Weigh Your Civic Consciousnesses Daily

I'm beginning a weight loss project.

Its not Jenny Craig, or Weight Watchers, or one of the hundreds of other weight loss brands out there. It's the "I Have Common Sense" program. "Eat less. Exercise more. Repeat."

As the mechanics of the process ran through my head last night - the recent review of my eating and exercise habits, the formulation of a plan to reduce caloric intake and increase physical activity, and then the actual follow through of the plan day after day - I thought about the present state of our political scene and our economic woes, and whether or not the American body politic is really ready to make the daily changes in our information gathering habits and our civic activities that are necessary to make significant changes in the area of political engagement, or whether we are just wasting a whole lot of hot air.

Congress is playing with itself right now, the way parents of unruly children do when they look at the chaos around their house, because both Congress and lazy parents know that to get and maintain order means that you are going to have to make a commitment to doing unpopular and unpleasant things until the unruly children or the underregulated industry realizes you mean business, and then be vigilant against the first, second, third, maybe even the one hundredth attempt to try to you, if need be, until the unruly children or underregulated industry believes that there will be consequences for inappropriate behavior without fail, each and every time it occurs.

All government agencies are not created equal. From the investors who have been taken advantage of by people like Bernard Madoff to the Congressmen who sat in hearings wondering how all of this chicanery by AIG and friends (Goldman Sachs and JP Morgan, this means you too) in the financial markets had been allowed to take place, they all railed against the SEC for not doing its job properly. The IRS is feared by both businesses and individuals. The SEC is not feared – it is tolerated. The difference? The IRS agents can seize your property and bank accounts without a whole lot of red tape. The SEC can issue a judgment, which doesn't really mean anything. Or bar you from the industry, which as you can see with Mike Milken or Ivan Boesky, is sort of a "under your name only" detention program they have easily skirted after getting out of jail. The SEC might as well be mall cops. The IRS, on the other hand, has all the subtlety of a SWAT team breaking down the door to your house. When was the last time you were worried about a mall cop?

Internet security companies realized long ago that the people they were up against – black hat hackers – were a sophisticated, highly motivated type of criminal element. So guess who has ex-hackers on their payroll? The SEC is in the business of hiring Boy Scouts to catch the financial equivalent of computer hackers – brilliant people who understand how to use the architecture of a system against itself. So hire a few of these guys to work for us. Or if there is no way to pay the kind of money to these people as civil servants it might require to get them onboard, put out Requests For Proposals for consultants that can contract with the agency to provide the kind of intricate analysis needed to keep the SEC at the heels of all the rule benders (do I have to type Goldman Sachs and Jp Morgan here again?) and out and out frauds.

The media, who claims it is working on behalf of the public, is a part of this too, playing with Congress and the White House as if it is one of those perennial "bridesmaid, never a bride" types who uses her dowry to attract one suitor after another in order to amuse herself before sending them packing. And we the public are lazy enough, or brain dead enough, to watch each new suitor’s arrival as if it some new kind of drama or intrigue between them might entertain us more than the last one did. How can you change the media’s focus? Since the thing we call the "news media" is really two entities - the news gathering and disseminating half, with its lifeless legs and foreshortened arms lashed to the back of the advertising delivery half, which holds up the people you see on TV or read in the paper – you can worry their sponsors the way the American Cancer Society worries smokers, day in and day out. Some of them are already falling. Hopefully the others will get back to their original mission.

There really is nothing that Kim Kardashian, Chris Brown, Alex Rodrieguez, Madonna, The Final Four, BMW, Mercedes, Louis Vuitton, Burberry, Tag Heuer, Bruno Magli, Jimmy Choo, American Idol or 24 can help to provide you with any additional insight or motivation about regarding the things we say are most central to our lives. How big Kardashian's butt is this week or how much the latest top of the line Mercedes costs is what we end up knowing when we focus this kind of time and energy on these things. Does that mean these things are all bad? I may have a taste of chocolate now and again, but it is a far cry from my old approach, which was to supplement my nightly quart of chocolate ice cream with raids on my emergency chocolate stash, or have a bit with my morning coffee. A little entertainment news can go along way. the good thing is, the same people are always in the news, so if you miss something this week, you'll probably see it again next week.

There are things we as citizens can do to reshape our cultural and political landscape, the same way there are things, like curtailing my immense love of chocolate, that I can do to reshape my body. We've done them before, without one hundred percent support of the people, the same way I'm going to lose this weight without having to give it one hundred percent of my attention. But they were painful times, and often produced imperfect results, whether it was the American Revolution, or the Civil War, or Prohibition, or the civil rights movement, or the Vietnam War protests.

Maybe we all need to be a little bit hungry all the time, not for food, but for entertainment and fluff, in a way that makes us savor smaller portions even as we gaze at the emerging musculature of our new found civic duty in the mirror.

Maybe, just maybe, what we are experiencing these days has made enough of us uncomfortable with what we are seeing and hearing to commit to changing our habits and our activities in a way that make us active players in our political and social scene.

I will be weighing my civic consciousnesses daily - my body, once a week.

Government Tired Of AIG Outrage, Public Is Not

There are so many stories floating around right now about the public’s rage over the AIG bonuses putting bailout efforts in jeopardy that it almost seems like they have been planted in an effort to browbeat Americans into laying off of the Obama administration for a while, so they can "do their job" in peace. As if the financial meltdown we are all in the middle of is a golf match, where the nation should behave like proper spectators and be absolutely silent while the players are taking their shots at the green.

But we're not playing golf - we are gutting dead fish.

If you're going to gut a fish, you've got to cut his belly open first. The mess that pours out all over your hands and stinks up the place is a part of the gutting process.

The articles that I've read presume that the public can only focus on one thing at a time, like we are a swarm of two year olds, as if we aren't capable of keeping one eye on the bonus fiasco and the other on those trillions that are flying out of the Fed. These articles suggest that our sixth senses are not operative - that we haven’t already braced ourselves for the next call for a another hundred billion, or another two hundred billion, to stanch the bleeding at AIG.

Our government officials sound as if they've are the kind of people who would tell their children that grandma "went away" instead of announcing that she had died.

I was at a neighborhood gathering a few years ago when the conversation got around to pets and the lengths their owners were willing to go to keep them alive. S.'s dog had recently been put to sleep, and I was recounting the difficulties of doggy grave digging when my next door neighbor abruptly said, "when I was growing up, everybody shot their own dog when it was time to put them down."

The room went silent. With all eyes on her, my neighbor continued. "We were on a farm. You didn't take a dog to the vet for something like that. When your dog got to sick to go on, my father would get his pistol, hand it to you, and tell you to make sure to shoot him in the head."

The suburban crowd was mostly taken aback. I remembered my own grandfather's farm, something about an old mule, and a gun shot or two. I wondered, as the conversation began to regain its footing, how big the hole must have been, and who dug it.

There is something visceral about that image of a hand holding a gun, and a beloved animal being shot to death, something visceral and repulsive and honest, all at the same time, that makes me wonder how much of our modern lives are actually connected to reality.

My neighbor's father didn’t beat around the bush, or hem and haw about life and death, or drag his feet in an effort to avoid having to deal with the unpleasant facts of death – he simply did what was necessary and went on about his business.

Our government is having trouble dealing with the unpleasant facts surrounding the bank bailout. Unfortunately for the president, it is not as simple as shooting a dying dog. Shooting one dog doesn't kill any other dog. But putting one of our mega banks out of its misery will most certainly result in significant harm being done to some of the other mega banks that hold our financial lives together.

Our real problem is complicated further by the idea that full disclosure of the dire straits we are in will damage the entire world banking system, an idea that may not hold water much longer if much more information is leaked or forced out in the open. This idea of keeping us mostly in the dark is starting to backfire, because the protestations of "all's well" are not jibing with the never ending rivers of money that seem to pour out of the Treasury and into the banking system.

I don't have a dog of my own, but I'd be willing to shoot the dog we've got myself if he got to the point that he couldn't go on living much longer.

I am willing to become a student again, if that is what it will take to better understand the nuances of the financial calamity we are in.

Most of us don't want the details, though. We want the synopsis. We want the Cliff's Notes version. We want the soundbite that we can digest while we are flipping channels during a March Madness commercial break.

For most things that we form opinions about in life, you can get by with that approach. Moral righteousness alone is often enough to validate your position, even if you have no understanding of the actual mechanics underpinning a controversial situation.

But to even voice an opinion on this, you have got to be able to grasp the importance of a few key financial and legal details in a way that allows you to understand how this alternate universe of high finance has completely upended the "positive outcome equals good, negative outcome equals bad" mantra we use to gauge whether or not an action is to be labeled "good" or "bad."

Outflank the media at their own game. Hit them with a barrage of cogent, well thought out emails everyday for the next two weeks that point out how they could do a better job of providing real information in a way that gives us context. Ask them questions on these radio and TV shows that show we've done a little bit of homework.

And shoot an email or two to the White House, to let them know they can get more leeway from the public with better thought out explanations about what is going on. To ask them if someone on their staff can spare the thirty minutes it would take to craft a Powerpoint for the web that can give an official overview of what is happening, with weekly updates to insert, delete, or correct information.

Can The President Take A Hint From Leno?

It's still a little hard to wrap my mind around President Obama appearing on The Tonight Show. Jay Leno has become almost as much a Tonight Show institution as Johnny Carson used to be, in spite of all the competition from the late night shows on cable. But Leno's still a comedian.

Luckily, President Obama hasn't developed the wooden version of presidential cheeriness yet, that forced smile that takes away the natural plasticity in their faces, a look that became a caricature of itself in almost every modern commander-in-chief except the first George Bush.

The audience had been searched. The Tonight Show band were all wearing suits. Jay Leno was noticeably excited but contained in his monologue. You really couldn't call this an interview, with the president getting plenty of room to deliver his pre-written jokes, but it was something less than a pure infomercial. It wasn't until about a third of the way through the president's visit that Leno's eyebrows began to inch skyward in disbelief, the way they normally do when his guests give him half answers.

You got the sense from watching this that Leno reluctantly went to the softball questions about the Obama's dog and Air Force One to wrap up the evening. He looked as if he could have asked questions about AIG until six in the morning.

The one thing this visit pointed out to me is a need for someone - the president, the treasury secretary, or some high ranking official - to go ahead and do a podcast or a webinar that actually explains step by step what kind of mess we are in, complete with a link to a glossary or on screen definitions so they can use all the correct names and terminology involved. Telling us that AIG's Financial Products division's foray into manufacturing derivatives was like "putting a hedge fund on top of an insurance company" may have been the best President Obama could do, but that was the kind of buzz word filled answer that leaves most listeners as clueless as ever. It was about as effective as explaining sex to your kids by using "the bird and the bees" analogy.

A presentation on AIG, how it works, and why the government feels it so important to the world economy may end up being an hour long - maybe two - but I think we deserve better pronouncements from our government officials than using half baked analogies to describe one obscure product nobody understands by comparing it to an obscure industry most people don’t understand.

For those of you who are also unsatisfied with all the eighth grade explanations about this, I've got a couple of links you need to check out.

Recipe for Disaster: The Formula That Killed Wall Street


EXCERPT:

If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.

When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).

It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.
As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.


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To put this in perspective, the entire U.S. housing mortgage debt is 11 trillion dollars.

Now that you've got a better foundation to understand WHAT happened, reading this next excerpt, you might begin to feel like you are standing in the shoes of your government officials, with a clearer picture of why they are scared to death of doing anything to keep the AIG crew away from their desks.

The excerpt below is from AIG itself.

EXCERPT: AIGFP Employee Retention Plan Executive Summary

There are also substantial risks related to the hedging of AIGFP's various books. Although we view the large-market risk books at AIGFP as generally well hedged, the hedging is dynamic - that is, it must be monitored and adjusted continuously. To the extent that AIGFP were to lose traders who currently oversee complicated though familiar positions and know how to hedge the book, gaps in hedging could result in significant losses.

This is driven to some extent by the size of the portfolios. In the interest rate book, for example, a move in market interest rates of just one basis point - that is 0.01% or one-100th of one percent - could result in a change in value of $700 million dollars if the book were not hedged. It has virtually no impact on the hedged book. There are similar exposures in the foreign exchange, commodities and equity derivatives books.

AIGFP's books also contain a significant number of complex - so-called bespoke - transactions that are difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale. Personal knowledge of the trades and the unique systems at AIGFP will be critical to an effective unwind of AIGFP's businesses and portfolios.

In this current environment, any perceived disruption in AIGFP's ability to conduct business, such as one that would result from the departure of a number of key employees, could also cause parties to limit or cease trading with AIGFP. Obviously, this would adversely affect its ability to continue to cost-effectively hedge its positions.

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That pesky devil, it seems, is still always in the details. In all fairness, though, I fall asleep fast enough already while watching The Tonight Show - 11;30 at night is not the time to be introducing these kinds of concepts.

Hopefully, the president took a hint from Leno, a certified car guy who loves domestic cars, who didn't ask ONE question about the GM or Chrylser situations. AIG will be here to stay, Mr. President, until the answers we get about the how and the why behind this never-ending bailout starts matching up with the urgency and the action you're taking with our money credit.

AIG Dream Team Holds White House Hostage

GM is practically dancing a jig and mouthing "yassuh, boss" every time they call Washington for emergency cash, while AIG's "Dream Team" impetuously suffers its way through the humiliating process of asking our government for a new truckload of greenbacks. Maybe the management at GM didn't read the same "How To Be Successful In Business Without Really Trying" books as the execs at AIG. You know the ones I'm talking about, where they impart the famous dictum, "in order to get people to give you money, you have to act like you don’t need it."

GM can't get the 20 or 30 billion or so that it says it needs to stay open unless everybody in its food chain - employees, suppliers, bond holders, executives - gives something up. The kind of restructuring they are going go through is a lot like going through a bankruptcy, except there's no judge involved. Even the smart people at GM, the ones considered to be the brains of the operation, have to give up their pound of flesh. I guess this would be the "old fashioned" way of asking the American public to lend a hand when things in your business have gone horribly wrong on your watch.

The attitude that seems to permeate the culture of AIG - "we are impervious to our mistakes" - is the thing that has Americans of every stripe ready to tar and feather anybody with an employee badge from the insurance giant. When we see this kind of arrogance and self centeredness from a company that will need 200 to 300 billion dollars by the time this is finished just to become a shell of its former self, it gets the nation's collective dander up.

The ideological terrorists who crashed those planes into the World Trade Center have had much less impact on our economy and our national psyche than our own homegrown financial terrorists who are reporting to work today at AIG, these Americans of ours who feel so strongly about deserving bonuses for being smart and wrong that they are willing to hold the country hostage in order to get it.

I don't have a problem with paying an office professional more than assembly line technicians because the professional can do complex quadratic equations in his head and manipulate computer models with impunity. What I do have a problem with is the disconnect we have fostered within this group of people when they feel that they are entitled to the reward just for being smart - not for being smart and right.

You won't see this in any study, because the only dysfunctional culture we will identify by name in this country is always in a ghetto, but my own unscientific years of observation in the suburbs has shown me what you already know but may not want to articulate - that the arrogant, reckless and entitled attitudes being displayed by the execs and the rank and file at AIG, who are mostly college educated white men, is homegrown right here in our nation's own suburbs.

If you want to see for yourself, take a ride to your nearest upscale suburban area around the time school gets out and park your car at a gas station near a high school, or next to a Starbucks.

When you grow up in isolation from the factories and warehouses and power plants, when you are cloistered in a bubble of perpetual youth that has no room for the old, the infirm, or the mentally ill, when you are segregated from the people who make the deliveries when you click your mouse, the thing you know as reality is different, different enough for you to believe that the people who turn wrenches and lift boxes and operate heavy equipment need you more than you need them.

Congress could horsewhip AIG CEO Edward Liddy today in their congressional hearing, the way they used to do to runaway slaves - shirt off, blood streaming down his back, the cries of agony echoing across D.C. - but it won't change the way his people think about what they've done, or how absolutely wrong they have been, or how much their errant calculations are responsible for taking America's economy to the brink of disaster.

Whether we can convince AIG's "Dream Team" that this alternate universe they think we live in - the one where it costs you all your marbles when you are dead wrong - is really the real world remains to be seen.

What AIG's CEO Really Needs To Say

What you really want to hear from Edward Liddy, the CEO at AIG, is this:

"I am between a rock and a hard place with these bonuses right now. The guys who concocted these derivatives have me and the company over a barrel, because we really don't know how these things work either.

I am forced to pay some of my people 6 million dollars to keep from losing 600 million dollars because a wet behind the ears rookie doesn't know how to bend or ignore marketplace trading rules the way my guys can without getting caught.

We call these payments we made last week "bonuses", but they don't mean the same thing in our world that they do in the rest of corporate America. A "bonus" can be commissions, or a pat on the back for our staffers who work hard but don't actually sell stuff, or whatever the hell we want it to be for. It is the tool we use to own our employees lives lock, stock and barrel. I'd really, really hate to give that kind of power up.

I have no idea how to renegotiate these contracts, the way they do in the sports world, or many other areas of business when the financial climate changes, because I never really had to even think about this before - and besides, it's never been my money that I was giving away.

I would leave myself - not because I've got a better offer from somewhere else, but because I am tired of the people with the microphones and the cameras who always want me to say something, even though they've already got the written statement I've memorized word for word, because a part of their job is to try to put a face on this mess. Most of us in this business, even at the top, are in the same boat - we are all running out of ready cash, and our investments, believe it or not, are down further than yours. But I can still turn a lot of those zeros in my investment accounts back into millions if I can keep enough cash coming in to live off of until the market comes back. You could call it a "personal bailout."

I really don't know how to tell you this, but I'm really not that concerned about a 150 or 160 million in bonuses right now, probably because we're working really hard, as I speak, to try to figure out how many more billions we're going to need from the government next month to keep the company operating. Well, that and the contingency proposal my assistant is cooking up that will hand me, ahem, I meant "that will permit me" to take a larger stake in a reorganized AIG without having to come up with a dime. The only reason this whole bonus brouhaha is even still on my personal radar is because of the bad publicity that erupted this weekend.

But that's the kind of thing we CEO's have to deal with, when a sneaky president and his administration can give billions to you with one hand and then pull the rug out from under you with the other."

But our business and government leaders have become so allergic to the truth in this country that they would probably go into anaphylactic shock if they even thought about doing something like this.

SEC Fails To Regulate "Me, Me, Me" Brokerages

I was talking to S. Wednesday night during a commercial break, while we were waiting for Screaming Sean Hannity, who was oddly subdued, to resume interviewing Sarah Palin. I'd just come in from smoking a cigar and reading the New York Times - well, I'd smoked the cigar, but I hadn't gotten very far in the paper, not after I'd read in more detail what had happened at AIG.

The first commercial was for Pacific Life, the insurance company with the trademark scene they show of the whale diving into the ocean, its massive tail flipping over as it disappeared beneath the surface. I was instantly hot, not at Palin, but at the snow job I was smelling from the press about the AIG situation.

"You know, I'm no economist, no insurance company analyst, but when was the last time you heard of a major insurance company going under?"

S. had been on conference calls all day. She didn't answer at first, patting the dog beside her, with a look on her face that said "negro, I am through thinking for the day". When I opened my mouth to continue, I guess she figured I wasn't going to shut up about it unless she gave some kind of response. "Can't think of any."

"EXACTLY!", I said. "'Cause insurance companies have to have a certain amount of reserves to cover the losses their policyholders could have."

"But they do more than just insurance. They're all over the world doing all kinds of stuff."

"So what? Those are subsidiaries. Separate books."

"But don't they invest the reserves?"

"Yeah, but they can't put them into just anything. Insurance companies are some of the most boring investors out there. Even Warren Buffet doesn't screw around with that shit."

I may not have had a degree in economics, but I'd taken the Series 7 test enough times to know that the insurance industry's obligation to its clients required it to keep enough capital in reserve to cover claims - what the ratio was I had no idea, but I knew that for a company that size it should have been substantial.

Karl Rove's fat face popped up on the screen after the interview, looking like the cat who ate the canary that was George Bush's presidency. He proceeded to carry water for McCain, smirking as he lambasted Obama for taking contributions from Fannie Mae and Freddie Mac, the two institutions that were now high on each candidates reform list. When he sat his fat ass up there and blamed the ENTIRE financial crisis on the alleged shortcomings of the underwriting process, I had to get up and walk away.

You couldn't even get Desktop Underwriter, the proprietary underwriting system we use to determine whether or not a loan could even qualify to be sold to Fannie or Freddie, to take a sub-prime borrower. Alt-A products were as exotic as they got outside of FHA, and nobody was even doing any volume in FHA until last year, when there was no where else to take credit challenged (broke with low credit score) borrowers.

Blaming the government sponsored entities (GSE's) for the mortgage crisis was like blaming the U.S. Mint for your gambling losses in Vegas because they printed up the money. Subprime lenders went under because the default rate on the paper they were holding was ten times higher than the GSE's.

I fumed over this all that night and into yesterday, until I saw THIS headline at one of the sites I frequent:

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers

By the time I'd gotten through the second paragraph:

"The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults."

I started to get my equilibrium back. I knew damn well you couldn't have a collapse of this magnitude just because a few more loans than usual were late (default in mortgage biz lingo isn't the same as an actual foreclosure - it can also mean the loan is in technical default because the mortgagor is way behind). Over 95% of all mortgages purchased by the GSE's were still being paid on time.

I read a little further. A smile crept across my face:

"The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. The net capital rule requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower."

A couple more paragraphs down, I hollered "I knew there was some kind of bullshit going on!"

"Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount."

Only five companies were eligible for this program when it was rolled out in 2004. Guess who these five firms were?

Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley.

The first thing that came to my mind when I read this was a quote I'd created as a part of a series of quotes that were sprinkled throughout a fictional story I'd published a couple of years back called The Black Folks Guide To Survival:

"White folks, and white men in particular, have always found ways to alter, bend, or just totally ignore the rules they've made up when something doesn't suit them."

Real life wasn't imitating art here - I'd simply expressed as directly as possible facts that we all already knew to be in existence. And here was the SEC chairman, proving my assertion once again.

While you were on the internet at work, scrolling past ads extolling the wisdom, foresight and prudence of the companies managing your retirement money, your SEC chairman was waving his magic money wand over the capital accounts of these companies, effectively doubling or tripling their buying power without the addition of one red cent of actual money to their coffers.

He turned the cash they had into supercurrency.

If you've been in the financial services game long enough, even on the retail side, like I have, you had to learn the "Four C's" of a lending transaction - character, capacity, credit, and collateral. Ignoring any one of these items means you can't properly qualify the risk in front of you. In this case, the argument was and will continue to be that the track record and the reputation these companies possessed was the deciding factor in making a decision like this. THIS was the same criteria we used to make stated income loans.

Which made reading this morning's latest SEC announcement on The New York Times website temporarily banning short selling of financial stocks all the more ironic. The quotes from the chairman got me so jacked up I didn't even need any coffee this morning:

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets"

Market manipulation is now the enemy, after you manipulated the make-sense rules that were already in place? Are these motherfuckers smoking crack?

The phrase "alter, bend, or just totally ignore the rules they've made up" will be reverberating through my head for the next few days as I watch these politicians and industry regulators who know better continue to point fingers at Fannie Mae, Freddie Mac, and the subprime mortgage lenders who have closed down.


What do they think we are, idiots?


Yep.