe, if the public, that majority of the
American electorate who thinks that deciding
whether or not to pay the four buck fee to use an
out-of-network ATM represents a major financial
decision, actually saw just how much power this
unelected institution really had, and how little
power really resided with their actual elected
solons, they might move towards voting for
politicians advocating actually taking away the
Fed’s vaunted independence.
Save the
economy, but lose their independence, or let the
economy keep on tanking and remain free? Over at
the Fed headquarters on Constitution Avenue in
Washington, if you see the lights on late into the
night, it’s probably reasonable to assume that
they still can’t decide which would be better, and
which worse.
But something has to be done.
As part of this week’s announcement of the new
writedowns, HSBC, the Paul Revere of the entire
subprime/structured finance credit crisis, warned
of developing problems with its US credit card and
automobile loans businesses as strapped homeowners
and consumers now decide which of their financial
obligations will get a seat in the lifeboat this
month and which will be set adrift to drown.
Speaking before an audience of community
bankers in Orlando, Florida, on Tuesday, Bernanke
called on bankers to forgive parts of the
principal, not just the interest, of subprime
mortgages, to help keep the endangered mortgage
holders in their homes. The bankers, of course,
want Bernanke to take the first step.
"After you", say the banks.
"I
wouldn’t dream of it - after you." says Bernanke.
"Absolutely not. After you."
And
what is the tune one hears as the accompaniment to
all the major actors dancing the subprime twostep?
To me, it sounds a lot like "Nearer, my God to
Thee", what the band on the Titanic played as the
frigid water washed over the foredecks and all the
lifeboats sailed away.
Julian
Delasantellis is a management consultant,
private investor and educator in international
business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
(Copyright 2008 Asia Times Online
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