My Breakfast with Bob Corker, Senator

CORKER: RIGHT MAN, RIGHT PLACE, RIGHT TIME, RIGHT ATTITUDE

(UPDATE: INDICES DIG DEEPER, DEEPER FRIDAY IN HEAVY VOLUME, BUT TEA PARTIES ARE UP, NETANYAHU IN....SEAT BELTS ON IN MIDDLE EAST. BUY GOLD, SILVER. Peek writes markets give Obama an F last month.)

It was standing room only yesterday morning at Le Peep restaurant in west Nashville as our US Senator Bob Corker stood before some of his prime constituents and dished out stimulus talk over bacon, eggs, pancakes and coffee.

I was there and not only didn't have any real coffee, I didn't even touch decaf, figuring water only and straight up would be the best accompaniment with the kind of things I knew Bob was going to say. I was over-stimulated enough by stimulus talk at taxpayers' expense (that would be my expense) over the past few days. I didn't need any more. I just listened and let food go too. It was a good call on my part. Corker stood and talked for almost an hour, answering questions and fielding comments. He did a great job of keeping extremely complex concepts fairly simple and straight forward. I left later filled to the brim with good information which I was too busy yesterday to untangle until now.

Corker---who sits on the Senate banking, foreign relations and energy committees---opened by describing about how he debated whether to go on the commerce or banking committees at the beginning of his term:

"All my advisers told me to go with the commerce committee, saying banking would be the dullest thing I'd ever do. There was just no action there. HA! I was just counter-intuitive enough to do the opposite of what they said and go with banking. Needless to say there hasn't been a dull moment. And I've learned more in the last few years than in decades prior, many things which I wish I didn't know. I honestly can't think of a more exciting place to be at this time in our history." (Understatement of the decade?)

From there it was all about the economy, some of which was off the record, all of which was sophisticated stuff. I'll highlight the salient points here:

1. No surprise, Bob voted against the stimulus package describing it as nothing more than a humongous 2-year spending binge that like a high-powered fire hose will be turned on at full velocity then turned off just as quickly. It does nothing, NOTHING, to address the real economic problems of unfreezing credit markets in financial institutions which is JOB 1 and dealing with toxic debts on the books of these institutions. ( Much of this toxic debt is a by-product of mark-to-marketing accounting requirements which often over-state the degree of toxicity.) Until that is done, our economy will continue to languish no matter how much money is thrown at the problem.

Harvard Professor Robert Barro chimes in via Carpe Diem.

2. The state of Tennessee which is among states in the best fiscal condition in the US---will get $4.2 billion in federal "bailout monies," and be forced, FORCED, to spend it ALL within 24 months in ways that it really doesn't want to. This leaves the state open to predatory lawsuits demanding such things as the re-extension of TENNCARE a program that almost bankrupted the state six years ago and has now been reined somewhat under control by Gov. Phil Bredesen's administration.

No state savings for rainier days is allowed. It has to be spent fast and furiously, by cracky and is predicted to leave---with the strings that come with the Federal government-- the state in worse financial shape than it is now. Corker said Bredesen who is a fiscal conservative is fretting about this every day.

UPDATE: Louisiana Gov. Bobby Jindel to refuse some of Louisiana's share of bailout money and talks about why. Again it's back to the fire hose analogy.

3. Calling on the Obama administration to let let us take our medicine now and allow the auto companies to fail sooner rather than later (not a matter of if they fail, just when) Corker called the auto bailout a pivotal moment in our nation's fiscal history. He said it will not be decided legislatively but rather in the executive branch. In answer to a question I posed to him, Bob said there was very little the public and taxpayers can do to influence decision making at this point except be well-informed and educated. (I beg to differ with him---we can make calls, read and write about it. And anyway, he said that before Rick the floor trader turned CNBC contributor made his fabulous tirade on CNBC yesterday. Tea Party, anyone?) Will be interesting to see how far to the auto labor unions Mr. Obama will lean, to the country's great detriment.

Corker talks to Kudlow Wednesday night.

4. Describing most of our 401Ks now as 201Ks, Corker said baby boomers and those soon to be retired will face greater poverty as a result of this spending spree and its ultimate effect on the economy than we can now begin to imagine.

The remainder of Corker's talk and Q and A got pretty sophisticated. I'm going to attempt to skim the surface on several of these and how they may impact the current economic crisis we're in:

5. One of the most shocking things Corker said he's learning since coming to the Senate (which he did not know) and has been catapulted up the learning curve is that most home mortgages in the US today are what is known as non-recourse loans. What this means is that the borrower is ultimately not liable for the value of the loan. If the borrower defaults, the lender can take the real asset which his home, but can't necessarily recover the stated value on the mortgage agreement. The effect of this is that it encourages people to walk away from mortgages where their home values have fallen below the mortgage agreement. This encourages what's known as Jingle mail, where house keys are mailed into mortgage lenders as homeowners flee their obligations to pay back the mortgage.

This type loan was provided as an incentive to lenders to make more prudent long-term loans, yet ironically came at a time the Federal government and Congress was forcing those same lenders through the Community Reinvestment Act to loosen standards of lending drastically and loan money to people who couldn't qualify and didn't have even a down payment.

6. Mark-to-Market accounting rules. Corker believes the recent change to M-T-M accounting was in part a good thing with certain caveats: While it forces assets to be valued in today's real time markets, it often causes an asset class to be falsely over-devalued.

Bob used an example of how Citicorp's bad mortgage debt was valued last year at about .20 cents on the dollar. This in turned forced a similar devaluation of toxic assets in other institutions even though the true value of those assets may have been much higher. This comparable valuing completely ignores a company or auditors taking stock and valuing these assets more realistically which in turn runs investors out the door screaming for their lives.

This is why there's so much more toxic debt in the system---some of which has been devalued far beyond reality---and also why bank stocks are trading so bloody low and may be for a long time to come. (BTW, when the dust settles, some risk-taking investors are going to make a lot of money buying these undervalued assets and having them immediately appreciate.)

Bottom line, the financial system needs more flexibility than the government wants to allow. The government always responds to problems by over-correcting. And this creates greater problems in the medium and long run.

7. Corker said he leans in favor of financial institutions and banks creating sub-banks to take its toxic assets off the books and encourage investors to reinvest. The "bad debts" and bundled mortgage instruments can then be worked out of the system without bring down the well managed aspects of the banking system. He only touched on this subject and I think it is an idea with lots of merit.

8. Bob said he had been in favor of the Isaacson tax credit and an uptick rule on short sellers. Unfortunately, I need to go to the gym and workout worse than I need to try to explain what little I know about these, mercifully.