Dollar crash/Crisis legislation

Good Afternoon!

I hope everyone is having a great weekend. I want to share a couple things with you today.

The first thing I wanted to share with you was another report from the well respected GEAB. Take a look at the stunning amount of debt that we have taken on from a historical perspective since WWII. Note: this does not include the additional debt that we will be taking on if the bailout passes this weekend.

The GEAB expects a dollar crash with a 1.75 Euro/Dollar exchange rate by the end of 2008. Here are the two explanations for their thesis as to why this will happen:

#1:

"1st explanation: « The whole world economy is now being hit by the crisis, provoking a rush towards quality » It is certain that the majority of the world's financial operators and investors only realised this summer that Europe, Asia and the emerging markets were also about to be hit by the crisis (« The world plunges into the heart of the global systemic crisis » was the main title of the GEAB's June edition). They had made the mistake to believe in the announcements released by those countries claiming, as always, that all was for the best... until they noticed it was the contrary. Of course the crisis has impacted most currencies, but they are not reacting simultaneously given the very different conditions between for instance the United Kingdom, the Eurozone, Japan and Australia. But, above all, in consideration of the obvious series of bad news coming from the United States (the nationalisation of Fanny Mae and Freddy Mac for instance will increase significantly the country's already abysmal public debt), the US economy can really not be described as a “quality” safe haven, as Lehman Brothers bankruptcy has just illustrated again. As a matter of fact, as we will see in the rest of the explanation on the dollar manipulation, it is precisely for opposite reasons to « quality » that this operation was set up. In any event, the markets' taking into account a new factor would not normally generate such linear, general, lengthy and uninterrupted process. The famous “invisible hand of the market” is less heavy and determining than that. This first argument has therefore been considered very insufficient to explain the scope of the movements taking place since the end of July, and totally irrelevant to justify the duration and linearity of the process."

#2:

"2nd explanation: « The US went into recession before the rest of world therefore they will come out of it sooner » Out of politeness, we prefer not to name the reputable media which, all over the world, repeated this « argument »: so much absurdity is either deliberate lying or plain stupidity. What is certain for the vast majority of financial and economic players is that the US are obviously hit by a severe recession, with their financial system imploding because of the subprime crisis and consequences (2). What is probable for most of them now, is that Europe, Asia and the rest of the world will be affected at various levels and will experience some economic slowdown (LEAP/E2020 already wrote in detail the ongoing and upcoming evolution of this process and it is not the time now to come back on that). What is certain also for the majority of investors, is that besides the UK - and Spain to a lesser extent, no major country is affected by such manyfold crisis (real estate, finance, banking, economy, currency, military…) as the US, no one having the faintest idea of how and when it will end. In fact, this “argument” is based on the idea that the crisis currently affecting the US would be less bad – or not worse, to the maximum – than the crises affecting the rest of the world, and that it would not affect the country any more and any longer than it would affect the rest of the world. Those who claim this argument would also like us to believe that all economic and financial investors massively rushed to buy US dollars and to sell their other currencies, even on those days when the Dow Jones was losing 300 points because of very bad economic news! Apparently these global investors display a rather hectic behaviour: they believe in the US dollar but they are selling all their assets tied to the US economy! They are convinced that the US economy will improve sooner that the rest but they are getting rid of their shares of this economy in order to buy US dollars! This kind of behavioural derangement has no more to do with stupidity, it is madness... unless it is a desperate « retreat forward », and in this case the upward trend is ephemeral and some very serious problems are ahead for the US dollar and US dollar-denominated assets. As we will see later on, it is precisely on this phenomenon that the manipulation played. In any event, the “argument” according to which “the US would get out of the crisis sooner than the others because they got into it before” failed to convince our team."

Quick Take:

I have thought since day 1 that this "first out of recession" thesis was a complete joke. IMO, Our dollar will used as be toilet paper within the next year. Bubblevision can tout this all they want. I believe its a complete joke.

Text of the Financial Crisis Legislation

Here it is folks! The legislation that will solve all of our problems!(NOT) Of course, this is subject to change, but I thought you guys would like to see the rough copy of the legislation.

Here are some blurbsfrom the text that are flat out frightening:

"Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency"

Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.—The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties"

Final Take

I guess Paulson now has the right to be the equivalent of a financial dictator with powers similar to Hitler.

The first paragraph that I highlighted is flat out frightening. This guy basically can do anything he wants without any consequences from any court of law. This is insane! This is the epitome of financial socialism.

What has happened to our country! If I was a financial company, the new powers that Paulson is about to receive would have me quaking in my boots. What if he decides to force these companies to sell their assets at 20 on the dollar?

There are no legal grounds for a bank to stop him if he has Immunity from the legal system.

I assume this will pass right through Congress tomorrow. I don't think the markets are going to like this one bit.

After the beatdown he gave AIG, Morgan Stanley and others better watch their backs.

Ron Paul Speaks

Take a listen to Ron Paul:

I couldn't have said it better.

Follow the Money

Just a quick note tonight folks.

I am a big fan of following the money and seeing what stocks are selling into strength.

Check out this chart from the WSJ.

Take a look at what stocks are getting dumped faster than a cheap hooker into this rally. Notice that Citi is #2 on the list and Goldman is also in the top 10. Many other financials were up towards the top of the list.

I think Monday will be critical for the market. Paulson just shot his last bazooka, and the economy is still on the ropes. The fundamentals haven't changed folks!

BTW, I am hearing that many Americans are jamming the phone lines and freaking out on their representatives in Congress over this proposed trust.

You may see some demonstrations over the weekend. Some are viewing this weekend as the last chance to rise up and protest financial socialism and the dumping of this Wall St. disaster onto the taxpayer.

I will be on The Housing Time Bomb all weekend with the latest headlines.

Where is Robin Hood?

Good Morning!

This was my thought this morning as I watched Paulson speak about his new Treasury plan. What we are witnessing if this bailout passes is taking money from the poor and giving it to the rich.

Where is Robin Hood? We need him now more than ever. It's obvious no one else in DC or on Wall St. is here to look out for our interests. Paulson says that this plan will bring confidence back to Wall St. and allow the banks to start lending again.

HA! Yeah Right. Who is ever going to trust Wall St. again after this mess? I have lost all confidence in the banking system. Why would I sit down and try to do business with banks that know they can commit fraud and then have the taxpayer pay for it? What incentive do they have to be ethical and conduct good business when they hold a "get out of jail free" card at my expense?

What's ironic is I think the banks will end up losing confidence in the financial system as well. What if the Treasury decides that the trust will pay no more than .30 on the dollar and forces the banks to sell the securities at a 70% loss? How are they going to feel after getting shafted like this?

Do you think they will be ready to run out and start throwing money out of helicopter's again and create another housing bubble after taking such huge losses?

The government plan is a short term fix and does nothing to resolve the long term problems of the economy. This is simply another delaying of the pain. Housing is still be at a level where no one can afford them, and the government seems hell bent at preventing housing from dropping to affordable levels.

Mr. Paulson needs to recognize that freeing up the banks books by buying their garbage will not guarantee that the banks will start lending agin at healthy levels. Hank cannot FORCE people to buy and he also can't FORCE banks to lend. In my eyes, banks and consumers will have very little desire to do business with each other.

The banks will be hesitant to lend if this legislation passes because their balance sheets will be a mess. Anyone buying a home will be hesitant to pull the trigger because their confidence and trust in the banking system will have been destroyed. The consumer will also be furious as their taxes go through the roof to pay for this whole mess. This trust could creat chaos instead of confidence.

My last point here is also what about all of the millions that bought houses at inflated levels? How are they not completely screwed by this bailout? What is going to prevent them from sending their keys back to the bank and saying the hell with this? If I was one of these buyers I would walk. Why pay double what you need to on a huge asset like a house?

Bottom Line:

I see this as nothing more than a big bailout of Wall St. This plan is very short sighted, and the government seems to be ignoring all of the blatant negative ramifications from pulling this trigger.

The economic ramifications here are also huge. The dollar will get killed on a trillion plus dollar bailout. This will lead to spikes in inflation, and our swelling balance sheet puts the credit rating of the United States of America in jeopardy.

Without a stellar balance sheet, our treasuries will be much less appealing foreign countries. Keep in mind, if this bailout goes through, we will have added close to $7 trillion dollars to our balance sheet. This is more than double what it was only a few weeks ago!

The series of events that have taken place in the last few weeks are unprecedented. Something has to be done to stem the tide of this, but I believe it should be at the expense of Wall St. instead of the taxpayer. We both will take losses here, but we all know who got the better end of this deal.

Wall St. has found their own sick version Robin Hood who steals from the poor and gives to the rich. His nickname should be Rob.

What I want to know is where is the real Robin Hood?

Resolution Trust: Part 2

I'll tell you what, the pigs on Wall St. and in DC have a lot of nerve to try sell the public on another Resolution Trust. I apologize for the rant tonight, but when I see the criminals about to act I get angry.

I am outraged by this. The market zoomed up 400 points as Wall St. cheered the mother(and I mean MOTHER) of all bailouts.

Here is news the that that lit the bulls fuse today a couple hours before the close.

"Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said."

My Take:

Alrighty folks, lets all jump in a time warp and go back in time to 1990/1991 and see how the taxpayer did with the last Resolution Trust.

Lets use Wikipedia to take a look at this. Here is how the Resolution Trust was setup by the government:

"The Resolution Trust Corporation was a United States Government-owned asset-management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations ("S&Ls") declared insolvent by the Office of Thrift Supervision, as a consequence of the Savings and Loan crisis of the 1980s. It also took over the insurance functions of the former Federal Home Loan Bank Board. It was created by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), adopted in 1989. In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation.

Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion. [1]"


So how did this work out for the Taxpayer?

Lets take a look at the savings and loan crisis losses that the Resolution Trust bailed out:

"While not part of the Savings and Loan Crisis, many other banks failed. Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance. [13]
From 1986 to 1995, the number of US federally insured savings and loans in the United States declined from 3,234 to 1,645. [8] This was primarily, but not exclusively, due to unsound real estate lending.[14]

The market share of S&Ls for single family mortgage loans went from 53% in 1975 to 30% in 1990.[3] U.S. General Accounting Office estimated cost of the crisis to around USD $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government from 1986 to 1996. [1] That figure does not include thrift insurance funds used before 1986 or after 1996. It also does not include state run thrift insurance funds or state bailouts.

The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession. Between 1986 and 1991, the number of new homes constructed dropped from 1.8 to 1 million, the lowest rate since World War II. [3]

A taxpayer funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis. [15]"

My Take:

If this doesn't sicken your stomach as a taxpayer then you don't have a pulse. We cannot let this happen! This mortgage crisis is 1990 x 20!. This crisis runs into the trillions not billions ladies and gentleman.

The problems with this idea are multiple. First of all, the losses would be over a trillion dollars. Look at the 1990 crisis. The last trust took over roughly $400 billion in assets in 1990. The trust lost roughly $160 billion and that didn't even include state bailouts.

Whats this one gonna cost us? $1-2 trillion? Where in the hell is the money going to come from? Last I knew, Santa didn't give out cash on Christmas.

This has got to stop! Whats the bond market going to say when the government tries to secure a trillion dollars from Congress to buy all of these bad assets? Another issue here is the government will want to buy the assets for .30 on the dollar like they did in 1990. Who says the banks will take a 70% losses on loans? Who says they can afford to take such losses? They are already insolvent. They will be left with pennies int heir pockets.

Remember, the trust took assets from mainly failed banks. This time the banks are technically still "solvent"(HA! What a joke) and open for business

If the government forces the banks to take this deal, will there be any banks left other than BofA and Wells Fargo? Also, who says the bank would agree to such terms? You know the government isn't going buy these assets at bloated prices. Hell, look at what the Treasury did to AIG this week. They took 80% of their capital and gave them a loan at an 11% interest rate. I am sure AIG was just thrilled with those terms(NOT)!

What sickens me even more here is who ends up making money on this trust: Wall St. What will happen if this ever goes through is Wall St. will find capital and buy these houses from the trust and make a fortune turning them around and selling the assets back to us and other private equity.

Meanwhile, the people who bought at the peak get totally screwed because they are stuck in a house that's worth half of what it was. Do you see those empty houses on your block or in your condo building? If this goes through, you will have new neighbors that will buy at half the price you did.

If you bought at the peak I would walk away if this goes through. Why pay for an asset that's worth half of what you paid?

The saddest part about this is guess who pays for the losses incurred from this trust. Take a look in the mirror folks: Its us.

Bottom Line:

The Treasury is in a total panic right now trying to stop this debt bubble from bursting. I don't think they can pull this trust off. The losses are too large and I think the bond market will go bananas with interest rates if they attempt it.

We cannot continue to add more debt onto our balance sheet. This would add trillions more to the trillions we already took on from the Fannie/Freddie disaster.

This bailout would kill the dollar and make our treasuries much less attractive. Mark my words folks: There will be a point where China says "enough" and says no mas to buying more T-bills. Other countries will surely follow. The game is over if this happens because we will have no one to fund our debt. We continue to make this crisis worse with these foolish greedy ideas.

It amazes me how Wall St. will step on anyone in order to make or save $$$. I really don't believe they have a conscious.

Let me finish by repeating Wikipedia's conclusions on the bailout of the savings and loan crisis:

"A taxpayer funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis. [15]"

If this trust goes through: Will Wall St. have learned a lesson?

I predict a potential crash in equities if this ever gets approved. It looks like they are going to give it a try. Lets hope the taxpayers and bond market rise up and say:

STOP THE BAILOUTS AND NO MORE DEBT.

I have already sent a message to my Congressman. I advise you all to do the same if you want to save your country.

Guns and Gold?

Good evening everyone!

What an epic day on Wall St. I must admit that I also find it to be a very sad day based on some news from the Treasury. I think I may have to tweak my thesis on the economy my friends. Watch the following video, and I will explain what scared the daylights out of me today.




Wow me might as well call this guy Nostradamus based on his recommendation to buy gold. I have been in the deflation camp throughout this crisis. I thought the gold bugs had it wrong because I thought the Fed would shrink the money supply, and we would work through this via a Japan like deflationary scenario.

I thought surely the government would understand that trying to hyperinflate out of this would be insane. I say this because they would risk destroying themselves in the process because governments are ALWAYS overthrown when the hyperinflationary route is taken. Go Google Argentina and Germany hyperinflation and see how it worked out for those two governments. (I'll give you a little hint: Germany ended up with Hitler in power).

Now why am I now worried that we might try to inflate out of this? The Treasury announced today its going to turn on the printing press because the Fed is broke:

"Sept. 17 (Bloomberg) -- The Treasury will sell more debt to enable the Federal Reserve to expand its balance sheet, a sign of the strains created by the biggest extension of central-bank credit to financial companies since the Great Depression.

The program starts today with a $40 billion auction of 35- day bills, a day after the government agreed to take over American International Group Inc., the Treasury said in a statement in Washington.

The proceeds will ``provide cash for use'' by the Fed as it seeks to boost liquidity in credit markets struggling from $515 billion in writedowns and losses since the start of last year. The announcement illustrates the potential drain on the government's finances in taking over AIG, Fannie Mae and Freddie Mac, and taking on $29 billion in Bear Stearns Cos. assets.

``It is becoming imperative for the Fed to take actions to enlarge its balance sheet,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

Yesterday the Fed announced an $85 billion loan to AIG, in exchange for a 79.9 percent government stake in the largest U.S. insurer. The Fed also has set up several other emergency lending programs to provide Wall Street firms with ready access to funding.

``The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program'' and ``will provide cash for use in the Fed initiatives,'' the department's statement said."

My Take:

I was speechless after I read this. I have always wondered where the government thought they were going to get the money to pay for all of these stupid bailouts. Now I know: The Printing Press!

Folks, the more dollars you add to the money supply, the less the dollar is worth. If we start printing money, the hyperinflation scenario has to be part of your investment thesis. This is why gold had its biggest one day move in history. Are you guys ready for $30 bread? This is what happens when countries try to print out of financial catastrophes.

That $500,000 nest egg you saved for your retirement all your life becomes almost worthless. Of course after this happens, the citizens revolt and the government gets overthrown. Folks, the government has been overthrown every time this happens. Every time!

Bottom Line:

I gave you examples of foreigners backing away from our debt yesterday. Today the printing press was turned on to make treasuries for sale because the Fed is broke. As we fall into a severe recession and the government keeps spending like a drunken sailor, foreigners are going to start bailing on the great USA and our debt.

Think about it:

What incentive will they have to buy treasuries if we continue to spend spend spend which eventually kill our dollar? Turning on the printing presses will only exacerbate the fall of the dollar which makes treasuries even less attractive.

To make things worse, we are no longer consuming like we used to. This was a big reason why China keeps buying our debt in the first place! They knew we would take the money and buy import billions of dollars worth of Chinese goods.

We are becoming a less attractive place to invest. This will make printing out of this via hyperinflation a much more attractive option for the government.

So what should you do as an investor? Buy some gold. I will be picking some up this week and I will buy more if I see more printing by the government. We need to put a stop to this. Call your Congressman and tell them to stop spending money we don't have. We cannot allow hyperinflation to occur. Its the worst case scenario folks!

Guns and Gold. This is what it is coming to if we don't clean up our act.

Stay Tuned.

Batten Down the Hatches

Wow

What a morning. It looks like investors have finally gotten tired of the bailouts. I don't know where to begin today folks. The financial system is hanging by a thread. It seems to me like there is a run on the investment banks.

Morgan Stanley is supposedly considering their options in terms of whether or not they want to stand alone according to CNBC. Goldman Sachs is also getting pummeled today. Here is the story on the last men standing:

"Sept. 17 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms, tumbled the most ever in New York after a government rescue plan for American International Group Inc. failed to ease the credit contraction.

Goldman fell as much as 23 percent on the New York Stock Exchange and Morgan Stanley plunged 44 percent, leading financial stocks to the lowest level in five years.

Morgan Stanley Chief Executive Officer John Mack and Goldman's Lloyd Blankfein are trying to navigate declining investor confidence that prompted emergency sales of Merrill Lynch & Co. and Bear Stearns Cos. and the bankruptcy of 158- year-old Lehman Brothers Holdings Inc. The turmoil spurred the U.S. government late yesterday to lend as much as $85 billion to AIG to prevent the insurer's collapse.

Markets are reacting to ``rumor and fear,'' Colm Kelleher, Morgan Stanley's finance chief, said yesterday after the New York-based company reported better-than-estimated earnings for the third quarter.

Morgan Stanley dropped $9.41 to $19.29, the lowest in almost 10 years, in composite trading on the New York Stock Exchange at 11:40 a.m. Goldman slumped $30.06 to $102.95, a three-year low. "

Quick Take:

All of the investment banks are just getting swallowed up by the massive deleveraging that is now hitting Wall St. These firms were so highly leveraged. They lent $30 for every one dollar in capital. That gives you a 30-1 leverage. When housing was going up, these firms made massive amounts of money with such high leverage.

However, leverage works both ways, so your losses are more severe when the game is over. When you are losing money at 30-1 leverage, it doesn't take much to wipe out your capital. I don't know if you will see an investment bank on Wall St. a year from now. That is unbelievable. Almost all of these firms navigated through the Great Depression. Is this a sign that this crisis is worse? Time will tell.

IMF: Worst of crisis lies ahead

Be worried when the IMF is worried:

"JEDDAH (Reuters) - The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF director general Dominique Strauss-Kahn said on Wednesday.

"The roots of the crisis are behind us, the roots being the fall in housing prices. The consequences for some financial institutions are still in front of us. We have to expect that there may be in the coming weeks and coming months other financial institutions with some problems," he said.

Still, the world economy was very resilient and should rebound in 2009, Strauss-Kahn said to reporters after a meeting with Gulf Arab finance ministers and central bank governors."

Quick Take:

This is one of the most respected organizations in the world. Take note when they make such predictions.

Bloated Pig For Sale!

Regulators are shopping this pig around before they have to take them over. They have yet to find a buyer. Gee what a shocker. I am sure their balance sheet is in great shape! There is a reason this pig has been sitting at $2 for the last couple weeks. Here is the news:

"NEW YORK (AP) -- The U.S. government has been reaching out to large banks in an effort to organize a buyout of the beleaguered Washington Mutual Inc., according to a person briefed on the talks between regulators and banks
.
The obstacle, however, is that "no one knows what's in their books," the person said, speaking on condition of anonymity because of the sensitivity of the matter. There could be, he said, "a minimum amount of value there."

A New York Post report Wednesday citing unnamed sources said regulators have reached out to Wells Fargo & Co., JPMorgan Chase & Co. and HSBC Holdings PLC, among other institutions. The Post noted that no discussions of a deal between any of those banks and Washington Mutual were under way."

Quick Take:

this is the nations 6th largest bank. If the FDIC is forced to take them over, it will pretty much wipe out all of their capital. Don't worry, the way are government has been spending lately, I am sure they will throw them billions to fill up their coffers.

Money Market Fund Halts Redemption

I posted this in the comments section last night, but I felt it deserved a mentioning on here today:

"Sept. 17 (Bloomberg) -- Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

Shareholders pulled more than 60 percent of the fund's $64.8 billion in assets in the two days since Lehman folded. Losses on the securities firm's debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement. Redemptions were suspended for as long as seven days."

Update:

A second money market fund just broke the buck.

Quick Take:

I advised everyone last night to get into treasuries and CD's. If you like money market funds, Vanguard is the safest one out there. We are in a crisis folks and you really need to pay attention to your investments. Please be careful!

Gold Soars

When there is blood in the streets gold always reacts. I discussed a move in gold about a week ago but I didn't expect the biggest jump in 8 years! Then again I also didn't think we would lose almost all of our investment banks this week either! Here is the news on gold:

"Sept. 17 (Bloomberg) -- Gold surged the most in eight years as investors sought the safety of precious metals on concern that the credit crisis will deepen, leading more financial institutions to fail. Silver jumped more than 8 percent.

The U.S. government took control of American International Group Inc. in an $85 billion bailout to prevent the biggest financial collapse ever. The cost of borrowing dollars for three months jumped the most since 1999 as banks hoarded cash. In March, gold reached a record after the Federal Reserve backed JPMorgan Chase & Co.'s purchase of Bear Stearns Cos.

``Gold is going to be the beneficiary of a global move toward a safe haven,'' said John Licata, the chief investment strategist at Blue Phoenix Inc. in New York. ``There's a gigantic fear factor. Most people are concerned another bank is going to fail.''

AIG

Everyone knows about this by today but here is the story in case you missed it. This was the trigger to the selloff this morning.

Final Take:

I wanted to make this news oriented today because there is so much going on, and I realize people want to know why this is happening. IMO we are witnessing total contagion.

Our financial markets are extremely intertwined,and we are now seeing the fallout of three major events. In the past week we have seen our housing system nationalized, Lehman go Bankrupt, and our largest insurance company get taken over by the government.

Each of these events set off triggers all around the world. To say these are unprecedented times would be an understatement!

Stock are down almost 300 points. I am hearing reports companies failing to make payroll. Here is an example of one. I have a friend who just had the same problem.

Treasuries are now at their lowest levels in 54 years:

"Sept. 17 (Bloomberg) -- U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 as a loss of confidence in credit markets worldwide prompted investors to abandon higher-yielding assets for the safety of the shortest- term government securities.

Investors pushed the rate to 0.0304 percent on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc. In a sign of banks' reluctance to lend, the rates charged for short-term loans relative to Treasury bill rates rose to the highest at least since the stock market crash of 1987.

``It's scary,'' said E. Craig Coats Jr., who co-heads fixed income at Keefe, Bruyette & Woods Inc. in New York and started trading bonds in 1969. ``This is the worst it's ever been since I've been in the business. Nobody knows what's really going on. Systemic risk is here and there and everywhere.''

Bottom Line:

Batten down the hatches. We are in the middle of a systemic crisis. Things are real bad folks. My biggest fear is the Government might try to print out of this in a panic. I hear that the Fed is about out of money and needs to sell more treasuries in order to shore up its balance sheet. I need more hard info on this before I talk about it.

This is why you saw a moonshot in gold today. If we hyperinflate out of this, we risk losing everything including our government.

Stay tuned.

AIG Bailout: The Financial System Hangs in the Balance

Good Afternoon Everyone!

Its been quite a day in the markets. All eyes are now focused on AIG. It looks like the Fed might blink and bailout AIG:

"Sept. 16 (Bloomberg) -- The Federal Reserve is considering extending a ``loan package'' to American International Group Inc., the insurer facing a cash shortage, according to a person familiar with the negotiations.

The stance by federal regulators is a reversal from a position they held as late as last night, and people with knowledge of the talks are ``cautiously optimistic,'' said the person, who declined to be identified because negotiations are confidential.

The person gave no timetable for reaching an agreement or estimate on how much money New York-based AIG would need. New York Fed spokesman Andrew Williams declined to comment."

My Take:

This is the ultimate game of chicken between the Fed and the private banks. The banks are holding out on offering a loan to AIG to see how the Fed reacts. Now that the Fed has blinked, the banks have come out with a more hawkish tone in terms of lending money to AIG.

When its all said and done, I expect the Fed to give in and extend some type of hand to AIG. I think the Fed is afraid too see what the ramifications of an AIG failure would be given the lack of confidence that now grips the markets.. Lets see how this all plays out. If AIG fails, all hell is going to break loose in the financial markets.

Fed: No rate cut!

Kudos to the Fed. Maybe they are finally starting to get it. Here is the news on the Fed holding Rates:

"Sept. 16 (Bloomberg) -- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for a cut after Lehman Brothers Holdings Inc.'s bankruptcy shook markets worldwide.

``Downside risks to growth and the upside risk to inflation are both of significant concern,'' the Federal Open Market Committee said in a statement in Washington. ``The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.''

Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy skirting a recession. Stocks fell after the decision, while the dollar gained and Treasuries remained higher."

My Take:

I think the Fed decided they needed to save some bullets for the next blowup. The obsession on AIG gave them the opportunity to take a breather without taking too much heat. This was the right call and it was a unanimous decision.

This deleveraging is going to destroy many financial firms. The Fed knows there are many more battles down the road. I think they also are sending the message to Wall St. that there is a line of moral hazard that they refuse to cross.

Here is another reason why the Fed may have decided to hold rates at 2%. Well take a look at the TIC report(Treasury International Capitol) for July:

"Treasury International Capital (TIC) data for July 2008 are released today and posted on the U.S. Treasury website (www.treas.gov/tic). The next release, which will report on data for August, is scheduled for October 16, 2008.

Net foreign purchases of long-term securities were $6.1 billion.

Net foreign purchases of long-term U.S. securities were negative $25.6 billion. Of this, net purchases by private foreign investors were negative $20.7 billion, and net purchases by foreign official institutions were negative $4.9 billion.

U.S. residents sold a net $31.7 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $8.2 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $8.4 billion. Foreign holdings of Treasury bills decreased $4.4 billion.

Banks’ own net dollar-denominated liabilities to foreign residents declined $58.1 billion.
Monthly net TIC flows were negative $74.8 billion. Of this, net foreign private flows were negative $92.9 billion, and net foreign official flows were $18.2 billion."

Final Take:

The Boys on Wall St. all want a cut because it helps bailout the financials. What the Fed is focusing on is the larger picture IMO. This data had to scare the hell out of the Fed.

WE CANNOT afford to lose our foreign buyers of treasuries. Foreigners are getting increasingly tired of all of the lies, fraud, and manipulation on Wall St. As you can see by this Fed report, they are starting to walk away! The game is over if this continues folks.

Bottom Line:

The fact the DOW is up today is ridiculous. Stocks are soaring based on a potential AIG bailout. The huge bounce in the last few minutes leads me to believe that the deal is probably already done.

If Wall St. had a brain, they would get away from there minute by minute trading and start focusing on the fact that foreigners are starting backing away from our debt. The TIC report blew me away folks. This is a frightening development.

The "bubble boys" just want to cheer on the bailout. This is just more simpleton thinking by a bunch of pump monkeys. Party on boys because you have very few days left.

This "black hole" of debt that's about to suck away our economy will soon turn those cheers into jeers. I will be back on with any AIG news.

Liquidations Flood Wall St.

Good Evening Everyone

MUST WATCH ALERT!

Before you read this post, PLEASE watch this interview of Meredith Whitney today.

You have seen Meredith on here many times before. She is the best financial analyst on the street IMO. Here is a wonderful explanation as to why we are not out of the woods and in deep trouble. As you can see, Meredith has now increased her peak to trough in housing from 30% up to 40-45%.

She also commented that banks like Citibank and others are expecting 20-25% losses in housing. You know what this means folks: All of the CDO's the financials are sitting on will be worth much less than they expected or planned for. This will trigger another string of writedowns for the financials.

Liquidations

I didn't have a full grasp of how crushing these liquidations are for the financials until I watched Meridith today. When you are forced to liquidate like Lehman and others, you have no leverage to negotiate fair pricing. As a result, assets are sold well below market value. This is simply devastating to the banks that hold the same assets.

Massive liquidations is why you saw oil go under $100/barrel today. The toxic loans that are on the banks balance sheet just got a little more toxic as Lehman is forced to mark to market and dump all of those sh*t sandwiches. Commercial real estate also got killed because Lehman holds huge amounts of commercial assets that will now have to be sold at bargain basement prices.

I am sure Donald Trump wanted to puke after watching this slaughter in commercial.

AIG

Folks, if AIG does not get funding tomorrow, run as fast as you can for the exits. Here is the story from Bloomberg:

"Sept. 15 (Bloomberg) -- American International Group Inc. is seeking a loan for as much as $75 billion through Goldman Sachs Group Inc. and JPMorgan Chase & Co. after the Federal Reserve balked at providing funding for the insurer, according to people familiar with the situation.
Representatives of Wall Street's biggest firms convened at the New York Fed for a fourth consecutive day, this time to discuss the funding crisis at AIG. The Fed urged AIG to seek private capital and discouraged the insurer from expecting a loan from the central bank, according to two people with knowledge of the discussions.

New York-based Goldman and JPMorgan are working with AIG to determine how much the insurer needs, said two more people, all of whom declined to be identified because negotiations are private. The loan would involve temporary financing, a so-called bridge loan, through a syndicate of banks, the person said, adding that there's no assurance an agreement can be worked out.

``We're still working on a number of alternatives,'' said Nicholas Ashooh, spokesman for New York-based AIG. JPMorgan's Brian Marchiony and Goldman's Lucas van Praag declined to comment.

AIG fell $7.38, or 61 percent, to $4.76 at 4:15 p.m. in New York Stock Exchange composite trading, bringing its loss for the year to 92 percent"

My Take:

AIG is big enough to take this whole market down my friends. They have a $1 trillion balance sheet. That makes them almost twice the size of Lehman. The stock dropped 61% today and now trades under $5. This is unbelievable. AIG is one of the USA's great companies. To see them in total shambles is a travesty.

When push comes to shove IMO, the Treasury is going to be forced to come to the rescue here if Wall St. fails to lend them the $75 billion they are asking for.

Anyone notice how the dollar amount on this loan keeps growing? Last night they supposedly only needed $40 billion. Now we are at $75 billion. The problem AIG has is I am not sure there is $75 billion left to borrow on Wall St.!

Bottom Line:

We are at sticksave levels folks. There is a FOMC meeting tomorrow and a rate cut would not surprise me. In fact, I wouldn't be surprised to see a half point cut. The strengthening of the dollar along with the commodity drop has given the Fed enough room to drop rates.

If a ratecut doesn't happen, expect something creative tomorrow by the Fed in an attempt to shore up the markets. The DOW was gushing red during the last hour of trading on very high volume. This was an ugly way to go out today. Market crashes occur at times like these although I am not predicting one.

As a result, expect more fireworks and a sticksave on Wed. This could lead to a bounce. Also, keep an eye on WAMU. They dropped under $2 today and could fail tomorrow. The FDIC loves to clean these messes up on a Friday.

If the Fed decides to make a "No More Bailouts" statement tomorrow to Wall St. and decides not to lend AIG any money then I have one piece of advice: Run for your life!

What Happens Next?

That's the question I am asking myself today. The Fed is taking unprecedented actions today in order to keep the market working. Lehman officially went Bankrupt this morning:

"Sept. 15 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990."

Quick Take:

The fall out of the Lehman bankruptcy poses a huge risk to the derivatives default swap market. Bloomberg reported on this today:

"Sept. 15 (Bloomberg) -- Bond-default risk soared worldwide as the collapse of Lehman Brothers Holdings Inc. sparked concern than the $62 trillion credit-derivatives market will unravel.

Benchmark gauges of corporate credit risk rose by a record in Europe, and traded near an all-time high in North America, driven by a rise in Goldman Sachs Group Inc., Morgan Stanley and American International Group. U.S. two-year Treasuries climbed, pushing yields below 2 percent for the first time since April, as investors sought the relative safety of government debt.

``The immediate problem is the derivative default swaps market, in which a plethora of institutional accounts and dealer accounts are at risk,'' Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in an interview with Bloomberg Radio yesterday. ``It induces a tremendous amount of volatility and uncertainty.''

My take:

We will just have to wait and see how this all plays out. The market is holding steady after dropping 300 points. The uncertainty and fallout however has only just begun. It appears that saving Merrill has saved the financial system at least for now.

I just watched the Merrill/BofA love fest news conference on CNBC. What a charade that was. When asked if the Fed pressured BofA to do the deal, BofA's CEO replied by saying no and blabbered on about how much strategic sense it made to acquire Merrill.

In almost the next sentence, BAC's CEO admitted that discussions to acquire Merrill started only two days ago on Saturday. Yeah OK Mr. Lewis, I am sure there was no pressure by the Fed for you to spend $50 billion to acquire Merrill after only having only 2 days to look at their books.

There is no doubt in my mind that this deal was shoved down their throat. Remember, if Merrill went down today, all of the pigmen would have been in deep trouble.

Bottom Line:

I see nothing but a big love fest on CNBC and the other financial media markets today. Everyone is holding hands and pretending everything is just fine. Don't be fooled by this charade.

The Fed is pulling out all the stops from a liquidity standpoint in order to make this huge transition in our banking system a smooth one. Unfortunately, this means more manipulation in the markets which creates more uncertianty. I also understand why this had to be done.

I am proud that the Fed did not go into bailout mode this weekend. Kudos to Paulson for finally closing up his pocketbook. Lets hope this is a trend that continues. Its the only way Wall St. will learn a lesson.

The ramifications of what happened today will take weeks to play out. Hold onto your seats because its going to be a bumpy ride.

Things to look for:

Watch the credit agencies on AIG today. They are threatening to downgrade them if they don't find a huge infusion of capital. If they get downgraded, it will trigger another wave of massive writedowns. Also keep an eye on the CDS fallout. Lehman's balance sheet was around $600 billion.

It will take time to figure out who is most exposed to Lehman, and what the ramifications are of having one of the largest investment banks go BK.

The way I see it, this whole debt bubble is unraveling and it cannot be stopped at this point. Dive into some treasuries for awhile and hangout. This is no time to be bottom feeding.

Timberrrrr

Good evening folks!

Just a quick update tonight. There is much to digest tonight so I don't want to get ahead of myself.

Anyone wanna play the card game 52 pickup? This is what Wall St. is essentially doing tonight as it tries to clean up this disaster. I am afraid Humpty Dumpty just had a great fall and we all know how that ended.

Here is what we know.

WSJ just confirmed to CNBC that Bank of America has agreed to purchase of Merrill Lynch at $29/share. Lehman looks to be headed into some type of bankruptcy. The details on this are still not out yet. Here is the most recent Bloomberg update. Please note that according to the Wall St. Journal, the Merrill deal is done.

A great question raised tonight by the CNBC panel is why did Bank of America pay such a high price for Merrill? They refused to buy Lehman at $1 but then they turn around and cough up a $29/share offer to Merrill?

This makes no sense. You know both of their balance sheets are a mess. All of these banks had Level 3 assets that if stacked in a pile would be taller than the Empire State Building. I don't see how Goldman makes it out of this mess when its all said and done.

Bottom Line:

I need a lot of time to see how this all goes down. The futures are now down over 300 points on the DOW. I expect a drop of 3-5% in the stock markets tomorrow.

Folks, I am stunned at how fast all of this is happening. The ramifications in the CDS market are my biggest concern. This is why AIG went down the toilet on Friday. They were the big CDS insurer on Wall St. Their exposure is $500 billion to financial derivatives. They need capital and they need it fast.

Guys, if this triggers a major explosion in the derivatives market, the financial system might be toast. The pigmen really did a number on themselves with this crisis. The ball is starting to gain steam rolling downhill and I don't see how these pigs can stop it. This is what happens when you create financial crisis and then constantly get bailed out by the Fed.

You keep pushing and pushing until you go too far. This is why the line of "moral hazard" must not be crossed. We are in uncharted territory folks. I have no idea what happens from here. The one thing I am sure of is you will see total chaos in the markets this week.

Hunker down in your financial bunker and ride out the storm. I will have much more on this tomorrow as I try to get my hands around it.

Major intervention and reforms will be needed because they aren't going to be able to put Humpty Dumpty back together again.