Commentary
My deck chair on the Titanic
By Jerry Mazza
Online Journal Associate Editor


Nov 17, 2008, 00:23

Well, actually, it’s my adjustable desk chair in my den. And I’m not staring at the sea. I’m looking at my sea blue computer screen whose bright light is beginning to blind me. And I’ve got a major storm to read about: Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis; Too Much, Too Soon for the U.S. Bond Market.

It’s a white paper by Martin Weiss, Ph.D., and Michael Larson, interest rate and real estate analyst for Weiss Research, Inc. Their study was submitted to the United States Congress Senate Banking Committee and House Financial Services Committee on September 25, corrected October 1. I wonder if anyone ever took at look at this brilliant piece.

For starters, their message is that the Federal Deposit Insurance Corporation (FDIC) now claims to be covering 117 institutions with $78 billion in assets. The problem (part of it is), according to broader analysis by Messrs. Weiss and Larson is that there are 1,479 member banks and 158 thrifts with assets of $3.6 trillion, 36 times the FDIC number of institutions at risk of failure. So we’re going to run a bit short in bailout funds, worse comes to worse.

Their white paper presents an alternate (perhaps more realistic) set of numbers for debt and funds to bail it out. In fact, the sheer volume of numbers flooding in was causing me to blink. All I could do was ask how did we sail into the middle of this ocean of debt, supposedly with the strongest, Titanic-like ship of state ever, regarding Great Depression icebergs? I mean, hadn’t we compartmentalized the hull so that if we got hit in one place it wouldn’t take the whole ship down? But then didn’t we remove all regulation, piece by piece?

Thus history tells us the Titanic steel was not of the highest quality, compartments gave and the iceberg gashed through a significant length of the hull, flooding it, and sending the Greatest Ship Ever, the Empire’s Titanic to the bottom in a few hours as the Class War unrolled on top, leaving the Rich and Richer in the lifeboats, including a few men who didn’t believe in women and children first, and the lower deck classes banging on the portholes as the fishes swelled up to meet, great and eat them. Whatever.

Maybe I have to stop looking at the tsunamis of the Dow Jones on the screen, swooshing down then up, beguiling investors, sending sell and buy screams from them to brokers around the world; people’s savings, houses, 401(k)s, pensions, liquid screen TVs et al floating away, so much scrap on the tide. Or at least that’s what Weiss and Larson can see. A day later, the market might rally. Or it might tank. Hope springs eternal and then reverses itself. Just the way greed alternates with fear. Hold, sell, sell, hold.

You don’t believe me? Please read Ph.D. Martin Weiss’s 25-page micro/macro analysis, free of charge, linked above. This man is a friend to investors, savers, everyday people, a whistleblower in the pilothouse. Still, I turn to Tricycle’s Daily Dharma, sent to me by an old friend, an art director I ducked the slings and arrows of advertising with many days. Today’s wisdom is titled, “Settle Your Day.”

It reads, “It is not merely enthusiasm that erodes when practice declines. Your body and mind can go out of tune. You are no longer a vessel of insight. The cardinal can sing; the wind can move the ironwood trees delicately; a child can ask a wise question -- and where is your center? How can you respond? Time to put yourself back in tune to be ready for experiences that make life fulfilling.

 “Take up the advice for beginners. Put your zazen pad somewhere between your bathroom and your kitchen. Sit down there in the morning after you use the bathroom and before you cook breakfast. You are sitting with everyone in the world. If you sit only briefly, you will have at least settled your day.” Words by Robert Aitken, Encouraging Words, from Everyday Mind, edited by Jean Smith, a Tricycle book.

Okay now, center yourself and get in touch with the cardinal. Then, read the part from Weiss’s white paper about the $14.8 trillion in residential and commercial mortgages being only half the problem. There’s another $20.4 trillion in consumer and corporate debt in the US. And then there are the bankrupt local governments, with $2.7 trillion in securities outstanding with bond insurance on the brink of collapse. I mean this $700 billion bailout is a drop in the bucket.

But hold on to your zazen seat. Sit with everyone in the world. They like you are also thinking about derivatives, trying to understand them. They were designed to reduce risk, but it’s their sheer volume and usage that have reached extreme levels. They have become speculative bets with greatly increased systemic risk to financial global markets. Regulators know little about them. They are probably at the root of the panic that spread through the global banking system in the wake of the Lehman Brothers bankruptcy on September 15.

In fact, Congress should ward off renewed waves of global panic, so any bailout must also factor in the following condition: the national (face value) amount of derivatives held by US commercial banks is estimated by Weiss and Larson at $180 trillion. Eek.

According to their white paper, JPMorgan Chase holds $90 trillion, 49.9 percent of all derivatives held by US commercial banks. That is a concentration of risk unheard of in US history. Thus, any bailout is going to benefit them more than any financial institution. Also, including what we have already seen in the wake of Bear Stearns and Lehman Bros failures, currently credit exposure to derivatives is $465 billion, 159 percent more than a year ago. The debt is flooding over the rails, the decks themselves. I’m getting soaked, so are you. Where’s my zazen seat. Hear me, cardinal, I’m tuned in. Trouble is afoot.

HSBC is holding $7.21 worth of risk per dollar of capital. That’s seven times more risk per dollar than it holds. That ratio exceeds the dollar ratios of Morgan, Citibank, Bank of America, and Wachovia though their ratios follow closely. Weiss and Larson believe that exposure more than a quarter per dollar of capital (a quarter per dollar!) is excessive. Contemplate that. Yet no government agency is contemplating same -- or seems to be contemplating at all, just knee-jerking. Give them zazen seats; think it all out. Paraphrasing Weiss, remove the cancerous debts from the economic body. Don’t leave them to fester and spread.

Additionally, the Security Investor Protection Corporation (SIPC)’s safety net for brokerage firm customers has two flaws. It has no coverage for market losses as a result of brokerage firm failure. And member assessments for brokerage firm failure have been laughably small, charges like $150 per member firm. The safety net of the SIPC insurance policyholder is full of holes, large holes.

The amount spent to protect policyholders is less than a brokerage firm’s amount spent on paper clips. On and on and on it goes: holes, loopholes, logic holes, rabbit holes, Titanic holes, gashes to drive trains through. There is not adequate protection for individual savers, investors, or policyholders. Each form of safety requires more funding. Bottom line: have no illusions about a $700 billion bailout being enough.

Twirp, twirp. Is that the cardinal’s call. Am I centered in truth? More to read? It’s no illusion that the market for US government securities will absorb additional burden-funding, i.e., massive government bailouts, hopefully without experiencing traumatic consequences. The bill is approaching $1 trillion says the Office of Management and Budget (OMB).

Fannie Mae and Freddie Mac……..$200 billion

AIG Insurance………………………………...85 billion

Bailout proposal…………………………...700 billion

­­­­­­­­­­­­­­­­­­­­­­­Total…………………………………………….$975 billion

This can double or triple the fed deficit in a very short time. It can drive up borrowing costs for the Treasury, and also for other kinds of bonds and for millions of mortgage seekers looking for that home credit or other credit, since Treasury yields are benchmarks against which most borrowing is based.

So deep, down deep, we go, diving on this wrecked ship of state, this lost Empire. And where’s my deck chair, my zazen seat. I have to center myself. Get in tune. Hear the cardinal sing. But I hear the US dollar collapsing. It’s an odd, frightening sound.  So what to do, oh wise bird, Martin Weiss?

1. Avoid a sharp rise in interest rates which could collapse the US dollar. Congress must limit funds allocated to any bailout.

2. Any agency that buys up bad private-sector debts should pay strictly fair market value for debts, plus a big discount reflecting the debt’s poor liquidity.

3. Congress must disclose all this crap to the public. It can’t cover it up or the derivative collapse.

4. Prioritize protection of government credit and ensure the stability of the US dollar. The private sector must handle any further spread of debt mostly without government financial assistance. Get it, fellas? Follow the money. Stay centered. Hear the cardinal. Enjoy life again. Sit with all people. This is a moral and financial imperative.

Between bathroom and kitchen, sitting zazen on a deck chair on the Titanic, I realize unless Congress greatly tempers its approach, it could produce the worst of both worlds: failure to resolve the current debt crisis plus create a new set of crises that will spread panic and prolong the pain. Much samsara. Sayonara.

And this for savers and investors

Don’t overestimate what Washington can do. Lower your expectations. Continue to save and invest prudently, seeking the safest havens for money, banks with B+ or better financial ratings, Treasury bills, money market fund investing in short-term US Treasury securities or their equivalent.

Be wary of low-rated banks, S&Ls and risky insurers and look for stronger institutions. Weiss Research recommends that consumers take advantage of their free financial strength ratings offers at www.TheStreet.com under Portfolio tools. Do it. Settle your day. Return to peace. Hear the cardinal. Balance all things. Sit with all people for a fulfilling life.