billmon: Chocolate Covered Cotton

[RedEarth]

I remember when billmon posted at Kos years ago and also when he had his blog Whiskey Bar. It's good to see him back posting at Kos on a somewhat regular basis since he is such a creative writer.

.here's a wiki page about billmon. http://en.wikipedia.org/wiki/Billmon

....here is his latest post at Kos........

Chocolate Covered Cotton
by billmon
Wed Feb 18, 2009 at 10:09:39 PM PST

By providing the financing the private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this crisis. Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets.

Tim Geithner
Statement to the Senate Banking Committee
February 10, 2009

billmon's diary :: ::
Milo shuddered violently. "I can’t watch it," he cried, turning away in anguish. "I just can’t sit here and watch while those mess halls let my syndicate die." He gnashed his teeth and shook his head with bitter woe and resentment. "If they had any loyalty, they would buy my cotton till it hurts so that they can keep on buying my cotton till it hurts them some more. They would build big fires and burn up their underwear and summer uniforms just to create bigger demand. But they won’t do a thing. Yossarian, try eating the rest of this chocolate-covered cotton for me. Maybe it will taste delicious now."

Yossarian pushed his hand away. "Give up, Milo. People can’t eat cotton."

Milo’s face narrowed cunningly. "It isn’t really cotton," he coaxed. "I was joking. It’s really cotton candy, delicious cotton candy. Try it and see."

Joseph Heller
Catch-22
1961

To understand the dilemma facing Mr. Geithner and the Obama Administration, you could do a lot worse than read Catch-22 (something I have also found to be true of life in general.) Because unfortunately, Heller’s chocolate-covered cotton metaphor rather precisely describes the estimated $2 or $3 trillion in "legacy" assets – to use the administration’s preferred euphemism – clogging the arteries of the global financial system.

Except that while chocolate-covered cotton at least has some novelty value, most -- if not all -- of Big Shitpile (to use Atrios’s favorite euphemism, and mine) has none.

This, in turn, means it would literally be easier to square a circle, or maybe invent a perpetual motion machine, than to devise a plan that a.) lifts Big Shitpile off the balance sheets of the banks, while at the same time leaving them b.) solvent and c.) in the hands of private investors, without d.) constituting a flat-out transfer of wealth from taxpayers to bank shareholders.

These are simply not realistic policy objectives – in fact, they are mutually exclusive, as even Alan Greenspan now seems prepared to admit.

So when Geithner talks about harnessing the power of private capital to "start" a market for Big Shitpile – by coaxing hedge funds and other bottom feeders into offering bids that banks teetering on the edge of insolvency just might be willing to accept – he’s not fooling himself, although he may be trying to fool us. I think he knows how implausible it is, just as Milo actually understood the truth about his cotton.

"It’s indigestible, Yossarian emphasized. "It will make them sick, don’t you understand? Why don’t you try living on it yourself if you don’t believe me?"

"I did try," admitted Milo gloomily. "And it made me sick."

But to understand why Big Shitpile is just that – with hardly any ponies hidden at the bottom for eager prospectors to dig up – it worth taking a look at how the stinking heap was created in the first place. As it turns out, I’ve been spending much of my professional time lately studying what happened in the credit markets during the bubble years, so I think I have a slightly better grasp than I did at the time, when I only thought it would lead to a nasty financial crisis, as opposed to Great Depression II.

The broad story is well known, even to the cable TV pinheads: Housing Bubble + Subprime Mortgage Lending + Derivatives = Armageddon. (The numerical illiterates at Fox News would probably add ACORN to that equation.) But even now I’m not sure if many people fully understand just how insanely reckless the carnival was, to the point where future historians will speak of "structured finance" in much the same the way we talk about the bubonic plague.

The carriers (fleas and rats) of this particular epidemic were the bright young Wall Street things who invented the concept of securitized lending – essentially, the repackaging of mortgages, corporate loans, credit card receivables and any other obligations that could quasi-credibly be described as "assets" into allegedly liquid securities that could then be sold to suckers, um, investors the world over.

The deadly bacillus wasn’t securitization per se – Fannie Mae and Freddie Mac, as well as many private lenders, managed to package and sell mortgage-backed securities for many years without destroying either the world or themselves.


.....much more.......

http://www.dailykos.com/story/2009/2/19/05524/5446/499/699191

[FSogol]

1. Catch 22! n/t

[girl gone mad]

2. I hope people take the time to read all of it.

It's excellent.

I thought of putting it here, but couldn't decide which paragraphs to use, it's all so good.

[Yavin4]

3. In The Movie, Milo Was Played by The Actor, Jon Voight

Voight is now a rabid right winger.

[pscot]

4. And the beauty part

is that everybody has a share.