Imagine you're going to a Museum. Let's call this museum the Wall Street Museum of Debt and Deregulation. The museum is made up of several rooms with assorted themes. In one room, THE PANIC ROOM, we see paintings of horizons with fine details of assorted scenes in the foreground. Incredibly enough, in each painting we can see both the forest and the trees. Each forest represents No Credit / No Financing / Stupid Decision-Making. These are the broad strokes of collapse. But if we really want to appreciate the painting we need to look a little closer at the trees. In our museum the trees are represented by Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., Merril Lynch, etc.
As we look even closer at each painting we can discern rolling meadows before the trees, barns and farm animals, lakes, etc. These scenes, however, are not so bucolic in our museum, as they are represented by the invidual instruments and activities of each institution that has been bailed out.
In the foreground of the Fannie Mae/Freddie Mac Painting, aptly titled "The Tower of Babel," we see a picture of people purchasing highly toxic CDO products, when they should have been focused on government sanctioned products. For contrast, also in the painting is Fannie Mae's heavily regulated side-kick, Ginnie Mae. She is sitting alone, but content. She may not have gotten the sudden high from big toxic profits, but she did not purchase toxic garbage either.
In the foreground of the Lehman Brother's painting, "Operation Rolling Blunder," instead of rolling hills in the foreground we see rolling debt. But we also see that those who are continuously lending and rolling money over for Lehman are worried. Lehman Brothers is shifting their investment and debt instruments so many times they have become a financial chameleon. Their risk levels shift every month. Lenders are worried because Lehman is borrowing too much each month ($100 billion) and decide they can't risk more money. As panic hits the market, lenders get cold feet, and Lehman is forced to declare bankruptcy.
Then we have insurance giant AIG. In the foreground we have people selling insurance. AIG thought they could sell insurance for markets filled with toxic instruments like they sold insurance for houses. Instead, they were insuring a house of cards, which is captured in the painting. In the painting's foreground we see the owners of houses bemoaning collapsing home values. We also see the holders of these mortgages asking AIG insurers to demonstrate they can cover the written value of their mortgages. AIG can't do this. Panic hits. An $85 billion bailout loan is organized by the federal government.
There are additional rooms in our museum. But no one seems interested in THE ROOM OF BAILOUTS PAST, where we find paintings of "The Mexico Bailout" (1982), "The Continental Illinois Affair" (1984), "The Savings & Loan Debacle" (1989-1990), "The Asian Currency Reclamation Project," "The Fed Organized LTCM Bailout" and the list goes on.
Making mattes worse, no one wants to go into THE GALILEO ROOM, which helps museum goers see ... we'll discuss this on the program this afternoon.
- Mark
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