Another Piece to the Credit Puzzle

Credit default swaps or CDS’s apparently contributed to or some say caused the present financial crisis.  Invented by Wall Street in the 1990’s, these contracts made subprime mortgages saleable.  In essence, financial institutions that should have known better agreed to pay an investor if his investment went sour.  This “insurance” meant that it was unnecessary to perform much due diligence on these mortgage backed securities because, after all, the risk was covered by the credit default swap.  This meant bad mortgages could be funded and sold.  Over time more and more “subprime mortgages”(predatory loans, bad loans, etc) steadily flowed into the mortgage backed security markets because the CDS covered the risk.  When the housing bubble burst, the mortgage back securities went into default.  This triggered the CDS.  The payors of the CDS (AIG for example) didn’t have the money to pay.  The collapse then had a domino effect.  94% of American mortgages are not in default.  The best way to handle this crisis is to educate the American people as to how this happened and why.  People are fearful now (with good reason) but if the average American can understand what happened and why, the panic should subside.  Wall Street has long known that knowledge is power.  Insider trading is the unlawful use of information not known to the general public.  That shows the power of knowledge.  Accordingly, if our leaders and the media can present a balanced analysis of what went wrong and why, this knowledge will give us the power to (a) control the panic and (b) prevent similar mistakes in the future.

The Next President

I pity the poor guy who is unfortunate enough to win the presidential race this year.  There are so many problems facing our country that it will be impossible for the next president to be fairly measured by his efforts as opposed to events and problems caused by others.  In order to have a successful term, the next president must communicate, communicate and communicate some more.  Politicians are not trained in economic theory.  Politicains are not trained to be a quick study.  Politicians are ill suited to demand performance as opposed to loyalty from those around them.  What invariably happens is that the “coach is measured by the team.”  If America happens to experience good times, whomever is president gets all the credit.  If America struggles, the president is blamed.  Go team.  Let’s hope America wins more of these battles than it loses over the next four years. 

Judicial temperment

I would not presume to tell anyone how to vote.  In West Virginia we have three candidates for two seats on our Supreme Court.  I suggest that you vote for the candidate or candidates whom you believe will preside with dignity, calmness and consummate politeness to all involved.  A court has no army, no money to hand out.  It only has respect for its decisions.  Judicial temperment is the idea that a judge must be patient, respectful and restrained in his or her conduct and comments.  They must not appear to be aligned with any party, any cause or any lawyer.  In the “good old days” the local judge was the lonliest person in town because he or she felt constrained not to “socialize” with folks since they needed to remain impartial.  In those days, a judge would never talk to a reporter let alone engage in any overt political activity.  Judicial temperment is what I look for when I cast a vote for judge.


I thought the Democrats were going to stop the war whereas the Republicans prefer to continue until a victory (however that might be defined) is obtained.  In listening to McCain, Palin, Obama and Biden it appears that both parties now favor “moving” the war to Afghanistan and perhaps Pakistan.  I find this disappointing.  The Russians were chewed up in Afghanistan.  I don’t see why Afghanistan will be any different from the kind of sacrifice now being made in Iraq.  The enemy there as in Iraq is not a country, a government or even a defined, identifiable group.  We are sending soldiers who must follow the Code of Military Justice with reporters in tow to “fight” against thugs, murderers and low lifes.  The war on terror needs to be “fought” using intelligence agencies, infiltration, paid informants and must be fought largely in the dark.  How sad that more Americans soldiers are going into harm’s way.  Neither party seems to think that “ramping up” in Afghanistan is a bad idea.  I do.  You don’t send a tank to “capture” a murderer – you send a marshall, a deptuy sheriff or a bounty hunter.

A Fuzzy Picture Becomes Clearer

At last, commentators (not politicians) seem to have analyzed the “bailout” and how it works.  This morning a financial analyst stated that the government was buying assets that are worth more than the purchase price.  Over time, the government (the taxpayers) will make money.  If that is true then the complicated bailout at least becomes “understandable” to Joe Six Pack.  It also appears that the problem was created in large part by well meaning politicians who wanted to have more home ownership for the country.  The regulatory pressure on banks (Community Reinvestment Act) to stop “redlining” poor neighborhoods and start making loans to those who normally could not access capital was allowed to “mushroom” out of control.  President Clinton tried to rein it in during his second term but Congress stopped that.  President Bush proposed similar adjustments a few years ago which again were stopped by Congress.  My one lingering fear is that the present crisis is merely one of a continuing series of “bad news” financial waves that will start hitting the American beach.  I pity the person who wins the presidential election. 

The Greater Good

I am told my bank owns some of the subprime mortgages that the government intends to buy.  The bank’s stock (of which I own none) recently dropped 32%.  I have had my mortgage with the bank for years and have never missed or been late with a payment.  Ok, as I understand it, some of my tax dollars will be used to buy those mortgages from my bank.  The bank’s stock I assume will go up.  My mortgage will remain the same.  How exactly do I benefit from this?  Short answer is that I don’t.  I guess the “thinking” is that this is for the “greater good.”  Now I guess after the bailout, my bank can now lend the money paid to it for the “bad” mortgages (prudently I hope) to a customer.  That benefits them.  How does that benefit me?  Not sure that it does.  I guess the borrower could use the loan to open a store.  I might shop at that store sometime in the future.  Maybe the owner of the store will hire me to do some work for the store.  I guess that benefits me …. if it happens.  Is that the “greater good” they are talking about?  Maybe so.