What happened?

Yeah, quite a stunning day if you watched your stocks plummet.

Here's my short theory on how this happened. Keep in mind that I am not an economist.

1). Congress has actively encouraged banks to give mortgages to the marginally qualified (and even to those not qualified based on usual credit scoring). Remember the term "Red lining"? Banks were sued for not granting loans in large enough numbers to people living in certain areas of the city.

2). Easy money by the Fed was a standard policy for way too long which encourages excesses in the markets (real estate in particular in this case). Recall the recent escalation of home values.

3). Congressional oversight of Freddie and Fanny was way too lax. F & F were generous with their campaign contributions and got a lot of slack.... too much. The WSJ and others (including McCain) were complaining about this for years. Zillions of dollars of the mortgages from #1 above were pawned off on F & F which everyone figured was safe as can be cause they are ostensibly backed by the US gov't.

4). Following the Enron mess Congress in their enthusiasm to do something passed new accounting laws called Sarbanes-Oxley. This imposed a new rule called "mark to market" on how assets are valued.

5). The wizards on Wall Street figured out how to package the shaky mortgages into bond-like instruments that could be resold to banks and other institutions. And, like all manias everybody figured the dance would go on forever. But, the music stopped. When the bubble burst, the new mark to market rule made the mortgage assets worth essentially zero and put otherwise profitable and substantial businesses in (and this is a technical term) deep shit. Banks have strict capital ratios to maintain to be recognized as solvent in the eyes of the FDIC. Holding assets that become instantly worthless does not look good on the balance sheet.

Of course, in a big mess there is plenty of blame to go around. However, the guys who are escaping blame thus far are the guys who should get the lion's share..... Congress. They have been essentially tossing money at this thing from the beginning (prob 700 or so billion) and now want to throw another 700 billion or more at the wall and see if that sticks. I am not at all convinced that the "bailout" is the right answer. However, in the final weeks of the election cycle it is clear that the politicians have made it their goal to use this situation as an opportunity to get elected or re-elected. And especially the Democrats who repeatedly blocked reforms of F & F and continue to encourage loans to the unqualified. Not good. Kind of like fiddling while Rome burns.

Unfortunately, I think Obama will get elected and prolong the misery. His many proposals mirror those of FDR who, if you analyze history honestly, prolonged the depression. (You can look this up). Obie thinks FDR was just great. McCain has not been swift on this crisis either.

Not fun.

More bailout discussion can be enjoyed (with a handful of Prozac) by reading Thomas Sowell's article on Townhall.com. There's also an interesting (although arguably incorrect in some aspects) article comparing the US economy to the Titanic.

Time for Humor?

With the stock market sliding downward like a flushed toilet and the Chicken Littles crying financial Armageddon if the US Congress fails to enact a $700 billion “rescue” package, this might be an excellent time to try to find something to chuckle about. Herewith a few tales to try to cheer you up.

"How Do You Know He's a King?"
In one of my early trips into the Bahamas as a deckhand aboard the Brigantine Yankee, we had one guest who set a new standard for obnoxiousness. Nothing pleased him and he complained in a loud voice about everything. He refused to follow any instructions from either the Captain or crew.

The “heads” on Yankee were about the size of a telephone booth and the marine toilets operated by a long pump handle that flushed the bowl out to sea. We had carefully instructed the passengers on the use of this balky equipment and warned them of their tendency to clog. We cautioned them not to throw anything into them, not to over pump and to contact a crewmember if they had a problem.

One afternoon as I strolled down the passageway I heard someone in one of the heads furiously pumping the toilet. It took only a few pumps to do the job and this guy (I could hear him muttering inside the tiny space) was levering the handle with determination. Uh oh, I thought.

Sure enough. Just as I was about to shout to the guy to stop pumping it backfired with a resounding blast. It sounded like a hand grenade had gone off in the enclosed space.

All went quiet and I became concerned. Then the door swung open slowly and, like a scene from a “Roadrunner” cartoon, out stepped our resident asshole. He was covered from head to toe with little bits of shit and toilet paper. He had it on all sides and even the top of his head, as the force of the blast had ricocheted off the walls and ceiling. Only the soles of his shoes were spared. With his appearance and the stunned look on his face, I had only one possible reaction—I fell down laughing.

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A Bunch of Blarney

In the 80s when our company represented the POS equipment manufacturer, VeriFone, I traveled frequently to San Francisco for meetings. On one trip after meeting with the sales managers we all headed out for dinner together. Maybe we had a few cocktails. It was a balmy evening so we all decided to walk back to the hotel. On the way I paused at the many beautiful buildings, put my nose up next to the granite facades and announced to my friends the identity of that particular granite. They all knew that I had been in the marble and granite business for 15 years before getting into the credit card market. I would sniff a wall of granite and announce, “Ah yes, this is Carnelian granite from South Dakota," or "this is Balmoral from South America.”

This supposed skill in identifying the source of granites from their smell particularly impressed one of the young woman sales managers. “You can actually tell the difference from the smell?” she asked.

“Yes,” I replied, “It’s like wine taking the minerals and characteristics of the soil in which it’s grown.” We proceed down the street with her sniffing the walls along with me. She was not having much luck in discerning the difference, but I assured her it was an acquired skill.

We all headed home and I forgot about the whole thing. Then several months later, I happened to be talking on the phone to same gal early one morning. She was describing her vacation to Mexico and I only half listening as I sipped my morning coffee. She said, “I bought one of those marble chess boards down there—you know, with the green and white marble squares? You’ll have to sniff it for me and tell me what kind of marble it is.”

Well, had I been more alert that morning I might not have given away the game. As it was, I did a spit gag with my coffee and tried to choke back my laugh. Didn’t work. “You son-of-a-bitch”, she said and hung up. At the next sales meeting she tried to get someone else to fall for it by asking me to sniff the granite coffee table. Sadly for her, they were skeptical.

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Orange You Glad I Asked?

For my 50th birthday I got an unwelcome gift…. Adult Onset Diabetes. The tiny islet cells in my pancreas suddenly decided to quit making insulin. I had to go directly to the needle and injecting insulin. My doctor, a morose and humorless guy, sent me off to the hospital where a plus sized diabetes nurse trained me on how to properly load a needle and inject it. The latter skill we perfected by sticking the needle in and pumping it into an orange.

Insulin can be dangerous if you take too much, so when starting out doctors are naturally cautious in working you up to the appropriate dosage. I had been going along for several weeks taking the prescribed amount and plotting the results of my blood sugars on a graph on my computer. (No doubt this comes as a surprise for many--- that I could actually do that on a computer, I mean). My blood sugars were still running way too high and it was obvious that I needed to take more insulin. I decided to fax my graph to my trusty doctor.

As I mentioned, my doc had zero sense of humor and later retired from medicine because of severe depression. I had never seen the poor man smile. I faxed the blood sugar results to him with a note attached. It went like this:

Dear Dr. Imsey,

Things do not seem to be working out as you can see by the attached graph. I have been injecting the insulin into the orange for the last couple of weeks with poor results. Should I eat the orange?

Dick

He called me for an immediate appointment and when I walked in he actually had a smile on his face.

I hope you do too.

K-129

The recent brutal invasion of Georgia by the KGB dominated Russian government reminded me of a book I read about a year ago. I immediately put aside Elizabeth George’s latest mystery and trundled off to my bookshelves to find and re-read it. The author, Kenneth Sewell, is a nuclear engineer who served five years aboard the USS Parche, a fast attack submarine that was involved in a number of Cold War escapades. (Check out Blind Man’s Bluff for that story.) Sewell held top secret security clearances with the Departments of Defense and Energy and in 1991 gained access to recently declassified intelligence files of the US and Soviets. From these and interviews of many of the parties involved, Sewell wrote The Red Star Rogue, The Untold Story of a Soviet Submarine’s Nuclear Strike Attempt on the US. It is, without a doubt, a sobering tale and should serve as a warning to those who do not think the KGB is alive and well in Russia and capable of anything. It ain’t a novel, folks. This really happened.

On 7 March 1968 at a precise intersection of latitude and longitude some 350 miles from Honolulu, the nuclear equipped Soviet submarine, K-129, surfaced in the dark of night, blew up and promptly sank to the ocean floor some three miles below. While many of the details of this incident still remain classified, Sewell unearthed enough facts to paint a very convincing picture of what occurred. But first, a few words about the geo-political situation in early 1968.

· The US was heavily involved in the Vietnam War, devoting much blood and treasure to that conflict while the populace at home became increasingly disenchanted.
· The Soviets were spending 50% of their GDP on their military and facing the prospect of financial ruin in the process. Supporting communist insurgencies around the world also helped drain their coffers.
· The KGB led by Andropov and the Soviet central government led by Brezhnev struggled for power.
· The KGB had control of all nuclear weapons held by the Soviets.
· China had emerged as a new military power with nuclear capabilities.
· China and the USSR were at each other’s throats for dominance of International Communism. They were fighting each other on their long mutual border and the Soviets had one half of their total forces arrayed along that border.
· Mao Tse-tung had China in turmoil with his Cultural Revolution and became increasingly belligerent with both the Soviets and the US. He had threatened all out nuclear war with the US, contending China with its huge size would survive and the US would not.
· All branches of the Soviet military had their own special operations troops known as “spetnaz”. The KGB had them as well and they were known as “osnaz”. The Osnaz were especially nasty lads who specialized in “wet ops” (kidnapping and murder). They were also trained in the handling of nuclear weapons and all types of military equipment, including submarines. They operated in ten man teams.

On February 24, 1968 the diesel-electric Golf Class Soviet submarine K-129 sailed on an unscheduled mission from its homeport at Vladivostok. At the last minute an additional 11 men boarded the sub making the cramped boat seriously over crowded. The Soviets, always anal about the chain of command, required that all subs report in to Moscow at predetermined locations along their course. After the first check point K-129 was never heard from again. When the Soviets finally launched a massive sea search for their sub they concentrated on an area some 800 miles north of where the sub actually sank. That was where K-129 was supposed to be patrolling.

A US satellite had noted the explosion off Hawaii and had not deemed it of strategic importance. A few days later a U of Hawaii research ship discovered a radioactive oil slick and alarm bells went off. The US, not wanting to tip off the Soviets, utilized their own sub towing a deeps submersible equipped with lights and cameras and found the K-129 in short order. Of course, they snapped lots of damning photos and used the mechanical arm of the submersible to recover the nuclear bombs and who knows what else from the wreckage.

It soon became clear what had happened and why. The K-129 had surfaced to fire a nuclear tipped rocket at Honolulu and although they possessed the launch codes, they were unaware of the super secret fail-safe device installed on the weapon. The US had given Soviet scientists the technology for the fail-safe device to prevent a rogue group from an unauthorized firing . From the damage to the sub it was evident that the nuclear device had self destructed, igniting the rocket fuel below and in the one next to it in a massive explosion that broke the back of K-129. It went to the bottom in seconds.

It quickly became obvious what had been intended and how it had been accomplished. The Captain and crew went to their deaths locked in a forward compartment, so the sub had been in the control of the 11 mysterious men who boarded as the sub set sail. The location of K-129 also offered some clues.

The Golf II was capable of firing from underwater and at ranges of 800 miles. The Chinese subs had to be on the surface to fire and within 400 miles of the target. They also had to be at the precise intersection of latitude and longitude lines to successfully navigate to the target. Obviously, the intention was to obliterate Honolulu including the vast military presence there, plus the residents and tourists, and blame the whole thing on the Chinese. The plot had been hatched by the cynical KGB trolls in Moscow to take out two enemies at one shot by starting a nuclear war between China and the US. The KGB lads knew that in the aftermath, the US would have no means or intention to occupy a country the size of China, so they would just march across the border and take over.

The info was damning and volatile. A Johnson Administration exhausted with the Vietnam debacle wanted no part of it. The newly installed Nixon Administration and the aggressive Henry Kissinger had no such reservations. A copy of the report and photos got slid under the door of the Soviet Embassy in Washington one dark night. Heads rolled in Moscow and the nuclear weapons got taken out of the hands of the KGB.

Kissinger also began negotiations with China. If you ever wondered how the hawk Nixon ever managed to be the guy to make the historic break through in US Chinese relations, you can be pretty sure the photos and report on the sinking of K-129 played a major part. “And now,” as Paul Harvey likes to say, “you know the rest of the story.”

Post Script:
During the Cold War the Soviets employed what is known as the “Brezhnev Doctrine” as exemplified by the brutal invasion of the Soviet satellite, Czechoslovakia. Forty years later here we are again with Russian tanks rolling. You have to ask yourself: If the KGB was willing to instigate a nuclear war to further their ambitions, of what is the current KGB boss, Putin, capable?