The American Spectator

The Nation's Pulse

After the Earthquake

By Barron Thomas on 9.19.08 @ 12:07AM

I didn't mean to begin this with "I told you so." I really didn't.

Well, okay, I did.

It was only after Wall Street's (and every TV News service's) dramatic reaction of fear and panic that it was time to think back to my American Spectator columns of a year ago (August 17, 2007: "The Coming Hedgefund Earthquake") and all the way back to July 6, 2005 ("Are We in a Real Estate Bubble?").

What's going to happen next?

First, can anyone truly be surprised that the carriage trade white glove Wall Street firms are lying dead in the ditch after being completely ruined by self-serving dealsters?

And with a Congress that even the wildest frat house would eye with disgust for looking askance at the Fed's total lack of adult supervision over our financial system.

And how exactly did Freddie & Fannie lose their respected hearth-and-home status and become derelict street vagrants?

Probably for the same reason that you don't allow your 8-year-old to choose the babysitter.

Another clue: Maybe, somewhere, scribbled on walls in the House Members' Gym Locker Room, are the immortal words: "Don't bite the hand that feeds you."

Has anyone yet been able to fully calculate the gross salary of the CEO of Countrywide, or did everyone quit after his paycheck passed $100 million? And Lehman Brothers' Richard Fuld's estimated $45 million paycheck for 2007 as he wiped out billions of dollars of wealth for his customers?

What will happen next is sad, but simple, and also intriguing.

First, the finger pointing hasn't even begun yet. There will be so much of it that we'll probably see finger traffic jams. Disappointed investors will point at reckless CEOs who were so busy cashing their lavish checks that they failed to keep up with what was going on down on the lower floors. Bank clients will point at gunslinger salespeople who off-loaded junk by the tanker load while collecting their turbocharged paychecks. Pundits will point at Congress, which opened up Wall Street to become the new Wild West. Congress itself will hold endless hearings trying to grab the most on-camera time discussing how much was paid for designer shower curtains.

But will any of this solve the problem?

It's like the old saying, "boys will be boys." If the parents leave for Europe and leave behind a Gold Amex card "just in case" the kids need something, and the keys to Dad's Ferrari are on the kitchen counter, and the parents return three months later and things are, well, "broken," then who's to blame?

Investors have had years to read about the creative antics on Wall Street. Most investors have at least some mathematical ability, yet why did they not stop and question the arcane paper shuffle going on? Can any investor really describe the wide range of derivatives, how hugely leveraged the Wall Street firms were in this highly speculative business? Can he truly understand how he, the small investor (or big investor) fits into the food chain of Auction Rate Securities? If you can't understand these financial "products," or didn't fully understand what was happening with real estate, you could have read The American Spectator and been forewarned. Okay, there, we said it. We told you so.

But what's important now is what's next? Is there any "Hollywood ending" in sight?

The answer is thankfully YES.

The happy "Hollywood ending" is probably 24 months out, but it's there.

But first, there will be a lot of soap-opera style small cliff-hanger endings en route. I predict there will be at least two more big-bank "mergers/failures" and probably 50 or so small bank mergers or failures. Sorry, but we all know. Doo-doo always flows downhill.

After the election, things will start to sober up slowly and people will tire of the bad news headlines. Credit will still be tight until the banks start healing and making money (like 1990-1992). Short of a major, presently unforeseen calamity, gold will stay about where it is today or within a 15% trading range. Ditto on oil.

The steep decline in housing starts, coupled with the stork never stopping, and a gradually healing banking system, will slowly start invigorating home values, but not to the extent that your home becomes a huge Visa card again.

The Hollywood ending will be enjoyed by all, but by some more than others. The "some" will be smart boys who are now assembling huge vulture funds to pick up the gems among the carnage following the garage sale of Lehman and similar disgorged assets. It will be a very, very Hollywood ending for this group.

If you get tired of watching over-paid CEOs squirm on CNN in front of TV-mad congressmen, just switch the channel over to Days of Our Lives or All My Children. The plotline won't be much different, but the characters are better looking.

Stay tuned for more.

Letter to the Editor

topics:
Trade, Business, Hollywood, Oil