MONDAY, DECEMBER 17, 2007

UP AND DOWN WALL STREET  

By ALAN ABELSON


Up in the Air

NO WAY, JOSE!

That, as we vividly remember, was scarcely an uncommon response to Juiced, ex star outfielder Jose Canseco's book that presumed to reveal the inside dope on Major League baseball's widespread affection for addiction. The rap was that Jose was an over-the-hill slugger and self-confessed hophead desperate to snag a few bucks by dishing dirt on big names, whether opposing players' or former teammates'.

Chances are the most naive and devoted fan was unlikely to confuse Jose with a choirboy, and he patently is not averse to turning a dollar, even if it means fouling off a few in the process. But whatever his motives or however unseemly, it emerged last week that in disclosing those fetid locker-room secrets, Jose was most definitely not just blowing smoke.

Vindication came in the form of a voluminous report, carrying the imprimatur of former Sen. George Mitchell, that offered the sorry details of who among the millionaires so extravagantly compensated for swinging a bat or throwing a ball used, in that wonderfully mellifluous and non-judgmental formulation only a baseball PR man could love, "performance-enhancing drugs." The findings suggest that while baseball still can lay claim to being America's pastime, professional baseball's No.1 pastime is steroids.

Some of the purported perps' names were familiar -- Mark McGwire and Barry Bonds, for example. Others were a surprise, prominent among them Roger Clemens, who achieved great fame and fortune with the Red Sox and the Yankees. Since the evidence is largely circumstantial, no matter how persuasive, it's bound to elicit a chorus of denials from the accused. So what else is new?

No doubt any number of the alleged enhancers may claim they thought they were being injected with vitamins rather than steroids, plausible enough if you happen to love needles. It might well be that from now on the standard baseball contract will require players to earn a certain number of credits in biochemistry.

We were very much reassured by a piece in Friday's Wall Street Journal that this, too, shall pass, that the revelations are not apt to have any lasting adverse impact on the sport. We do suspect, though, that for a spell (and not an excessively long one) there'll be a less-forgiving attitude on the part of the people who write the checks toward the use of steroids and human growth hormones.

The relative absence of enhancement also implies fewer home runs and 20-game winners, which are the stuff that fills stadiums. So the owners, not a uniformly likable group, may grow quite nostalgic for the good old steroid days. Life is never simple, eh?

Maybe we're a bit too fixated on the markets, but we rarely fail to hear "steroids" than we immediately think of stocks. At first blush, that may seem like a pretty weird association, mostly because it is, we guess. Still, just as baseball players use them (steroids, that is, not stocks) to bulk up and trade short-term physical gain for long-term distress, so expectations for stocks often are wildly enhanced to spur quickie runs at the considerable cost of long-term grief.

Thus, despite mounting evidence that we could be headed for just about the worst of all possible economies, with inflation beginning to howl in earnest -- consumer prices were up an ugly 0.8% in November, while producer prices rose 3.2%, the biggest monthly advance since 1973 -- and recession knocking at the door, the market continues to hang in there. Nothing like steroids to dull -- for the moment, at least -- the powerful sting of stagflation.

If stocks are on steroids, what, pray tell, are those unrepentantly upbeat strategists and advisers using? According to Investors Intelligence, the latest sounding of advisory sentiment showed a marked increase in bullishness, to 53.3%, from the previous week's 49.4%, and a corresponding shrinkage in bearishness to 25.6%, from 27.6%. A couple of weeks more of this trend and we'll all soon have to be taking something to ward off the pain.

KEEP THE HELICOPTERS FLYING! That, vowed Ben Bernanke before ascending to the top of the Fed, was the key to how he would rescue the economy should it, as economies are wont to do from time to time, stumble into a perilous morass. The helicopters, he elaborated, would not be your ordinary run-of-the-sky choppers but special numbers from which you can drop billions of bucks fresh off the Fed's own printing press.

And, as one who has criticized the chairman for being too accommodating in every sense of the word, we must commend him for resolutely adhering to his pledge. While we're at it, we might also dispel the rather malignant myth that, like his predecessor, he has a figurative "put" designed to buffer any unseemly decline in the stock market.

Fact is, there is no such "put" as there was when Mr. Greenspan was monetary maestro. Instead, working on the incontrovertible assumption that money is the root of all cures, Mr. Bernanke, whenever the market seems serious about taking a dive, calls in the helicopters to drop their billion-dollar payloads, targeting whatever seems to be the trouble.

It isn't, as some nasty types snicker, that his touching solicitude for Wall Street springs from a desire to please his friends in the investment business (he's a very serious fellow, but that doesn't necessarily preclude his having a few friends in the investment business). Rather, he's apparently possessed by the bizarre belief that a bull market is what makes for a healthy economy; we say bizarre because, of course, it's the other way around.

What we especially appreciate about Mr. Bernanke is that he's not dogmatic; indeed, he goes out of his way to stress his flexibility. When something doesn't work -- that is, doesn't win cheers from the financial markets -- he doesn't sulk, but lickety-split tries a different tack.

So when he took another judicious slice out of interest rates and investors promptly showed their displeasure (at the very least, they wanted a bigger cut) by dumping their stocks, Ben (we feel we know him well enough to relax into nomenclatural familiarity) rallied his fellow central bankers and unveiled a concoction dubbed a Term Auction Facility (or "Taffy," as in the chewy confection), aimed at fending off the end of credit as we know it.

More specifically, the idea is that the Fed and its fellow foreign institutions will, via an auction, lend a nice bundle of dough at comparatively low interest rates to banks holding mortgage-backed securities. A device, to put it another way, manifestly designed to provide short-term liquidity at decidedly less than usurious cost to needy banks, of which there seems to be no shortage.

Banks, of course, can always try to hit up the Fed at the discount window, but an extremely sensitive lot, they don't like to publicize the fact that they sure could use a few billion here or there. So what the new facility does is permit them, at the auction, to bid anonymously for the loan. Which gives you a hint of how admirably sensitive Ben and his cohorts are.

What's more, it enables the borrowing bank to put up just about any collateral it chooses (laundry tickets, however, are not eligible), including those pale and ever more sickly looking subprime mortgages, which frankly more and more to our untutored eye resemble liabilities rather than assets.

If the loans for some reason are not repaid, why the Fed can always unload the collateral, we suppose, although to whom and at what ridiculously knocked-down price is not clear. As Peter Schiff observes in his latest commentary, an indication of how much subprime mortgages are worth these days is that E-Trade Financial recently liquidated its entire portfolio of the things at 27 cents on the dollar.

In general, the Street's collective punditry greeted Taffy positively as a "first step," but studiously neglected to say a first step to where or what the next step might be. If by chance it's supposed to start the banks lending with enough enthusiasm to revivify the mortgage market or even stanch the hemorrhaging, we can only say, lots of luck. And it fails to face up to any of the other significant drags on the tiring economy.

Nor is the new facility apt to bring much balm of any sort to housing, whose condition goes inexorably from bad to worse. On that score, Fannie Mae's CEO grimly said last week that he couldn't remember a time when housing and the mortgage market were in such awful shape, warned we hadn't yet reached bottom and recovery wasn't in the cards until late 2009 "at the earliest."

The problem, pure and simple, we repeat, is that you've got a lot of folks out there who just can't afford the houses they putatively own and are not likely to be able to.

In her latest MacroMavens dispatch, Stephanie Pomboy posits that its latest brainstorm merely confirms the Fed is off on a mission impossible, namely to pump up the fast-deflating housing bubble. In her usual gentle fashion, she advises Bernanke & Co. to forget it, reminding them that "never in history has a bubble been reflated." While there's always a first time, she makes clear, this isn't likely to be it.

As evidence of just how quixotic this quest is, she cites the massive supply of unsold houses and the little matter of the "banks having to write off the $300-500 billion (already realized if not recognized) in mortgage-related losses before they can begin to think about extending new credit."

By week's end, even the erstwhile ebullient stock market seemed to be having some dour second thoughts on Taffy.


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