Monday, September 29, 2008

America has Spoken: NO BAILOUT OF WALL ST!

Good Evening Folks!

Wow, I don't know where to start. Today was one for the history books. The DOW suffered its largest point drop ever as stocks took their biggest fall since 1987.

"Sept. 29 (Bloomberg) -- U.S. stocks plunged and the Standard & Poor's 500 Index tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan to rescue the financial system.

The Dow Jones Industrial Average slid 778 points for its biggest point drop ever as $1.2 trillion in market value was erased from American equities. The MSCI World Index of 23 developed markets slid 6.9 percent, the most in 21 years.

`Unwind Into Chaos'

``There's a real opportunity for this thing to totally unwind into chaos if we can't get some real direction from Washington,'' said Russ Kamp, chief executive officer of Invesco Quantitative Strategies, which manages about $461 billion in New York."

My Take:

Today was stunning ladies and gentlemen. The drop today of course was a reaction to the failure of the financial rescue plan today in the house. Its becoming clear that this is developing into a battle between Main St. and Wall St. The government is caught in the middle and doesn't have the answer to the problem. Even the experts seem divided on how we can fix this mess.

There are many reasons why this rescue plan failed today. I believe the main reason why it didn't pass was lack of trust. I don't think Congress or Main St. trusts Wall St. I believe many representatives really personally struggled on how to vote today. They already knew by a 300-1 margin that their constituents hated the idea of a Wall St bailout, but on the other hand they also understand that they have a responsibility to protect the country and make tough decisions.

I think when it came down to actually voting yes or no on the bailout, they just couldn't pull the trigger and hand over $700 billion to the same people that created this disaster through deception, fraud and greed.

I don't blame them. In fact, I applaud them. This was a tough decision because they all want to do whats best for the country. I think that at the last second, most realized this wasn't the answer. 160 economists told them this wasn't the answer. Wall St. was down 300 points before the vote was taken, so I don't even think they thought it was the answer.

I must say that I am proud to be an American today because I think Congress did the right thing. Was today painful? Yes. Did I lose money in my 410k? Yes. However, I think todays vote was more then just about trying to fix a financial crisis. This was a vote on principles, sending Wall St. a message, and doing the right thing for the future of this country.

No one wants to go through a recession. I dread the idea of going through one. However, we must go through one after periods of euphoria. It cleanses the system of excesses and greed. If we had allowed the bailout to pass, our children would have been stuck with the tab.

Where do we go from here?

This is the tough question. The Fed has a major problem with its balance sheet now that the Treasury isn't getting the $700 billion. Take a look at how the discount window has allowed the Fed's balance sheet to start looking like a garbage dump:

Final Take:

As you can seethe Fed is running out of options. All of these toxic mortgages that they took at the discount window have deeply contaminated their balance sheet. The Fed only has $800 billion at their disposal. More than half of it is now filled with the crap sandwiches from our financial system.

The only way we get out of this is through creating transparency within our financials. This will restore trust and get the banks back lending with one another. The second part of the solution is to simply allow the continued deleveraging of our system down to levels of affordability.

Americans do not make enough money to own a $600,000 house. We can't afford to spend $40,000 a year to send each child to college. We can't afford to have two $35,000 cars in the driveway.

The cost of simply living got completely out of hand! We could no longer afford to live without credit cards. We leveraged up the system as high as we could, and now we are facing the consequences of doing so. We must allow the system to revert to the mean no matter how painful it is to our financial system.

Trying to stabilize home prices at unaffordable levels fixes nothing. It just temporarily numbs the pain. You cannot prevent a bubble from bursting especially when its already started.

I compare this financial "innovation" era to the baseball "steroid" era of the 1990's. We all watched in awe in the 90's as Barry Bonds, Mark McGuire, and Sammy Sosa all broke Roger Maris's home run mark. Average players hit 30 home runs because everyone was taking steroids. Baseball's popularity soared as all of the players "leveraged" up by taking shots of the "juice".

After the euphoria wore off, questions started to be asked like "how did all of those players all of the sudden hit 60-70 homeruns?". Rumors started to swirl, books accusing different players of doping were written. BALCO labs was then discovered which provided evidence and admissions of guilt by its owners. The courts then began getting involved. Criminal charges forced players to testify under oath about their usage of steroids. Lawsuits then ensued. Sound familiar yet?

Congress then got involved and before you knew it "POOF!" the steroid era was over. The "deleveraging" of baseball then ensued via drug testing and regulations.

Baseball took a lot of heat for tainting the game. Players were booed and released as their skills diminished as the "leverage" of steroids was gone.

There were some that questioned if baseball would ever gain back their status as America's favorite pastime. Guess What? Over time it did. The game survived and got back to basics. In fact, the home run total this year in baseball was the lowest since 1993. The Red Sox broke the Babe Ruths curse in 2004 and the game hasn't looked back since.

Bottom Line:

We can recover just like baseball did. It will be done in the same way. We will come up with sound legislation that will regulate our financial game just like baseball found a way to regulate their game.

We all must realize that its going to be very painful as we get back to basics. Many banks will fail, 401k's will shrink, and many pigmen will end up going to jail. However, this too shall pass.

I think we took an important step forward today by shooting down legislation that would have bailed out a bunch of fraudulent bankers. The pigmen kicked and screamed on CNBC warning of financial Armageddon and another Great Depression. I thought the market behaved pretty well today given the doomsday scenario that we were told would happen if this legislation wasn't approved.

I didn't see Armageddon today did you? Maybe this will be like Y2K. All bark and no bite.


Avl Guy said...

Hey I am so glad today. But we got to work work work tonight congratulating the many Nyet congresspersons and encouraging all to stay principled & vigilant.
We also need to give the ayes a piece of our mind.
I hear Paulson's going to try to get a Senate vote on “No Bank Left Behind” on Wednesday to pressure the House.

Im going to circulate ur speech, uh, umm, I mean blog.

Jeff said...

Lol Avl

Have at it.

I am sure many disagree with my take.

It took a lot of guts for Congress to stand up to the pigmen today didn't it?

The "little" guy finally won one. The arrogance of CNBC drove me nuts today though. They acted as if we little people aren't intelligent enough to understand that this was a Main St. problem.

They kept trying to talk down to their viewers like children thinking we don't understand why Wall St. needs their $700 billion.

It was pretty sick and insulting.

Anonymous said...

While I agree generally, you mihgt be wrong about the FED balance sheet:

Apparently the Treasury can move capital to the Fed even without the new legislation. Bloomberg had a former FED governor on a couple days ago and someone asked if the Fed would run out of money. He said not to worry about the FED's balance sheet -- it is infinite.


Minton Mckarkquey said...

JEFF - hurray!

It's nice to see that voters have a voice (even if it's only weeks before an election). I'm hoping that even the politicians are seeing that no bailout does not equal the end of civilization.

Interesting that Citibank still reports a dividend, even though we're supposed to be tapped for a trillion bucks...

Jeff said...


Welcome! Great point.

I missed that on Bloomberg today. I have heard that infinite balance sheet arguement before, and I am sure they can get as much money as they need.

However, the balance sheet is only infinite until China stops buying our treasuires or the dollar crashes!

They know they can't print or they risk hyperinflation so they understand that they can only spend so much. I don't think they are stupid enough to try risk hyperinflating.

If things get bad enough though who knows?

Jeff said...



Speaking up does make a difference! Yeah, You gotta wonder how much the election had to do with this.

I am glad the timing worked out this way though. A little luck never hurt anyone.

You know some of these fat cat politicians were simply worried about losing their seats.

If Armegeddon doesn't come Wall st. is on its own!

John Maynes said...

Your readers lost more than double the amount in their 401s alone today than the bailout would have cost them. Great! Well done! :-)

Jeff said...

Ahh JM

you like stirring it up don't ya..:)

We were minus 300 before the bailout was passed. The market priced the bailout in on Thursday/Friday.

Long term their 401k's would have been empty if they let these hogs run wild with $700 billion.

The short term losses taken today will be long term gains in the long run.

BTW my short ETF's were up 15-20% today to offset any losses.

Anyone who has read this blog long term would have setup a hedge of shorts to offset brutal days like today.

Tomorrow will be intersting!

John Maynes said...

"The short term losses taken today will be long term gains in the long run."

First of all this is not proper English. Secondly it's wrong semantically. Complete bollocks. Losses are losses. Simple as that.

John Maynes said...

Sorry. Forgot something. Jeff, you made actually the call of the quarter. Who else predicted the bailout would be rejected? I could it only read here. The rest of the blogsphere was quiet and expected the bailout to go through.

Jeff said...


You sound like a long that got his a** whooped today. Have a beer and relax.

The bull market will be back around 2020!

Losses are losses and gains are gains! My trading account went through the roof today!

My 401k took some hits but oh well.

Sorry about my "semantically" wrong english. I am too busy making money.

Jeff said...



It was just a hunch, but I don't think it made a difference because the results would have been the same.

The bailout sucked and so does the economy.

Thank god Congress was smart enough to realize it.

I appreciate the kudos though!

John Maynes said...

Hi Jeff,

thanks but I don't drink beer. I was short and made some good money yesterday. Unfortunately I sold to early. I could have made 30%. But 20% are not bad either.

I think you have no idea what that refusal of the bailout meant to the US. The world is saying now the Americans can't solve their problems. A lot of confidence has been destroyed.

Jeff said...


Congrats on making some money yesterday.

I never said we didn't need a bailout. My point is the bailout that was proposed was not going to work.

I think its critical we find a bill that creates solutions to our problems.

The bill IMO needs to force banks to open up their balance sheets so people know what they are investing in.

I think we get nowhere until we have transparency in the financial markets. This is only thing that will encourage banks to lend to one another.

If the "hide the sausage" games continue, we will go nowhere.

Japan played "hide the sausage" for eight years until they finally forced the banks to puke up their losses.

This resulted in a "lost decade" for Japan's economy. We are facing a serious deflation threat if Wall St. continues to hide their losses.

Like I said yesterday, we also need to let houses continue to fall back to affordability. Trying to prop them at unsustainable prices does nothing.

The Treasury needs to wait until this correction is home prices is over before they start buying bad loans.

I agree that we need to fix the credit markets. Until we have transparency, I think the lending will continue to be non-existant.

Thanks for your thoughts. I agree a lot with your concerns.

Jeff said...

One other thing to point out from yesterday. Bernanke injected $630 billion dollars into the global financial system yesterday to try and induce lending.

Despite the injection, the credit markets remained locked. I think this tells you how well Paulson's plan would have worked.

The $700 billion would have been a band aid and nothing more.

John Maynes said...

Don't you like band-aids? You have a serious mental problem, Jeff! LOL

Jeff said...


Nice bouce this morning so far. You think it holds?

Mat said...


"A lot of confidence has been destroyed." Indeed, but not by the refusal of the "P&B panic bailout".

It is scary to realize how the anglo saxon counties have been handling their financial markets over the past decade(s).

I always wondered how and why your banks could hand out "120% mortgages".
Now a know: neglegt of professional duties / risk management

In germany for example the max. credit you can get on a house is 50-60% of the actual value, so if the contract goes bust the bank can auction the house off and will usually recover 100% of the credit sum = save deal for the bank.

I would like to see the risk calculations of "120% mortgage"!
It will probably state: 1)Bribe Moody`s 2)Sell those mortgages asap
3)Let others handle it.

Also, abusive interest rate clauses are legaly void in germany = the mortgage contract will still be valid but no interest has to be paid!= save (best) deal for the house owner. Banks will not overcharge because they riks getting paid no interest at all!

How can anyone honestly dare to tell that it is a valid business model to lend 120% of the value and still call that "asset backed"???

Of course the dow has to go down because a lot the massive gains over the last years were just built on "crap".

Bankers, clients and companies all over the world will have to learn it the hard way because the "believed" in a "myth" called "Wall Street". We all know that the americans are very good at selling you anything and the rest of the world was very impressed.

And yes, I lived and worked in Manhattan and have friends high up in ML Europe(R.I.P.). And I knew that this international myth is mostly based an outstanding marketing, fair enough.
But what really scares me is to see that they are actually not just "normal" and average like I expected them to be, but unprofessional and incompetent business people.

And how about your anti-trust regulations? "Too big to fail" is just insane. How can we dare to let any company grow that big so they take the biggest economy of the world (or even the whole world) as hostage. "Gimme all your money or I will drag you all down with me!"


johndaniels said...

the american people will get their deflation.

Avl Guy said...

John, stop using B-B-guns to intimidate the Messengers.

And whenever talk deteriorates to the need to bolster the 'confidence' of traders & bankers ... be they domestic or overseas ... we might as well de-evolve back to the 17th century and cast spells and incantations to ward away evil spirits and attract those nice 'confidence' spirits for our beleaguered traders/bankers.
Sheeesh. It's the 21st century already, put away the voodoo dolls and pins, and the 'worry beads'.

As a lending manager, I didn’t give a blank about anyone’s confidence in a borrower, I did my own due-diligence and made sure I had a credit-worthy borrower who was worth something (not over-encumbered by others' claims) and that I had a straight shot at unencumbered collateral.

Avl Guy said...

Jeff, we have a few GOP senators likely to filibuster any passage attempts tomorrow.

We'll see what happens.

Art said...

Decent article with some details:

teddy bear said...

did you have any news about that in mainstream tv?

Jeff said...


I saw that video. The pitchforks and the torches are next!


Its great to hear some viewpoints from aacross the pond. Thanks for your insight. I couldn't agree with you more!.


A filibuster? Interesting. I was travelling today and could only listen to CNBC on satellite radio today.

As a result, my head is filled with the financial world as seen through "bubblevision".

I can hardly stomach this channel anymore. Its was filled with pure cheerleading and zero substance today. I thought Maria B. was going to have an *rgasm when the DOW was up nearly 500 points.

I will have something up in awhile. New "hide the sausage" accounting rules are out today. Thats the topic tonight folks!

Japan here we come!

Avl Guy said...

Hilarious YouTube Creativity

Batman Meets The Paulson bailOut

watch it before the YouTube/Batman Lawyers yank It !!!