Tuesday, September 30, 2008

So just how bad is the financial crisis?

If the bailout isn't approved soon -- very soon -- look out for a deep economic depression that could last maybe a decade. That's the assessment of the Washington Post's Steven Pearlstein this morning. From left to right on the opinion spectrum, there's the same dire assessment. But is it really that bad?

David Cay Johnston, a former New York Times reporter, says no. Johnston is not just a journalist sounding off. He's an expert on tax and economic policy and a Pulitzer prize-winning investigative reporter with 40 years' experience.

In the linked interview, Johnston says journalists should dig to the core of the financial crisis:

"No one I've seen has asked the Treasury, did you ask every bank to submit to you data on how many illiquid assets you have, what you bought them at and what you value them at now? That might identify the problem is concentrated in a handful of banks."

Monday, September 29, 2008

America won't bail out Wall Street

The defeat of the bailout in the House means that the authors of this defective, bungled legislation will have to do a lot better. The basic problem is not House Speaker Pelosi's ill-timed accusations against the Republicans, or Minority Leader Boehner not corraling more GOP members -- it's the bailout bill itself.

Americans, whether they're on Main Street or in academia and the think tanks, don't, for the most part, don't want a "bailout" of Wall Street. They want the Street to go through a "workout." They're not emotionally reacting to punish Wall Street. What they want, which is difficult to communicate accurately in the inflamed atmosphere, is a process that will deliver results based not on hysteria but reality, however fugitive reality may be right now. Yes -- inject money into the financial institutions that can cope with their problems if they can buy time till housing prices increase enough to make their most shaky mortgage securities stable. The only alternative for the weakest institutions is for them to go under. In which case they can be bought out, again with government assistance, to the extent that's necessary to protect homeowners.

The current bill, despite the massaging it received in House and Senate negotiations over the past several days, doesn't go this route. It remains essentially what Treasury Secretary Paulson crafted. Not surprisingly, Paulson, the former CEO of Goldman Sachs, came up with a bailout instead of a workout.

A bailout won't make it. Who will show the leadership to come up with a legislative solution that lets Wall Street work out its problems instead of being bailed out?

Obama, McCain, are you listening to America?

Sunday, September 28, 2008

A bold move that this time could help McCain

As Obama opens up bigger leads in national polls, like this 8-point margin in the Gallup Daily Poll -- what will McCain do? He likes to take bold moves -- like naming a popular, contrarian but mostly unknown Alaska governor, Sara Palin, as his running mate, or suspending his campaign to promote congressional enactment of the bailout to free up credit and soothe the markets.

Neither of these moves had a Houdini-like effect on the campaign -- most likely because they weren't carefully thought out (something you could never accuse Houdini of). ln the current circumstances, McCain has no choice but to stay bold, but with more tactical care. The financial crisis has benefited Obama, even though the Democratic candidate isn't doing much to capitalize on his gift. As the bailout compromise legislation heads toward a vote, McCain should go all out to point out what he thinks are its defects. If he believes the compromise still rewards Wall Street at the expense of Main Street, he should say so. And, on Wednesday -- when the Senate vote is scheduled -- he should be in the well of the chamber, calmly but firmly spelling out his concerns and objections, even if he ultimately votes aye.

In truth, the bailout, despite the massaging that the legislation has produced, is flawed, perhaps fatally. It would not be reckless or "political" for McCain to question the current language. "Bailout" is the wrong solution to the crisis. What's needed is a workout, as I argued last Tuesday. McCain should go after this core weakness of the legislation If he loses in Congress -- which he is more than likely to do -- he may win in the court of public opinion and help his faltering campaign.

Voters are still trying to get the measure of the presidential candidates. By taking a courageous stand on the massive federal forgiveness of Wall Street recklessness, McCain can clearly reveal how tall he stands.

The bailout: Big crisis, small thinking

As the $700 billion bailout (such a terrible word to sum up the crisis this country is in) gets parsed into legislation, Americans are pausing to wonder not only whether the financial crisis will be fixed, but where are we...as a nation -- as a confident nation that's always been optimistically poised toward the future. Except recently.

Peggy Noonan picks up on that unique but now Xerox shadow of our national characteristic:

"If nothing else, this [crisis] means we must now have our fights over big issues, issues of real consequence that are pertinent to the moment we're in. We shouldn't be fighting and hitting each other over the head over little things, stupid things, needlessly chafing ones."

In retrospect, it is shocking that we didn't use the dark time of 9/11 to light more candles. Properly, we committed ourselves to creating a country that would be safe from terrorists. But we didn't commit ourselves to building an America that would be stronger in other ways. We didn't make a long-term investment in people and physical assets -- the bulwark against any enemy, known or unknown. Instead, Washington invested in deregulation. The result was an army of mediocrities with MBAs getting their green belts as mini-Masters of the Universe on Wall Street. Now most of the Masters, mini and major (excluding those of the hedge funds in Greenwich, Conn., as Tom Wolfe points out), have fallen. But who will succeed them to lead the rebuilding of America?

The bailout -- that terrible, here's-your-crutch word again -- proposes to extricate us from the mess of underwater securities -- but where will it take us? The wheels of credit will be greased again, but where will the credit go, particularly in the sphere of public benefit?

It's amazing to me that most of the participants in the bailout -- Democrat and Republican alike -- don't see this moment as a defining one -- not just for Wall Street, or Main Street, but for America as a nation and people.

Saturday, September 27, 2008

Why aren't Obama and McCain shaping the bailout?

Senate Majority Leader Reid disinvited Obama and McCain to be part of the bailout negotiations. But why? One of them will be the next President, in fewer than four months, and spending much of his time coping with the impact of the bailout.

McCain apparently did insert himself in the counter-negotiations of the Republican minority, but reportedly without taking a clear stand. Obama, while saying the bailout should not reward executives whose companies unload underwater mortgage securities, has not offered any specifics regarding what enabling legislation should or shouldn't include.

But with Treasury Secretary Paulson and his team and congressional leaders so unsure of the consequences of the legislative package they're wrapping up, Obama and McCain should be involved to the point of putting their clear and indelible stamp on the results. If they aren't, if all they do is vote aye or nay in the Senate Sunday night or whenever the legislation goes to vote, the one of them who wins the election will be a damaged President from the day he's inaugurated.

Wednesday, September 24, 2008

Are we really at the edge of a financial cliff?

We keep being told how dire the financial situation is. But then Warren Buffett steps up with a $5 billion investment in Goldman Sachs -- a drop in the bucket compared to the proposed $700 billion bailout -- and the markets respond warmly.

Mutual funds and institutional investors are the majority stockholders in U.S. companies. While they are not immune to panicky thinking, their job -- their responsibility -- is to make decisions that will protect their multibillion-dollar investments. A sustained sell-off is not a protection strategy.

Congressional leaders are beginning to communicate that the narrow-based bailout hurriedly concocted by Treasury Secretary Paulson & Co. is a non-starter. But at the same time they should emphasize they're dedicated to crafting a more comprehensive solution to a crisis that's bigger than so-called toxic securities and a potential credit seizure. That solution should include Main Street as well as Wall Street, and provide at least a template for long-term investment in America's human and physical resources.

The crossroads that we're at is not just saving the financial system, but all the pillars of the economy -- infrastructure, education, health care, as well as credit facilities.

If doing this takes longer than a few days -- which it will -- so be it.

Tuesday, September 23, 2008

We need a 'workout,' not a 'bailout'

Skepticism about the Paulson bailout is swelling. But what does it mean -- that Congress will go through a limited-hangout of grumbling, and then cave in? We are told that if a drastic bailout doesn't happen soon, the entire global financial system will go kaput. But why does a rescue have to follow the Paulson lose-you-win prescription? Instead of a bailout, why not a workout? Why not bring everybody together -- Wall Street, Main Street and Washington -- to agree to a plan that would achieve the desired results. That's two big challenges: Blunting the panicky run on the financial system that, sooner rather than later, might collapse it, and creating a template for long-term investment in our country's human and physical assets?

The financial situation is bad, but is it a precursor to the total disintegration that occurred in the Great Depression? Back then, stock was owned primarily by wealthy families. There were few mutual funds or institutional investors. In other words, the government could do nothing but jaw-bone that things would get better -- which is what President Hoover did. The stock-owning families, having no recognized community of interest, caved -- sometimes literally out of windows. But today most stock is held by mutual funds and institutional investors. While they are not immune to panicky fears, they could be reasoned with if the pitch came from all the major interests.

Why not create a "trust" consisting of key government players -- including Treasury and the financial and housing oversight agencies -- and Wall Street and Main Street. This trust would structure not a "bailout" but a "workout." A workout would require everyone to tighten his belt for a few years until economic circumstances improved, and the "toxic" loans became healthy ones. The federal government would provide a flow of funds to financial institutions that showed responsibility in trying to solve the crisis -- loan by loan, month by month. If we can't agree that's possible, then we have no faith in capitalism. At that point, why not turn the country over to a Chavez or Castro?

If you want to do a little history on bailouts, go back to the Emperor Hadrian, who, in 118 A.D. forgave a huge amount of taxes owned to the empire's treasury by the big guys. It didn't work. Rome's decline continued. Marcus Aurelius tried another bailout toward the end of that century. Didn't work either. Someone might say, hey, Rome kept going for many years after Hadrian and Marcus Aurelius. But reread Gibbon, and get a renewed feel for the brutish -- hellish -- life in the empire during its last 200-plus years. Do we want to bequeath to our children and their children that kind of life?

Monday, September 22, 2008

Fannie Mae/Freddie Mac and the presidential candidates

McCain's campaign operations manager, Steve Schmidt, is huffing and puffing about the New York Times piece detailing campaign top guy Rick Davis's $30,000-a-month gig for five years with Fannie Mae and Freddie Mac. "This [the Times] is an organization that is completely, totally 150 percent in the tank for the Democratic candidate," Schmidt said in a conference call to campaign reporters. Davis himself offered this explanation of his role: "I was the public face of an organization that promoted homeownership for a number of years." Sure.

The Times should have included more detail in the story, but it's been pretty well documented in the media that the Fannie Mae-Freddie Mac group that Davis headed up -- Homeownership Alliance -- was basically a front to help the mortgage giants fight off more regulation.

But how about Obama and the two F's? The McCain campaign has tried to draw a solid line between the Democratic presidential candidate and former Fannie Mae CEO Jim Johnson, who headed Obama's VP search team before abruptly resigning after the Wall Street Journal reported he personally received favorable mortgage loan rates while CEO from one of Fannie Mae's biggest customers, Countrywide Financial. Obama has been responding to the McCain attacks by saying he spent no more than "five minutes" meeting with Johnson. But so what? Obama chose Johnson for an important role -- when he should have known, or cared, that this Washington insider helped to set up the Fannie Mae "their way" culture -- detailed in a devastating report by the Office of Federal Housing Enterprise Oversight in 2004 -- that lead to Fannie's undoing.

Presidential candidates and the bailout

The (maybe fatally) flawed financial bailout is the presidential candidates' chance to show leadership that could make the difference in their even race. I wouldn't count on McCain to pick the bailout apart and propose an alternative. All the reasons why are in this Bloomberg piece. Obama says legislation should not reward the reckless financial players who created the mess, and says the bailout concocted by Paulson & Co. is only a "concept," not a plan. But Obama is yet to say what a real plan should be.

Sunday, September 21, 2008

Maybe the biggest Wall Street bailout tale

This tale is surely the most sensational of the stories about the terrible things that would happen to the global economy if there hadn't been the sudden and dramatic federal move for a Wall Street bailout. You'll notice from the story that the panic sellers would have included money market funds and institutional accounts. But knowing that dumping their holdings would send the Dow Jones down by 20 percent or more, why would those investors, responsible for so many billions of dollars entrusted to their professional care, put a gun to their and their customers' heads?

Poker player Paulson changes the rules

Forbes is featuring "What We Need to Know About the Bailout Plan," but too many of the answers end in question marks. No one, not even Treasury Secretary Paulson, the chief author of the bailout, can hazard a good guess about the outcome, because the "assets" can't be calculated with any certainty. Paulson says he's playing the hand he was dealt. But he's not, according to poker rules. Called by the dealer (the market), he's clinging to his cards but insisting, "I don't like this hand, so I'm changing the rules." The change of rules is the bailout.

Capitalism has many faults, but it's the best system we have. The bailout is an end run around capitalism. But to where?

Saturday, September 20, 2008

Instead of a bailout, why not table-turning workouts?

Almost everyone, it seems, is drinking the bailout Kool-Aid mixed up by Treasury Secretary Paulson, Federal Reserve Chairman Bernanke & Co. The Bush administration is asking Congress to approve its $700 billion plan to buy up "bad" loans from financial institutions so credit -- the lifeblood of economic growth -- can start flowing again. Or so the bill writers devoutly hope. It looks as if the Democratic-controlled Congress will pass the proposal, or something close to it. But is this quickly produced ad-hoc concoction the way to go?

Yes, say advocates, who argue that such drastic action must be taken to avert an economic depression that likely would be global. But just how "bad" are the written-down loans? Under "mark-to-market rules" of Fair Value Accounting, they're very bad. That's because the assets collateralizing the loans are -- in most cases -- residential real estate. Homes, as everyone knows, have been rapidly declining in many key markets, where most real estate transactions occur. But over the next several years, deflated home values should come back -- at least to the point where many of the "bad" loans to buy them would become tolerably "good" loans. That point of inflection would mean the financial institutions holdings the loans would not have big write-downs weighing their books, and thus not be sinking as defined by accounting rules.

So why not let this market process take place -- with the government being ready to provide targeted cash aid to financial institutions when each of them needed it? The aid would come with the traditional loan "workout" strings that financial institutions impose on business lenders who fall behind on their payments, but have a reasonable chance of regaining their credit-worthiness. In such cases, lenders order failing borrowers to give up all their liquid assets -- including, even, the Rolex watch on their wrists -- and impose severe cost cutting within their companies. Now the tables would be turned, and it would be the financial institutions who would have to go through the workout. Institutions with reckless records of speculative loan churning would get no deal permitting them to stay in business. Their loans would be assumed by the government, and their businesses would be shuttered or sold whole or piece-meal through receiverships. Liquidation would include no golden parachutes for the top executives who created the mess.

The administration bailout is nowhere as discriminating. It bails out every institution, and thus rewards the most reckless with everyone else.

Selective assistance would not require as much money as the bailout plan's $300 billion because the government wouldn't be buying in one fell swoop all the written-down securities. It would also send a strong message to financial institutions -- we will help you work through your problems, but we won't wave them away. Isn't that the message that both lenders and borrowers need to hear?

Friday, September 19, 2008

From Peggy Noonan, a hammock truth about the McCain-Obama race

I enjoy Peggy Noonan's straight-from-the-hammock, sipping-my-iced-tea political musings in the Wall Street Journal , whether I agree with them or not. I think she got the presidential race exactly right in this column. Which ever side we come down on, we're a lot less than satisfied. Obama amps us his mantra ("Change We Need"), but once you get beyond the eloquence quotient, what's there? McCain, of course, delivered his cringing affirmation of "the fundamental strength" of the U.S. economy in the middle of its down-for-the-count pasting, and then, trigger happily, tries to zap Securities and Exchange Commission Chairman Christoper Cox.

You look at the videos and photos of square-jawed Treasury Secretary Hank Paulson, and, reflexively, want to start banging your fight program against your seat. Except you know, or should know, that that photogenic jaw is an inviting target.

Washington's 'sweeping changes' in financial mess should focus on transparency

This is the way it's done in the movies -- bam, bam, thank you, ma'am (or, in this case, Uncle Sam). When I hear the words "sweeping plan" from Washington, I am not reassured. The situation is bad, but how much of the bad is structural? The flashing orange light in this WSJ column, "How to Save the Financial System," by William M. Isaac, who was chairman of the Federal Deposit Insurance Corp. in President Reagan's first term, makes me wonder.

Wall Street indeed screwed up, but why should we count on both ends of Pennsylvania Avenue to fix things? What's needed most of all in the financial markets is transparency, not a lot of new rules. Fannie Mae and Freddie Mac hid their dodgy dealings through opaque accounting. On Wall Street, it was the same story, with investment houses and other debt-churning businesses hiding their dodgy stuff in off-balance-sheet instruments like "Structured Investment Vehicles."

Marched to the edge of the gang plank, Wall Street looks to be ready to roll up the shades and let the light come in. If Washington's sweeping changes concentrate on enforcing transparency, that may be sweeping enough.

Wednesday, September 17, 2008

Stocks Prices Plunge, Political Truth Telling Rises

The spreading financial crisis is not only reducing the value of hyper-extended balance sheets and stock prices, but also tiresome political rhetoric -- at least wishfully. That's good for the body politic, rudely shaken as it is. When it became clear that Treasury Secretary Hank Paulson's Vegas-inspired poker playing was not succeeding, and all the arrows pointed deeply south, the quack-quackers started talking in language that approximated reality. Of course it's reality -- not bluster or even the most rarefied and skilled guile -- that matters when a poker hand is called, as it has been for Wall Street.

We'll see where this reality check takes us with the closely polled presidential candidates. Both of them are so straitjacked by their parties' cliches on the economy it's not clear how much truth telling we'll see in the last six weeks of the campaign.

Obama, representing the party that's been out for eight years, has an advantage. But as his critics have pointed out, he keeps serving up standard Democratic attack rhetoric. In this new truth telling time, he could connect with voters by saying what he really thinks about the economy, beyond his mantra of the "last eight failed years."

Will he?

McCain and Palin: What He Could Do

Sarah Palin got rid of the old-boy network in the entrenched Republican Party in Alaska. Maybe McCain should promise his VP candidate will get rid of Secretary Paulson's Treasury Department/Goldman Sachs gang that's running, and maybe ruining, the U.S. economy and a good chunk of the global one.

Palin does say she's "disappointed" by the new bailout of the Paulson gang -- of the big swaps contracts insurer AIG. McCain himself has been in a quack-quack mode on the newest eruptions in the financial crisis, so here's a chance for him to show the electorate how Palin could keep on cleaning up messes.

Thursday, September 11, 2008

Advice to Obama in Revlon Super Lustrous

The Obama campaign remains trapped in its death spiral. The candidate had a chance to neutralize the blowback from his putting-lipstick-on-a-pig rumination, but he blew it. David Letterman gave Obama an exceedingly wide berth Wednesday night, but all he succeeded in doing was digging a slightly deeper rhetorical hole.

In one of his trademark convolutions, Obama dissected the lipstick-on-a-pig line to say that Sarah Palin was the lipstick, and John McCain's economic program was the pig. Ouch. Letterman did a double take, then tried to verbally skate around Obama's tortured comment and rescue him. But Obama wanted to keep digging his hopeless semantic hole.

All Obama had to do from his seat on the enviable Letterman couch -- which has to be worth a couple of hundred thousands of dollars in campaign media buys -- was show a little humor, which is in very short supply in his campaign. He could have, for example, said something like:

"David, I would never compare Sarah Palin, a very attractive woman and very strong candidate, to a pig with lipstick. After all, she's already compared herself to a pit bull with lipstick. Besides, I don't have any lipstick, and I'm pretty sure Michelle wouldn't give me any."

Let's hope that Bill Clinton has given his new pal a few campaigning tips.

Wednesday, September 10, 2008

Biden Over Schweitzer – A Missed Opportunity?

When Barack Obama named Joe Biden as his running mate, the decision looked so responsible, so statesmanlike. The Russian invasion of Georgia several weeks earlier had jarred everyone into thinking again about that knottiest of subjects – foreign policy. But we could trust Biden to help untie the knots. He was chairman of the Senate Foreign Relations Committee, and he'd just made a visit to besieged Georgia a week before he was picked. Here was a guy who knew his way around the Caucusus and every other hot spot.

But today, with the Democratic ticket sinking in the polls, how good does Obama's choice look?

Obama propelled himself into being a contender for the Democratic presidential nomination with his fresh and eloquent theme of change. At the Democratic National Convention, he said, in one of his few memorable rhetorical flourishes:

"You understand that in this election, the greatest risk we can take is to try the same old politics with the same old players and expect a different result. You have shown what history teaches us -- that at defining moments like this one, the change we need doesn't come from Washington. Change comes to Washington."

But how does choosing a U.S. senator of 36 years standing help make that happen?

What if Obama's choice had been a Washington outsider? What if it had been, say, Brian Schweitzer, governor of Montana?

Schweitzer did get a little bit of pre-selection buzz, but I'm mystified why he didn't get more play. Democrats love to talk about the need for universal health care and energy independence, but for Schweitzer those issues are not programmatic abstractions but interrelated practicalities. Like in this Q. & A. from Salon magazine:

Q. A lot of people are talking about, if Obama wins, should healthcare come first or energy reform come first?

A. Both. You can't pay for healthcare if we're sending a trillion dollars a year to dictators. Bottom line is, we gotta stop hemorrhaging, and the hemorrhaging is full-flung. Climate change, that is the long-term economic hit to our economy. The short-term economic hit to our economy is the largest transfer of wealth from one economy to another economy. So, create a new energy system in America, and create an energy system that's cleaner and greener and is designed by American engineers and built by American workers. Once we get that right we can afford to invest in healthcare and education.

In front of a microphone, Schweitzer is even more impressive. Watch him at the Democratic National Convention.

A rancher, he charmingly bragged about the Big Sky State: "I may be a little biased, but I think it's the greatest place in the world to raise a family, start and grow a business and build a community."

Even though he was only a warm-up for eagerly awaited Hillary Clinton, Schweitzer grabbed the attention of the convention crowd. Bill Clinton, sitting in the audience, nodded enthusiastically when the governor ad-libbed:

“We need all of you to stand up,” he yelled. “Colorado! Stand up! Florida! Stand up! Pennsylvania! Get off your hind end! In the cheap seats! Stand up! We want to hear you from Denver to Detroit, from Montana to Mississippi, from California to Carolinas.”

When Obama decided on Biden, did he miss an opportunity to choose a running mate who would be his own version of a Sarah Palin-like running mate?

Tuesday, September 9, 2008

Obama's Hissing Balloon: Don't Blame Palin

Is it too soon to talk about how Barack Obama lost the election?

I not so sure – not with him down 15 points against John McCain. That’s right, 15 – five points in the Gallup Daily Poll (two days in a row) and the 10-point gift for any Democrat who would have run against a party in charge of the most unpopular administration in modern history.

Some campaign watchers say Sarah Palin did it. But air began seeping out of the Obama balloon months before Palin delivered her deft pinpricks.

It began, actually, last spring, when Obama, who promised he would bring change to Washington, showed he couldn’t bring change to his parish church in Chicago.

Trinity United Pastor Jeremiah Wright’s rants were the perfect opportunity for Obama to actually “do” something rather than talk about it. The Trinity community was, understandably, deeply conflicted about how to balance the social and racial views of their esteemed pastor and equally regarded congregant Obama. But Obama did nothing – except literally walk away from the church where he had worshipped for 20 years.

That cop-out, I think, was the beginning of the end of the Obama phenomenon. If he couldn’t help heal a crisis in his own church community – one that he was a party to creating – how could he change Washington?

More air seeped out of the balloon when the head of Obama’s vice presidential search team, Jim Johnson, had to resign because of his role in the Fannie Mae/mortgage financing mess. (As CEO of Fannie Mae in the late 1990s, Johnson helped set in motion the risky borrow-buy-and-flip culture that lead to the institution’s meltdown. About the same time, he got some favorable mortgage interest rates for his own home purchases from Countrywide Financial Corp.’s CEO Angelo Mozilo, who, as a major customer of Fannie Mae, assembled his "friends of Angelo.") How could Obama turn to such a quintessential Washington deal maker and palm greaser to help him choose his No. 2 broom wielder?

Then came the Democratic National Convention, where Obama could have redeemed himself and re-energized his presidential run by making just one single, significant pledge of change that didn’t come out of his page-worn campaign playbook. He could have, for example, promised to fight for ending payroll taxes for all those who make less than the median income. It would be costly, but the benefits – for the workers and their rusted-out communities – would be greater, as detailed in the 2007 Foreign Affairs article co-written by Matthew J. Slaughter, the Dartmouth/Tuck School of Business professor who earlier served on President Bush’s Council of Economic Advisers. Payroll taxes – they total 15.3% and come right off the top of wages -- are a crushing burden for lower-income workers, and are a barrier to their making life-transforming decisions, like getting more education they need to move up economically. A frontal assault on payroll taxes would have won Obama support where he most needed it in many battleground states and given him sustained media attention. Talk about a game changer. Instead, he offered up the same old, tired programs from his long campaign for the nomination.

Along comes Sarah Palin. Yes, she knocked Obama off stride. But he was already heading down the wrong path to election victory.

Monday, September 8, 2008

For Debt Addicts Fannie Mae and Freddie Mac -- the Big Fix

If you heard about a drug treatment program that gave heroin addicts a continuing, unlimited supply of the powerful narcotic, insisting only that they be minded by a “conservator,” you would surely say – no way.

But that’s exactly what the Fannie Mae/Freddie Mac federal bailout does. The two housing hermaphrodites will be able – actually be compelled – to continue the reckless financing strategy that has taken them, and much of the global financial system with them, to the edge of calamity.

Oh, goody, we are told, the two “F’s” won’t be able to do any more lobbying – on which they spent $170 million in the past decade – and their new CEOs will take big pay cuts.

But consider this fine print from the agreement (the last graf):

“Each [government-sponsored enterprise’s] retained mortgages and mortgage-backed securities portfolio shall not exceed $850 billon as of Dec. 31, 2009, and shall decline by 10% per year until it reaches $250 billion.”

With the two F’s total liability standing at about $6 trillion – counting mortgages they both own and back – how are they going to shrink that staggering pile of obligations down to $1.7 trillion ($850 billion x 2) in a year-plus?

For at least a couple more years, the real estate market will continue to be pulled downward as the second-wave crisis kicks in – the so-called “Alt-A” loans that were turbo-dispensed in the years leading up to the current mess. These no- or low-interest introductory loans, which are automatically kicking into punishing “resets” that will continue till about 2010, are a financial time bomb. To try to prevent a megaton detonation, the two F’s will have to take over foreclosed Alt-A’s that it backed. As they do that – with seemingly unlimited taxpayer dollars -- how will they manage to reduce their mountainous obligations?

Treasury Secretary Hank Paulson won’t be around to have to answer for the virtually certain failure. In the bailout language he crafted or at least approved, the most time-certain word is “until.” Until when – hell freezes over?

Closed door at The Washington Post

It's tough to get an op-ed piece published by The Washington Post. The editorial page department gets hundreds weekly, so even if you're No. 3 or 4 in the sorting process, you're likely to be zapped as unceremoniously as submitter No. 150 or 250. I know, because I've had many submissions rejected, probably more than the 25 or so I've had published over the years. So I didn't stamp my feet too loudly when my most recent submission -- a reply to the Aug. 4 op-ed titled "Housing Collapse Ahead?" -- was rejected. But I did ask editorial page editor Fred Hiatt to run an important correction regarding the identity of the published piece's three authors -- Charles W. Calomiris, Stanley D. Longhofer and William Miles. They were identified as academics, when, in fact, all three were also creatures of the real estate industry. I received no reply from Hiatt, or from Deborah Howell, the Post ombudsman, whom I copied. The Post is a great newspaper -- I spent many years working there as a reporter and editor. So why is it permitting itself to be part of such a blatant deception? Contrary to Calomiris & Co. in their op-ed, the real estate crisis is not going to go away -- and housing prices are likely to continue to fall in many key markets -- as almost everybody but the real estate industry acknowledges. The Post is not part of that industry, but by refusing to own up to how its op-ed page was used by three industry creatures, it blemishes its reputation.

Here's my rejected op-ed:

Real Estate Industry Cheerleaders
Find a Home in Groves of Academe

By Tom Grubisich
Why wouldn’t Post op-ed writers Charles W. Calomiris, Stanley D. Longhofer and William Miles be optimistic about where home prices are headed? (“Housing Collapse Ahead?” – Aug. 4, 2008.) All three of them are tied umbilically to the real estate industry – a fact not disclosed in the op-ed.

Calomiris is, as described, Henry Kaufman professor of financial institutions at Columbia University. But he is also board chairman of Greater Atlantic Financial Corp., whose Greater Atlantic Bank in suburban Northern Virginia and Maryland sells, among other mortgage instruments, the infamous “no documentation” loans that helped to trigger the U.S. financial crisis that he and his writing colleagues find overblown. Greater Atlantic Bank advertises its aggressive lending practices on its website.
Greater Atlantic Financial was de-listed from the Nasdaq exchange in 2007 for not maintaining minimum stockholder equity and has lost two thirds of its stock value in the past four years. It is in the process of merging with less-battered Summit Financial Corp. of Moorfield, W.Va.

Calomiris’ op-ed co-author Stanley D. Longhofer is, as described, director of the Center for Real Estate at Wichita State University’s business school, and William Miles is, as described, an associate professor of economics and Barton fellow at Wichita State. But most Post readers may not know that the WSU center is an appendage of the local real estate industry – a fact about which the center, the university and its business school proudly boast on the center’s website: “Leveraging the Center's close ties to the real estate community, the real estate degree programs at WSU also give students the unique opportunity to gain educational, technical, and practical experience by working and interacting with some of the areas best and brightest real estate professionals. This unique blend of education and networking give students the foundation they need to get started in their career, and to propel them to the top of their profession.” Sinclair Lewis’s George Babbitt, the top Realtor of Zenith, couldn’t have said it better.

The center’s “close ties” to the Wichita real estate industry are personified by the industry’s complete domination of the group’s advisory board. There is only one official on the 24-member board who doesn’t work for a real estate company, bank, builder or other part of the industry – Terry Cassady, who is in the Wichita city manager’s office. But what does Cassady do? She’s director of the candidly named Development Assistance Center, whose mission, as described on its website, is: “To improve service to the real estate development industry by streamlining processes and cutting through the red tape of City Hall for developers.”

Calomiris, Longhofer and Miles, like anyone else, should have access to the Post’s op-ed page. Self-interested opinions are not, by definition, evil. Counter-intuitively, they may throw light on a complicated issue that is in danger of being reduced to simplicities that don’t jibe with reality.

The home mortgage crisis is just such an issue. Sometimes confounded by all the swirling “facts” of this crisis, I would love to know everything that’s important to know. But do Calomiris, Longhofer and Miles help us to really understand the crisis?
Unfortunately for millions of financially threatened home owners, desperate stockholders in Fannie Mae, Freddie Mac and other institutions heavily invested in mortgages, and, most significantly, American taxpayers who will pay for a bailout of the real estate industry that has no defined cap, Messrs. Calomiris, Longhofer and Miles are the anxious emperor’s soothsayers.

They argue that the decline in housing prices has been hugely exaggerated. I could serve up a lot of contrary conclusions, from experts. Instead, here are some home-sale metrics from the metro Washington, DC, community of South Riding in eastern Loudoun County. Greater Atlantic Bank has an office there.

The metrics, compiled by real estate agent Mike Murad, whose blog covers activity in the South Riding area:

· Net price of second-quarter sales in 2008: $423,956 – down 15.7 percent compared to 2007.
· Short sales (where the mortgage owner accepts less than is owed) for the same period: 8 – compared to none in 2007.
· Foreclosures: 24 – compared to two in 2007.
I wonder how much comfort home sellers in South Riding were able to find in the op-ed by Calomiris & Co., and how much of it was cold?

The writer is a former reporter and editor at the Washington Post. He is reachable at TomEditor@msn.com.