Big political money gets even bigger as Wall Street swings Dem

Wall Street is throwing ever more money into campaign contributions, including now having a 57-43 tilt toward Democrats.

In both presidential and congressional contests, Democrats are benefiting more than Republicans from the surge in business donations, with 57 percent of giving from typical big donors going to Democrats versus 43 percent in 2006 and 2004.

More money is coming in from lawyers than from any other sector, as usual. But the biggest increase in giving since 2004 is coming from financiers, whose donations are up 91 percent.

Steep increases are also coming from the real estate industry, Hollywood, healthcare professionals and insurers. …
Wall Street's favorite presidential candidate, based on the latest FEC disclosures from October 29, was Democratic New York Sen. Hillary Clinton. Close behind her in donations from financiers were Republican former New York Mayor Rudolph Giuliani and Democratic Illinois Sen. Barack Obama.

Next were Republican former Massachusetts Gov. Mitt Romney, Democratic Sen. Christopher Dodd of Connecticut, Republican Sen. John McCain from Arizona, Democratic former North Carolina Sen. John Edwards and Democratic New Mexico Gov. Bill Richardson.

The biggest donors in the securities and investment sector, as of October 29, were the brokerage firms Goldman Sachs, Morgan Stanley, UBS, Merrill Lynch, Lehman Brothers and Credit Suisse.

Also among the sector's top contributors were hedge funds and private equity firms Bain Capital, SAC Capital Advisers, Fortress Investment Group and Blackstone Group.

Chuck Schumer is probably saying, “Bring ’em on” even as we speak. Do you really expect a lot of change out of the next presidential administration? Or the next Democratic Congress?

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Wall Street: Giant Ponzi scheme? Giant poker game?

The combination of subprime mortgages, other mortgages and other items of debt into the complex collateralized debt obligations and credit default swaps invite both these comparisons, as Michael Panzner makes clear.

In essence, these forms of smashed, blended debt, sliced into tranches, are a Ponzi scheme because they have been relying on more and more people buying houses, buying bigger houses, refinancing for remodels and so forth.

These debt forms are like a giant poker game because the main bettors have been betting against the odds, especially the odds of subprime borrowers defaulting. (At the same time, as part of the incestuousness of these arrangements, creators of this debt have been depending on ratings agencies like Moody’s both to give the best possible rating on CDOs and to talk up the financial market in general, and housing market in particular, at the same time.

From Mish (whose blog on economic analysis is a highly recommended read), here’s what I mean by incestuousness:

Moody’s: “Moody’s has no obligation to perform, and does not perform, due diligence.”

S&P: “Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.”

Because of that bottom-line fact, Mish has a boatload of questions:

* How many billions of dollars will be lost because of absurd pricing models?
• How can it be that an entire system of investment decisions are based on ratings that the ratings companies tell everyone not to use for investment purposes?
• Were the ratings companies grossly incompetent or just foolish?
• Will the disclaimers of the ratings companies hold up in court?
• How long will it be before there be a court test of those disclaimers?
• Why has only a minuscule portion of subprime debt (2.1% or $12 billion of a massive $565.3 billion of subprime bonds) downgraded?
• Are the ratings companies under pressure by the banks and/or the Fed to not rerate this debt?
• Why is it that ratings companies are allowed to have outside business relationships with the companies whose debt they rate?
• Did banks realize how absurd those ratings were but look away because of greed and the ease in offloading he debt to pension plans, insurance companies, and hedge funds out of pure greed?
• Heck, did the upper echelons at the ratings companies themselves know their ratings model was flawed and look the other way out of greed?
• How long before there is a government sponsored bailout of this mess? Hint small ones are starting already. See Please - No More Help! for a discussion.
• How long before Bernanke starts cutting rates?
• How high will gold prices rise when Bernanke starts cutting?
Here's the big question: How big will the taxpayer bailout be?

But, Mish’s quote of Moody and S&P hand-washing, bad as it is, still isn’t the full story.

For one thing, these CDOs were backed not with money, but with insurance. And, just like people can “short” a stock, banks and other CDO creators could short their insurance.

Well, what’s happening right now is that a lot of bluffs are being called. Or, on the analogy above, a lot of banks and other lenders are facing the equivalent of margin calls. And, a lot of the people whose bluffs are being called are having to reveal they’ve been betting with IOUs or overrun bank drafts. And, unlike monetary deposits, these investments aren’t protected, even if made by banks. Plus, as Panzner points out, many of these types of loans were made by nonbanking entities.

Already three years ago, Warren Buffet was calling derivatives “financial weapons of mass destruction.” But Greenspan kept encouraging banks and other lending agencies to keep churning them out. Combine that with the Fed loosening the fractional money reserve requirement of banks, and you have the perfect storm.

This is why the Fed and the European Central Bank are injecting money into the system through buybacks. Banks already are thin enough on reserves that their power to fluff more credit into the system is running low. But, the Fed is actually using credit, not money, for these buybacks; banks, then, with their small reserve margins, can inflate this credit.

Stoneleigh at The Oil Drum goes into even more depth (warning, it’s about 5,000 words); if you still don’t understand too much about how much more than a “housing bubble” the subprime crisis is, and have a bit of reading time, I strongly recommend it.

One final note; our, and the world’s, Great Depression wasn’t caused by hyperinflation anywhere. Instead, the Roaring ’20s were a period of high credit inflation.

I think I’ve writeen enough on this to give you the general idea.

Cross-posted at Socratic Gadfly.

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More on why the Fed and Wall Street is a rigged game

Like Mish says, the Fed never has trouble with inflating bubbles, just deflating ones. Here’s his own words:

Essentially the Fed views a falling market as a threat. Of course a rising market, no matter how reckless or speculative is not a threat. Such is the nature of the misguided policies of the Fed that constantly blows bigger and bigger bubbles to cover up its own mistakes.

This is of a piece with New York Stock Exchange’s shutting down computerized trading programs whenever stocks drop too rapidly in a day, but letting them run wild in an uptick of the same percentage, as I posted here.

The question is, will Democratic presidential candidates address how bad Greenspan was about this? Will they pledge to hold Bernanke’s feet to the fire of a different policy? And, what about Congress? Will we get action, not fluff?

Cross-posted at Socratic Gadfly.

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Why hasn’t Wall Street reacted to the subprime crisis the way it “should”?

Because the Street has a lot to protect. Note the words “contained,” “suppressed” and “protected” in the Bill Fleckenstein analysis quoted below:

The problems have taken a long time to play out, largely because of what we've recently come to discover but probably could or should have known all along: that the building blocks of the housing ATM — more accurately referred to as structured credit — were created in such a way that these securities were rarely marked to market. Rather, they were allowed to be marked to a model, based on a variety of assumptions. Essentially, therefore, one's assets were impaired only when the ratings companies downgraded them. ...

Fast-forward to last February and March, which saw the implosion of a couple of dozen subprime lenders. Wall Street reacted by proclaiming the problem “contained.” Though I essentially laughed at that sanguine response, now I understand what it meant: Those in the know understood that nothing was going to be marked to market, so the subprime-loan-originator implosion didn't matter.

Next, we saw the blowup of Bear Stearns’ High-Grade Structured Credit Strategies Enhanced Leverage Fund. That happened, in part, because manager Ralph Cioffi had tried to hedge some of its weaker credits with an ABX index that did get marked to market. Thus the fund lost money and was hit with redemptions.

At the time, I said that redemptions were going to force price discovery into the market — although, as Jim Grant so eloquently put it in a recent issue of Grant's Interest Rate Observer — Bear Stearns had a totally different opinion: “Price discovery could wait until the return of blue skies and normal pulse rates. The first order of business was price suppression.”

This price suppression was the outcome folks had hoped for. After all, according to a July 11 article in Bloomberg, Wall Street took in about $27 billion in revenue from underwriting and trading asset-backed securities last year alone. It’s a mighty profitable business that they are protecting.

In other words, until the Street gets as “rational” about sunk costs as classical economists believe people are supposed to be, it’s not going to own up to the size of this problem.

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