Time For Subprime Gods

I just witnessed the final moments of a god.  Specifically, James Morris's Wotan in Die Walkure.  (He returns Thursday for Siegfried, but I'm done until Gotterdammerung closes the Otto Shenk production out altogether on Saturday; he is unlikely to return to the role next year.)

Morris, whose decades of service in the role earn him every drop of applause he receives, has nonetheless grown underpowered and overponderous.  He knows too well what will happen next.  His is thus a ceremonial and peremptorily fatalistic Wotan, with none of the reluctance Albert Dohmen showd last week in relinquishing the god's incertitude or adolescent ways.  There is, in effect, no Puck left in his [rhyme goes here]: his philandering is too much merely remembered to possess him, shape his motive or admit much of an arc.

The same maturity first afflicts, then elevates Linda Watson.  Her Brunnhilde was persuasive in the anguished third act, but lacked the barbaric yawp of Katarina Dalayman's ever-teen goddess-daughter.  Too much Erda makes 'Hilde a dull gal.

Trooper that he is, an ill Domingo gave his all before yielding to a game Gary Lehman in the part of Siegmund, and Adrieanne Pieczonka was a riveting, anxious Sieglinde.  But on the whole, after 20 years of dutifully Teutonic mists (and the tenors who made them dance), we are due a Ring production  for our time.  

After all, is the entire cycle not a parable of regulatory failure, brought about by irregular financing for a home even the gods cannot afford?  As with the disposal of Yankee Stadium last season, Otto Shenk's Ring deserves a fond farewell.  But in the spirit of the Ring Cycle itself, we all know it's time for a new generation to take the reins.

How I Spent My Summer (and Fall, and Winter) Vacation

I'm grateful to those who've asked about my year-long hiatus.  What happened?  

In a phrase: Fannie, and Lehman, and Bear, oh my!  Perilous times for those (like me) who work in corporate America, even those far from the financial services sector.  

But on Capitol (or shall we now say "Capital") Hill, it's also a generational opportunity to replace shopworn epithets and partisan acrimony with new policy solutions.  

The ascent will be bloody and the window will be brief.  Already, we've reverted to the old "tax and spend" versus "party of the rich" nonsense...

But let's give it a shot.  It would be nice to bring back a museum, jazz or opera review or two while I'm at it.  

And yes, I'm aware that I owe most of you a drink.

Ah, the pleasures that overtime taketh away...and recessions restoreth!  Let's hope we can all let the budget axe rest for a spell, at least on the weekends.

Obama's Great Speech

Like many, my opinion of Obama ramped up with his speech on race because it reminded me that even today, there are issues for which rhetoric itself is the substance of change. His willingness to offer strong words on a subject where they can make a difference breaks a barrier not just of race, but of leadership.

The speech appears to be modeled carefully after Robert Kennedy's astonishingly beautiful off-the-cuff remarks after MLK was killed. It is my favorite moment in the history of American oratory. Obama's may be the best speech on the subject since.

I'd like to think that those who dismiss the influence of such events today are underestimating Joe Six-Pack. Indianapolis, where RFK's speech was delivered, remained calm that night while dozens of cities across the country erupted in violence. Listen to the audio on the link above, from the initial gasps to the concluding applause.

Joe Six-Pack heard the message, all right. For the first time, I agree with those who believe that, given the chance, they'll hear Obama's as well. This shapes and improves the upside in this year's presidential contest.

On the everyday issues that matter, McCain is still my man.

On the issues that cut deepest, Obama outshines him spectacularly.

And inasmuch as politics depends on sharp elbows to get things done, Hillary is still any betting man's girl in a fight.

Each candidate has major flaws, but change of one stripe or another is coming for the better no matter who wins. For the first time since McCain and Bradley blew out their chances in South Carolina in 2000, I almost feel like we simply can't lose.

The Merits of Margin Calls

Lost in today's euphoria are the reports that circulated yesterday of $325 billion in what JP Morgan describes as a "systemic margin call." The FT had a great piece on this as well.

Margin calls have a great way of getting people back to basics. The
good news: this may be the most important part of economic therapy to
date for what ails us. The bad news: it may be what puts us over the
edge.

The write-downs we've seen so far are almost meaningless, because
accounting rules require that firms write down even performing loans.
If there's zero market for a security, you mark it to $0 even if the
underlying assets are performing at 60%, 85%, whatever. So a lot of
people think Citibank will have a great Q4 or even Q3 -- whenever the
logjam clears for CDOs -- and they can write this stuff back up by
huge amounts.

In contrast, margin calls are not a fluke of accounting regulations.
They require investors to put up for what they borrowed. The good
news is that, unlike "subprime write-downs," this process gets to the
heart of the mountain of leverage that plagues the marketplace. The
bad news is that as everyone rushes for the exits at the same time,
nobody knows which doors will break or what walls might come down.

Half the equation should resolve itself through ordinary market
forces. The Yahoo article is right that corporate bond spreads have
risen, so a lot of stuff is getting cheaper. Vulture types will swoop
in at some point, helping stem the tide and stabilize pricing.

But it is the nature of the credit default market that unwinding
derivative positions requires the PURCHASE of offsetting swaps for
credit insurance. And those are in short supply. So while the
headline may be about a fire sale, the plot of this chapter will read
more like a "short squeeze." That $325 billion figures is not a "mark
to market" -- it's cash that investors need to show today or tomorrow
or next week. And once the vultures are out of offsetting swaps to
sell, we'll find out who's actually left holding the bag.

Mac Is Not Bush

Some smart people I admire keep telling me a vote for McCain is a vote to continue the failed policies of the Bush administration. They've taken his worst rhetorical blunders, blended in some lesser blunders ripped from their context, and drunk the stinky Kool-Aid that results.

I have more sympathy than most for what it takes to make it as a
centrist Republican in a primary contest. I think McCain is pandering
now, and as President will revert to his record which is:

- closer to HW than to W on taxes (still Right of Obama, but who ain't)

- closer to TR than to W on the environment (by a lot)

- closer to Ted Kennedy than you'd believe on healthcare (they
co-sponsored a "patient bill of rights" half a dozen years ago)

- likelier to reform Social Security in ways that are a bit more
complex than "privatization" or other one-word solutions/paper tigers

He's collaborated with Kennedy on immigration and healthcare, Sen.
Clinton on military affairs, Feingold on election reform, and others
on everything from earmarks (which are problematic for both fiscal and
ethical integrity) to healthcare insurance for children.

The idea that a McCain presidency would be a mere continuation of the policies of the former Governor of Texas -- a man who wouldn't cross the aisle to save his own mother (that's what Jeb is for) -- is a temporary and necessary fiction forced upon him by circumstances of party, media and geography. It's unfortunate, it diminishes him as a "saint," but it preserves him as a candidate with a shot at the chance to govern.

Did I smirk a bit when Chicago-native Hillary said she was a lifelong
Yankees fan, or when she endorsed a flag-burning amendment after a
career standing up for the First Amendment? Yes. Do I make such
things the cornerstone of my arguments against her? No.

NC Prosecutor thinks I'm nuts for respecting Ben Stein's opinion, but here he is on this sort of subject in the abstract:

"I watched Barack Obama speak in Madison, Wis. As usual, Senator Obama gave a fine oration, with thunderous applause from the audience as his reward. But then I was beguiled by a series of gifts he was going to give the American people (of course, with their own money): universal health care, antipoverty programs, large grants to college students in return for community service (a darned good idea) and other goodies.

....Now, I know it's primary season. I know Democratic candidates have
to make obeisance to the populist, antibusiness wing of their party,
just as the Republican front-runner, Senator John McCain, has to make
bows and curtsies to the supply-side part of his (and my) party.

....As I said, Mr. Obama is a smart man. And Senator Clinton is a
smart woman. I have worked in politics and with politicians. I know
they have to say crowd-pleasing things (just as Republican leaders
have to say that cutting taxes raises revenue)."

It is fitting that it is Obama's supporters, not Clinton's, who are jumping all over what McCain is saying today. They aren't looking at McCain's record, because their own candidate's is so sparse.

Let Them Pay Rent

Since none of the conventional solutions for the housing & foreclosure crisis seem to be working, how about this for distressed borrowers with ARMs:

1. Owners keep the keys but sign over their deeds to the bank, forgoing what little equity they have.

2. Bank becomes a landlord, charging some large percentage of whatever the total mortgage payment had been prior to the rate increase in the ARM -- in the case of "interest-only" loans, perhaps 100% or more.

Benefits:

1. Dramatically diminished dislocation of stressed borrowers.

2. Collateral damage to neighbors and indeed neighborhoods is
diminished with sustained occupancy levels.

3. Increases liquidity in the overall national market for homes, as
renters don't have to wait on the sale of their own homes in order to
take possession of a new one. This supports broader economic
liquidity (people can relocate to take a new job in a softening
economy, eg).

4. Moral hazard is mitigated by some loss of principal by current homowners, and by making banks deal with the real-world problem they helped create.

5. Rather than write down more crippling losses under accounting rules
-- often of performing assets, further distorting the market! -- banks
keep assets on their books that retain considerable value: the homes
themselves, rather than "zero-value-because-hard-to

-value" CDOs.

6. Likewise saves lenders both the out-of-pocket costs and the
diminished equity from neglected/stripped properties that are
associated with the foreclosure process.

7. Stable flow of rental income frees capital for banks to resume
lending on their own balance sheets.

8. Minimizes the intrusion of the federal government; suggests a wide
range of possible roles as mediators, guideline-setters etc. for state
and local governments at little or not cost to them.

Obstacles:

1. Banks aren't landlords. Possible solution: outsource
administrative functions to mortgage brokers. I'm not entirely
kidding: they're in need of work, too, and this would be more
productive than what they were doing, while using at least a few of
the same skill sets: market knowledge, interfacing with residential
real estate clients etc.

2. Identifying the "banks." This is the tough part: the technological
enabler of the subprime and even prime (ARMs, mostly) debacle is the
disintermediation of borrower and lender by the CDO. Solution: no
idea, except to say that there will have to be one even for normal
foreclosures to proceed. I'm sure there will be some sort of
legal/administrative hybrid solution soon.

3. "You're killing the American dream." Actually, this could help get people back
on track by keeping them in their homes. Who knows: some borrowers,
aided by the stability of staying in their homes, might be ready in a
year or two for a normal mortgage -- and on a home they enjoy that has
repriced to a level that they can afford.

Be gentle, readers...it's just a thought. And as Larry Summers said recently: the country has "never been in more need of serious economic thinking than we are now."

How Barack Broke My Heart

I wanted to much to fall for the bright teeth, strong voice and, perhaps most of all, the blank slate that together constitute Barack's appeal. After 8 years of lousy policies, no policies at all is pretty seductive.

Then I stood gaping as specifics dropped from his mouth after winning Wisconsin.

Guarantee everyone in the country a healthcare plan "at least as good as what I get as a member of Congress" within 4 years?

Forego taxes on all senior citizens making $50,000 or less -- nearly the national median income for a family of four?

Specify a demon's roster of dictators you'll sit down with -- the only thing he seems prepared to do on "Day One" -- even absent an agenda to guide discussion?

And this collaborator, this antimicomanager, wants to go into classrooms and dictate equally to all teachers in all circumstances, "I don't want you teaching to the test"?

Oh yes, and somewhere in there, he's going to collaborate his way out of our global trade agreements, and everyone will move to Lake Woebegone right before taking the SATs.

I'm more solidly behind McCain in the general than ever. At least with Hillary, her shamelessness will guide her toward the latest polls rather than to social and economic policies that have been discredited for, oh, let's call it 20 years.

There is a shark swimming betwixt hope and naivete (on a less good day, some might call it "pandering"). Senator Obama has jumped it.

In the general, as governing philosophies come front and center, Obama will be shown up for the #1 Liberal that National Journal ranked him. He'll keep the Democratic coalition he forged against Hillary. But centrist hearts will return to the former Navy aviator in droves.