Because some men aren't looking for anything logical, like money. They can't be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.

    -- Dark Knight (2008)

Take your third deep breath in ten days. Because we stand at a precipice in U.S. markets. Congress is playing political brinkmanship with the biggest financial decision of our generation. We just had the largest bank failure in U.S. history. Credit spreads have widened to the point of gibbering meaninglessness. And some people are still nattering about what might be the perfect variant of the Paulson bailout plan.

Listen. There is no perfect. As Voltaire wrote, "Le mieux est l'ennemi du bien". The perfect is the enemy of the good. No plan is perfect; no plan will be static. But standing on the precipice and inching every closer to the abyss is stupid and suicidal. We need to ease the pressure in the system by moving to allow losses to be written off over longer periods, by getting bad paper out of institutions so counterparty trading can happen, and perhaps by some easing as well. Take preferred shares along the way, absolutely, but credit markets can't be left like this for much longer.

Some people don't care. A few just haven't thought it through, but others are so wrapped in their anti-Wall Street vendettas, their ideological purity and their Calvinist moralizing that they would rather see everything come down around their ears -- look at all the shiny creative destruction! -- than worry that it's their economy too. Fuck them. While some men want to watch the world burn, we don't need to stand idly by while they set the fire.

I shouldn't be posting things tonight as I'm too tired and frustrated, but in case you can't tell, I've had it.

John Paulson of Paulson & Co. endorses Treasury action, but with preferred share and warrant coverage for we taxpayers. Agreed, of course, but I still think we end up with a mix of weapons: taking individual items off balance sheets, plus senior equity where possible/desirable. People who believe in either/or don't belong in the real world.

And so my ongoing question: What's the hold-up?

This mechanism -- purchases of senior preferred stock with warrants in troubled institutions -- addresses the problems with the Treasury plan. The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.

The institutions continue to function, their cost of funding will decline as equity capital increases, and innocent third parties like bank depositors, broker/dealer clients and insurance-policy holders are all protected. The only difference is that potential losses are kept with the shareholders where they belong.

The Treasury plan would also entail larger outlays than the Preferred plan. By allowing all banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don't have a private alternative. But under a Preferred plan, only banks that don't have a private alternative will be given federal assistance. This would reduce the outlay otherwise required to solve the crisis.

Few people familiar with the issues deny that Treasury action is needed to stabilize the financial markets. However, the question is who should bear the cost?

Under the Treasury plan the taxpayer pays the price. Under a Preferred plan, the shareholders of the firms who created the problems bear the first loss.

[via WSJ]

The betting line on a financial markets bailout deal today is improving, and the market is responding accordingly. But John McCain is not coming out of this smelling of roses (nor, to some degree, is Obama, if only because he seemed like he didn't know what to do with McCain's aggression). Here is Senator Reid (D.) from moment ago:

In late morning statement, Democratic Sen. Reid says "fair to say we're making progress" on bailout bill. In shot at Sen. McCain, Sen. Reid says "insertion of presidential politics has not been helpful."

[via WSJ]

When I was a child I had a fever.
My hands felt just like two balloons.
Now I got that feeling once again.
I cant explain, you would not understand.
This is not how I am.
I have become comfortably numb.

        -- "Comfortably Numb", Pink Floyd

If I had told you a year ago that the largest bank in U.S. history to fail would do so yesterday, how would you think the market would respond today? And by way of more facts, it would essentially be a bankruptcy, and while people knew things were bad, the actual event would happen so fast that the company's CEO would apparently be on an airplane between Seattle in New York as the FDIC shit came down.

Right. Pretty much no reaction at all to the Washington Mutual bankruptcy last night. The market is officially comfortably numb, which doesn't make things an iota less dangerous.

The other night on CNBC my friend Barry Ritholtz told a good story. He said that for the first time in credit market history loans between 2002 and 2006 were made on the basis of the ability to cut up and syndicate the debt, as opposed to lenders' ability to pay.

It's a good story. But is it true? No, other than in the most superficial sense. I'm assuming Barry was really saying that it was the first time loans were made because there was an external appetite for the loans as byproducts, instead of lender concern about prudently putting out money that could be paid off. (If instead Barry meant that it was the first time in history loans had been syndicated, then that's a trivial point, like saying this was the first time Countrywide had failed.)

So, was it the first time that credit market push created a problem in debt markets? Of course not. Almost every banking crisis back almost 200 years has had much of its roots in the sudden explosion of credit availability, without regard for people's ability to likely pay off the loan in any reasonable risk-adjusted scenario.

Look at the crisis in the 1870s. It was driven almost entirely by a flood of European capital into U.S. banks without regard for the wild and uneconomic overbuilding of railroads that ensued. Lenders were under pressure from European institutions to put the money out, and so they put more money out.

Sound familiar? It should, because it ended very similarly to the current crisis.

More here from Barry.

Not sure if I've mentioned this book here before, and it's admittedly for the empirically minded, but the best book on the current crisis remains Riccardo Rebonato's excellent Plight of the Fortune-tellers. Great reading -- from before things melted down -- on how risk models could go awry and hurt us all, as well as about a path forward.

My quote du jour is solipsistic again. Here's me from earlier today on Twitter:

Carping at how Wall Street-ers will benefit from the proposed credit market bailout is like rodents in a sealed box arguing that poking new air holes will unduly benefit fat mice.