Colonel Jack Jacobs Overviews Financial Crisis
(Imus Gets Into Naked Shorts)
Imus: Can you get us up to speed on where we are? Fundamentally do you think the American way of life is going to change?
Jack Jacobs: The way of life has to change whether they bail it out or not. The market is going to continue to slide.
There is plenty of blame to go around everybody has been asleep at the switch. Including the Congress and the Executive Branch they’ve all been sleeping! People on Wall Street have not been paying attention to it.Imus: a few people on Wall Street were paying attention. Every once and awhile somebody will write a book. You mean generally people are not paying attention?
Jack Jacobs: John Thain, who use to be at the Stock Exchange, shortly after he went over to Merrill he realized their portfolio was in lousy shape. He sold off $32B in stuff taking an $8B hit and probably the “opprobrium” of all of his stockholders. Turns out it was the right thing to do!
Jack Jacobs: Let me give you an example of a few things that do not make any sense at all.
- If I buy more then 5% of a listed stock I have to file with the SEC and tell them that I bought more then 5%. If I sell more then 5% of a listed stock I don’t have to tell the SEC anything!
- I can sell 100% of GE without even having the stock, hoping to buy it back later at a lower price. Naked Shorts are terribly destabilizing.
- Credit Defualt Swaps Market, is basically buying insurance on stuff you don’t own. This market is $70 Trillion. It’s like taking out insurance on an automobile that I don’t own, that nobody owns, that doesn’t exist!
- Excessive leverage taken on by Wall Street Firms. If you buy a house you put down 10% or more and you borrow the rest of it. Institutions were borrowing money way in excess of that. Borrowing money to “beat the band” way in excess of their ability to pay it back, unless the trade worked out okay.
Imus: As you’re talking, I listen for a little bit but then start thinking about something else. Its not you, Its just too hard to understand. It’s too hard for us to understand.
Jack Jacobs: Its too hard for the guys running the Wall Street firms to understand!
Imus: Is this an economic Pearl Harbor? Is this the crash of ’29 or worse?
Jack Jacobs: Not the crash of ’29 because lots of things did not exist then that exist today. Theoretically there is a mechanism for controlling things. We are at a watershed for the way a) run the economy and b) move money around. The Executive Branch acts as if the only tool we have is the money supply. Things are a little rough? Print some more money and ease up interest rates. Inflation heats up? Tighten up interest rates a little bit. That’s not going to work in this environment where we have a crisis in confidence. There are other things at work here. We are possibly on the verge of having enormously high interest rates and no economic growth. We will have inflation and a stagnating economy, that’s a very bad combination.
Imus: Does the $700B have to pass?
Jack Jacobs: Yes it has to pass for confidence. Almost doesn’t matter if they know what the $700B is going to buy. It is essential to pass to instill a modicum of confidence.
Imus: Everyone will think this solves it, whether it does or not?
Jack Jacobs: If the guys who are passing this are not paying attention and there is another problem down the road they will deal with it. If they don’t deal with it, all bets are off and you can grab your ankles!
Imus: Bernard tells me there are Democrats who are willing to torpedo this bill to avoid John McCain getting any credit.
Jack Jacobs: Bernard’s right! People I talk to tell me the same thing. This election is on a razors edge. On the national level its every man for himself. The irony is If you look at the Constitution you will see the President has no enumerated powers. Teddy Roosevelt was right its just a “Bully Pulpit”, all the power is in the Congress. Yet we are focusing attention on the one guy who will occupy the White House.
This is what we ought to do, have Obama and McCain on the same ticket and flip after a two year turn as President and then we can see who did best!