A few people have asked via email why I haven't posted about the Senate's passage tonight of the Paulson plan, V2.217. The honest answer: I just don't care.

Sorry, I don't. I'm exhausted from this crap, and I like the Paulson plan less and less every time I see it. That is doubly true in its current incarnation loaded with laminated arrows, or whatever the most deranged clause is in the revenue bill to which it is attached. I still haven't gotten a satisfactory answer on his preoccupation with purchasing toxic crap versus emphasizing recapitalizing companies, selectively nationalizing, and rebuilding counterparty trust.

I wish I felt better about it, but I don't. Paulson's undoubtedly a bright guy, but he's been utterly tone-deaf in handling this, and he has come awfully close to losing me entirely. The only thing keeping me marginally optimistic is that so many people, myself included on alternate hours, are expecting an imminent systemic financial collapse that the fact that it hasn't happened yet is bleakly reassuring. Comforting thought, non?

Anyway, one nice thing about all this: I've been reading a lot more Kafka. No idea why, but wandering through old Franz's diaries has felt just about right of late.

6 July. 1916. A man lay in bed, seriously ill. The doctor sat at the little table had been pushed next to the bed and watched the sick man, who looked at him in return. 'No help," said the sick man, not as if he were asking, but as if he were answering a question. The doctor partly opened a large medical work lying on the edge of the little table, hurriedly glanced into it from afar, and, clapping the book shut, said, "Help is coming from Bregenz." When the sick man, with an effort, squinted his eyes, the doctor added,: "Bregenz in Vorarlberg."

"That is far away," the sick man said.

Once again, it's late and I'm tired, so I really shouldn't be let anywhere near where I can post stuff.

Other than insisting on using notional value to really hike up the Fear Factor (and to irritate me), the current Fortune has a required reading article on credit default swaps (CDS). Best characterized as an insurance market run by under-capitalized non-insurers for people who only want to pretend their debt is insured, the CDS business's vestiges are dangling out there waiting to explode, like abandoned ordinance.

Here's a snippet:

It doesn't help that CDS trading is a haphazard process. Most contracts are bought and sold over the phone or by instant message and settled manually. Settlement has been sloppy, confirms Jamie Cawley of IDX Capital, a firm that brokers trades between big banks. Pushed by New York Fed president Timothy Geithner, the players have been improving the process. But even as recently as a year ago, Cawley says, so many trades were sitting around unfulfilled that "there were $1 trillion worth of swaps that were unsettled among counterparties."

More here.

Some fairly staggering numbers in the September car sales data by brand. For the first time in recent memory, every single brand sold in the U.S. saw a decline in the month. Every one. The best performing brand, Audi, was still down 5% year-over-year.

And the worst performing brand? That has to be Hummer, with volumes off 54.8%, thus marking the sixth straight month of at least 50% sales volume declines at the hulking-stupid-gas-guzzler maker.

More here.

Investor Warren Buffett was on Charlie Rose last night for the hour. Watch it. (And Charlie and Warren were apparently both here in San Diego yesterday, and neither one called. I'm hurt!)

Thought-provoking quote from the opening paragraphs of a new Gillian Tett piece on "murky finance" over at the Financial Times.

A couple of years ago, a senior investment banker berated me for using the word “murky” to describe the world of structured finance. “It’s not opaque,” he said indignantly. “You can get plenty of information if you know where to look on a Bloomberg machine.”

“But what about those people who don’t have a Bloomberg machine?” I asked. Or a Reuters terminal, say.

The banker seemed momentarily stumped; apparently he had never felt the need before to wonder if the part of the population that is tragically Bloomberg-deprived might need to know about finance too. Then he eventually declared that I was missing the point. “People who need to know, know where to look for data,” he said. “It is not really murky at all.”

[FT]

Security through obscurity, as the techies like to say.

Some quick links to a few things of interest:

• Wachovia limits fund access by colleges, inciting fears (NY Times)
• Ireland is a hedge fund (Andrew Clavell)
• Stop Treating Wall Streeters Like Villains and Resolve This Crisis (Economix/McTeer)
• CBO analysis of of Senate financial rescue legislation, in particular the new FDIC changes (CBO)
• Understanding the TED spread (Econbrowser)

Peter Wallison at AEI has out an attempted take-down of economist Paul Krugman ("Fannie, Freddie and You", 7/14/2008), and pretty much anyone else who thinks Freddie and Fannie's role in this crisis during the 2005-2007 period was irrelevant compared to private actors. It's provocative stuff, and reasonably nuanced.

At the same time, Wallison introducesexpands a theory for why the two firms acted so destructively: While they were fighting for share, they were mostly trying to impress Democratic overseers post-account scandals. Call it the tail-wagging model of mortgage market implosion.

Why did the GSEs follow this disastrous course? One explanation--advanced by Lockhart--is that Fannie and Freddie were competing for market share with the private label securitizers and had to purchase substantial amounts of subprime mortgages in order to retain their position in a growing market. Fannie and Freddie's explanation is that they were the victims of excessively stringent HUD affordable housing goals. Neither of these explanations is plausible. For many years before 2004, Fannie and Freddie had followed relatively prudent investment strategies, even with respect to affordable housing, but they suddenly changed their approach in 2005. Freddie Mac's report, for example, shows that the percentage of mortgages in its portfolio with subprime characteristics rose rapidly after 2004. In addition, Freddie Mac's disclosures indicate that of the loans added to its portfolio of single-family loans between 2005 and 2007, 97 percent were interest-only mortgages, 85 percent were Alt-A, 72 percent were negative amortization loans, 67 percent had FICO scores lower than 620, and 68 percent had original loan-to-value ratios greater than 90 percent. It seems unlikely that competing for market share or complying with HUD regulations--which contained no enforcement mechanism other than disclosure and delay in approving requests for mission expansions--could be the reason for such an obviously destructive course.

Instead, it seems likely that the event responsible for the GSEs' change in direction and culture was the accounting scandal that each of them encountered in 2003 and 2004. In both cases, they lost their reputation as well-managed companies and began to encounter questions about their contribution to reducing mortgage rates and their safety and soundness. Serious observers questioned whether they should be allowed to continue to hold mortgages and MBS in their portfolios--by far their most profitable activity--and Senate Republicans moved a bill out of committee that would have prohibited this activity.

Under these circumstances, the need to manage their political risk became paramount, and this required them to prove to their supporters in Congress that they still served a useful purpose. In 2003, as noted above, Frank had cited an arrangement in which the GSEs' congressional benefits were linked to their investments in affordable housing. In this context, substantially increasing their support for affordable housing--through the purchase of the subprime loans permitted by HUD--seems a logical and even necessary tactic.

More here.

Two of my favorite semi-unusual places to watch for bank tells -- signs that a particular banking institution is struggling -- are Bankrate's 1-year CD page, and Mediaguide's weekly radio spending numbers. In the case of Bankrate, the indicator is if a new low-rated bank suddenly moves to the top of the rate charts after not having been there in recent history. A sudden need for semi-secure deposits doesn't have to mean anything, but it can.

Turning to radio, recall that daytime radio's audience is large and much more middle America, loosely speaking, than other media. As a result, it was the place to watch over the last three years to see the rise of HELOCs, deranged new subprime lenders and all the inventory of rotten exurb houses coming to market. All of these folks were relentless advertisers on radio.

Now, however, you'd be hard-pressed to find any of the above. Instead, radio advertising is almost entirely inhabited by chain restaurants, car repair, and insurance companies. Now and then, however, a bank pops in, and it's usually worth watching, as it was last week.

Check the following figure showing the 3101% increase in the number of Wachovia Bank ad plays week-over-week as the struggling bank went from 594 on the list of top advertisers to number 7. Wonder why that might have been ....

Nice Bloomberg chart of growth in U.S. real estate lending among major U.S. banks. You get a pretty clear idea of how badly timed Wachovia's buy of lender Golden West turned out to be, and how big of an inflection point the event was in Wachovia's declining fortunes.

[via Bloomberg]

Today's quiz question: Only one OECD country does not have deposit insurance for individual accounts. The first person to name it in the comment section below gets the thrill of having me say "You were first".

And for double-bonus points and related huzzahs, name the country that was until recently the only other OECD member without deposit insurance.

[Update] We have a winner. Simon Hallett got it right that New Zealand is the only OECD country left without deposit insurance. I'm still waiting for someone to get the runner-up award: Which country was the second-last?

Buttercup: We'll never succeed. We may as well die here.
Westley: No, no. We have already succeeded. I mean, what are the three terrors of the Fire Swamp? One, the flame spurt - no problem. There's a popping sound preceding each; we can avoid that. Two, the lightning sand, which you were clever enough to discover what that looks like, so in the future we can avoid that too.
Buttercup: Westley, what about the R.O.U.S.'s?
Westley: Rodents Of Unusual Size? I don't think they exist.
[Immediately, an R.O.U.S. attacks him]

-- The Princess Bride  (1987)

I'm sure it's just me, and you serious people feel free to skip over this as it's a snapped-synapse aside, but every time I say "CDS's" I hear "ROUS's". While the former abbreviation refers to "credit default swaps", the latter, of course, is the abbreviation used in the movie The Princess Bride for the pesky Rodents of Unusual Size in the fire swamp.

The metaphor works for me, however, in more ways than the merely sonic. My belief (pace the recent Fortune article) is default swaps remain the dark matter of the current crisis. And just when we think the systemic risk is somewhat reduced (whatever that means when you're on a precipice), having wandered through the subprime swamp, it will be ROUS's, I mean CDS's, that pop up and savagely attack.

Almost two months ago I wrote a post here that frugality is the new black. I see that fellow TED-ster Juan Enriquez has an OpEd in today's Boston Globe saying something very similar -- he thinks we need to talk a lot more about "austerity" on our way to a major economic restructuring in the U.S. It is highly persuasive.

Many politicians decided reelection depended on cutting taxes and offering more benefits. Increase Medicare, postpone Social Security reform, hire more bureaucrats, and pay for a two-front war. Debt grew to pay for this party. These were not true tax cuts, just postponed debt; now we owe more and the bill has come due with interest.

Complicating this crisis is US economic hegemony. There were few places to park a lot of money. Despite the euro, European policies on debts and deficits are not much to brag about. So foreigners have gorged on US debt. The United States continues importing more than it exports. Middle Easterners and Asians who save and invest bought dollars for decades, but some of this money is now fleeing. The dollar has dropped sharply. Gold and oil have skyrocketed. In financial crises, huge pools of capital cross borders very quickly; a few can make a great deal of money shorting the country's currency.

The United States requires a massive restructuring to address its debt, cutting back on its borrowing, spending, and wars. The bailout package is essential to keep the credit markets open. But absent sentences that include the word austerity all the bailout will accomplish is a temporary postponement. Bailout and stimulus are a stopgap.

A solution requires the country to begin to spend what it earns, reduce its mountainous debt, and address massive liabilities, restructure Social Security, pension deficits, military, and Medicare. No wonder politicians would rather spend more of your money now rather than address these problems. Because we have been spending 5 to 7 percent more each year than we earn, a forced restructuring, triggered by a currency collapse, would have the same effect on wages and purchasing power that the housing collapse had on housing prices. So let's learn from our Latin and Asian friends and act before it is too late.

More here.

Great slide deck on making sense of the mortgage meltdown from a seminar today at the Milken Institute in Los Angeles. They always have the best and most data-rich slides, bar none. Required viewing, even if the page images via Slideshare are too small. Press the easel button in the viewer to blow it to full screen, or download the original.

Just to slide-dive for a moment, here is one page from the deck that really caught my eye. Truly remarkable.

Quote of the day goes to my friends at CNBC who have a story up about consumers struggling to get credit. It contains the following quote of Jim Bianco dismissing the current Paulson plan as being unhealthily similar to a rejected proposal Paulson made last year:

"I didn't think that bill they were voting on yesterday was going to do much good for anything. Yes, it would have given a psychological boost--the problem is the banking system is too small. The banking system needs capital."

"It would have been a lot like all the other Paulson plans. None of them have worked so far. This is just the sieve bailout, version 2008, which failed last year to get through." [Emphasis mine]

[via CNBC]

Ah, the sieve (nee SIV) bailout. I remember it well -- it just can't hold onto anything. Even though the above was phonetic and accidental, I wish I had thought of first.

The nice thing about the hedge fund industry? Left alone in a room chasing returns long enough, it will consume itself and we will have one less over-levered bunch of crazies to worry about in this mass de-levering economy.

Today's evidence comes from a piece in the FT highlighting the various cannibalistic and generally sociopathic things hedge funds are doing to take advantage of each other's problems.

• Funds are mercilessly shorting the Goldman Sachs MVP list, an index of the most widely-held stocks among hedge funds. With hedgies selling  frantically to meet redemptions, it is a way to prey on one another.
• They are watching for other funds winding down, and shorting the crap out of their holdings, hoping to thereby screw up other funds, thus causing more selling.
• It is so bad among widely-held hedge fund stocks that David Einhorn of Greenlight Capital has had a 17% down year, the worst in his fund's history, despite nailing the Lehman short trade.

As I said, the solution is to leave 'em all alone in a locked room for a while. Problem solved.

A quick update on my Wells Fargo post from yesterday. Looks like Peter Eavis at the WSJ is pursuing a similar line, with a nervous piece in Friday's paper about "safe haven" banks Wells Fargo and U.S. Bancorp.

Does he advance the story? A little, but not a whole bunch. This will, however, bring more scrutiny to the two banks, in particular to Wells' borrowing costs and increasing use of (expensive) short-term paper.

More here.