SCENE: Allderdice High School located in Pittsburgh, PA’s Jewish enclave of
Squirrel Hill.  Classroom of Mr. Murray J. Roos, 11th Grade history teacher. 
An exam is about to begin.

Mr. Roos passes in front of each row of seats.  As he passes, he stops and
places a small stack of blue books into the hands of the first student in each
row.

“Good morning.  All textbooks, notebooks, and papers go under your seat.  Pass
the blue books back. Put your name, period, and today’s date in the middle of
the cover of your blue book.  If you need another book, raise your hand.  No
talking.”

After distributing the blue books, Mr. Roos walks to the blackboard at the
front of the class. A pull-down white movie screen obscures the blackboard.

“When I lift the screen, you will each have …”, checking his watch, “forty-
five minutes.  Remember, ‘ad hoc ergo propter hoc’. DON’T forget your
outline.”

He pulled on the screen and it crisply snapped up, revealing the single
question for the American History final:

“Common household items have had, from time to time, important influences upon
the course of US financial history. 

Provide at least three examples. Be specific, generalize, and discuss.”

Ira Artman concentrates for a minute…

(I need my “Outline”.  Hmm … how about this…)

Common household items have had, from time to time, important influences upon
the course of US financial history. I will consider three.

• During the revolutionary post-colonial era, kitchen appliances and
  breakfast food provided a model for late 20th century banking expansion.
• During the mid-1960’s, efforts to provide everyone with guns and dairy
  products spawned an over-leveraged and risky mortgage finance system.
• In the early years of the 21st century, which we now call the “Boom-Bushed”
  period, a common hand tool improperly “fixed” the financial system, in that it
  resolved problems of the past without any consideration for the challenges of
  the future.

(Good enough… let’s go!)

THE AMERICAN COLONIAL ERA

While an English company sold an electric toaster in the late 1890’s, the
importance of small kitchen appliances predates electricity. The toaster was 
well known in Pre-Revolutionary North America and figured prominently in the
lives of many American Patriots.

Ben Franklin, the great inventor, statesman, and businessman, had a fondness
for toast.  Towards the end of his “Autobiography”, Franklin recounts how in
the middle of the night he is confronted by the “spirit” of the gout, who
challenges Franklin’s eating habits:

“Yet you [Franklin] eat an inordinate breakfast, four dishes of tea, with
cream, and one or two buttered toasts, with slices of hung beef, which I fancy
are not things the most easily digested.”

Yes, toast certainly was an important part of early American colonial life.

As an American businessman & printer, Franklin achieved wide fame through his
successful development of the first American business franchise with his
network of printing shops that stretched throughout the colonies.  Franklin
also achieved business success while Ambassador to France, from the mid 1770’s
to the mid 1780’s.

As Charles Morris describes, in his “Ben Franklin – The Toast of Paris”,
Franklin developed a chain of French shops that sold toast and croissants. 
When Franklin left France, he brought back to America this French pastry store
concept, and franchised the shops under the name of “Franklin’s American Good
Time Rolls”.  But these American shops never achieved the success of those in
France, which he continued to operate under the name of “L’USA  - Les Bon
Temps Roulez”.

Franklin’s franchise challenges preceded and provided a model for the
development of latter 20th century branch banking networks.  The managers of
Bank One, NCNB, and WaMu all dealt with problems of standardization, business
communication and integration that were first resolved by Franklin in his
printing and pastry shop franchises.

THE 1960′S

Lyndon Johnson became President following the assassination of President
Kennedy in Dallas.  Dr. Cyril Wecht, who once lived near our school, was a
member of the House Select Committee on Assassinations, and later became the
Coroner of Allegheny County. 

As President, Johnson tried to eliminate poverty and racial injustice with
special programs for education, medical care, and the inner city.  At the same
time, America was also fighting the Vietnam War in Southeast Asia.  The
Vietnam War was expensive.  So, President Johnson did two things.  First, he
cut back his Great Society initiatives and focused simply on the provision of
“Guns and Butter” to every American family. 

For butter, families could choose between butter or margarine.  Margarine does
not contain dairy products and Jews can eat margarine with meat. Families also
had two choices with respect to guns, either a shotgun similar to that used by
Allegheny County District Attorney Duggan to kill himself in 1974, or a
handgun.

President Johnson needed money, which he did not have, to pay for the
expensive guns and butter.  So he had to sell something.  This was the second
thing.  He decided to sell FNMA in 1968, which was a government agency setup
by FDR in 1938 to promote homeownership.  To raise as much money as he could
for his guns and butter programs, President Johnson sold FNMA to the public,
which is all of us, in a public offering. To get even more money for the guns
and butter, he did not provide FNMA with much capital (with an “a”), but
instead provided it with implicit government guarantees, which are free and
liked by investors.

Thus, President Johnson’s promise of guns and butter FOR all of us led to the 
sale of FNMA TO all of us, and all of us got guns, butter, and cheap homes. 
Times were good. President Johnson was a great President.

THE BOOM – BUSHED ERA

The “Boom – Bushed Era” refers to the years 2001 – 2009, and spans the years
that George W. Bush was President.  It was called that because they began with
a “boom” (the destruction of the WTC on 9/11), and by the time that they ended
everyone was “bushed”, which means “really tired”.

By the middle of the Era, people with subprime (which means ‘below prime’)
home loans could not pay back their mortgages when they could not sell their
homes at prices that were more than they had originally paid.  So, they tried
to pay back their mortgages more slowly, which is what delinquent means. 

These slow payments upset the investors who had purchased the loans, and they
were not happy.  So they all tried to sell their loans to other investors. 
This made the prices of the loans fall, which is the same as making the
interest rates go up.  These even higher rates made it even harder for the
people with subprime loans, who had NOT got their loans from the FNMA that I
mentioned in my second part.  This made them very sad. Some people were so sad
that they left their homes empty.

Some of the companies that purchased the loans were investment banks.  These
investment banks had sold some but not all of the subprime loans that they
purchased from banks or loosely-regulated mortgage brokers.  They had kept
what they thought were the best part, like the “AAA” pieces.  “AAA” pieces are
like “USDA Prime” cuts of meat, which are the highest in quality and fat and
are in limited supply. 

So these banks thought that the “AAA” pieces (which were graded by private
rating agencies, and NOT the US Government, like meat, even though investments
are more important than meat) should never go bad.  But they did, and this
left the investment banks with a bad taste in their mouths.

The banks were so busy dealing with the bad tastes, that they did not react
quickly enough as their stock prices went down.  Stock prices are set in the
stock market, which is all of us and which I should have mentioned in my
second part. Some of the banks failed, or were taken over by the government or
by other banks.

To fix this problem, President George W. Bush turned to his Treasury
Secretary, who was known as “The Hammer”, which is a common hand tool and is
why this should count even though I know he was not REALLY a hammer.

President Bush asked The Hammer “What should we do?” The Hammer tried a couple
of different things and worked with his friends at the Federal Reserve.  But
none of these worked.  So like I mentioned that President Johnson had to SELL
stuff to fix his problems in my second part, The Hammer decided to BUY stuff. 

The stuff that The Hammer decided to buy were called securities, and included
the “AAA” pieces that left a bad taste in the mouths of the investment banks
and insurance companies that owned them.  The Hammer asked the US Congress
(which is the second branch of government) for permission to spend $700
billion, a billion is a thousand millions. It took a while, but after a week
or two the Congress agreed to give The Hammer the $700 billion.

Once The Hammer had his $700 billion, he started to try and buy securities
from banks and insurance companies. The Hammer had difficulty in determining
the price to pay for the securities.  His problem was like that faced by
Goldilocks in “Goldilocks and The Three Bears”.  Some prices were too high,
some prices were too low, and it was difficult to find the price that was
“just right”.

So it took time for him to spend his money, and this upset the US Congress,
and they were as upset as The Bears were in the Goldilocks story.

While The Hammer was trying to find the “just right” price, housing market
conditions continued to deteriorate.  It turned out that The Hammer had
neglected to focus on what had become a key part of the mortgage finance
business – mortgage insurance companies, also known as “MI’s”. 

While these MI’s had NOT been that important when The Hammer worked on Wall
Street, they had become VERY important as FNMA’s market share increased and
the origination of non-FNMA type loans “whithered away” (Karl Marx also used
this term, but he was not thinking about non-FNMA loans since he was already
dead).

This is because FNMA thought that borrowers SHOULD have “equity” in the homes
that they lived in, which means the same as “they cared about them” and “took
good care of them”. If the borrowers did NOT have equity, then FNMA asked the
borrowers to get an insurance policy from the MI companies, to make sure that
someone or something cared.

But The Hammer did NOT care about the MI companies, and the collapse of the MI
companies, EVEN after The Hammer had his $700 billion to spend, upset
homebuyers, and the stock market.  Once the stock market collapsed, the
richest man in the world, Carlos Slim Helu, bought up most of the US stock
market, and that’s why everyone in the US must study the Spanish language and
Mexican history, in addition to English and American history. . .      
Mr. Roos clapped his hands as he said: “Time is up.  Pens and pencils down. 
Everyone, pass you blue books forward.  I will have them graded in one week. 
We can discuss your essays individually AFTER they are graded.  Thank you
everyone, for your best efforts today.  I am sure that I will enjoy reading
your essays.”

- - - - - - - - 

MR. ROOS’ EVALUATION:

Mr. Artman:

SUMMARY

You have a breathtaking eye for detail and it occasionally glances upon what
most people call “facts”.  They pop up in your essay like gophers on the Great
American Prairie.

However, the specific choices that you made with respect to household items
were sound, and you demonstrated a general command of the subject matter and
appreciation for the problems in each of the covered periods.  But, no Thomas
Jefferson, Andrew Jackson or Hoover? What were you thinking?

Some of the local references to politicians or events or the religious
practices of some of your classmates, while all true, do not belong in the
essay.  They do not, by themselves, provide me with any indication that you
properly understood the material covered in class or in the readings (which is
the point of the exam).

DETAIL

Good outline.

Morris’ book, “Ben Franklin – The Toast of Paris”, has nothing to do with
pastry shops or franchising.  Is it possible that you neglected to read this
book, even though it was on the ‘Required Reading’ list?  That’s my guess.
Imaginative construction, even if completely untrue.  I liked your pun, but
this is History, not English. Too bad.  However, your appreciation for the
importance of Franklin’s American franchised businesses as a predecessor of
branch banking was sound, even if not fully developed.  

You were much too literal in your discussion of the 1960’s.  President Johnson
did NOT propose to give everybody ACTUAL “guns and butter”.  The term referred
to his intent to create and expand Great Society programs at the same time
that he was fighting the Vietnam War, without raising taxes. Perhaps you were
not completely awake when we covered The Great Society?  However, you
correctly identified one of the key consequences of the War, which was the
inadequately capitalized quasi spin-off of FNMA.  This paved the way for the
overly-levered US approach to housing, which was not recognized until (as we
must say these days) “Hace relativamente poco”.

I sensed a growing hastiness as your essay progressed, and this was most
evident in your choice of President Bush’s Treasury Secretary for your last
“common household item”, based on his nickname. Nevertheless, the Secretary’s
decision to seek $700 billion for a “bailout program” that did not include any
appreciation for the crucial role played by MI companies in a mortgage market
that required adequate downpayments or insurance surely ranks as one of the
greatest economic travesties in American history.  In addition, it explains
why, even today, 75 years after the fact, no one in the US is permitted to
speak or write his complete name, and must refer to him either as “The
Secretary” or “The Hammer”. I am sympathetic to the fact that that this may
have contributed to your confusion.

GRADE

C+.  You can do better.  Read the books.  Do the work.

AUTHOR’S COMMENT:

Mr. J. Bruce Forry taught European History at Taylor Allderdice in the 1970’s. 
It is only recently that I fully appreciated how his demanding standards and
insistence upon an outline for every essay contributed to my conceptual
abilities.  Thank you.  

I have been contributing to Bill’s Blog at a furious pace since I learned that
I would be leaving my present position. But it’s more realistic for me to
contribute at a somewhat slower pace, on the order of once a week or so.  We
will see how it goes.

I will, of course, continue to look for another position that builds upon my
analytic and modeling skills, which are more completely described in the links
below.  But if you want to contact me about possible writing assignments, I’m
happy to try that as well.

For those friends “in the business” who are still employed at firms that
sponsor occasional or irregular mortgage finance or fixed income conferences
on the web, py phone, or in the New York area, I hope you will continue to
invite me to your conferences, even if I am simply a civilian.

If you’d like to reach me, you can contact me at the address that appeared
towards the beginning of my prior post, Wilderness, Then and Now . 
Just to make sure, here it is again, somewhat obscured:

Ibartman [at] inbox [dot] com

Thank you for your time and interest.   

If you’d like to learn even more about me, you’ll find it here.

Till next time - Ira Artman