It Ain't Over

Why Yogi Berra has it right, and Paulson, Dimon and the Street are wrong. AIG's terrific knack for losing money.

WHOM DO YOU TRUST? HENRY PAULSON, JAMES DIMON OR YOGI BERRA?

Granted, it's a tough call. Here you have such luminaries as Mr. Paulson, who, as we're sure you know -- but the stylebook mandates that we identify him regardless -- is top dog at the U.S. Treasury, and Mr. Dimon, JPMorgan Chase's big boss, saying the credit crisis is over. Obviously a numbers man, Mr. Dimon even ventured that it was 75% to 85% over.

Our immediate reaction was, if Hank and Jamie say it's over, it must be over. And we can't tell you how happy that made us, so we won't bother to.

But then, before we even had time to lift a glass in celebration, we remembered the prophetic words of Yogi when that widely revered sawed-off sage proclaimed: "It ain't over till it's over."

And we're quite confident he would agree that "it ain't over till it's over" might well be applicable to describing a grave financial exigency. Like, for instance, the present one, which has a shot, when the final tally is in on the full extent of the damage it is wreaking, to go down as the mother of all credit crises.

So with all due respect to Messrs. Paulson and Dimon, after due reflection, we believe Yogi had it right: It (in this case, the credit crisis) ain't over. And reinforcing that less than cheery conviction is the colossal loss that American International Group -- AIG -- the mammoth insurer, reported after the close last Thursday. The quarter ended March was awash in red ink, a vivid $7.8 billion worth.

We've no doubt Mr. Paulson and Mr. Dimon remain steadfast in their contention that the worst is over, although there are rumors being bruited about that Mr. Dimon now gauges the crisis to be 72%-82% over, a modest haircut from his original assessment but sufficient to demonstrate his legendary flexibility.

In March 2001, the Nasdaq was off by more than 70% from its peak set only a scant year earlier. Investors became increasingly convinced that lightning had already struck, the landscape was littered with shattered stocks and a turn had to be in the offing. Were they ever wrong! Instead, recession reared its ugly head, profits posted their biggest declines since the 1920s and Nasdaq fell another 50% before hitting bottom deep into 2002.

The most conspicuous of which is that, just as in March 2001 when the Nasdaq was off 72% from its top, so the home builders today are down eerily the same percentage from their all-time high.

The biggest flaw in the notion that the worst is over, in her view, is that the source of the problem -- home-price deflation -- is not only continuing but intensifying. "According to the latest Case-Shiller Index," she notes, "home prices are now deflating at a 32% annual rate, versus 8% six months ago. And the deflation is sure to intensify as the 4.6 million new and existing homes still sitting on the market find a clearing price."

She exhorts us to "Think of it...that 4.6 million inventory is nearly double the 2.6 million average inventory in the 20 years leading up to the bubble. More disturbing still, a record 2.27 million of those homes are sitting empty!"

For good measure, Stephanie adds that those melancholy figures fail to include all the homes "stuck in purgatory at banks, which are now collecting keys faster than they can list the properties." The Federal Deposit Insurance Corp., she relates, reckons that "other real estate owned" by banks is up more than double the year-ago total.

And, she concludes, "As long as the largest asset on household -- and bank -- balance sheets continues to deflate, the credit and consumption hits will keep coming." In short, the worst sure ain't over.

IF, WE'RE DEAD WRONG and the worst really is over, we wish that some illustrious personage -- say Mr. Paulson or Mr. Dimon -- would take a few minutes out of his busy, busy schedule to pass the good news along to Ben Bernanke. For if the credit crisis truly is winding down, why in the world is Mr. Bernanke's Fed running around like a proverbial chicken without its head and still working feverishly to prop up the banks?

The only possible explanation is that Ben has been so preoccupied trying to appease one angry congressional committee or another and taking bows for preserving the remains of what used to be Bear Stearns, he hasn't been able to stop for breath and see for himself that the bad old credit crisis has up and left.

Any day now, thanks to Bernanke & Co.'s importuning, Congress will furnish the OK to the Fed's latest stab at giving aid and comfort to those hyperventilating banks still suffering the consequences of years of avaricious bingeing. On the surface, what the Fed is requesting seems modest enough: It wants to pay interest on the commercial bank reserves it holds. The change was supposed to take place in 2011, but our beloved central bank, unaware that the crisis has passed, is eager for it to happen pronto.

Innocuous as it may seem, the proposal, warn Paul Brodsky and Lee Quaintance, is destined to exert a significant and not universally happy impact. Paul and Lee run the hedge fund QB Partners, and from time to time we've cited their intriguing takes on the economy and investing. Currently, banks hold as few reserves as possible at the Fed because of zero interest. Once the go-ahead is granted to pay interest on those reserves, the Fed will expand its balance sheet and the banks will get a bit of change and buy time to work off their mess of so-called Level 3 assets.

In case you've forgotten or blessedly never knew, Level 3 assets are packages of all sorts of different stuff, from credit-card receivables to leveraged loans, and absent any way of pricing them, their supposed value is what management says it is, or as one cynic put it, they're marked to make-believe. There are many billions of them, and these days they're the epitome of illiquidity.

The bottom line, according to Lee and Paul, is that the winners will be the large banks, the Fed and, since it's the latest wrinkle in what they dub the Fed's "monetary inflation strategy," debtors generally. Commodity prices and gold, they predict, will go up.

The losers? Oh, pretty much the rest of us, natch, who happen to be stuck with a debasing currency.