Sunday, September 21, 2008

On the brink of Collapse/Paulson Update

Good Afternoon!

I hope everyone is having a great weekend. I wanted to talk about a couple of things today.

I read an article in the New York Post that was very eye opening. Apparently we were a few trades away from Financial Armegeddon last week. Here is the article in full from the Post:

"The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.

Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value.

The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.

While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.

Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.

Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund - which touted itself as super safe - fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default - which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.
By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.

Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.

And for good reason. By the close of business on Wednesday, $144.5 billion - a record - had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.

By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.

The banks knew something drastic had to be done. So did Paulson.

The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.

Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.

Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.

By that time, Paulson had announced the plan. It included insurance on money market accounts, a move that started in quiet Thursday morning, when the former Goldman Sachs executive saved the country from a paralyzing meltdown."

My Take:

I am amazed at how close we came to "Armageddon". One thing I have been starting to think about is how much of this is hype and how much of it is actually real. Could some of these recent "end of the world" stories be PR scare tactics by Wall St. as they attempt to throw this whole collapse onto the lap of the taxpayer.

Remember folks, for the last couple years the street motto was subprime is "contained". Bush has eve said within the last month that our economy remains strong. Now all of the sudden within the last week the new motto is "Fire!, everybody out!". I find the timing of this to be interesting considering Congress is now debating on the passing of the mother of all bailouts for Wall St.

I am starting to believe the term "Financial Armageddon" may mean two different things when it comes to being a Banker on Wall St. versus being a US taxpayer.

My "Financial Armageddon" is getting a tax bill that will take the rest of my life to pay off because a group of people decided to commit fraud in order to become rich beyond their wildest dreams.

My "Financial Armageddon" is losing the high standard of living in this country that I have enjoyed for my entire life because our country is broke and cannot pay off its debts.

What is Wall St.'s "Financial Armageddon"?

Watching their Ponzi machines go bankrupt leaving them without jobs. Don't think for a second that they are begging for bailouts and attempting to put together this trust so that they can save the nation from Armageddon. They are doing it to save themselves and attempting to get rich in the process.

Holding this country hostage by threatening financial suicide in order to get bailed out is an extremely disgusting concept. The fact that they now have the balls to put together this resolution trust is mind boggling to me.

These hogs want more than just a bail out! They want a set up from the government by which they can get wealthy all over again!

In a nutshell here is how the trust works:

The government buys all of the assets at huge discounts and takes all of the bad debts off the banks books by using taxpayer dollars. The assets are then sold back to Wall St. who then sells them at a nice profit. Disgusting isn't it? We take Wall St.'s hit and then they turn around and make a profit.

What I want to know is where is my piece of the profits? You used my money to make these deals so shouldn't I get a check? We already know that's not going to happen.

Maybe "Financial Armageddon" is what we need in order to wring out the greed of this country and teach Wall St. a good hard lesson. Its appearing more and more like there is no way to stop this financial Tsunami. I think these bailouts are doing nothing but plugging the leaks of a dam that eventually is going to burst.

I am sure if "Financial Armageddon" happens we will survive. We survived the Great Depression. Lehman failed and the world didn't end like many warned. This too shall pass, and I think we would come out of Armageddon as a "humbled" nation that gets back to sound fundamentals and a strong understanding of what made this country great.

It will be painful for all of us if it happens. However, if its going to happen anyway, lets do it the right way via capitalism and free markets. At least this way we hold true to our beliefs and values, and lessons are learned. If we go down kicking and screaming via socialism and financial dictatorships, this country will have sold itself out on its own beliefs and values and the whole world will know it.

We will have lose the identity of our nation.

Bottom Line:

Financial socialism and paying off the losses of a bunch of people who committed fraud is my "Financial Armageddon". I can't believe its possibly a week away from happening. I am starting to lose faith in this country and the passing of this Resolution Trust will only further enhance my feelings.

Paulson gets Pushback

Another quick note here. Sorry for being so long winded today. Paulson appears to be getting pushback from the Democrats on the financial crisis bill.:

"Sept. 21 (Bloomberg) -- Congressional Democrats clashed with Treasury Secretary Henry Paulson over whether the $700 billion rescue plan for U.S. financial companies should curb executive pay, setting the stage for a fight on the legislation.

U.S. Representative Barney Frank, the chairman of the House Financial Services Committee, said it would be a ``grave mistake'' not to include limits on the compensation of executives whose companies benefit from the plan. Paulson called such a measure ``punitive.''

``We need this to be clean and quick and we need to get it in place,'' Paulson said on ``Fox News Sunday.'' Paulson signaled a willingness to compromise on Democrats' demands that the measure help people avoid foreclosures.

Republicans warned of dire consequences if the proposal becomes bogged down in partisan politics. ``This could be the most serious financial crisis the world has ever dealt with,'' said House Minority Leader John Boehner, a Republican from Ohio, said on ABC's ``This Week.''
U.S. Senator Jon Kyl, an Arizona Republican, did not rule out congressional actions on executive pay and homeowner protections in the future.

``First let's put the fire out and then we can go deal with our favorite solutions to these problems,'' Kyl said today on ``Fox News Sunday"

Final Take:

Can you believe Paulson has the nerve to be pushing back on executive pay after the debacle Wall St. has created? God forbid we try to reign them in. If Paulson was looking out for the taxpayer, he should be pushing for this instead if fighting it. Once a pigmen always a pigmen. I guess he needs to look out for his boys.

The longer this bill takes in Congress, the higher the risk of a financial collapse in the very near future. It will be interesting to see if they can all put their ego's aside to get this done.

In my eyes, this bill just delays the collapse. This Tsunami can't be stopped.


Anonymous said...

Captain Paulson of the USS Economy has determined that no matter what is done the ship is going to sink. Instead of issuing a general 'Abandon Ship' he has decided to order all the passengers to go below deck and help bail. While the passengers toil away below deck Captain Paulson and his crew pilfer the cabins and load everything up in the lifeboats. As Captain Paulson and his crew row away in their loaded lifeboats Captain Paulson shouts back to the ship, "Keep bailing, bail faster." This gives his crew a good laugh.

Jeff said...

lol anon

So true. This rally is going to turn into a panic once the reality of what Pauson and his crew are trying to do.

I can only imagine whats going on behind closed doors in DC right now. They all must be in an complete panic trying to figure out what the answer is.

Guess what? Maybe there isn't one!

Jeff said...

I loved this letter to Congress from Hussman:

"In summary, the Treasury proposal to address current financial difficulties places corporate bondholders ahead of the public, rewards irresponsible risk-taking, and sets a precedent for future bailouts. Moreover, we know from a long history of economic experience across countries that a major expansion of government liabilities is invariably followed by multi-year periods of extremely high inflation, particularly when it is not matched by a similar expansion of economic production. Such inflation would initially be modest because of the current weakness in the economy, but could pose unusual challenges to the United States in the coming years.

Congress can benefit the American public by maintaining a focus on responsibly assisting homeowners in distress rather than defending the stockholders and bondholders of overleveraged financial companies. It is essential to recognize that the failure of these companies need not result in “financial meltdown” provided that the “good bank” representing the vast majority of assets and liabilities is cut away, protecting customers and counterparties, so that the losses are properly borne out of the capital base of the companies that incurred them.

Again, everyone knows that a policy of bailouts will increase their number. By choosing who bears the losses for irresponsible decisions at these companies, Congress will also choose the scope of the bailouts that follow.


John P. Hussman, Ph.D.
President, Hussman Investment Trust"

Jeff said...

Stock Futures for Monday are Tanking.

It looks like its going to be a very red day at the start tomorrow.

This week could be a wild ride.

opportunistic said...

I think 8300 would have been a nice start. Not the bottom but definitely near it. Sure it would be rough, but at least it is a consequence fitting the behavior.

Are we attempting to save a something that is already dead? ie. After each bailout we continue a downward trend, so why not let the chipps fall and then rebuild with a solid foundation?

Thanks again Jeff. This is a great service you provide, as it's tough to filter through the bs news.

ZMonet said...

To be fair, is less than 1% really tanking? I think you're right, there is likely going to be a backlash, but I'm not sure that doesn't push lawmakers/"the people" into agreeing to this plan out of shear fear. Maybe if the down push is far enough Dems will agree to it without even getting any (baby) teeth into this.

I'm not sure it will help at all, but I don't think it will hurt to follow Mish's advice here. Again, probably little chance it will do anything, but I feel like I've at least made my point known to the people who get to decide this crap. I'll also be letting these people know how I feel by how I move my money around.

Jeff said...


Your wlecome. Glad the info helps. I think it is dead.


Futures have bounced back a bit. They were down further earlier. Fair value is on the DOW +42 so you need to tack that on.

I love Mish. I just read him tonight. I have already faxed my congressman. I plan on making some more calls tomorrow.

Look at what the FED is trying to do now.

They now want to bailout credit card debt, home loans, and other troubled assets. This from Bloomberg.

Hell if this is the the case I may go charge a BMW on my credit card!

This has gotten completly ridiculous:

"The U.S. Treasury submitted revised guidance to Congress on its plan a day after first submitting it, as lawmakers and lobbyists push their own ideas. Officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said."

Jeff said...

Ooops Typo from above.

I meant Treasury not the Fed.

ZMonet said...


Don't get me wrong, I think that if there is even a 1% downward push in this volatile market, it might cause some to think someone else is in the know and drive the price down further. For financials, without the aid of short buys on the way down, this might make for a hard landing. As you keep saying, this will be an interesting week...

jeff said...


It sure is going to be interesting!

You make an excellent point. Everyone is so jittery right now that the slightest smell of fear or bullishness can send equities up or down 300 points.

If the financials won't have those nice bounces without the shorts covering anymore.

If they start to roll over, its going to be interesting to see what happens!

Art said...

So Lehman had 740 billion in debt and 35 billion in real commercial assets, now that it went under government is putting up a rescue plan and call for 700 billion in taxpayer spending, interesting number coincidence.

Any idea who would benefit from hyperinflation>?

jeff said...


No one benefits from hyperinflation.

There isn't a single positive in that sceanrio unless you are looking for the government to be overthrown.

Lets just hope we aren't stupid enough to go that route.

Whats crazy is the more distressed our financial markets become, the more tempting it is to just hyperinflate out of it.

Lets hope Paulson isn't that stupid!