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Friday, March 5, 2010
By Lou Barnes

     Long-term interest rates rose this week, 10-year Treasurys to 3.69% and mortgages toward 5.125%. The drivers: economic data not as weak as could have been, $74 billion in fresh Treasury borrowing next week, and the ever-closer conclusion to Fed purchases of MBS.
     The northeast-centered media assume that their weather determines the course of national economic activity, and the loss of another 36,000 jobs in February was just a snow distortion. Nevermind that the Bureau of Labor Statistics counts you with a job if you were on a payroll, whether you got to work or not. Legitimate good news: preliminary retail sales figures were up, and weather really does suppress shopping.

     As observed here before, we still have no national consensus about the cause of the financial wreck, or how to escape its consequences, or how to prevent a recurrence. The result is not a policy vacuum, but an overfilled political sausage split to pieces. Almost three years after the financial show stopped, dozens of factions -- experts, agencies, lobbyists, politicians, regulators, voters -- are still shouting, their only unity an angry search for bad guys, rage at bailouts, and demand for new regulation.
      The hunt for senior bad guys should proceed: too many CEOs and directors have slipped away. However, deep and broad misconception about bailouts and regulation have intercepted good policy-making.
     The center of bailout rage: the TARP hose of taxpayer cash into ungrateful banks.     
The ragers are wrong. The original TARP appropriation was $700 billion, but only about half of the money ever went anywhere, and half of that is already back. $245 billion went into banks, but the big-bank portion ($167 billion) has been repaid, with interest. The rest went to local banks, spread in dribs that will return in a few years. $80 billion went to Chrysler and GM (keep your fingers crossed). And $30 billion to AIG.
     The AIG accounting is tricky, but illustrates why the 2008 advances were wise, and not a bailout of anybody but us. In addition to the $30 billion from TARP, AIG borrowed $100 billion from the New York Fed against future sales of pieces of itself. Last week AIG was able to sell a subsidiary for $35 billion, at least double the bids in the awful winter of ’08, proceeds to the Fed. AIG has already paid down a total of $50 billion.
     The TARP and Fed operations were bridges across a panic, when fire-selling assets would have torched us all. A “bailout” is a dead-loss advance; but even Fannie and Freddie will one day pay back their loss bridge.      
     Regulation... those wronged by any industry want a tough rulebook imposed and enforced. The traditional flaws: rulebooks are expensive straightjackets; and although they forbid past misbehavior, they fail to anticipate future malinvention.
     We do need new regulation: of derivatives, and plug-pulling “living wills” for giant institutions. However, the most frustrating part of this last episode: enforcers did not use their existing authority. The most gratifying news today: the enforcers are roused to action, embarrassed, and fearful that authority will be taken away. Use it or lose it.
     Item: Days after Goldman was exposed as enabler in Greek debt shenanigans, the Fed began an investigation and named Goldman. Perfesser Bernanke’s quick mention of “counterproductive” behavior may seem too soft-spoken, but nobody on the Street can withstand such notice. Never in Mr. Greenspan’s reign was such notice taken.
     Item: As revelations from Greece continued (credit-swap profiteering has caused a downward spiral in Greek bonds), the Justice Department began an investigation and publically ordered by name several hedge funds and trading houses to preserve all records of trades and correspondence involving Greece.
     This is the way the Fed, Justice, and the SEC used to work, before faith in markets addled their brains and slacked their guts. No rulebook can keep up with the wizards and vampires of Goldman. But, vigilance, speed, transparency and sunshine... nothing scares Wall Street like the threat of sunburn, and it’s back.