After today's debacle on the capital markets -- in a too-fine irony, the S&P 500 lost roughly the same amount in aggregate market capitalization today as the Paulson plan's gross cost -- I thought folks might enjoy an update on the worst-performing Dow returns presidential sweepstakes.

Here is the latest (live) rankings for the five worst financially-performing presidencies in U.S. history:

As I write this early Tuesday morning, the U.S. pre-market futures are all currently tipping gains tomorrow morning, which will complicate life. Are they trading higher because they believe that Congress will pass some sort of TARP-like bill? If so, does having them trade higher now mean the passage of such a bill is less likely, as Congressional representatives become more sanguine about yesterday's losses? If so, should they be trading lower? You see -- it makes your head hurt.

A scathing comment over on Nouriel Roubini's RGE Monitor blog that is sure to provoke some strong feelings:

It's amazing how many people, including some on this blog, are totally misreading the situation.

The House Republicans fear socialism, even this "socialism for the rich", more than collapse of the economy. They are mostly well-trained rabble, pious schoolchildren, who sincerely believe the free-market ideology that led to this disaster in the first place. They have been more than happy with handouts to the rich for decades! But their deep fear of anything non-capitalist has brought them to total absurdity: they want bankrupt businesses to buy government insurance and to escape capital gains tax, even though these businesses obviously have no revenue!

Do any of them understand that the day-to-day operations of the US government and military are totally in the hands of foreign rival creditors? We can and should hate Paulson but at least that lying miser understands the stakes for US capitalism and world power. The "no" vote is a sign of deterioration not "victory for the people."

Do these small minded rightist fools understand BWII, the international flow of funds, the organization of world trade, etc.? Do they understand the link between the military, petrodollars, bonds, and export-led growth? OF COURSE NOT. They just want their small minded and frankly shopkeeper fascist fantasy that they too can one day get rich.

But US capitalism has happily cultivated these Panglossian delusions for decades, if not two centuries, because it has helped them repress various domestic untermenschen. So the US deserves such self-destructive stupidity. It is the economic equivalent of falling on your own sword.

Okay, I'll confess to an abiding weakness for this sort of outburst now and then.

Here is a quick cut at geocoding Monday's House vote on the TARP plan. The following color-coded map of the U.S. shows each state's relative "Nay-isness" or "Yea-ishness", with pure white meaning the state's representatives voted all "Nay", while pure gold means said state came down all "Yea".

There is also a tab on the chart for Dem/Rep. The more blue a state is the higher the concentration of House Democrats, and the more white then the higher the concentration of Republicans. (And no, I don't get to pick the colors.)

[Update] I initially had the calculations correct here, but the color scale backwards. It's now fixed. Late night geocoding ....

For a literate and interesting take on why taking a little more time to work out a bailout package isn't disastrous, read this Michael Lewitt column. An excerpt:

The problem with trying to legislate in the middle of a revolution is that you aren't sure whether you are governing the world that is being destroyed or the one that is coming into being. There can be little question that the Wall Street that existed at the beginning of this year is no longer the industry that Congress is seeking to rescue from its own excesses. The financial world has been permanently altered by the collapse of the debt bubble that inexorably built up over the past three decades. Now Congress is trying to design a rescue plan for a world whose shape is highly contingent and unstable. Such an undertaking requires more than two weeks of work. Conventional thinking tells us that the government must do something to stabilize the markets immediately, and that doing something is better than doing nothing. Once again, conventional thinking is wrong. Congress would be much better advised to take the extra few days or week it would take to structure a plan that the world is going to have to live with for a very long time. As we were completing this newsletter, the House of Representatives voted down the emergency package and the financial markets are panicking. Such panic is unwarranted. The world should take a deep breath and consider whether defeat of a deeply flawed bill should be treated as a catastrophe or a rallying cry to develop a better plan that addressed the underlying issues that need to be fixed.

HCM has been warning for years that all of the king's horses and all of the king's men wouldn't be able to put this mess back together again. It is now time for America to take the pain and figure out how to move forward. Any plan that is adopted must include a sufficient dose of strong medicine to prevent the culture of self-delusion and moral hazard that created the current crisis from further perpetuating itself. The purpose of the Paulson Plan has to be to rebuild confidence in the financial system. The manner in which the plan was presented and debated rendered that more difficult but hopefully not impossible. For any plan that fails to bring confidence back to the market will not work.

And from further on, here is Lewett's plan principles:

The HCM Bailout Plan

• The government should announce that it will effectively stand behind the U.S. financial system against failure through some sort of guarantee or insurance program. The government has already done this with respect to money market assets.
• Mark-to-market accounting for financial institutions should be suspended for an indefinite period. Since nobody knows what these assets are worth, we should not drive the system into insolvency trying to place a value on assets that nobody is willing to purchase at the current time.
• The Federal Reserve should reduce the overnight interest rate by 75 basis points immediately. This will allow financial institutions to begin to earn more on their assets, which will begin the process of rebuilding their balance sheets.
• The Securities and Exchange Commission should announce the formation of a study group that will report back no later than December 31, 2008 on a comprehensive regime for regulating the credit default swap market.

I'm sure this won't please everyone either -- the hunt for a perfect plan is a waste, especially in the face of a mob mentality -- but it's worth a read.

So here's where we are at:

1. Almost two weeks ago the market soared when late on a Thursday word broke that Congress would soon see a U.S. plan to help solidify the financial system. It continue to climb the next day.
2. The market then fell on the first three days of the following week as it became obvious that doing such a plan was far from a lock, and as Congress squabbled and fought over it.
3. The market then climbed for two days on signs that Congress was behind the bill, that it was taking it seriously, and that it would get completed over the weekend.
4. The market tanked yesterday, as the House voted down the current plan, saying a host of things, many of which were petty, silly and personal.
5. The market is soaring again today on news that plan isn't dead yet, and that some in Congress are saying a "bill get done".
6. We're back to hearing that something may come together by the weekend.

Congress needs to put or shut up (and heaven help us if it's the latter),and Treasury's Paulson needs to become less of a liability. First, these oscillations are doing even more damage to equity markets, with investors withdrawing more capital in the face of record volatility. Similarly, it keeps credit markets locked, as no-one knows what to expect so cash is kept on lenders' balance sheets, not given out. And I'm not just blaming Congress here, but a tone-deaf Hank Paulson who misplayed his hand badly here.

At the same time, ass-hat politicians misinterpret these moves. Yesterday the world didn't end, as some had thought Paulson had suggested, so they maintained a world-weary sang froid about the whole thing, arguing that the markets should be left to sort themselves out. Similarly, today's climb in the markets has these same people saying, Look, the markets are already on the rise, ignoring that the only reason markets are climbing is because they think there is a chance a plan will be passed.

So now we're back to where we were a week ago, with hopes rising that by next weekend we will have some sort of plan that can make it through the U.S. House of Representatives. If it feels to people a little like Lucy, Charlie Brown, and the football, that's because it should. Too bad we're all the football.

A few quick links to items of interest today:

• Blast from the past: Fannie Mae eases credit to aid mortgage lending (NY Times/1999)
• The World Is Curved: Hidden Dangers to the Global Economy (Amazon)
• Op-ed: Beijing slowdown is going faster and further than its leaders expected (Peterson/WSJ)
• Time for central bankers to take Spanish lessons (FT)
• Should Paulson resign? How his misreading of Congress helped get us here (IA)
• The end-goal of any bailout or government takeover: Getting unsecured lenders to lend again (Bronte)
• Stochastic cascades, credit contagions, and portfolio losses (JEB)
• An inside look at current money market behavior: Worst in 20 years (Across the Curve)
• Current U.S. real estate price declines by city: Phoenix and Las Vegas still lead the way (CR)
• Canadian prime minister caught in plagiarism mini-scandal (Globe & Mail)

A snapshot of exchange rate trends over the last 90-days among major currencies to the U.S. dollar. A bit of vindication underway for the Yen given the similarity of the credit crisis to Japan's experience more than a decade ago.

Even more links that keep flooding into my inbox:

• Administration, Congress Completely Fail Communications Test (Advertising Age)
• Corporate bonds have worst month since 1980: "the only thing you know is that if you don't buy anymore, you can't get hurt anymore" (Bloomberg)
• Libor rises most on record: Anyone not funded through 2008 is essentially toast (Bloomberg)
• Bartiromo vs Burnett at CNBC (Vanity Fair)
• Failed WaMu still leads the list of top yielding one-year CDs, but one-star Corus is close behind (Bankrate)
• Interesting Cramer apology on Wacovia (YouTube)
• Cringe-inducing instant period piece from 2006, the first episode of Wall Street Warriors (Hulu)
• Good FRB Atlanta speech text on why a working credit market matters (FRB Atlanta)

I've long argued that part of the reason why things have gotten to this point is that we don't have enough smaller banking crises, so we just have the odd epochal one instead. It's much the same point as is made in fire ecology: Regular smaller fires are both safer and less ecosystem-damaging than periodic conflagrations.

Check the following figure to see how dangerously quiet recent banking history has been:

More here and here.

Good description in a recent CEPS report of how the U.S., via its AIG bailout, temporarily saved the over-leveraged European banking system.

But the AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe. This explains why AIG’s problems had sent shock waves through the share prices of European banks. For the time being the US Treasury has saved, inter alia, the European banking system, but given that AIG is to be liquidated European banks now have to scramble to find other ways of obtaining the ‘regulatory capital relief’ they appear to need urgently.

Get all that? It's less well known than it should be, but Europeans banks have long been gaming their regulators, having far less than the actual capital reserves that they needed given their balance sheets. AIG filled the hole, selling credit defaults swaps to European banks via which they could tell regulators that they were adequately covered -- at triple-A, no less -- while carrying less cash than required.

I'm not suggesting that this was an outright scam. Instead, it was just another example of how an over-connected financial market with too little slack ended up being under-collateralized and far riskier than any of its participants expected. And it helped that we had been living through a period of relative crisis quiet, boosting the illusion that all was eternally well.

The upshot, of course, is that the European banks are generally more levered than their U.S. counterparts. With that coming into plain view in the absence of the regulatory arbitrage cover provided by AIG's swaps, that helps explain what we are now seeing on the Continent at present.

More here.

Interesting to see that so many companies with nothing to do with Wall Street, banking, or trading all got off their asses and began shouting at Congress today. Stories are everywhere about people like Microsoft's Steve Ballmer finally realizing that Congress wasn't going to get the urgency of the current credit market problems without prodding from companies perceived to well away from the financial nexus.

It's classic example of game theory and externalities. Keep your own credibility by hoping a squeaker vote goes thru, only to find out that the other side was so noisy and strident that your message -- that this is a big issue affecting far more people than anyone seemingly understands -- didn't make it through and the vote failed by a tiny amount. A big, big miscalculation by companies across America.