Week in Review

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Week in Review

03/22/2008

For the week 3/17-3/21

[Posted 7:00 AM ET]

Send in the Fed

Note: Friends, this is the longest review in my nine years (so
think twice before printing it out) but I think you’d agree it was a
titanic week; from bailouts and wipeouts, to Bernanke and Bear,
to Fannie and Freddie, and even Obama, it was a week that
engendered a ton of discussion on serious issues. As I’m fond of
saying this column is also a running history and I’m not into
mere sound bites. I have poured over the material and while
some of the opinions expressed are lengthy, there should be no
mistaking the context.

Economist Irwin Stelzer / London Times Sunday, March 16,
prior to word of JP Morgan Chase’s acquisition of Bear Stearns
for $2 a share.

“(The) Fed’s critics are saying that the enemy is no longer
liquidity, but the threat of insolvency. We have already had
billions in write-offs, and hundreds of billions more of such
‘marking to market’ is coming. So steep will these writedowns
be that the banks will find they are bust – what they owe to
depositors and creditors exceeds the value of their shriveled
assets. Unless they can get more capital, say the doom-mongers,
they will have to shut their tellers’ windows.

“So far, sovereign wealth funds have put up that capital, but even
they do not have deep enough pockets to shore up the entire
American banking system. Faced with a systemic collapse of the
banking system, the government can do one of two things. It can
flood the economy with cash, driving up inflation and the
nominal value of the assets underlying bank loans. Lenders
would get repaid, but in depreciated dollars. Fear of just such a
devaluation has driven up gold to $1,000 an ounce, and the dollar
to record lows.

“Or the government can nationalize the debt owed to the banks.
Taxpayers’ funds would be conscripted, and pumped into failing
financial institutions to prevent their collapse. Sound like
Northern Rock? Or something like what the American
government did when Continental Illinois, the nation’s seventh-
largest bank, hit the rocks in 1984?....

“If it looks like a bailout, and sounds like a bailout, it is a bailout.
But ‘capitalism without failure is like religion without sin. It
doesn’t work,’ says Carnegie Mellon professor Allan Meltzer.
Guarantee lenders against failure and they will lend and lend and
lend, diverting resources to ill-conceived ventures, driving down
productivity and living standards. Only if the shareholders are
first wiped out, or if the taxpayers gain a real opportunity to
profit in a recovery, can a government rescue package avoid
becoming an invitation to a repeat disaster.”

Editorial / Wall Street Journal Tues. March 18

“Bear (Stearns) employees, who hold about one third of its
shares, are angry and grousing that they could get more cents on
the equity dollar in Chapter 11. Some may even be inclined to
vote against the sale, but then they’d have to find a market for
that $30 billion in mortgage securities that no one wants to
finance.

“The hard capitalist truth is that Bear’s most senior managers
have mainly themselves to blame. They bought their second or
third homes with fabulous bonuses during the good times, and
they must now endure the losses from Bear’s errant investment
bets. Bear took particular pride in its risk management, but it let
its standards slide in the hunt for higher returns during the
mortgage mania earlier this decade. There’s no joy in seeing a
venerable firm expire, but it has to happen if financial markets
are going to have any discipline going forward.

“As for JP Morgan and CEO Jamie Dimon, remind us to have
him negotiate our next contract. He gets Bear’s best assets,
including a Manhattan building said to be worth $1.4 billion by
itself. Meantime, he gets the Fed to backstop Bear’s riskiest
paper. We don’t know the quality of that paper – and we hope
the Fed has done its due diligence – but taxpayers are now on the
hook for future losses. Some previous Fed officials might have
told Mr. Dimon to take all of Bear or nothing at that $2
liquidation price, but Ben Bernanke and Tim Geithner of the
New York Fed seem to have been desperate to get a sale
announced before markets opened on Monday. Mr. Dimon took
them to school.

“The Fed is also opening its discount window even further to
non-deposit-taking institutions, and for an open-ended amount of
lending and mortgage-based collateral. We endorsed this last
week as a way of reviving a frozen market in mortgage-related
securities. But with its Sunday move, the Fed is going all in.
This raises genuine issues of moral hazard. Commercial banks
traditionally have access to the discount window – that is, to
public money – because they are regulated and have certain
reporting and capital obligations .

“If this latest effort does help to revive the mortgage credit
markets, then the Fed’s potential losses may never be realized.
On the other hand, no one knows how far housing prices will
fall, and steeper declines in home prices will mean steeper losses
in mortgage-backed securities. Moreover, if this doesn’t work,
Wall Street pressure will build for the Fed to buy up mortgage
securities wholesale. This could end up ruining the Fed’s
balance sheet, and ultimately its credibility as the lender of last
resort.”

Economist Alan Blinder / Washington Post Tues. March 18

“Earth to the White House and Congress. The Fed cannot do this
job alone.

“But isn’t the central bank the fabled ‘lender of last resort’? Yes,
and the Fed is performing that role extensively. But central banks
are designed to lend money to banks that are illiquid but not
insolvent. It is not supposed to spend taxpayer money or even
put much of it at risk. Those political decisions are properly
made by elected leaders.

“So what can be done now?

“First, everyone should take a deep breath. To those living far
from the canyons of Manhattan, the sky is not falling. If you
don’t want to sell your home, forget about falling house prices.
Even on paper, it’s unlikely that you’ve ‘lost’ anything near what
you ‘gained’ in the run-up. Yes, the economy is limping, but
it’s not collapsing. And the effects of the Fed’s interest rate cuts
and the stimulus package that Congress enacted last month are
still to come.

“Second, it would be nice to see some patient capital step up to
the plate .patient investors who don’t need liquidity and don’t
have to worry about mark-to-market accounting have a chance to
be the JP Morgans of our day.

“Third, our nation’s great financial houses need to use the
breathing space the Fed is providing to put themselves in order –
post haste. They need to come clean, book the losses and, in
many cases, raise new capital. If the capital must come from
abroad, Americans must set aside their pride and / or
xenophobia. [By the way, why are some of these companies still
paying large dividends and enormous bonuses to their top
executives?]

“Fourth, we need leadership from political Washington. Forget
the president. We need the Treasury secretary to take charge, not
just to ‘support the Fed.’ While Paulson repeats his ‘strong
dollar’ mantra, confidence in the dollar ebbs. How about doing
something about it – such as a dramatic currency market
intervention in concert with other nations?....

“In 1933, Franklin Roosevelt famously told Americans that ‘the
only thing we have to fear is fear itself.’ Unbridled fear is
gripping today’s financial markets. We need some soothing
words right now – followed by actions, as FDR’s words were.
Who will step forward?”

Camilla Cavendish / London Times Thurs. March 20

“This has been a week of astonishing brinksmanship – one that, I
cannot help thinking, has shown what giants the guardians of
America’s financial system are compared with the pygmies
running Britain.

“On Friday the rumors that an American bank was about to
collapse sowed panic in stock markets that had hitherto seemed
almost immune to the credit crunch. The dollar went into
freefall. By Tuesday the gunslingers of the U.S. Federal Reserve
had engineered a takeover of Bear Stearns by JP Morgan, with
the help of a $30 billion subsidy. In doing so, the Fed ripped up
the rulebook of central banking. America has not offered
emergency funds to brokers, as opposed to banks, since the Great
Depression.

“Why should the taxpayer bail out banks that have no
depositors? Aren’t these the same idiots who convinced
Americans in trailer parks to buy houses they couldn’t afford?
Who packaged up dodgy loans into elegant parcels and passed
them around the world? Yes. Abetted by complacent rating
agencies, who stuck triple-A quality labels on junk, banks such
as Bear Stearns have created a new kind of financial crisis,
because there were so many players playing pass-the-parcel, and
because no one knows where all the parcels ended up. They now
sit like unexploded bombs on the balance sheet of almost every
financial institution.

“But that is precisely why Bear Stearns had to be saved. The
company was a financial intermediary at the heart of many
complicated global transactions. Had it collapsed, no one knew
how many more dominoes would have fallen. The Fed’s bold
bailout avoided the much bigger bailout that a collapse would
have necessitated, because so many of the counterparties to Bear
Stearns’ agreements were banks that do have depositors.

“Bankers may live in a different world to most of us, but our
fortunes are horribly aligned. Old-fashioned banks were not
built with marble halls for nothing. They were meant to exude
solidity, because to doubt a bank’s creditworthiness is to
undermine every commercial transaction. If lenders stop
lending, economies stall. The living standards of millions of
people hang in the balance .

“By rescuing Bear Stearns, the U.S. Fed has put out a clear
message that it will not let a big firm go down. It has backed up
that message by offering emergency loans in exchange for a
broad range of collateral. The Bank of England is still offering
emergency funding on much narrower terms. So U.K. banks
face significantly higher costs of borrowing than their American
and continental competitors. This is dangerous, because Britain
is particularly vulnerable to a liquidity crunch. Our banks
currently hold about $1.1 trillion more in loans than deposits.
Fears about imbalances lead to companies such as Scottish
Widows withdrawing mortgage offers at ten minutes notice.
That spooks consumers .

“Uncertainty is lethal. Confidence is priceless. That is a point
that our rulers seem unable to grasp. God save America. And
God help Britain.”

Editorial / South China Morning Post [Hong Kong] Tues.
March 18

“Like spoiled children who have grown fat eating too much
candy, the major investment houses over the past few years have
benefited from the easy credit that has boosted their bottom lines.
Unfortunately, the good times also bred arrogant investors with a
Midas syndrome – the belief that anything they touched would
turn to gold. That led to the poor risk management and reckless
regard for shareholder value that has resulted in the subprime
debacle.

“Now with their investments soured and their credit lines barren,
these very same investors are crying out for a financial lifeline
from the Fed. So far, Mr. Bernanke has proved to be extremely
accommodating, doling out more free sweeties in the form of a
series of interest rate cuts and acceptance of their mortgage-
backed securities as collateral. The problem is that this indulgent
approach has failed; the credit crisis is deepening, and the spoiled
investors are crying out for more free candy. Bailouts and
financial lifelines may simply encourage the same lax attitude
that led to this crisis.

“The approach that the Fed appears determined to follow on its
home ground contrasts with the tough line the U.S. and other
industrialized nations took when Asian countries faced a similar
crisis of confidence in 1997. During the Asian financial crisis,
nations such as South Korea, Indonesia and Thailand were asked
by the west to tighten their belts by raising interest rates, cutting
expenditure and improving transparency. The Fed has lowered
its benchmark overnight rate five times and the discount rate
seven times since the middle of August, when subprime started
to rattle investors. It is no wonder that economists such as Nobel
laureate Joseph Stiglitz have accused the west of hypocrisy and
double standards .

“The precarious state of the global financial system requires
some fancy policy footwork from the Fed and other central banks
if confidence is to be restored. However, the approach so far has
been more to treat the symptoms than the disease itself. It may
be time for some more bitter medicine for the people who played
fast and loose with the rules of economics.”

If the above sounds familiar, I referenced a similar editorial from
the same paper back on 12/15/07.

“[On President Bush’s and Treasury Secretary Paulson’s rescue
package for mortgage holders], it is ironic that the plan has been
introduced by Mr. Bush, who came to office espousing the
principles of free markets, free trade and small government. But
his administration has repeatedly caved in to political and
economic pressure to help industries such as airlines and steel.
And Mr. Bush is not the first U.S. president to have done so.
During Bill Clinton’s administration, the U.S. Federal Reserve
supported a multibillion-dollar bailout of the hedge fund Long-
Term Capital Management to prevent a ‘fire sale’ of assets and
disruption to financial markets.

“Such intervention contrasts with advice given to Asian countries
during the Asian financial crisis from the International Monetary
Fund and the U.S. Treasury: raise interest rates, bear the cost of
massive defaults and improve transparency and regulation. For
some of the countries obliged to adopt such advice, notably
Indonesia, the social and political consequences were highly
damaging. But as Joseph Stiglitz, former World Bank economist
and Nobel laureate in economics, recently pointed out, a lack of
transparency is central to the subprime crisis .

“Supporters of Mr. Bush’s rescue package argue that the adverse
consequences of not bailing out U.S. subprime mortgage
borrowers outweigh those of allowing a financial meltdown to
take its course. That might be the case. But the international
community is entitled to take the world’s most sophisticated
economy to task for failing to manage its financial industries,
with all the implications this has for the health of the global
economy.

“Experience shows that troubled borrowers have a very high rate
of default, even after generous renegotiation of their mortgages.
The bailout might only delay the day of reckoning for people
struggling under a heavy debt burden and may lead to bigger
losses. Moreover, if investors in these mortgages are forced to
accept a smaller return they can be expected to demand a higher
risk premium in the future, making mortgages more expensive.
Moral hazard can therefore come at a heavy cost. It does nothing
for the efficient operation of free markets and the image of U.S.
financial professionals proferring their services all over the
world.”

And so it was that last December I caught some heat from
readers for the following comment of mine tied to the above
editorial.

“We hold ourselves out to be the model? Of what, fraud? That’s
what lack of transparency really is, fraud. We have a dirty
system. Not capitalism itself. Nothing wrong there. But
capitalism is built on playing by some pretty simple rules. I’ve
been asking for weeks now, just what do we stand for, both in
economics and foreign policy? The United States today is a
throbbing blob of hypocrisy in so many respects. That comment
above on how we treated Indonesia? That should be ingrained in
every American college student taking economics or political
science, for starters, and every presidential candidate should be
asked to comment on it. Maybe we’d finally learn something
about their true character in the process.”

Three months later, I stand by the statement.

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Continuing, this week you also had the issue of government-
chartered mortgage lenders Fannie and Freddie, who got
approval to pump as much as $200 billion of liquidity into the
housing market.

Editorial / Wall Street Journal

“Yesterday, Fannie and Freddie announced that they would be
leveraging up their businesses in the name of riding to the rescue
of the mortgage-backed securities market. Here’s how the
wizardry works: Mr. Lockhart, the Director of the Office of
Federal Housing Enterprise Oversight, agreed to cut the amount
of capital Fannie and Freddie are required to maintain by a
combined $5.9 billion and to allow them to increase their
leverage to 33-1 from about 30-1. That means Fan and Fred can
borrow up to $33 for every dollar in freed-up capital, and presto
– the two mortgage giants get $200 billion or so to spend buying
up mortgages or mortgage-backed securities.

“There is a catch. In exchange for this freedom, Fan and Fred
have promised to raise ‘significant’ new capital over the next
year. We’re told it’s on the order of $10 billion each. That’s the
good news. The bad news is that the companies can leverage any
new capital right alongside the old, meaning that the total
increase in business – and risk – could be well above the $200
billion set by Mr. Lockhart.

“Let’s put some of these numbers into context. JP Morgan
Chase is leveraged about 12-1 against its Tier 1 capital base.
Investment banks are usually more highly leveraged than
commercial banks, and Bear Stearns, formerly the industry
leader in this category, was leveraged at 34-1 at the end of 2007.
You know how that turned out.

“The oddest argument is that Fan and Fred need to be unleashed
to help the mortgage market. That’s what they were supposed to
be doing all along, yet so far in this crisis they have themselves
become sources of systemic financial fear. After taking big
losses in last year’s fourth quarter, investors and counterparties
have become nervous that Fan and Fred might face solvency
problems similar to those of other mortgage players .

“As it stands now, Fannie and Freddie get to gear back up, and if
they get into deeper trouble because housing prices keep falling,
the taxpayers pick up the tab. If the crisis ends, Fan and Fred’s
private shareholders get all the upside and their executives get
even richer than they are. If Washington wants to socialize the
housing market – as it seems eager to do – let’s do it in the open
and put Fannie’s debt on the federal budget so taxpayers can see
what they’re buying.

“Of course, the last thing Congress wants is all of this to be
transparent. The Members benefit from the current private-
public confidence game because the two companies ladle them
with campaign contributions to protect their privileged status.
That’s why Congress continues to dither over reforms that might
actually provide a regulator capable of staring down Fan and
Fred.

“With a couple of brave exceptions Fannie and Freddie own
Washington. It’d be better for the housing markets and taxpayers
if Washington finally admitted it and bought Fannie and
Freddie.”

The above was but some of the debate taking place this week. In
the end it’s all about how the markets react, though, and stocks
registered their best gains in seven weeks, while bonds largely
rallied as mortgage rates fell and worrisome spreads narrowed,
all positives. At week’s end, the majority on the Street clearly
thought the worst was behind us, that despite some of the
criticisms expressed above, the Fed and Ben Bernanke had
accomplished the seemingly impossible, they calmed the
markets.

Of course this is a gross generalization and there was little
evidence this had been accomplished in just a few days, but
that’s the opinion of the bulls for now.

What is clear is that the deleveraging of America, and other parts
of the world, continues apace, as spelled out further below. It’s
time to clean up the balance sheet, sports fans, whether you are
Joe Six-pack or Merrill Lynch and Lehman Brothers. Funny
how the only ones who don’t seem to be following the rules are
the federal government and its children, Fannie and Freddie.

What’s also clear, as even Treasury Secretary Paulson had to
admit, finally, is that the “economy has turned down sharply,”
though he once again had to play administration hack with a
further pronouncement that the “long-term fundamentals
compared with other major countries are strong.” Someone
please tell me once and for all, just what “fundamentals” are
Paulson and President George W. Bush looking at? The largest
levels of debt since the invention of the wheel? That’s good?
And if so, how is it that no one wants to lend you and I a nickel
these days? And as local municipalities are forced to reassess
home values downward and tax receipts dry up, how is this good
for the towns (and employees) where we live?

Here’s what we do know. You can talk all you want about
unfreezing the capital markets and getting credit flowing again,
but it still all comes down to housing, and whether it’s Dem. Sen.
Charles Schumer saying “housing has been the bull’s eye of the
crisis” or PIMCO’s Paul McCulley offering it’s the “cancer at
the core,” there will be no sustained recovery in the economy
until housing bottoms and as I’ve maintained, once we do
bottom we’ll just sit there for awhile, further delaying recovery,
though it would be disingenuous not to acknowledge that the
Fed’s actions, particularly in lowering interest rates, will at least
lessen the pain of homeowners stretching to meet their mortgage
payments come reset time.

Regardless, the American consumer has finally seen the light.
We all know the next shoe to drop is in the reporting of spiking
defaults on home equity and car loans, and that big ticket
industries, such as autos, will continue to feel the pain, and with
increasing layoffs.

One thing that was hammered home while I was at PIMCO was
an appreciation for the Big Picture. I haven’t changed my
opinion in 15 months, for example. I said end of ’06 that
recession would hit in 2008 and you’d be hard-pressed to find
many economists who don’t concede this is indeed the case, with
76% of the American people, according to a USA Today/Gallup
survey, believing this to be true as well.

But I did say back on 12/29/07 that the recession would be a
shallow one. I’ll explore that further next week at quarter end, as
well as look at my prediction for the stock market.

Street Bytes

--The Dow Jones rallied 3.4% to 12361, including a second 400-
point Tuesday, while the S&P 500 picked up 3.2% and Nasdaq,
2.1%. Investors were heartened not only by the Fed action, but
also by earnings that beat expectations from Goldman Sachs,
Lehman Brothers and Morgan Stanley. Forget that in all three
cases the profits were well below year ago levels, at least there
didn’t appear to be any fresh negative surprises.

The markets were also helped on Friday by influential financial
services analyst Richard Bove who said “The financial crisis is
over” and that we are in the midst of a “once in a generation
opportunity to buy.” I hope he’s right, but I’ll hold onto my cash
for now, thank you.

--U.S. Treasury Yields

6-mo. 1.19% 2-yr. 1.60% 10-yr. 3.33% 30-yr. 4.17%

As part of its reliquification program, the Fed dropped its short-
term funds rate a whopping 75 basis points to 2.25%. In the
accompanying statement:

“Recent information indicates the outlook for economic activity
has weakened further. Growth in consumer spending has slowed
and labor markets have softened. Financial markets remain
under considerable stress, and the tightening of credit conditions
and the deepening of the housing contraction are likely to weigh
on economic growth over the next few quarters.”

But then the Fed talked of inflation being “elevated,” but that it
would moderate in coming quarters. However, “Still, uncertainty
about the inflation outlook has increased.” These are the best and
brightest? Make up your freakin’ minds, guys.

Personally, I’m in the Bill Gross camp. Inflation is going to
moderate as the economy weakens. More importantly, it’s a
global slowdown and commodity prices will fall with slackening
demand.

--A study by S&P said the stock market is the most volatile it’s
been in 70 years. Thus far in 2008, 52% of the trading sessions
have seen an advance or decline of 1%, which is the highest
proportion since 1938. Back in 2002, as stocks were bottoming,
the percentage of similar moves was 50%. By 2006, that had
declined to 12%, but had increased back up to 39% by the second
half of 2007.

--In what experts are calling a classic deleveraging trade,
commodities took a big hit on Wednesday and Thursday as
investors, particularly hedge funds, were hit with margin calls on
other trades they have on such as mortgage securities. Gold
plummeted from its high of $1,003 on Tuesday (it traded above
$1,020 intraday) to $920 at week’s end. Oil closed at $101 after
its closing high of $110.33. Overall, the Commodity Research
Bureau index declined 8.3% for the four-day week, its steepest
one-week decline since the index came into being in 1956. A
slightly higher dollar is one reason for the slide, though also a
general fear that recession will cause a drop in demand for all
raw materials.

Commenting on the commodities bubble in an interview with
Maria Bartiromo, BlackRock CEO Larry Fink offered:

“I would say the biggest bubble is in U.S. Treasuries. I think
U.S. Treasuries represent one of the worst investments in the
world. If the global economies do slow down, commodity prices
should slow down, too. The run-up in commodity prices is
because so much of our markets are being driven by hedge funds,
and most hedge fund managers are momentum traders. So
they’re buying long positions in commodities because the
momentum is for higher prices. I don’t believe the economic
activity we’re seeing in the world justifies these commodity
prices.”

[Fink made his statement right before this week’s slide, but focus
on the Treasury comment.]

--Back to the Bear Stearns bailout, the Fed can choose to sell the
$30 billion in hard to value assets it’s inheriting or hold them to
maturity. So the Fed could realize a gain if the market has
proved to be too pessimistic. Or if we see Armageddon, the
American taxpayer is hit.

--Goldman’s Abby Joseph Cohen was replaced as chief
forecaster for the U.S. stock market by David Kostin, who said
he expects the S&P 500 to fall 10% to 1,160 in the ‘near term’
before rebounding to 1,380 by year’s end. [It closed Friday at
1329.] Cohen, on the other hand, had predicted an S&P close of
1675 by 12/08, as she is shunted aside to ‘develop public policy
ideas’ after being interminably bullish.

--George W. Bush, at a housing conference in October 2002.
“We want everybody in America to own their own home.” This
goes down as one of the dumber comments of his presidency,
one that is replete with them.

--As expected, layoff notices are beginning to surge on Wall
Street, with Citigroup announcing 2,000 additional cuts on top of
4,200 previously announced, with most of the carnage slated for
offices in London and New York. UBS is talking about 8,000
potential layoffs and Goldman Sachs, despite its still humongous
profits, is planning on cutting up to 15% in its capital markets
area, according to the New York Post, though Goldman said it
was still going to expand outside the U.S. in 2008. About 30,000
have been laid off thus far in the industry.

--For those of you looking for a job, how about watch repairer?
BusinessWeek reports that whereas there were 44,000 skilled
workers in the U.S. in the 1950s, today there are only about
4,400 (average age, 62) – not enough to meet demand as sales of
luxury watches have skyrocketed. Rolex is pledging $1 million
for scholarships to the two-year watchmaking program at
Oklahoma State University, for starters. Nice hours, but you
become very narrow minded.

--In another sign of the credit crunch, CIT Group, the largest
independent commercial financing company in the U.S., was
forced to draw on $7.3 billion in emergency credit lines to meet
short-term funding requirements. The funds will be used to pay
off debt maturing this year, but then the issue becomes, where
will they find the funds to operate beyond that?

--In an example of counterparty risk, Merrill Lynch was forced to
sue XL Capital Assurance to stop the bond insurer from
canceling $3.1 billion of contracts on collateralized debt
obligations (CDOs). “We filed suit to make clear that XL
Capital is required to meet its contractual obligations for credit
default swaps it agreed to,” said a Merrill spokesman.

--Congressman Barney Frank, head of the House financial
services committee, at first blush appears to have a good
proposal for broadening the Federal Reserve’s powers to include
“financial services risk regulator.”

“To the extent that anybody is creating credit, they ought to be
subject to the same type of prudential supervision that now
applies only to banks,” Frank proposed.

Currently, investment banks are regulated by the SEC, but
Congressman Frank is saying that if investment banks have
access to the Fed’s emergency cash, they should accept the
supervision of a regulator that “could have enhanced tools to
receive timely market information from market players, inspect
institutions, report to Congress on the health of the entire
financial sector and act when necessary to limit risky practices or
protect the integrity of the financial system.”

The SEC has limited powers, with a mandate to protect investors
vs. preventing the investment banks from taking on risky
positions. The Fed, on the other hand, has the authority to tackle
systemic risk, as it did in the case of Bear Stearns.

--Delinquencies on loans to build single-family homes hit 7.5%
of the value of all such loans in the fourth quarter, up from 2.1%
a year earlier.

--Shares in Fannie Mae closed at $19.80 on March 10.
Following the relaxation in its capital requirements, the stock
closed the week at $34.30. Sibling Freddie Mac saw its shares
rise from a 3/10 close of $17.40 to $32.60. Congratulations if
you saw this coming, but remember both have to raise a ton of
new capital that should be highly dilutive.

--Among the brokerage winners, Lehman Brothers’ stock hit a
low of $20.25 on Monday morning, closing the same day at
$31.75, and then finishing the week at $48.65. Unreal. There
are some huge winners, and losers, out there in the hedge fund
community one must assume.

--Steve D. passed along a research report from UBS concerning
Bear Stearns, after Bear was slain by JP Morgan, one in which
the investment bank reduced its rating to ‘hold’ and lowered its
price range from $27-$35 to $2-$3. As Steve noted, “Is that
value added or what?!”

--Us savers are really taking it on the chin as money market
yields, about 4.70% a year ago, plummet through 3% over the
coming weeks. Remember, my elderly friends, your president
and Federal Reserve want you spending every last penny you
have, including your stimulus check, to the point where you’re
eating gruel upon realizing an alligator has made a nest where
you buried your coffee cans of coins and safe deposit box key.

--Despite the market turmoil, Visa Inc. was able to successfully
come to market with the largest initial public offering in U.S.
history, raising $19.7 billion on higher than expected demand for
the shares, which finished the first day up over 30%. The IPO
represented a windfall for JP Morgan Chase in particular as it
scarfed up investment banking fees and shareholder proceeds in
excess of $1.25 billion, or five times what JPM is paying for
Bear Stearns. For its part, Visa is depositing $3 billion in an
escrow account to settle potential claims on its long-running
antitrust suit. [I hope you filed your return in this matter. I’m
thinking I pick up a check for $25 in about ten years, which
might be enough for a six-pack of premium at that point.]

--Bear Stearns chairman Jimmy Cayne, who was playing in a
bridge tournament in Detroit while his firm was going under, saw
his holdings in Bear drop from about $1.2 billion to around $15
million, not that we are crying for the man.

Of course then you have Bear investor Joe Lewis, who we
learned not only bought a massive chunk around $107 as
previously reported, but on March 13 purchased 569,000 more
shares at $55.13. Lewis, whose stake is said to be about 8.4%, is
attempting to lead a charge among employees, who own a
collective 30%, to vote down the deal with JP Morgan, but JPM
is offering bonuses to managing directors to stay and approve the
acquisition, MDs obviously holding a lion’s share of the 30%.

Tears are reserved for some legitimately sad stories, the kind that
don’t get the notice when brokerage firms go under. Back office
types, for example, saw their meager savings wiped out. I’ll
never forget my own experience at Thomson McKinnon
Securities when it went kerplunk in 1989. I was young and
didn’t have much in our ESOP plan after about six years there,
but I still think about some of the older folks I knew, who did so
many favors for me, and were totally wiped out. It sucks.

--More problems for Las Vegas real estate as the developer of the
$3.9 billion Cosmopolitan Resort Casino condo-hotel complex is
being foreclosed on by prime lender Deutsche Bank. Earlier, Ian
Bruce Eichner had defaulted on some loans with junior lenders.
The 3,000 room complex is next to the Bellagio.

And then you have two massive residential projects (Inspirada
and Kyle Canyon Gateway) going under in Vegas involving
builders such as Toll Brothers, KB Home and Lennar in joint
ventures.

As reported by the Journal, Inspirada was supposed to eventually
be as many as 13,500 homes. But as one developer said, only
about 162 homes have been sold so far. What was once thought
to be a seven-year build-out is now looking like 10-15, if they’re
lucky. This is a classic example of what is taking place out this
way, as I saw firsthand last month.

--The Federal Reserve has a long list of collateral eligible for its
auction of Treasuries as part of its announcement it was
expanding its lending facilities in order to ease credit-market
pressures. I’m wondering if I can slip in some Mark McGwire
and Roger Clemens baseball cards that have been devalued with
the steroid revelations in exchange for Treasuries. I’m sure
holders of Barry Bonds cards are thinking the same thing.

--Starbucks continues to struggle as CEO Howard Schultz said
the U.S. economy is in a “tailspin and many would say the
consumer is in a recession. We are dealing with things that we
haven’t seen before in terms of how people are responding to
how tough it is.” Oh, stop whining, mused the Dunkin’ Donuts
fan.

--I was just informed that for a variety of reasons, I can’t go to
the Fed window to exchange baseball cards for Treasuries. An
official did tell me, though, “maybe in another few weeks.”

--Since it’s “Web Sweeps Week,” I can’t help but note a New
York Post story by Lukas Alpert and Samuel Goldsmith
concerning billionaire hedge fund manager James Chanos, 50,
and his association with ‘Kristen,’ Ashley Dupre – Eliot
Spitzer’s hooker. It seems Chanos has had his own dealings with
Dupre, who calls him “Uncle Jim.” Ironically, Chanos pumped
in $100,000 to Spitzer’s campaigns over the past five years.

Chanos is well known for his parties at his Long Island estate,
beach blowouts “to which he invites scores of sultry young
women.”

“During a clambake last summer, Chanos introduced Dupre to
other partygoers as his house-sitter .

“ ‘This was a very formal, fine dining event,’ said Varshini
Soobiah, who attended the party. ‘There were limos, sit down
dinners, chefs, and fancy rooms for all guests. The girls were
staying together. We were always together – changing together,
going out together .it never occurred to us at all’ that Dupre
was a hooker.”

But another attendee told the Post that Dupre stood out like a
sore thumb.

“She was wearing a silk shirt as a dress. You could see every
body part. She looked like a hooker there.”

Huh. Moving right along ..

--My portfolio: Live by the volatility in small caps, die by the
volatility. What a year it’s been already for moi. The first week
in January, as the market was taking its first dive, was my best
ever, but the last two have probably been the worst, even though
my stock holdings are minimal. Every day I come in thinking
‘what has changed,’ when looking at the Big Picture and, say,
12-18 months out, and I can’t see selling my biodiesel or solar
plays, which are my major positions. In the case of solar,
though, I’ll admit I’m basing my faith on the government
extending the tax credit by year end (let alone there is a proposal
that would make the credit even more valuable). To me it’s a
layup, because number one it’s a jobs program for the housing
industry. But bottom line, I’m drinking domestic these days with
no signs of cracking open a premium beer for some time to
come. [OK, maybe a Harp at Easter though calling this a
‘premium’ brew is admittedly a stretch.]

Foreign Affairs

Iraq: It’s been five long years since the war began and as the
death toll approaches 4,000, it’s a good time to assess the effort.

Back when the war started, Bush adviser Larry Lindsey soon
found himself out of a job when he projected the conflict would
cost $200 billion. Then-Secretary of Defense Donald Rumsfeld
said it would only cost $50 billion to $60 billion. The real cost is
now over $600 billion, with the monthly tab at about $12 billion.

Regarding reconstruction, $47 billion has been spent thus far,
with U.S. allies sharing in few of the costs, and with only minor
tangible results.

Commemorating the anniversary, President Bush said “removing
Saddam Hussein from power was the right decision” and that the
surge has brought about “a major strategic victory in the broader
war on terror.” Bush added “The costs are necessary when we
consider the cost of a strategic victory for our enemies in Iraq.”
For his part, Vice President Cheney, in Iraq this week, said the
war was a “successful endeavor” and “well worth the effort.”

As for Republican presidential nominee John McCain, Professor
Peter Feaver commented in The Weekly Standard:

“McCain cannot stake his entire candidacy on trying to persuade
people to support the original war decision. After several years
of one-sided propaganda, American attitudes on this are fairly
entrenched and unlikely to move much. But he shouldn’t cede
the ground without a fight.

“In his victory speech, McCain showed that he understood this
because he went on to say, ‘I will defend the decision to destroy
Saddam Hussein’s regime as I criticized the failed tactics that
were employed for too long to establish the conditions that will
allow us to leave that country with our country’s interests secure
and our honor intact.’

“Avoiding the historical case won’t trick Obama or Clinton into
relaxing their relentless Iraq-oriented attacks on McCain. For
Obama, his one speech opposing the Iraq invasion is the solitary
piece of evidence that he has the foreign policy experience
worthy of a commander in chief. Obama and Clinton will
deliver their Iraq talking points no matter what. The real
question is whether Americans can hear from McCain a more
persuasive historical case on Iraq than we have heard in years.”

Editorial / Wall Street Journal

“Five years after U.S. and coalition forces began rolling into Iraq
on their way to Baghdad, it’s easy to lament the war’s mistakes.

“The Bush administration underestimated the war’s cost – in
treasure, and most painfully in lives. The CIA and every other
Western intelligence agency was wrong about Saddam’s
weapons of mass destruction. The U.S. failed to anticipate the
insurgency and was almost fatally late in implementing a
counterinsurgency. It allowed the U.N. to design a system of
proportional representation that has encouraged its sectarian
political divisions. And so on.

“These columns have often discussed these and other blunders.
But we have always done so while supporting the larger war
effort and with a goal of victory that would be worthy of the
sacrifice. Five years on, and thanks to the troop ‘surge’ and
strategy change of the last year, many of the goals that motivated
the original invasion are once again within reach if we see the
effort through .

“(Our) view has always been that nations shouldn’t begin wars
only to walk away when the fighting gets difficult. The U.S.
soldiers have fought superbly, and the best way – the only way –
to honor both is to leave Iraq in victory.”

Ralph Peters / New York Post

“On the fifth anniversary of our campaign to remove Saddam
Hussein’s monstrous regime from power, it’s hard not to despair
– not because of the situation in Iraq, which has improved
remarkably, but because so few American politicians in either
party appear to have drawn the right lessons from our experience.

“For the record, I still believe that deposing Saddam was justified
and useful. He was a Hitler, and he was our enemy. But I’m still
reeling from the snotty incompetence with which the Bush
administration acted. Above all, I’m ashamed that I trusted
President Bush and his circle to have a plan for the day after
Baghdad fell.

“All of our failures in Iraq stemmed from this fundamental
neglect of a basic requirement: Our soldiers and marines reached
Baghdad without orders or strategic guidance. We became the
dog that caught the fire truck. The tragedy is that it didn’t have
to be that way: One thing our military knows how to do is plan.

“But the relevant staffs were prevented from doing so.
Ideologues and avaricious friends of the administration wanted
the war for their own reasons and they didn’t intend to alarm
Congress with high cost estimates. So they trusted the perfumed
tales of a convicted criminal, Ahmad Chalabi, rather than the
professional views of the last honorable generals then-Secretary
of Defense Donald Rumsfeld had not yet removed .

“Iraq just didn’t have to be this hard. We made it immeasurably
more difficult by trying to make war on the cheap, then turning
the war’s aftermath into a looting orgy for well-connected
contractors .

“(But) while the Bush administration deserves every lash it gets,
domestic opponents of the war have been hypocritical, dishonest
and destructive. As this column long has maintained, had
President Bill Clinton sent our troops to depose Saddam Hussein,
Democrats would have celebrated him as the greatest liberator
since Abraham Lincoln.

“The problem for the left wasn’t really what was done, but who
did it. And hatred of Bush actually empowered him – the
administration had no incentive to reach out to those who
wouldn’t reach back, so it just did as it pleased. Today’s
‘antiwar’ left also contains plenty of politicians who backed
interventions in the Balkans and Somalia, who would be glad to
send American troops to Darfur today and who voted for war in
Iraq.

“Both parties are quick to employ our military. It’s the only
foreign-policy tool we have that works. Neither party is a peace
party – each just wants to pick its own wars. The hypocrisy in
Washington is as astonishing as the dishonesty about security
needs .

“Given all our mistakes and partisan agendas, it’s amazing Iraq is
going as well as it is today. The improved conditions in Baghdad
and most of the provinces verge on the miraculous, given the
situation a year ago. But we’ve paid a needlessly high price.

“As for President Bush, let’s face it: He’s been our most-inept
wartime leader since James Madison fled the White House,
leaving his wife behind to save what she could before the British
troops arrived with torches.

“That said, Bush has displayed one single worthy characteristic:
He won’t surrender .

“As horribly as Bush performed for our first four years in Iraq,
it’s still possible to do worse. Both of the Democratic Party’s
presidential aspirants believe that the answer is to flee, handing
the terrorists we’ve defeated a strategic victory, inviting a
genocidal civil war, further destabilizing the Middle East, and
sending the message to the world that Americans lack the
courage and staying power of our enemies.

“Declaring failure isn’t the correct response to failure narrowly
avoided. Both Senators Barack Obama and Hillary Clinton
would kill a struggling convalescent. Bush’s shambles would
become the next administration’s catastrophe. As president,
Obama or Clinton would finish with far more blood on his or her
hands than President Bush has on his.

“Was deposing Saddam Hussein a good idea? Yes. I still
believe that. It was an act of vision and virtue. It’s only a shame
we didn’t do it competently.”

I agree with everything stated above in both the Journal editorial
and Ret. Lt. Col. Peters’ piece. I stated in these pages my
concerns by late summer of 2003, correctly called Rumsfeld a
liar, and spelled out what a disaster Tommy Franks and other
generals proved to be after the initial successes.

Yet all the while I have continued to support the mission, though
I readily conceded a year ago that if the surge didn’t work, we
should consider pulling out.

Well, Gen. David Petraeus proved to be the leader we’ve been
screaming for and Bush deserves credit for finally seeing the
light in elevating the general as he did.

But I’ll tell you something you won’t find anywhere else.
Petraeus could be the man to say ‘it’s not working’ if over the
next 6-9 months the Iraqi people can’t get their act together. I
trust the general more than any other man in America today and
he’s clearly getting frustrated himself with the lack of progress
on reconciliation. Watch what he says during his testimony to
Congress in April. There could be a surprise or two.

Of course every single American should hope the mission yet
succeeds and there have been tentative signs Iraqi leaders
understand time is running short.

But I have to close on an equally exasperating note, a further
example of the incredible incompetence displayed in the conduct
of this war.

In Thursday’s Wall Street Journal, there is an op-ed by Dan
Senor and Roman Martinez, who were foreign policy advisers to
the administration and based in Baghdad in 2003 and 2004.
You’ll recall Senor was L. Paul Bremer’s spokesman.

The piece is titled “Whatever Happened to Moqtada?” and is
about Sadr’s “rise, and fall.” No doubt Moqtada has been less
visible, but the authors write this:

“While he has not appeared in public in close to a year, he still
has his family name and a base of support among the Shiite
underclass, particularly in Baghdad. He may be biding his time,
hoping U.S. withdrawal will leave him with a weaker opponent
in the fledgling Iraqi security services...etc. etc.”

Not one mention of why he hasn’t been seen. I told you in this
space last Dec. 15, from Germany, what the situation was. Sadr
is holed up with clerics in Najaf, taking a crash course to become
Ayatollah! What is normally a multi-year process, he’s
attempting to reduce to 12-18 months. And what does that mean,
Mr. Senor and Mr. Martinez? If and when he gains the title, his
pronouncements will carry even more weight than before.

You’d think these ‘experts’ would know enough to mention this
rather important fact, assuming they are indeed aware of it. But
it’s so emblematic of much of the administration these days, and
it’s no wonder why more than a few of us await the day when the
president hops on Air Force One for the last flight to Texas.

Iran: While there are a slew of runoffs still to be held, hardliners
appear to have captured about 70% of the seats in the
parliamentary elections, a victory for President Ahmadinejad,
though a heavily tainted one as some 1,700 candidates, mostly
reformers, were barred from the process. With the outcome,
Ahmadinejad said nuclear talks were over as Iran continues to
defy the UN and enrich uranium. Rival Hashemi Rafsanjani
called for “unconditional negotiations” with the West.

[The election is one prediction I already botched for ’08. I did
not calculate how many reformers would be excluded from the
vote and thought Ahmadinejad’s supporters would flame out.]

Israel: According to new reports, back in February, Israel warned
Syria that if Hizbullah attacked Israel, the Israelis would hold
Syria accountable. While in the Palestinian territories, a
respected poll has Hamas leader Haniyeh favored 47-46 over
Mahmoud Abbas, a large slip in support for the latter, as 84%
approve of the Yeshiva attack and 75% of Palestinians say
negotiations with Israel should be terminated. 64% also support
the rocket attacks. Very troubling, to say the least, and one
would think President Bush is being apprised of these sentiments
before he talks of a comprehensive peace agreement by the time
he leaves office.

German Chancellor Angela Merkel, in addressing the Knesset on
Tuesday, said Germany will never forget its “historic
responsibility” toward the Jewish state and that the German
government would continue to press for tighter sanctions on Iran
to halt its nuclear program. Iranian possession of nuclear
weapons, she added, would have “disastrous consequences.
Above all for the security and existence of Israel, then for the
entire region and finally for everyone in Europe and the world
who subscribes to the values of freedom, democracy and human
rights.”

China: The government has had to admit violence has spread
from Tibet to the western provinces, as well as Nepal. Said one
police officer in Sichuan, “They’ve gone crazy,” referring to
those protesting Chinese rule and influence. In essence it’s
devolved into a race riot as in the case of Tibet, Chinese
businesses have been torched and owners directly targeted. The
Dalai Lama, exiled spiritual leader, said Tibet was facing
“cultural genocide,” but urged a stop to the violence. Beijing
said the Dalai Lama was directly responsible for the uprising and
that he and his followers were attempting to “sabotage” the
Olympics.

So, as expected, there is now a growing call in the international
community to show up China at the Games, with many in Europe
talking of a boycott of the opening ceremonies.

One key impact of the violence has been a reassessment on
Taiwan, just as voters go to the polls today, Saturday, to select a
new president and vote on a referendum for declaring
independence. Just a week ago, the Nationalist / Kuomintang
leader Ma Ying-jeou was supposed to have an easy time of it, but
now the Democratic Progressive Party (currently in power) and
its candidate Frank Hsieh are gaining the support of those who
see how China is repressing Tibet and rethinking just how
closely they want to be aligned with the mainland; though both
parties have espoused a more open dialogue than that which
exists today between the Communists and President Chen Shui-
bian. Nonetheless, China has totally underestimated the impact
its action in Tibet has had on the Taiwanese and their future.

Lastly, back to the Olympics, China had promised that foreign
journalists would have free rein to roam the country prior to the
Games. That promise has already been broken as few, if any, are
allowed to cover the violence in Tibet and in the western
provinces.

Russia: The story has emerged that on March 2, security forces
squelched an assassination attempt on the lives of Vladimir Putin
and Dmitry Medvedev as the two walked to a post-election
celebration in front of St. Basil’s Cathedral in Red Square.
Having just been there, I’ve been trying to picture the apartment,
across the Moscow River, where the sniper supposedly was
holed up and it’s a long ways off but authorities say he had a
clear shot. Mysteriously, it took two weeks for the story to
emerge.

Separately, in another worrisome development for the
international oil industry, the Kremlin’s goons detained an
employee of BP’s Russian joint venture with TNK and are
accusing the man and his brother of industrial espionage. Both
are Russians who hold U.S. citizenship. They were also
graduates of Oxford. The move came a day after raids on the
offices of BP in Moscow, as the operation is the only one in the
country with partial foreign control, other than Exxon Mobil’s
production sharing agreement on Sakhalin Island. The joint
venture has been under pressure to sell a large natural gas field to
Gazprom. Ya think this will now happen?

This is yet another move that hurts Russian-British relations in
particular, as some experts say there are groups within the
Russian government seeking to acquire valuable oil and gas
assets from foreign investors as part of a power struggle during
President Putin’s final days.

Meanwhile, Secretary of State Condoleezza Rice and Defense
Secretary Robert Gates were in Moscow to discuss the missile
defense proposal and supposedly talks went reasonably well as
Gates said Russia would be allowed a physical presence (though
not continuous) at the sites in Poland and the Czech Republic.
Additionally, the U.S. has proposed that interceptors not be
placed in their silos until an Iranian ballistic missile threat
becomes real, an offer meant to alleviate concerns the facilities
could be reconfigured to target missile launches from Russia.

Serbia: It’s playing out just as I expected here as violence hit the
divided northern Kosovo town of Mitrovica, where 40,000 Serbs
confront 80,000 Kosovo Albanians. Serbs attacked a UN court
building and 150 were injured in rioting. Again, it’s not the
casualties, it’s about sapping NATO’s resources which are
needed at the same time in Afghanistan.

Zimbabwe: The presidential election is March 29 and what was
once thought to be an easy time for President Robert Mugabe is
suddenly looking less so as long-time opposition leader Morgan
Tsvangirai is surging in the polls. Tsvangirai, by the way, is
calling for “chinja,” ‘change,’ as he has an 8-point lead in the
latest survey. So how will Mugabe rig it?

Saudi Arabia: Story out of the BBC that the Saudi monarchy is
retraining 40,000 imams in an effort to counter militant Islam.
But ultraconservatives still hold sway here, witness a case just
last week where a prominent cleric called for the beheading of
two liberal writers who had questioned the orthodox view that
Muslims can not change their religion. [Memo to self:
Reconsider plans to visit here some day.]

Britain: Support for Gordon Brown’s Labour Party has hit a low
not seen since 1983, 27% and 16 points behind the
Conservatives, currently headed by David Cameron. Brown
doesn’t have to call an election anytime soon, however. The
same survey, though, says 83% now believe the economy will
either grow more slowly over the next 12 months or slip into
recession.

Random Musings

--The latest nationwide Gallup Poll has Hillary Clinton surging
ahead of Barack Obama, 49-42,* while in head-to-head contests
between McCain and either one of them, they are basically dead
heats. Hillary’s schedules as First Lady were finally released and
there were no smoking guns, aside from Bill Clinton’s cigar as
the documents revealed Hillary was in the White House at the
same time as one of the president’s sexcapades with Monica.
And Bill Richardson, in deciding how best he could become vice
president, placed his chips on Obama.

*[Just saw an update...it''s down to a 47-45 lead.]

Obama, meanwhile, had no shortage of publicity, including the
revelation at week’s end that the State Department had fired two
contract employees and disciplined a third after they accessed
Obama’s passport information; rather illegal, to say the least. In
Saudi Arabia all three would be beheaded, which would be in
keeping with the fact they are obviously idiots with nothing up
top anyway. For its part, though, the Obama campaign screamed
‘dirty tricks’ that is until it was revealed the jerks had accessed
Hillary and McCain’s information, too.

But with Obama, the far bigger issue concerned his relationship
with the now retired pastor, Rev. Wright. You obviously noticed
I didn’t comment last week on the matter, which was because I
wanted to wait a bit longer. Good thing, since Obama then gave
what was immediately billed in some quarters as an historic
speech on race. I only saw the clips of the address the day he
gave it, and then I read the whole speech a few days later and I
thought there were some good passages, but at least half of it was
simply a liberal campaign tract. If you haven’t actually read the
whole thing yourself, please “invest some time,” as one
commentator put it, and do so.

First the facts. In a sermon on the Sunday after the attacks of
September 11, 2001, Rev. Wright told his congregation:

“We have supported state terrorism against the Palestinians and
black South Africans, and now we are indignant because the stuff
we have done overseas is now brought right back to our own
front yards.

“America’s chickens are coming home to roost.”

In a 2003 sermon, Mr. Wright said blacks should condemn the
U.S.

“God damn America for treating our citizens as less than
human.”

Following are some opinions. I’ll admit up front they are tilted
to the right.

Editorial / Wall Street Journal

“The political tide for Barack Obama was inconceivable as
recently as a few months ago, and it may still carry him into the
White House. A mere three years out of the state legislature, the
Illinois Senator has captured the Democratic imagination with
his charisma, his silver tongue, and most of all, his claims to
transcend the partisan and racial animosities of the day.

“But the suddenness of Mr. Obama’s rise allowed him, until
recently, to evade the scrutiny that usually attends Presidential
campaigns. If nothing else, the uproar over Reverend Jeremiah
Wright has changed that. In Philadelphia yesterday, the Senator
tried to explain his puzzling 20-year attendance at Reverend
Wright’s Chicago’s Trinity United Church of Christ, while also
using his nearly 5,000-word address to elaborate on the themes
that have energized his candidacy. It was an instructive moment,
though not always in the way the Senator intended.

“Mr. Obama, of course, is in the midst of a chiefly political
crisis. No one honestly believes he shares his minister’s rage, or
his political and racial beliefs, which have been seen all over
cable news and reveal a deep disgust with America. Mr.
Obama’s fault, rather, was to maintain a two-decade
entanglement with Mr. Wright without ever seeming to harbor
qualms about the causes espoused by his mentor and spiritual
guide.

“Such complacency couldn’t simply be waved off, as the Senator
tried initially to do, because it drills into the core of his political
appeal: that he represents new thinking and an attempt to end
cultural and racial polarization. Mr. Wright imperils the
possibility inherent in the first black candidate who has a genuine
shot at the Presidency, in part because race is only an element of
the Senator’s political character, not its definition.

“So yesterday Mr. Obama sought to rehabilitate his image by
distancing himself from Mr. Wright’s race-paranoia. He talked
about his own multiracial background – son of a white mother
and Kenyan father – and said, ‘I will never forget that in no other
country on Earth is my story even possible.’

“Mr. Wright’s remarks ‘expressed a profoundly distorted view of
this country,’ Mr. Obama continued, and are ‘not only wrong but
divisive, divisive at a time when we need unity’ – his way of
broadening out the discussion to include his political message .

“It is also notable that Mr. Obama situated Mr. Wright within
what the Senator sees as the continuing black-white conflict and
the worst excesses of racial injustice like Jim Crow. He dwelled
on a lack of funding for inner-city schools and a general ‘lack of
economic opportunity.’ But Mr. Obama neglected the massive
failures of the government programs that were supposed to
address these problems, as well as the culture of dependency they
ingrained. A genuine message of racial healing would also have
given more credit to the real racial gains in American society
over the last 40 years .

“Mr. Obama’s message is we ‘need unity’ because all Americans
are victims, racial and otherwise; he even mentioned working for
change by ‘binding our particular grievances.’

“And the cause of all this human misery? Why, ‘a corporate
culture rife with inside dealing, questionable accounting
practices, and short-term greed; a Washington dominated by
lobbyists and special interests; economic policies that favor the
few over the many.’ Mr. Obama’s villains, in other words, are
the standard-issue populist straw men of Wall Street and the
GOP, and his candidacy is a vessel for liberal policy orthodoxy –
raise taxes, ‘invest’ more in social programs, restrict trade,
retreat from Iraq.

“Needless to say, this is not an agenda rooted in bipartisanship or
even one that has captured a national Presidential majority in
more than 40 years. It would be unfortunate if Mr. Obama’s
candidacy were toppled by racial neuroses, and his speech
yesterday may have prevented that. But it also revealed the
extent to which his ideas are neither new nor transcendent.”

Shelby Steele / Wall Street Journal

“Geraldine Ferraro may have had sinister motives when she said
that Barack Obama would not be ‘in his position’ as a
frontrunner but for his race. Possibly she was acting as Hillary
Clinton’s surrogate. Or maybe she was simply befuddled by this
new reality – in which blackness could constitute a political
advantage.

“But whatever her motives, she was right: ‘If Obama was a white
man, he would not be in his position.’ Barack Obama is, of
course, a very talented politician with a first-rate political
organization at his back. But it does not detract from his merit to
say that his race is also a large part of his prominence. And it is
undeniable that something extremely powerful in the body
politic, a force quite apart from the man himself, has pulled
Obama forward. This force is about race and nothing else .

“How to turn one’s blackness to advantage? The answer is that
one ‘bargains.’ Bargaining is a mask that blacks can wear in the
American mainstream, one that enables them to put whites at
their ease. This mask diffuses the anxiety that goes along with
being white in a multiracial society. Bargainers make the
subliminal promise to whites not to shame them with America’s
history of racism, on the condition that they will not hold the
bargainer’s race against him. And whites love this bargain –
because it gives them racial innocence in a society where whites
live under constant threat of being stigmatized as racist. So the
bargainer presents himself as an opportunity for whites to
experience racial innocence .

“Mr. Obama’s extraordinary dash to the forefront of American
politics is less a measure of the man than of the hunger in white
America for racial innocence .

“For many Americans – black and white – Barack Obama is
simply too good (and too rare) an opportunity to pass up. For
whites, here is the opportunity to document their deliverance
from the shames of their forbearers. And for blacks, here is the
chance to document the end of inferiority .

“But bargainers have an Achilles heel. They succeed as conduits
of white innocence only as long as they are largely invisible as
complex human beings .[We don’t know the real politics or
convictions of Tiger Woods or Michael Jordan or Oprah
Winfrey, bargainers all.] Mr. Obama has said of himself, ‘I serve
as a blank screen on which people of vastly different political
stripes project their own views ’ And so, human visibility is
Mr. Obama’s Achilles heel. If we see the real man, his
contradictions and bents of character, he will be ruined as an
icon, as a ‘blank screen.’

“Thus, nothing could be more dangerous to Mr. Obama’s
political aspirations than the revelation that he, the son of a white
woman, sat Sunday after Sunday – for 20 years – in an
Afrocentric, black nationalist church in which his own mother,
not to mention other whites, could never feel comfortable. His
pastor, Rev. Jeremiah Wright, is a challenger who goes far past
Al Sharpton and Jesse Jackson in his anti-American outrage
(‘God damn America.’).

“How does one ‘transcend’ race in this church? The fact is that
Barack Obama has fellow-traveled with a hate-filled, anti-
American black nationalism all his adult life, failing to stand and
challenge an ideology that would have no place for his own
mother. And what portent of presidential judgment is it to have
exposed his two daughters for their entire lives to what is, at the
very least, a subtext of anti-white vitriol?

“What could he have been thinking? Of course he wasn’t
thinking. He was driven by insecurity, by a need to ‘be black’
despite his biracial background. And so fellow-traveling with a
little race hatred seemed a small price to pay for a more secure
racial identity. And anyway, wasn’t this hatred more rhetorical
than real?....

“No matter his ultimate political fate, there is already enough
pathos in Barack Obama to make him a cautionary tale. His
public persona thrives on a manipulation of whites (bargaining),
and his private sense of racial identity demands both self-betrayal
and duplicity. His is the story of a man who flew so high, yet
neglected to become himself.”

Charles Krauthammer / Washington Post

“The beauty of a speech is that you don’t just give the answers,
you provide your own questions. ‘Did I ever hear him make
remarks that could be considered controversial while I sat in
church? Yes.’ So said Barack Obama, in his Philadelphia
speech about his pastor, friend, mentor and spiritual adviser of 20
years, Jeremiah Wright.

“An interesting, if belated, admission. But the more important
question is: which ‘controversial’ remarks?

“Wright’s assertion from the pulpit that the U.S. government
invented HIV ‘as a means of genocide against people of color’?
Wright’s claim that America was morally responsible for Sept.
11 ‘chickens coming home to roost’ – because of, among other
crimes, Hiroshima and Nagasaki? [Obama says he missed
church that day. Had he never heard about it?] What about the
charge that the U.S. government (of Franklin Roosevelt, mind
you) knew about Pearl Harbor, but lied about it? Or that the
government gives drugs to black people, presumably to enslave
and imprison them?

“Obama condemns such statements as wrong and divisive, then
frames the next question: ‘There will no doubt be those for
whom my statements of condemnation are not enough. Why
associate myself with Reverend Wright in the first place, they
may ask? Why not join another church?’

“But that is not the question. The question is why didn’t he leave
that church? Why didn’t he leave – why doesn’t he leave even
today – a pastor who thundered not once but three times from the
pulpit (on a DVD the church proudly sells) ‘God damn
America’? Obama’s 5,000-word speech, fawned over as a great
meditation on race, is little more than an elegantly crafted,
brilliantly sophistic justification of that scandalous dereliction .

“Obama’s purpose in the speech was to put Wright’s outrages in
context. By context, Obama means history. And by history, he
means the history of white racism. Obama says, ‘We do not
need to recite here the history of racial injustice in this country,’
and then he proceeds to do precisely that. What lies at the end of
his recital of the long train of white racial assaults from slavery
to employment discrimination? Jeremiah Wright, of course .

“(Obama) was supposed to be new. He flatters himself as a man
of the future transcending the anger of the past as represented by
his beloved pastor. Obama then waxes rhapsodic about the hope
brought by the new consciousness of the young people in his
campaign ..[Yet] it is not just the older congregants who stand
and cheer and roar in wild approval of Wright’s rants, but young
people as well. Why did you give $22,500 just two years ago to
a church run by a man of the past who infects the younger
generation with precisely the racial attitudes and animus you say
you have come unto us to transcend?”

Michael Gerson / Washington Post

“Barack Obama has run a campaign based on a simple premise:
that words of unity and hope matter to America. Now he has
been forced by his charismatic, angry pastor to argue that words
of hatred and division don’t really matter as much as we thought.

“Obama’s speech in Philadelphia yesterday made this argument
as well as it could be made. He condemned the Rev. Jeremiah
Wright’s views in strong language – and embraced Wright as a
wayward member of the family. He made Wright and his
congregation a symbol of both the nobility and ‘shocking
ignorance’ of the African American experience – and presented
himself as a leader who transcends that conflicted legacy. The
speech recognized the historical reasons for black anger – and
argued that the best response to those grievances is the adoption
of Obama’s own social and economic agenda.

“It was one of the finest political performances under pressure
since John F. Kennedy at the Greater Houston Ministerial
Association in 1960. It also fell short in significant ways.

“The problem with Obama’s argument is that Wright is not a
symbol of the strengths and weaknesses of African Americans.
He is a political extremist, holding views that are shocking to
many Americans who wonder how any presidential candidate
could be so closely associated with an adviser who refers to the
‘U.S. of KKK-A’ and urges God to ‘damn’ our country .

“In Philadelphia, Obama attempted to explain Wright’s anger as
typical of the civil rights generation, with its ‘memories of
humiliation and doubt and fear.’ But Wright has the opposite
problem: He ignored the message of Martin Luther King Jr. and
introduced a new generation to the politics of hatred.

“King drew a different lesson from the oppression he
experienced: ‘I’ve seen too much hate to want to hate myself;
hate is too great a burden to bear. I’ve seen it on the faces of too
many sheriffs of the South Hate distorts the personality The
man who hates can’t think straight; the man who hates can’t
reason right; the man who hates can’t see right; the man who
hates can’t walk right.’

“Barack Obama is not a man who hates – but he chose to walk
with a man who does.”

Nicholas Kristof / New York Times

“Barack Obama this week gave the best political speech since
John Kennedy talked about his Catholicism in Houston in 1960,
and it derived power from something most unusual in modern
politics: an acknowledgement of complexity, nuance and
legitimate grievances on many sides. It was not a sound bite, but
a symphony.

“But the furor over the Rev. Jeremiah Wright’s inflammatory
sermons show that Mr. Obama erred in an earlier speech – the
2004 speech to the Democratic National Convention that
catapulted him to fame.

“In that speech, Mr. Obama declared that ‘there is not a black
America and a white America .There’s the United States of
America.’ That’s a beautiful aspiration, and we’re making
progress toward it. But this last week has underscored that we’re
not nearly there yet.

“The outrage over sermons by Mr. Wright demonstrates how
desperately we as a nation need the dialogue about race that Mr.
Obama tried to start with his speech on Tuesday.

“Many well-meaning Americans perceive Mr. Wright as
fundamentally a hate-monger who preaches antagonism toward
whites. But those who know his church say that is an
unrecognizable caricature: He is a complex figure and sometimes
a reckless speaker, but one of his central messages is not anti-
white hostility but black self-reliance .

“Much of the time, blacks have a pretty good sense of what
whites think, but whites are oblivious to common black
perspectives.

“What’s happening, I think, is that the Obama campaign has led
many white Americans to listen in for the first time to some of
the black conversation – and they are thunderstruck.

“All of this demonstrates that a national dialogue on race is
painful, awkward and essential. And that dialogue needs to
focus not on clips from old sermons by Mr. Wright but on far
more urgent challenges – for example, that about half of black
males do not graduate from high school with their class.

“Then maybe we can achieve our goal of getting, finally, to the
point where there is ‘not a black America and not a white
America .There’s the United States of America.’”

Barack Obama

“I have asserted a firm conviction – a conviction rooted in my
faith in God and my faith in the American people – that working
together we can move beyond some of our old racial wounds,
and that in fact we have no choice if we are to continue on the
path of a more perfect union.

“For the African-American community, that path means
embracing the burdens of our past without becoming victims of
our past. It means continuing to insist on a full measure of
justice in every aspect of American life. But it also means
binding our particular grievances – for better health care, and
better schools, and better jobs – to the larger aspirations of all
Americans .

“It means taking full responsibility for our own lives – by
demanding more from our fathers, and spending more time with
our children, and reading to them, and teaching them that while
they may face challenges and discrimination in their own lives,
they must never succumb to despair or cynicism; they must
always believe that they can write their own destiny.

“Ironically, this quintessentially American – and yes,
conservative – notion of self-help found frequent expression in
Reverend Wright’s sermons. But what my former pastor too
often failed to understand is that embarking on a program of self-
help also requires a belief that society can change.

“The profound mistake of Reverend Wright’s sermons is not that
he spoke about racism in our society. It’s that he spoke as if our
society was static; as if no progress has been made; as if this
country – a country that has made it possible for one of his own
members to run for the highest office in the land and build a
coalition of white and black; Latino and Asian, rich and poor,
young and old – is still irrevocably bound to a tragic past. But
what we know – what we have seen – is that America can
change.”

In all the mainstream opinions I read, and in all of Obama’s
5,000 words, not one word of acknowledgement of Bill Cosby
and his work on the topic. Such as in Obama’s call for
“demanding more of our (black) fathers.” God bless the ones
who are truly around, but it’s tough to demand much of those
who are absent.

I know I shouldn’t get into this topic myself in a column such as
this, but I do have an opinion. When it comes to race, the only
things that will heal the divide are time and individuals taking it
upon themselves to make an effort in some way to change a few
hearts and minds. This is more than a bit self-serving, but I
myself have done that over the years.

That said, two weeks ago I had a well-known former professional
sports figure in my office for the first time, an African-American,
and as I cleaned up some work he was looking at the pictures on
my walls. He didn’t say anything and I was too wrapped up in
what I was doing to really notice .until the next day when it hit
me. He was staring at the two Civil War prints of Robert E. Lee
and Stonewall Jackson that I have above the sofa. I know Willie
far better than he knows me, such as the fact I’m a simple history
buff and they are cool looking paintings, but I can imagine what
he was thinking. ‘Just who the heck am I dealing with here?!’

Oh, no doubt we have a long ways to go in understanding each
other, blacks and whites, let alone the other combinations of
races in today’s America. Each of us is required to do what we
can to improve the world.

As for Obama, the initial polls seem to show his speech
backfired, or rather, maybe not the speech as much as his handling
of his relationship with Rev. Wright. It shows an amazing lack
of judgment for one planning to be president for as long as he has.
And seeing as he has little actual experience, judgment is what
we are supposed to be pinning our hopes on.

-----

--March 23 is the 25th anniversary of President Ronald Reagan’s
dream of a missile defense system. No doubt, there are many
other threats that our nation faces these days aside from the sort
of massive missile attack Reagan feared in his time, but I believe
the threat still exists.

In the latest Defense News, Christopher Kubasik of Lockheed
Martin writes:

“As we struggle with difficult economic, political and technical
decisions on how to proceed with missile defense, three things
are certain.

“First, technology many believe impossible today will become
routine tomorrow .

“Next, the economic, political and military landscape of our
world will change unpredictably and bring new threats to our
safety and security.

“Finally, our enemies will not hesitate to use the threat of missile
attack for political or economic leverage, with no regard for
innocent civilians who may be injured or killed.

“The reality is that ballistic missiles and weapons of mass
destruction are proliferating with horrific potential consequences.
An aggressive and comprehensive missile defense program is
imperative to protect our homeland, our allies and our worldwide
deployed forces. Thanks to President Reagan’s bold vision, we
are well on our way.”

--What a stretch it’s been in the Greater New York area, what
with the fall from grace of Eliot Spitzer, the elevation of David
Paterson, who then confessed to a myriad number of affairs, and
the ongoing sexual gross out that is the McGreevey divorce.
Even my favorite local television anchor, NBC’s Darlene
Rodriguez, was thrust into the spotlight because her husband, a
New Rochelle police officer, was arrested for a vicious assault on
a 17-year-old girl.

Andrea Peyser of the New York Post commented on both
Paterson and the McGreeveys. First Paterson, who one day after
being sworn in, held a press conference to admit he had bedded a
number of women outside marriage, but that he didn’t use state
funds, a key point since at least one woman is still on the state
payroll. Then the day after that, the papers discover he had
indeed used campaign money, though it appears he reimbursed it.

“Here we go again. New York’s accidental and temporary
governor, David Paterson, cannot remember whether he engaged
in energetic sex with a woman not his wife for two – or was it
three? – years around the turn of this century .

“Paterson revealed yesterday the reason he can’t get straight the
frequency or duration of his loving ways: He was engaged in
flings with a burgeoning population of strange and familiar
women. Too many to count.

“ ‘I didn’t violate an oath,’ he actually said, as if the oath of
marriage were a ticklish formality that one may easily trash –
provided, as he insists, he did not spend state money to pleasure
himself.

“But wasn’t Paterson catting around during times he should have
been busy writing legislation or something? What duties are we,
the taxpayers, paying these guys to perform?

“Paterson’s greatest sin is not that he was horny. Rather, he’s
cheap.

“It’s as if he were in competition with New Jersey’s deposed gay
governor, Jim McGreevey, who engaged in sexual m nages a
trios with his wife and his hot, male driver following dinner at
that fine wings-and-skins emporium, TGI Friday’s.

“Paterson’s tastes were so low-rent, he made up with his wife,
Michelle, with an intimate liaison at the same Manhattan Days
Inn where he met with various women whose names escape him.

“Days Inn, David? Was Motel 6 booked?....

“We are rapidly growing desensitized to chief executives whose
carnal needs trump common sense. It appears that a state
position and the ability to twist arms is all it takes for a public
servant to get laid while on the clock.”

[Sorry for the language, folks, but like I said it’s “Web Sweeps
Week.”]

As for McGreevey, Peyser writes:

“Aren’t we forgetting someone?

“It’s as obvious as the stench regularly emanating from the
Jersey swamps that Dina Matos McGreevey was well aware her
husband, the gay ex-Governor Jim, preferred hard bodies to her
body.

“In the midst of a divorce battle so vicious, so primal and so
carnal, it makes Heather Mills’ epic struggle against Sir Paul
McCartney look like a frisky Jell-O fight, news has exploded that
Mr. and Mrs. McG were not alone in the bedroom .

“According to former McGreevey driver Teddy Pedersen, the
couple frequently enjoyed dinner a trios, before retiring to lick
leftover spicy Buffalo wing sauce and chive-immersed sour
cream from Pedersen’s body. Lord knows what they did with the
fried mozzarella sticks.

“Dina all but acknowledged the frequent TGI Three-For-Alls
when she testified in a divorce deposition.

“But, now, all of a sudden, Dina remembers she’s a mother. She
denies ever doing the nasty with the fit, young stud for the
governor’s benefit .

“I wish I did not have the barnyard image of middle-aged lust
forever imprinted on my brain. But our incompetent
northeastern governors seem intent on topping one another, or
something equally unsavory.”

Yup, what a stretch it’s been. And great stuff to be talking about
around Easter, isn’t it? No wonder people seem to be leaving
this area in droves. [Outrageous tax rates also have something to
do with it.]

--But to end on a more positive note, I really wouldn’t mind
seeing Tiger Woods win the next 56 PGA Tour events. It
doesn’t get old to me, watching the greatest athlete of the
century, Tiger having already locked that award up, with 92
years to go. Plus I have $50 on him to win the Grand Slam. A
legal bet, placed in Vegas, the editor hastened to add.

---

Pray for the men and women of our armed forces.

God bless America.

---

Gold closed at $920
Oil, $101.84

Returns for the week 3/17-3/21

Dow Jones +3.4% [12361]
S&P 500 +3.2% [1329]
S&P MidCap +1.2%
Russell 2000 +2.8%
Nasdaq +2.1% [2258]

Returns for the period 1/1/08-3/21/08

Dow Jones -6.8%
S&P 500 -9.5%
S&P MidCap -10.3%
Russell 2000 -11.0%
Nasdaq -14.9%

Bulls 30.9*
Bears 44.7 [Source: Chartcraft / Investors Intelligence]

*Remember what I said last week, contrarians. This is a
bull/bear ratio not seen since the Oct. 2002 lows.

Happy Easter!

Brian Trumbore

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