Thursday, September 25, 2008

Beware of Bailout Blindness

Good evening everyone!

What a day. The DC drama continues tonight as Senator Richard Shelby went on TV at 5:00PM and announced that a bailout agreement has not been reached. I think this debate might end up going into the weekend. Kudos to anyone who called or e-mailed Congress and spoke out against the bailout. Its making a difference! I still think some form of the bailout will be passed, but I expect it to be much tougher on Wall St. because Americans rose up and demanded to be heard!

I want to get away from this story tonight and focus on the economic fundamentals. We can't allow ourselves to get blinded by the bailout news. The bounce we saw today is only temporary. Folks, the economy is falling apart. Lets look at some data today.

One of the reasons the Republicans are backing away from this bailout is because some economists and analysts are sending research reports to Congress. The following report will make you realize why the government is in a total panic.

Sit down before you read this because it will send chills down your spine:

"1. Disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call report data, we find that institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.6 trillion, or 36 times the assets of banks on the FDIC’s list.

2. Think twice before providing a broad bailout for U.S. debts given the wide diversity of mortgage holders and the great magnitude of the total debts outstanding in the United States. Just-released Federal Reserve Flow of Funds data show that, beyond mortgages, there are another $20.4 trillion in private sector consumer and corporate debts, plus $2.7 trillion in municipal securities outstanding.

3. Recognize that, among banks and thrifts with $5 billion or more in assets, there are 61 banks and 25 thrifts that are heavily exposed to nonperforming mortgages"

Quick Take:

I really don't know what to say folks. I'm speechless. Read every word in that report. It will take your breath away. There is a list of the most troubled banks at the end of the report. If your money is in one of these institutions I would suggest that you move it tomorrow.

We have gotten to a point where this whole economy could collapse at any moment. Get prepared. Make sure you have some cash on hand. After reading this report, I have come to the conclusion that its too late for this economy to be saved. Its only a matter of time before this all blows up. The report suggests that there are 1500 banks that will potentially fail with assets of over $3.5 trillion.

We should be focising on bailing out the FDIC which protects the savings of Main St. versus bailing out the debts on Wall Street. Protect our savings instead of Wall St.'s greed! It looks like the $700 billion dollar bailout is a drop in the bucket versus the amount of bad debts in the banking system alone!

This bailout is insane and its not enough. The word is the Treasury will only get $250 billion if the bailout passes. What in the hell is $250 billion going to do given the enormity of this problem? Its like trying to shoot an elephant with a BB gun. It doesn't work!

We spent $300 billion on the last housing bill in an attempt to prevent foreclosures. How did that workout? Last I saw, homeowners were still continuing to fold like tents. If we can't stop foreclosures with $300 billion, then how in the hell can we save the financial system with $250 billion?

If this wasn't so tragic I would think that this was a comedy act.

Economic Data update

The focus on the bailout kept a lot of economic data out of the headlines today. Lets start with the jobless claims. The data was terrible:

"Sept. 25 (Bloomberg) -- The number of Americans filing first-time claims for unemployment benefits rose last week to the highest since September 2001 as hurricanes kept residents of Texas and Louisiana out of work.

Initial jobless claims increased by 32,000 to 493,000 in the week that ended Sept. 20, from a revised 461,000 the prior week, the Labor Department said today in Washington. Economists in a Bloomberg survey had forecast a drop. Hurricanes Ike and Gustav added 50,000 claims, the department said."

Quick Take:

Anything over 400,000 is considered to be a bad number and very recessionary. Take away the hurricane claims and its still a terrible print.

New Home Sales in August hit a 17 year low

"Sept. 25 (Bloomberg) -- Sales of new homes in the U.S. fell in August to a 17-year low, signaling the housing market suffered another setback even before the latest turmoil in financial markets.
Sales dropped 11.5 percent, more than forecast, to an annual rate of 460,000, the fewest since January 1991, the Commerce Department said today in Washington. The median sales price dropped to a four-year low.

A financial meltdown that prompted the government this week to ask Congress for $700 billion in emergency funding to buy up troubled bank assets may continue to clog the flow of credit to homebuyers and businesses. Shrinking credit availability threatens to extend the three-year housing slump and deepen the economic downturn.

``The market is looking particularly depressing,'' said Guy Lebas, chief economist at Janney Montgomery Scott LLC in Philadelphia, whose sales forecast was the closest. ``Construction activity has to fall further than it has, as do prices,'' to reduce a glut of unsold homes.

The median price of a new home dropped 6.2 percent from a year earlier to $221,900, the lowest level since September 2004.

While builders cut back, they weren't able to keep pace with the slump in sales. The number of homes for sale fell to a four-year low of 408,000, down 4.4 percent from the prior month. The decline was the biggest since 1963. Still, the supply of homes at the current sales rate rose to 10.9 months' worth from 10.3 months."

Final Take:

Note much to talk about here. Prices have dropped to 2004 levels. I have predicted we return back to 1998 prices. Lets see where we end up. We are getting closer!

Jeez..How would you like to be a home builder right now? Sales are anemic, prices are dropping, and inventories are rising. Can it get any worse? Oh wait, yes it can! I forgot to include the fact that we are also having a financial meltdown! Better hurry buyers. The summer selling season is almost over. "Now is the time to buy!" NOT!

Bottom Line:

That's enough bad news for one day. I don't want anyone jumping off a bridge after reading this!

Things are bad folks and getting worse by the minute. There were a dozen other stories that I could have highlighted today. Demand for treasuries continued to plummet. The 10-year rose sharply again today. This is going to start moving interest rates much higher.

I don't know how much more our economy can take before it blows up. Paulson looked like he had seen a ghost today. I have never seen such fear in Congress. The last time I looked at the TV, they were all scrambling around the White House like a pack of squirrels.

Lets all hope we find a way out of this mess.

I plan on doing some things to prepare for a global meltdown. I am going to buy a safe and keep some cash at home. I also plan on making sure I stock up on some food. I am also going to fill up my gas tank. I really don't know what to expect if this all blows up. I do know that I need money, food, and the ability to travel. Keep in mind that I am not calling for the end of the world here folks! However if a meltdown occurs, a "timeout" of about a week is a distinct possability in my mind in an attempt by the government to keep the masses calm.

Be prepared for a few days of chaos just in case things get out of hand. If Congress walks away from the bailout bill tomorrow, you could see a black Friday in the stock market. Our way of life could well possibly change forever.

It didn't have to come to this. Sadly, all of our fears are slowly becoming a reality.


opportunistic said...

We discussed intentional inflation as a possible remedy to our current situation. With the attempt to put a floor under house prices and the ridiculous level of borrowing\bailing out, this scenario seems to be more realistic. Could it be part of the plan or are they simply trying to get throught he election?

I have to believe that at least someone behind the scenes knows what he is doing. Although in hindsight it doesn't appear that way.

Jeff said...


I think this thing just spiraled out of control. Leaks everywhere and no money left to plug them. Things are unraveling at lightning speed.

CNBC has breaking news every 5 minutes . They are doing special coverage tonight.

I think this has turned into a political stick of dynomite right before the election. Lots of grandstanding and posturing.

It looks like the republicans are serious about turning this deal down. This deal might be dead without major changes.

Equities will plunge if this bill gets tied up. Ben will probably want equities to tank because it might increase the chances the bill passes.

I wouldn't want to be long any equities while this is being debated.

Jeff said...

WAMU is gone. It was seized by the FDIC and then acquired by JPMorgan. WAMU equity holders are wiped out:

"Sept. 25 (Bloomberg) -- Washington Mutual Inc. was taken over by the Federal Deposit Insurance Corp. in the largest failure of any bank in history, CNBC reported, without citing anyone.

The FDIC will sell the bank's $130 billion deposit base to JPMorgan Chase & Co. for an undisclosed sum, CNBC said."

Avl Guy said...

A couple of points:
1. The FDIC is not likely to declare any bank insolvent IF it lacks the manpower to process it and does not have a buyer/receiver lined up. To grasp this mgmt tactic, think of State Troopers on a highway where EVERYONE is speeding 20mph OVER. Troopers only act on the workload they can handle and ignore all other offenders. The greatest risk we have in banking over the next 30-90 days are not declarations of insolvencies, it is bank runs. If FDIC is nly gonna deal with their list, then cool. Jeff, ur point is well taken, that gives the tiny minority that would actually read a 24-page pdf (like me & u) time to shift their money to a healthier bank.

2. The lesson from #1 is to manage the reality of people behavior & group behavior, not manage to 'enforce the rules' just because they are on the books.

3. Starting from the worst case & working back: no single physical asset in the US will evaporate under any bankruptcy or default, they'll simply have new valuations, new liabilities, new owners and it will all be tied up in log-jam courts if it unfolds too quickly. Untangling new ownership will prove to be too time-consuming for basic needs, so expect multiple ‘Defacto’ battlefield decisions in this 'worst case'; people will learn to operate in a bizarre world of IOUs & bartering. As long as the physical assets are functioning, the foundation for starting a recovery will always be there. Who owns who what will flow thru the courts in time.

4. I'd know #2 is closer at hand AND that someone is in charge - when National Guard & Reserve forces are mobilized, and someone learns that reserve forces are being pulled out of Iraq and 'staged', in order to facilitate # 3.

And that's the worst case in terms of the next 1-to-90 days. For guys like me, grasping the worst case is essential; then I work towards likely cases/outcomes as oppossed to the worst.

A dose of mega-inflation is not an unlikehood somewhere along the line. I feel 1973-1984 is an instructive 11 year crisis. We went thru 4 presidents, double-digit wage-inflation and price inflation, gas lines & rationing, athree recessions, 2 bouts with 18-22% interest rates, joblessness that hit 40% in some communities & neighborhoods, and the destruction of an entire way-of-life: manufacturing and production.
We can handle today's crisis.
What we're missing is accepting that we will not emerge from this (in 2018?) in the same shape (lotsa wealth & inflated assets, tons of debt)we came in.

Jeff said...


Well Said!! I the 1970's may be a best case scenario at this point.

Your point on the National guard is a great point.

Check this out. It appears the government is already mobilizing the national guard to contro things in the states.

Perhaps they are afraid the pitchforks are about to come out?

"But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities."

Jeff said...

Wow. Fisher knocked Ben right over the head with this speech.

Maybe they will come to blows at the next Fed meeting!

"Sept. 25 (Bloomberg) -- Dallas Federal Reserve Bank President Richard Fisher said the proposed $700 billion rescue of financial institutions backed by Fed Chairman Ben S. Bernanke would plunge the U.S. government deeper into a fiscal abyss.

The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions would put ``one more straw on the back of the frightfully encumbered camel that is the federal government ledger,'' Fisher said today in the text of a speech in New York. ``We are deeply submerged in a vast fiscal chasm.''

Fisher made the comments as the central bank expands its role in the biggest government intrusion into markets since the New Deal, with Bernanke trying to persuade Congress to approve Paulson's bailout."

Avl Guy said...

Hmm...will a fist fight break out in the Cabinet Room of the White House or halls of Congress first, before a FOMC mtg?
I wager two shares of FNM stock that we see fists flying in Congress first. Man, Im so glad I did two nights of phoning & emailing to the republicans! I may get a fist fight to boot on top of stalling the dreaded bailout.

NY Times: Bailout Plan Stalls After Day of Talks; Paulson Heads Back to Capitol Hill
The day began with an agreement that Washington hoped would end the financial crisis that has gripped the nation. It dissolved into a verbal brawl in the Cabinet Room of the White House, warnings from an angry president and pleas from a Treasury secretary who knelt before the House speaker and appealed for her support.
It was an implosion that spilled out from behind closed doors into public view in a way rarely seen in Washington. Left uncertain was the fate of the bailout...
The talks broke up in angry recriminations, according to accounts provided ... and were followed by dueling press conferences and interviews rife with partisan finger-pointing.

Avl Guy said...

Jeff, ur note on the NorthComm joint command is good; I forgot they can also mobilize chunks of the Homeland Security network too.

Jeff said...



I think they are trying to be prepared for any scenario.

Interesting trading this morning. It looks like Wall St. is still betting a deal gets done.

I thought we would be lower today.

Art said...

Have you guys noticed how much assets JPMorgan have been acquiring while everyone around is broke? Here is the food for though, JPMorgan is the biggest share holder of FED, FED shares can't be bought or sold, they only can be acquired thru mergers or passed down to a family member.

Also, JPMorgan has invented derivatives back in 1995, and holds 50% (90 Trillion) of all derivative market.

Jeff said...


Great info. Thanks.

Thats I have been thinking about today. The market cheered that the private sector took care of this without costing the taxplayer anything.

The problem is the two big boys(BofA and JPMorga) that are buying everything are becoming bloated pigs.

I gotta think they are are about as stuffed as a family after Thanksgiving.

The "hide the sausage" continues!

Avl Guy said...

art & jeff,

yes, the Weiss Research was not exactly flattering to JPMorganChase. Ive already circulated that white paper to my lending & underwriting colleagues.

Im glad more congressmen are seeing this is no longer a subprime mortgage problem nor was the problem CAUSED by subprime borrowers. Yes, the distress 1st surfaced w/subprime delenquencies, but Weiss points out all the other excessively leveraged debt that threatens banks & insurers and which has leaped far beyond, in $s, sub-prime or the GSEs.
Sadly, the simple-minded general media cant shake that 'narrative story', favored by their weaker writers, that this is still a subprime problem and not a larger, broader, debt unwind problem.