Virginia Shanahan, writing at MacsMind, has a longer memory than most of us, and cites a NY Times article from 2003 recalling that the Bush administration actually foresaw problems, and tried reforming Fannie Mae and Freddie Mac, but his efforts were blocked. By whom? The same democrats who now possess a Congressional majority. With current Chairman of the House Financial Services Committee, Massachusetts’ own Barney Frank playing a leading role.

I doubt many of the readers recall this article from the New York Times five years ago.

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

We can see now that the Bush administration had accurately diagnosed the problem in the lending market and had a plan to address it. Reluctantly Fannie Mae and Freddie Mac supported the plan. However, Democrats objected.

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.

Panopticon explains the tale of Asset-Backed Securities (ABS), tranches of risk, Collateralised Debt Obligations (low tranche ABS) repackaged and marketed at higher ratings, Adjustable-Rate Mortgages, and No Documentation Loans. Making mortgage loans was really profitable, the federal government wanted home ownership made more accessible, and real estate prices only go up, after all. What could possibly go wrong?

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Hat tip to Karen L. Myers.

Donald Luskin, in yesterday’s Washington Post, points out that politicians and reporters have a personal interest in exaggerating the scope and dimensions of current economic woes.

Do a Google News search for “since the Great Depression,” and you come up with more than 4,500 examples of the phrase’s use in just the past month.

But that doesn’t make any of it true. Things today just aren’t that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression — or exaggerated Depression comparisons.

Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That’s virtually the same as the 3.4 percent average growth rate since — yes — the Great Depression.

Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that “the entire world is either now locked in a global economic recession or soon will be.” Actually, that’s a major clue to what started this thought-contagion about everything being the worst it has been “since the Great Depression”: Politics.

Patient zero in this epidemic is the Democratic candidate for president. As it would be for any challenger, it’s in his interest to portray the incumbent party’s economic performance in the grimmest possible terms. Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the “percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression.” At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as “maybe” or “probably.” According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, “there are no consistent data on foreclosure or delinquency going all the way back to the Depression.”

The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today’s delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day — the highest since the Great Depression, one supposes — in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don’t recall hearing any Democratic politicians complaining back then.

Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it’s spurious to evoke memories of that great national calamity when talking about today — it’s akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock’s research, more than 50 percent of home loans were in default.

Moreover, MBA data show that today’s foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures. This suggests that today’s mortgage difficulties are probably a side effect of the otherwise happy fact that, over the past several years, millions of Americans of modest means have come to own their own homes for the first time.

Read the whole thing.

ArabianBusiness.com boasts that Dubai is in the process of replacing London and New York as world capital of the financial industry.

Dubai is picking up the mantle of the financial capital of the world, as global banking sectors London and New York continue to fade on the back of the global credit crises.

The new mantra in New York and London is “Dubai, Mumbai, Shanghai or goodbye”, as job losses mount in both cities while opportunities in the east continue to rise.

Lehman Brothers on Tuesday became the latest investment bank moving one of its most senior positions to the UAE. Philip Lynch, the bank’s co-head of equities for Europe and the Middle East, will be relocating to Dubai after serving more than two decades in London.

The US investment bank, which has axed over 6,000 staff in the last nine months, said the move was aimed at serving the growing needs of clients in the Gulf region and the wider Middle East.

Lynch will find himself in good company. Barclays last month dispatched Roger Jenkins, one of London’s highest-paid bankers, to the emirate as chairman of investment banking and investment management.

Earlier in May Citigroup, which has so far cut 1,500 jobs because of the global credit crisis, announced it would send Alberto Verme, co-head of global investment banking from London to Dubai. …

The relocation of roles from London and New York to Dubai, and to a lesser extent Mumbai and Shanghai, reflects the reshaping of global opportunities for investment banks.

With a surge in oil revenue, rapidly rising infrastructure needs, and the emergence of sovereign wealth funds at the head of M&A activity, the Middle East and Asia have become crucial for global investment banks looking to remain profitable.

Slate reviews current cognacs, and discloses a pretty outrageous gambit by Hennessy to fleece the excessively affluent and vainglorious consumer. Flaunt your taste, Hennessy advises.

In 2007, a record 158 million bottles were sold worldwide, and the cognac houses are naturally rushing to cash in on the flush times, particularly at the high end. Hennessy recently introduced a new cognac, called Beauté du Siècle, whose specs are as over-the-top as its name: Only 100 bottles are being produced, the bottles are all made of Baccarat crystal, each one comes in an ornate mirrored chest apparently fashioned by a team of 10 artists, and the cognac is hand-delivered to buyers by members of the Hennessy board. The cost? $235,000 per bottle.

France24 The Observers:

Yahoo! China pasted a “most wanted” poster across its homepage today in aid of the police’s witch-hunt for 24 Tibetans accused of taking part in the recent riots. MSN China made the same move, although it didn’t go as far as publishing the list on its homepage.

Yahoo indignantly wrote France24 saying: “Yahoo! isn’t doing this. It’s Yahoo! China*.”

*Yahoo had to accept a Chinese partner, and Chinese control, to gain access to China’s market.

Hat tip to Matt Brown Hamlin

Ronald Reagan said: “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Democrat Barack Obama promises to do all that:

In a major economic address at Cooper Union today, Senator Barack Obama called for immediate relief for homeowners hit by the housing crisis, modernization of our regulatory framework, and an additional $30 billion stimulus package to jumpstart the economy and help protect families from the economic slowdown. …

In his speech today, Obama made the case that while markets are the engine of American progress, the government’s role as umpire and steward is critical to the function of the free market. For too long, he said, special interests have been able to bend the rules to maximize their profits on the backs of hardworking Americans.

Obama pledged to restore confidence in the markets, tackle the housing crisis and protect families from the economic slowdown by:

Ø Creating 21st century standards for transparency and oversight of the financial system in order to prevent future abuses and crises.

Ø Providing immediate relief to homeowners hit by the housing crisis.

Ø Enacting a second stimulus package to stabilize and strengthen the economy, provide aid to homeowners and states hardest-hit by the housing crisis, and extend and expand unemployment insurance.

But who needs Obama? Even if the democrats don’t win, Republicans like George W. Bush, and certainly John McCain, will do nearly every bit of very much the same.

Bloomberg:

Treasury Secretary Henry Paulson is likely to call for the creation of new regulatory agencies with broad powers over lending, the securities industry and business conduct, according to the draft of a study he commissioned.

The report, which recommends more power for the Federal Reserve, also proposes combining the Office of Comptroller of the Currency — which dates back to the Civil War — and the Office of Thrift Supervision into a single banking overseer. In addition, the draft, which was circulated to government agencies this week and obtained by Bloomberg News, calls for the merging of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

New York Times:

The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades. …

According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.

Google is a prestigious company, pays well, has terrific benefits, pampers employees with perqs, and (back when the market was moving in the right direction) had highly attractive stock options to pass out. Information Technology professionals are consequently very eager to apply for openings at Google, but Google insiders are notoriously egomanaical and capricious, and even fewer job interviews than usual seem to end favorably when Google is the prospective employer.

So notorious is the “rejected by Google” experience, that it seems a new literary genre (kind of in the spirit of the satires of Martial) describing “How I Blew my Google Interview” has been identified by Henry Blodget.

Hat tip to Karen Myers.

John Mangum argues that the US Government’s failure to strengthen the dollar is a clever and deliberate (and unannounced) gambit in the economic contest between the US and China.

we must ask, why is this happening? Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?

Perhaps the larger picture is that the United States is waging an economic war against China.

The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.

China has refused to revalue its currency to a realistic level to improve its trade position with the United States. China has used its huge dollar reserves as a sword against the United States by threatening to sell those dollars, and thereby causing the dollar to drop in value. In effect, the United States is using China’s strength against China.

In order for China to maintain the levels of its trade with the United States, it will be forced to lower the value of its currency. However, if it does that, it faces two major problems. Foreign direct investment (FDI) into China would become less expensive, and China is worried that more and cheaper FDI would spur China’s inflation. Further, a devalued currency would reduce the profit to China for its exported goods.

If China keeps it currency at its present levels, the United States will buy less. The United States wanted a stronger yuan to reduce trade, which China was unwilling to do. That objective is now achieved by a weaker dollar.

China’s dollar holdings are worth much less when buying goods like oil and metals that China depends on for its development and growth. Further, China has been talking and trying for some time to diversify its foreign-reserve holdings form dollars to other currencies and gold. Now, their dollars are worth much less when buying gold, yen and euros. …

the “crisis” is being used to further the US economic position, long-term position, particularly with regard to China. From Sun Tzu: “All warfare is based on deception.”

Steve Forbes identifies two steps for the administration to take to end the panic in the equities and real estate markets.

The Bush administration must take two steps immediately to quickly halt the unending, enervating credit crisis: shore up the anemic dollar and, for the time being, suspend “marking to market” those new financial instruments, such as packages of subprime mortgages.

The weak dollar is pummeling equities, disrupting the economy, distorting global trade and giving hundreds of billions of dollars in windfall revenues–through skyrocketing commodity prices–to our adversaries such as Iran and Venezuela. Not since Jimmy Carter has the U.S. had a President so oblivious to the damage done by an increasingly feeble greenback.

The Federal Reserve can rally the markets for a day or two by finding some new mechanism through which to lend more money to banks and other financial institutions. But this is the proverbial Band-Aid for a patient who is beginning to hemorrhage.

The Administration acts as if the dollar were like the sun, its rising and falling beyond any control. Countless times experience has shown that notion to be false. The U.S. Treasury Department could buy dollars in the currency exchange markets. Our allies would gladly cooperate with such an operation; their exports are being hurt more and more. The Fed could mop up some of the excess liquidity it has created since 2004, even as it makes targeted loans to beleaguered banks and financial houses.

The other measure: The Treasury Department and the Fed should get together with the SEC, the Comptroller of the Currency and other bank regulators and announce that financial institutions for the next 12 months will no longer write down the value of exotic financial instruments (primarily packages of subprime mortgages). Instead, writedowns will occur only when there have been actual losses on those assets. If a mortgage defaults, a bank will then–and only then–recognize the loss.

It’s preposterous to try to guess what these new instruments are worth in a time of panic. Such assets are being marked down to increasingly arbitrary low levels. But when a bank books such a loss, it must replenish depleted capital, even though cash flows for most financial firms are still positive. Worse, when forced by panicky regulators and lawsuit-fearing accountants to write down the value of these securities, institutions will dump assets in a market where there are temporarily few or no buyers. The result is a spiraling disaster. So let’s have a time-out on markdowns until we actually have real experience in what kind of losses are actually going to occur.

These two steps would quickly end the panic.

He basically right, but one more step (beyond the power of the current administration) is needed. The democrats need to lose in November.

It’s not only the weak dollar and the credit crisis resulting from write-downs inducing fear and depression. There is the belief that a democrat is inevitably going to win in November, and next year Congress, encouraged by the White House, will start raising taxes.

I am finally getting around to linking a witty and highly perceptive article by Michael S. Malone, author of ABC News’ Silicon Insider column, writing in Monday’s Wall Street Journal, which I’ve been wanting to recommend to friends.

If you look at Microsoft with an objective eye, it becomes apparent that it is a giant company past its prime. It is big and rich, but increasingly toothless. It is able to use its money to put on a great show at the Consumer Electronics Show, underwrite an interesting market initiative — or buy another big company — but it no longer has the fire of ambition or the addiction to risk to ruthlessly execute on those desires any more. As has been noted before, once you look past all of the high profile moves (such as MSN, MSNBC, Zune and XBox), Microsoft has only really been as successful as it reputation would suggest in just two businesses: Windows and Office. Most everything else is flash.

Even Microsoft’s full-out assault on Netscape (which, ironically, will officially die on March 1) for control of the Internet browser industry — justly earning it the sobriquet “Evil Empire” — in retrospect was less a brilliant maneuver by Gates & Co. to capture a hot new industry and more a desperate (and questionable) scramble by a market leader caught napping.

That corporate somnolence, rather than its more-remembered ruthlessness, has far better characterized Microsoft over the past decade. Even the Vista operating system, the most recent upgrade of Microsoft’s core product line, managed to be so late that it almost crippled the personal computer industry. It finally arrived to a chorus of boos, most of them undeserved (it’s a pretty good operating system), but some dead-on (it’s a technological hop when it should have been a leap). Microsoft lost its killer instinct a long time ago. On the rare occasions when the mood resurfaces, the company doesn’t have the chops anymore to execute on its desires.

And that brings us to the Microsoft-Yahoo deal. For all of the excitement, this is just big, rich, but slow-moving giant looking to buy another slow-moving giant, the latter having stuck to an obsolete business plan too long and lost its way. The scheme is less predation than it is desperation: In the world of search, Google owns these two lumbering monsters.

Microsoft understandably covets the sheer size of Yahoo’s subscriber rolls, believing it can accomplish what Yahoo has failed to do: convert more of those 130 million monthly visitors into real, paying customers. But Microsoft has hardly shown it can do that at MSN. So, can it really find a solution to Yahoo’s structural problems?

That remains to be seen — and Microsoft’s one genius is as a late adopter. The real problem Yahoo — and perhaps soon Microsoft — faces is that those legions of Yahoo users don’t want to be stuck inside a small corner of the Web, not getting all of the experiences and services (like live TV and first-run movies) they were promised. Especially not when they can run around and find all of those things, in abundance, elsewhere on the Web. Microsoft is even less prepared to solve that problem than Yahoo.

That leaves search, which is probably the real reason Microsoft wants Yahoo. Combining the two search engines would, in terms of sheer numbers, represent the biggest challenge to Google to date. But the sum of two also-rans is almost never a winner — unless the newly merged is very, very lucky in its competitors. That’s what happened with HP and Compaq: Who’d have guessed that Dell would suddenly fall on its face?

Incredibly, the same may happen with a Microsoft-Yahoo deal if it happens. If you look at the stock market, peruse the industry gossip blogs, follow the departure of key employees, or read about the various new initiatives (energy?) the company is pursuing, it becomes increasingly apparent that Google is a company about to have an early midlife crisis. Microsoft-Yahoo may turn out to be a pedestrian idea with absolutely brilliant timing.

If that is the case, and the merger proves successful, it will have more to do with Google than Microsoft and Yahoo. Which is why the feds should stay out of it.

So, Yahoo: Take the deal (unless a better one comes along). Microsoft: Let this be the first of many high-risk moves. Treat Yahoo as a heart transplant, not a skin graft. And Google: This new competition should be a warning to stop fooling around and get back to business.

John Murrell at Good Morning Silicon Valley reports on Microsoft’s $31 a share offer for Yahoo.

You could watch it playing out like one of those “nature, red in tooth and claw” documentaries. There was the wildebeest (played by Yahoo), slowed by a nagging groin injury, gradually starting to fall behind the herd. The vultures and hyenas (played by analysts and pundits) were starting to circle and salivate, respectively. Then, off in the tall grass there’s a stirring, then an explosion of dust as the lion (played with scenery-chewing enthusiasm by Microsoft) springs at its quarry and sinks its teeth into the back of its neck. Sensitive viewers may want to turn away.