Business Blog: Hoover’s Business Insight Zone

Confession time: after a summer of relentless headlines about the mortgage meltdown, credit crunch, and assorted alliterative anti-affluence ailments, my eyes have started to glaze over when I read stories about the latest on CDOs, SIVs, et al. So I glanced at a few things about the supposedly big deal announced on Monday, through which Citigroup, JPMorgan Chase, and Bank of America will help to create a Master Liquidity Enhancement Conduit (MLE-C).

If you’re confused by that title, you’re not alone, but you can get clarification from this Floyd Norris article:

3 Major Banks Offer Plan to Calm Debts in Housing*

The biggest banks in the United States, with active encouragement from the Treasury Department, unveiled a plan yesterday to keep the housing-related debt crisis from worsening.

The plan calls for the banks to create a new financing vehicle to try to restore confidence and reduce the risk of a market meltdown by propping up an important part of the debt markets. But the banks hope to take minimal risk and avoid actually investing any of their own money.

If Norris isn’t the dean of financial journalist in the US, I’m not sure who is, and his treatment here is sound. But the most interesting analysis I’ve come across is this one from Andrew Leonard in Salon, who thinks the MLE-C plan implicitly enables the continuation of what he calls “Enron economics redux.”

First he lays out Wall Street’s reaction to the announcement of the plan:

Way to spoil the party! The Dow Jones industrial average immediately dropped by 108 points on Monday and another 71 on Tuesday. Why? Because the announcement of a rescue plan is tantamount to shouting, in capital letters: WALL STREET, WE STILL HAVE A PROBLEM.

When combined with Treasury Secretary Hank Paulson’s somber speech Tuesday morning warning that the housing crisis is set to drag on indeterminately, one can only conclude that the stresses that have flowed from real estate into the financial markets are going to ramp up. The purpose of the super conduit may not be to clean up the mess that already exists, but prevent matters from getting considerably worse.

Leonard then digs into the underlying issues of “conduits,” which are financial vehicles designed to make money by arbitraging long-term and short-term debt yields. (Read his description; it’s better than mine.) And he points out the ways in which conduits are supposed to be opaque — designed, as they are to live outside the typical categories of investments expressed on a bank’s balance sheet.

He also raises larger questions about the efficiacy of the Treasury/megabank plan:

Will it work? Nobody knows, and analysts are all over the map on the question of whether to call the plan a bail-out, a shell game, or just a highly ironic attempt to solve a problem by engaging in the exact same behavior that caused it. The only thing we know for sure is that the Master Liquidity Enhancement Vehicle will be featured in the center ring of the Wall Street circus for a while to come.

That circus is increasingly complex. It stretches far beyond Wall Street — throughout the globalized financial world, in fact. It involves many convoluted relationships between public and private entities, between individual consumers and massive institutions, and between the industries and economies of various countries. (German and Japanese banks have suffered from exposure to the US mortgage lending market, to pick just one handy example.)

In this environment, where so much uncertainty has reigned as the unexpected impacts of “exotic” financial instruments have begun to be felt, Leonard’s call for greater transparency is apt. Maybe the MLE-C plan has merit, but in any event it’s hard to get down to the brass tacks of fixing the mess in the financial markets if we can’t figure out where those brass tacks are.

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* Probably I’ve mentioned my increasing frustration with the Times’ headline writers. This one offers a case in point: the first thing mentioned in the headline is three banks . . . but the names of the banks don’t show up until the seventh paragraph of the story. I’m not even going to entertain counter-arguments on this point: the mismatch between the headline and the story is simply wrong-headed. Memo to Times headline writers: Either cast the headline to say something like “Treasury-Backed Plan to Calm Housing Debts,” or else name the banks at the top of the story.