There was a reader Q&A this Wednesday morning on the Washington Post site with business columnist Steven Pearlstein, who won a Pulitzer for his 2007 coverage of the financial crisis and has continued to write great stuff (via Romenesko). I link to it mainly because I'm getting asked more questions these days than I can ever answer, so when I find someone whose answers sound a lot like mine I'm more than happy to outsource (as I did with Tyler Cowen yesterday). A sample:

Savage, Md.: I'm sure this has been asked a million times, but I don't remember the answer. Why did lenders ever think highly variable and exotic products like ARMs with artificially lower teasers or interest-only options were ever appropriate for subprime borrowers with bad credit? I can understand the existence of subprime mortgages -- higher rates reflect higher risk, just like with jumbo mortgages -- but if the lender had wanted to minimize risk, wouldn't the only sensible thing be a constant payment schedule?

Steven Pearlstein: I have never explained it because it is simply inexplicable, other than by the conclusion that the people making and brokering thse loans knew full well that it was stupid but that (1) it wasn't their money at risk (2) the fees were great and (3) the borrower would get into trouble and then simply get out of trouble by refinancing the loan (with another set of fees) later, and using the higher price and added equity to get into a more reasonable loan. When the prices stopped rising and refinancing was no longer possible, the Ponzi scheme ended.

The one part of the Q&A I didn't like was when he responded to a question/complaint about the bailout bill being "rotten to the core" thusly:

Steven Pearlstein: The left wing bloggers are out in force on this one -- they see this as a seminal issue, like the Iraq war vote and the vote on warrantless searches. But other than not really understanding the problem and not really having studied the proposal, you guys are doing just great! Thank God there is a mainstream media out there that actually does reporting and has people who understand thing, because if the flow of information and news to the American people were left solely to bloggers, we'd be in a big mess.

Can't we just pass some kind of law decreeing that people at mainstream media organizations are no longer allowed to make sweeping statements about the bloggers? Maybe it could be part of the bailout bill! The Paul Wellstone Emergency Economic Stabilization, Non-Laminated Wooden Arrow Excise Tax Exemption and Mainstream-Media Undiscriminating-Blogger-Denigration Prevention Act of 2008, or PWEESNLWAETEMMUBDPA.

I mean, I've criticized the same silly this-is-the-new-Iraq argument that Pearlstein is talking about. Guess what: So have some lefty bloggers! The lower barriers to entry of the blogosphere do mean that more unadulterated, uninformed nonsense is spouted there than in the pages of the Washington Post or Time magazine. But they also mean that the blogosphere produces huge quantities of more specialized, more informed, more intelligent commentary (and on occasion better reporting) than much of what you find in the Washington Post or Time magazine. I know the comments to this blog often contain far more intelligent and informed discussion of the affairs of the day than I can muster.

Okay, off my soapbox. I still think professional media are indispensable, although there's no law saying they have to look like our existing mainstream media. I just hate the whole bloggers this or bloggers that line of discourse. It's so 2005. Criticize the "the idiots" or the "the lunkheads" or the "the zealots" all you want, Pearlstein. Just not "the bloggers."

A bunch of value investors got together at Columbia University today for the annual celebration of Graham and Dodd—those Columbia B school profs who wrote the 1934 tome Security Analysis and inspired generations of investors (Warren Buffet among them) with the philosophy that the way to make money is to buy good companies on the cheap and then let the market, over time, discover how much those companies are actually worth.

By some measures, it's the perfect time to be a value investor. Thanks to the whole financial tumult/market freak-out situation, there's a lot of cheap stuff out there. "Everything we buy goes down every day, but we look at the economics and the price and they're some of the best opportunities we've ever seen," said David Abrams of Abrams Capital Management. More than one of today's panelists has gotten into distressed debt. Seth Klarman, who runs The Baupost Group, said that "it's sad" to be buying from panicked, out-of-their-mind sellers—including some of the "best trading desks on Wall Street"—who are being forced to unload assets because of plunging valuations and redemptions. But he's doing it, they're all doing it, because this is how value investing, in the long run, comes out on top.

Emphasis on long run.

(more...)

Regular readers of this blog are aware that I'm extremely dubious of the argument that the 1999 repeal of the Glass-Steagall Act, which separated banks from securities firms, is to blame for today's financial crisis. But it keeps coming up, so let me try to smack it down again.

First, I think it's fair to say that 90% of the people who blame today's troubles on Glass-Steagall repeal have no idea what they're talking about. It's just that the whole thing has a deregulatory sound to it--and deregulation is bad. That, and one of the names on the law that repealed Glass-Steagall, the Gramm-Leach-Bliley Act, belongs to John McCain's Treasury-Secretary-in-Waiting Phil Gramm, who is not just Satanic but Texan. Nobody seems to care that another of the names on the law belongs to saintly Iowan Obama supporter Jim Leach. Or that Bill Clinton signed it. But whatever: Let's focus on the 10% who do have some idea of what they're talking about.

(more...)