Wednesday, May 21, 2008

A Meltdown Foretold

Analyst foresaw economic crisis

A push to increase home ownership along with Wall Street's desire for new securities to trade and a lack of oversight led to a crisis Christopher Whalen says will be the worst since the
Posted on Mon, May. 19, 2008

Christopher Whalen

Current job: Newsletter publisher, investment banker, financial analyst

Education: Bachelor's in history from Villanova University

A past you would never guess: Advisor to Mexican presidential candidate Cuauhtémoc Cárdenas

Most recent book read:Fifty Billion Dollars (Franklin D. Roosevelt and the New Deal era), by
Jesse H. Jones

Where you have seen or read about him: Interviews on Bloomberg Television and writings in
Barrons, Insight on the News and The Financial Times

Investment banker, financial analyst and newsletter publisher Christopher Whalen has explored the ins and outs of Washington, Wall Street and Latin America for more than two decades.

Following stints on Capitol Hill, the Federal Reserve of New York and Bear, Stearns & Co., Whalen founded the newsletters The Mexico Report and Washington & Wall Street.

In 2003, he co-founded Institutional Risk Analytics, which offers risk analysis and consulting.
Besides editing the firm's newsletter, The Institutional Risk Analyst, he writes articles,
testifies in Washington and speaks frequently to financial groups.

Whalen, who has worked in New York, London and Washington, frequently looks to economic history to put the present in perspective. He points out that when President Franklin Delano Roosevelt took office on March 4, 1933, banks in 32 of the 50 states were closed because of panic.

Whalen spoke with The Miami Herald during a visit to South Florida to address the Insurer
Investment Forum, ''The Times They Are A-Changin,'' at the Diplomat Country Club & Spa in
Hallandale Beach.

Q: The U.S. economic picture was much rosier when you founded Institutional Risk Analytics. Are you surprised about the turn of events?

A: We saw that our colleagues had so badly skewed their thinking on risks that we knew eventually there would be a swing back the other way. This one was so severe and everyone was so impetuous; whether you are talking about home buyers -- borrowing 100 percent of their mortgages -- or banks -- people packaging securities up and selling them. It evidenced the mania. We said: ``Wow! Why don't we set up our lemonade stand here and people will come?''

Q: How serious is this financial crisis?

A: We are in the worst financial crisis in this country in 100 years. This is going to make the
savings and loan crisis look like a party.

It won't be as bad as 1930 and 1931 when you had a 30 percent unemployment rate. But it is going to get bad. A lot of value is going to be destroyed.

If you think of the way your parents lived and think of today, we've gone from people buying a
house and staying there, to people buying houses like baseball cards. People are using credit
cards and their home equity financing and pretending things are going to be OK. But we are
running out of gas.

Q: How did we get in this trouble both in the housing market and with subprime mortgages?

A: Right after the realestate crunch in the early 1990s, the government-sponsored enterprises --
Fannie Mae, Freddie Mac, the Housing and Urban Development department, the Federal Housing Authority, the Office of Federal Housing Enterprise Oversight, the Federal Home Loan Banks, the whole cast of characters, they put together this public/private partnership to push for home ownership. The Realtors, mortgage brokers and regulators picked up this theme. Then the banks picked up the theme.

The United States had the highest home ownership rates in the world, 65 percent. They pushed that to 70 percent. Unfortunately, many of these were marginal buyers and they are walking away. If you got into one of the adjustable-rate mortgages and you have no equity in it, there's not a whole lot of incentive to stay.

The Street was looking for something to trade. The banks were looking to securitize stuff. They
all got a fee. But no one took responsibility for the overall outcomes.

The banks are now being forced to write this down. All these loans and securities derived from
the loans have become illiquid.

It's amazing. We have to ask how did we do this? Foreign friends ask me, ``How did we screw up so badly?''

Q: Was no one looking at what was happening?

A: They were actively ignoring it. They were beating up on Brooksley Born [former chairwoman of the Commodity Futures Trading Commission] and saying: ''No, no, you are not going to regulate over-the-counter securities.'' They argued competitiveness. But these are not innovation. These are opaque securities that no one can value.

It's also how the dealers could make money. Over-the-counter is 10 times as profitable as the
exchange trade model.

Q: What is your assessment of the government's actions so far and what should be done?

A: The Bush administration has been totally asleep. But there were a lot of people responsible,
including former Federal Reserve Chairman Alan Greenspan. Everybody focuses on his interest-rate policy, holding interest rates down for so long. But the real fault of Greenspan was allowing the banks to get more and more into securities, like mortgage-backed securities, and allowing them to move off balance sheet.

None of this over-the-counter paper was registered with the Securities and Exchange Commission.

That's why you have about $7 trillion in government-sponsored-enterpris
es paper and $3 trillion in private-label securities. That is all being redeemed. The banking system can't pick up the slack. So it's crunch time.

By election time, I think that the economy will be the only issue. We could be contracting
economically for the next couple of years. That will shock America because Americans are not used to this kind of environment. Whoever wins the White House will be in crisis mode from day one.

We have to have a discussion about market structure; what has to be registered with the
Securities and Exchange Commission and what doesn't. Anything a bank buys and sells or a pension fund buys and sells need to be registered.

We have to remake this marketplace in a much more transparent fashion.

Some thoughts, from an Engineer

Excerpt of an email from WM Bertolet, Fort Myers:

The USA faces a crisis that imperils the nation's economy and the planet's ecology. We have
forgotten about efficiency and durability. We have a pervasive irresponsible throw away mentality which ignores the precepts of quality and conservation and a woefully misguided administration.

There must be a change towards efficient and durable products offering quality and longevity.

Prime example. Detroit builds shoddy monstrous plastic gas guzzlers that are, by design and
marketing plan, throw away junk by the last coupon in the payment book. The USA has never
developed a viable diesel automobile. Incredibly, five states prohibit the registration of diesel
automobiles thus politically discouraging diesel imports.

If only one third of the cars on American highways were diesel we would not have to import one
drop of petroleum. That's efficiency. Diesels have service lives measured in millions of miles.
That's durability.

Appliances built to price are short lived energy hogs doomed to an early death from mechanical
failure or rust.

New buildings, both commercial and residential, have design service lives shorter than their
mortgages and are dependant on artificial ventilation and illumination.

Our reliance upon the automobile, truck and airplane is woefully inefficient and wasteful. Fast
and convenient mass transit systems are all but absent in north America. We have no bullet trains let alone passenger trains. We depend upon air and highway transport networks with prohibitively high fuel consumption per seat or ton mile. Why the 3 ton SUV with driver only?

Railroads can lug a ton of freight over 400 miles on a gallon of diesel oil, ships and barges are
even more efficient yet The US killed the railroads and merchant marine with government and
unions after WW2.

Intelligently deployed nuclear power is the only viable technology for present power demands.
Example France.

The severely limited energy densities for solar, wind, wave, and thermal differential energy
technologies preclude practical nationwide application, particularly for urban areas. For an
isolated dwelling, they are feasible but costly to build and maintain. They simply cannot be
scaled upwards to accommodate cities or a power grid.

Of the future energy technologies oil from algae is the most promising. The feedstock is waste,
no arable land is required, the growth rate is explosive, days compared to months, and the yield
per acre potentially 100 times that of any other bio source, the extraction of diesel oil
requires only pressing, and the pulp remaining is fodder, fuel pellets or fertilizer. The Salton
Sea area could supply the nation.

Mature technology exists to address all these issues. Buildings cars and appliances should be a
once in lifetime purchases designed for maximum efficiency and durability rather than throw away life cycles.

Inefficiency, lack of durability, and the throw away mentality exacerbate pollution.

The smallest and most basic measures which could be implemented instantly are overlooked in our aura of waste. In Europe the supermarkets sell shopping bags and they are not inexpensive so most folks carry reusable fabric mesh bags. In the USA plastic bags which are made from petroleum, are, despite $130.00 per barrel oil, still cheaper than biodegradable paper bags, and both are given away. Waste.

Many items are sold in plastic or foil packaging that exceeds the cost of the product within. It
would seem that in such cases regulation requiring the product to equal or exceed the value of
the package would have practical results. The fast food ketchup pouch would fatten to the point
where one pack would take the place of the three or four required to drench an order of fries.

The aptly named clear plastic "clamshell" packs so much a part of retail marketing for their
pegboard product display and theft-reducing bulk could just as easily be paper packed to the joy
of anyone who has fought to open one using scissors or knives.

The empty pack will be with us for eternity.

Recycling of plastics, including synthetic fibers, is mostly energy negative due to the variety
of materials leading to cross contamination. Even the familiar clear beverage containers must
have the cap retainer rings, the label film sleeve or the ink removed prior to shredding.
Plastics are a particular nuisance and curse in this regard as they are very long lived. Landfills of disposable diapers will take centuries, if ever, to degrade.

Fortunately glass, metals, nuclear fuel rods, and paper are energy positive or neutral to

Products with combinations of many materials, such as motor vehicles, are hardly worth recycling as the costs to separate the various materials either manually pre-processing or mechanically after shredding tend to be prohibitive. Magnetic separation can pluck out the ferritic alloys but the other metals such as copper and aluminum are more difficult to select and the remaining amalgam of shredded plastics, glass, paint and fiber is valueless bulk.

Dump the politicians and the fruitcake "scientists" with their past failures and future dreams.

Bring on the engineers for real and immediate solutions..

That covers the practical, now to the political.

The oil market is worldwide and highly competitive, fully subject to supply and demand. Big
numbers, certainly. Conspiracies and cartels, no. So who’s making the big money? The countries
that produce crude oil. Crude represents more than half of the cost of each gallon of gasoline
sold. Federal, state and local taxes represent another fifth.

In 1998, a recession in Asia created an oil glut. Prices plunged to historic lows (near $10 a
barrel), and American drivers reaped the benefits, with gas dipping below $1 per gallon. Within
ten years we are facing a tenfold increase in cost, or, conversely and far more accurately a
tenfold devaluation of our currency.

We are bankrupting the nation with terrifying rapidity.

Given an intelligent balance of eco-priorities global warming issues could be ameliorated with
the funds saved by common sense energy policies.

Engineering cannot resolve political problems, revolution could. The blame lies 100% in

One Man Stands up to Bush


Address by Mayor Ross C. 'Rocky' Anderson

Today, as we come together once again in this great city, we raise our voices in unison to say to
President Bush, to Vice President Cheney, to other members of the Bush Administration (past and present), to a majority of Congress, including Utah's entire congressional delegation, and to
much of the mainstream media: 'You have failed us miserably and we won't take it anymore.'

While we had every reason to expect far more of you, you have been pompous, greedy, cruel, and incompetent as you have led this great nation to a moral, military, and national security abyss.' 'You have breached trust with the American people in the most egregious ways. You have utterly failed in the performance of your jobs. You have undermined our Constitution, permitted the violation of the most fundamental treaty obligations, and betrayed the rule of law.

You have engaged in, or permitted, heinous human rights abuses of the sort never before
countenanced in our nation's history as a matter of official policy. You have sent American men
and women to kill and be killed on the basis of lies, on the basis of shifting justifications,
without competent leadership, and without even a coherent plan for this monumental blunder.

We are here to tell you: We won't take it anymore! You have acted in direct contravention of
values that we, as Americans who love our country, hold dear. You have deceived us in the most
cynical, outrageous ways. You have undermined, or allowed the undermining of, our constitutional system of checks and balances among the three presumed co-equal branches of government. You have helped lead our nation to the brink of fascism, of a dictatorship contemptuous of our nation's treaty obligations, federal statutory law, our Constitution, and the rule of law.

Because of you, and because of your jingoistic false 'patriotism,' our world is far more
dangerous, our nation is far more despised, and the threat of terrorism is far greater than ever
before. It has been absolutely astounding how you have committed the most horrendous acts,
causing such needless tragedy in the lives of millions of people, yet you wear your so-called
religion on your sleeves, asserting your God-is-on-my-side nonsense when what you have done flies in the face of any religious or humanitarian tradition. Your hypocrisy is mind-boggling - and
disgraceful. What part of 'Thou shalt not kill' do you not understand? What part of the 'Golden
rule' do you not understand? What part of 'be honest,' 'be responsible,' and 'be accountable'
don't you understand? What part of 'Blessed are the peacekeepers' do you not understand?

Because of you, hundreds of thousands of people have been killed, many thousands of people have suffered horrendous lifetime injuries, and millions have been run off from their homes. For the sake of our nation, for the sake of our children, and for the sake of our brothers and sisters
around the world, we are morally compelled to say, as loudly as we can, 'We won't take it
anymore!' As United States agents kidnap, disappear, and torture human beings around the world, you justify, you deceive, and you cover up. We find what you have done to men, women and children, and to the good name and reputation of the United States, so appalling, so
unconscionable, and so outrageous as to compel us to call upon you to step aside and allow other
men and women who are competent, true to our nation's values, and with high moral principles to stand in your places for the good of our nation, for the good of our children, and for the good
of our world.

In the case of the President and Vice President, this means impeachment and removal from office, without any further delay from a complacent, complicit Congress, the Democratic majority of which cares more about political gain in 2008 than it does about the vindication of our Constitution, the rule of law, and democratic accountability. It means the election of people as President and Vice President who, unlike most of the presidential candidates from both major parties, have not aided and abetted in the perpetration of the illegal, tragic, devastating invasion and occupation of Iraq. And it means the election of people as President and Vice President who will commit to return our nation to the moral and strategic imperative of refraining from torturing human beings. In the case of the majority of Congress, it means electing people who are diligent enough to learn the facts, including reading available National Intelligence Estimates, before voting to go to war. It means electing to Congress men and women who will jealously guard Congress's sole prerogative to declare war. It means electing to Congress men and women who will not submit like vapid lap dogs to presidential requests for blank checks to engage in so-called preemptive wars, for legislation permitting warrant-less wiretapping of communications involving US citizens, and for dangerous, irresponsible, saber-rattling legislation like the recent Kyl- Lieberman amendment.

We must avoid the trap of focusing the blame solely upon President Bush and Vice-President
Cheney. This is not just about a few people who have wronged our country - and the world. They
were enabled by members of both parties in Congress, they were enabled by the pathetic mainstream news media, and, ultimately, they have been enabled by the American people--40% of whom are so ill-informed they still think Iraq was behind the 9/11 attacks a people who know and care more about baseball statistics and which drunken starlets are not wearing underwear than they know and care about the atrocities being committed every single day in our name by a government for which we need to take responsibility.

As loyal Americans, without regard to political partisanship as veterans, as teachers, as
religious leaders, as working men and women, as students, as professionals, as businesspeople, as
public servants, as retirees, as people of all ages, races, ethnic origins, sexual orientations,
and faiths we are here to say to the Bush administration, to the majority of Congress, and to the
mainstream media: 'You have violated your solemn responsibilities. You have undermined our
democracy, spat upon our Constitution, and engaged in outrageous, despicable acts. You have
brought our nation to a point of immorality, inhumanity, and illegality of immense, tragic,
unprecedented proportions.'

But we will live up to our responsibilities as citizens, as brothers and sisters of those who
have suffered as a result of the imperial bullying of the United States government, and as moral
actors who must take a stand: And we will, and must, mean it when we say 'We won't take it
anymore.' If we want principled, courageous elected officials, we need to be principled,
courageous, and tenacious ourselves. History has demonstrated that our elected officials are not
the leaders the leadership has to come from us. If we don't insist, if we don't persist, then we
are not living up to our responsibilities as citizens in a democracy and our responsibilities as
moral human beings. If we remain silent, we signal to Congress and the Bush administration and to candidates running for office and to the world that we support the status quo.

Silence is complicity. Only by standing up for what's right and never letting down can we say we
are doing our part. Our government, on the basis of a campaign we now know was entirely
fraudulent, attacked and militarily occupied a nation that posed no danger to the United States.
Our government, acting in our name, has caused immense, unjustified death and destruction. It all started five years ago, yet where have we, the American people, been? At this point, we are
responsible. We get together once in a while at demonstrations and complain about Bush and
Cheney, about Congress, and about the pathetic news media. We point fingers and yell a lot. Then most people politely go away until another demonstration a few months later.

How many people can honestly say they have spent as much time learning about and opposing the outrages of the Bush administration as they have spent watching sports or mindless television programs during the past five years? Escapist, time-sapping sports and insipid entertainment have indeed become the opiate of the masses. Why is this country so sound-asleep? Why do we abide what is happening to our nation, to our Constitution, to the cause of peace and international law and order? Why are we not doing all in our power to put an end to this madness? We should be in the streets regularly and students should be raising hell on our campuses. We should be making it clear in every way possible that apologies or convoluted, disingenuous explanations just don't cut it when presidential candidates and so many others voted to authorize George Bush and his neo-con buddies to send American men and women to attack and occupy Iraq.

Let's awaken, and wake up the country by committing here and now to do all each of us can to take our nation back. Let them hear us across the country, as we ask others to join us: 'We won't take it anymore!' I implore you: Draw a line. Figure out exactly where your own moral breaking point is. How much will you put up with before you say 'No more' and mean it?

I have drawn my line as a matter of simple personal morality: I cannot, and will not, support any
candidate who has voted to fund the atrocities in Iraq. I cannot, and will not, support any
candidate who will not commit to remove all US troops, as soon as possible, from Iraq. I cannot,
and will not, support any candidate who has supported legislation that takes us one step closer
to attacking Iran. I cannot, and will not, support any candidate who has not fought to stop the
kidnapping, disappearances, and torture being carried on in our name.

If we expect our nation's elected officials to take us seriously, let us send a powerful message
they cannot misunderstand. Let them know we really do have our moral breaking point. Let them know we have drawn a bright line. Let them know they cannot take our support for granted that, regardless of their party and regardless of other political considerations, they will not have our support if they cannot provide, and have not provided, principled leadership.

The people of this nation may have been far too quiet for five years, but let us pledge that we
won't let it go on one more day that we will do all we can to put an end to the illegalities, the
moral degradation, and the disintegration of our nation's reputation in the world.

Let us be unified in drawing the line in declaring that we do have a moral breaking point. Let us
insist, together, in supporting our troops and in gratitude for the freedoms for which our
veterans gave so much that we bring our troops home from Iraq , that we return our government to a constitutional democracy, and that we commit to honoring the fundamental principles of human rights.

In defense of our country, in defense of our Constitution, in defense of our shared values as
Americans and as moral human beings we declare today that we will fight in every way possible to stop the insanity, stop the continued military occupation of Iraq, and stop the moral depravity
reflected by the kidnapping, disappearing, and torture of people around the world.