Saturday, September 27, 2008
Just a note today. It looks like significant progress has been made on the housing bill. I expect it to be passed within the next day or so. It appears that Congress looked at the pressure on financial system and decided something had to be done or most of our banks were going to die.
Take a look at this graph from Deutsche Bank on lending from the discount window:
As you can see, the lending from the discount window soared in September as the crisis continued to worsen.
Bloomberg reported that banks were borrowing $180 billion a day from the Fed last week. This is why Paulson frantically ran to the government begging for a bailout. He realized that the lending escalation from the Fed along with a run on money market funds was about to blow up the whole financial system.
What I find funny is how the invesmtent banks stopped lending all to together late in the summer in an attempt to show the world that they were strong and didn't need to. I guess that idea went out the window when all hell broke loose this month!
Now as I have said before, I don't think this $700 billion is going to be enough to solve the problem. This is nothing more than another band aid that will hold things together for a little while longer. This dam is eventually going to burst because the leverage in the system needs to be unwound.
Our economy is drowning in debt and we can no longer afford to service this debt. Our politicians realize this.
Why do you think the Democrats didn't approve this plan yesterday on their own if they were so confident that it would work? They had enough votes to do it. The reason they didn't is because if this plan doesn't work and the Dems passed the bill, they get blamed for it.
If they were confident in the plan, it would have been a no brainer to jam it through because they could be annointed as the political party that "Saved the financial System!". I think everyone in Washington realizes this bailout is a "Hail Mary".
Expect the mother of all bailouts to be passed by Monday or Tues. at the latest. It will be interesting to see how the stock market and world reacts to it. If the credit markets don't loosen up significantly from this, expect the fear to be right back up to the pre-bailout levels.
Lets see what happens!
Friday, September 26, 2008
The DC bailout drama continues to unfold as the economy hangs in the balance. It appears like we have another cluster **** on our hands folks. As you can see by my equation headline, this is what you end up with when you throw three giant elephants into a room.
I want to focus on an article in the Economist today that explains why finding a solution to this plan is so difficult to find. It also concludes that Paulson's plan isn't enough.
Why the Fed Balance Sheet couldn't be used
"Conceivably, the Fed could have contained the damage by supplying lots of cash. But that would have meant ever greater and more creative use of its balance sheet. By September 17th it had grown to $1 trillion, up by 10% in a fortnight, with most of it tied up in loans to banks, investment banks, foreign central banks, AIG and Bear Stearns (see chart 2). It was becoming the lender of first resort, not last.
Such steps were also courting political risk. After the rescue of AIG, Nancy Pelosi, speaker of the House of Representatives, demanded, “Why does one person have the right to grant $85 billion in a bail-out [to AIG] without the scrutiny and transparency the American people deserve?” Mr Bernanke later acknowledged that the Fed wanted to get out of crisis management, for which it lacked authority and broad support. “We prefer to get back to monetary policy, which is our function, our key mission,” he told Congress this week."
Why did Congress balk at the plan?
"The Fed chairman told Mr Paulson on September 17th that the time had come to call for a big injection of public money. By the next day Mr Paulson was in agreement and the two men, after getting Mr Bush’s approval, approached Capitol Hill.
Mr Paulson’s first proposal left Democrats cold: it would give the Treasury virtually unchecked authority for two years to spend up to $700 billion on mortgage assets or anything else necessary to stabilise the system. It looked like a power-grab. Democrats countered with several conditions: troubled mortgages would be modified where possible to keep homeowners in their homes; an oversight board would watch over the programme; taxpayers would share any gains for participating companies via shares or warrants; and executives’ compensation would be capped. By September 24th, Mr Paulson seemed to be bending to all these conditions. For its part, the finance industry is ready to yield to all of these conditions in order to get something done. “It was a gargantuan abyss that we faced last week,” says Steve Bartlett, chairman of the Financial Services Roundtable, which represents about 100 big financial firms"
Why The Plan Won't work and isn't enough
"Assuming it comes into existence, there are still numerous risks surrounding the TARP. The first is that it does too much. At $700 billion, the amount allocated to it easily exceeds the Federal Deposit Insurance Corporation’s (FDIC) estimate of roughly $500 billion of residential mortgages seriously delinquent in June, out of a total of $10.6 trillion, though that figure will rise. The Treasury has sought broad authority to buy not just mortgage securities but anything related to them, such as credit derivatives, and if necessary equity in companies weakened by their bad loans.
It is more likely that the programme will not go far enough. Conscious of the public’s deep antipathy to anything that smacks of favours for Wall Street, politicians from both parties have insisted that the protection of the taxpayer be paramount. Yet the point of bail-outs is to socialise losses that are clogging the financial system. If taxpayers are completely insulated from losses, the bail-out will probably be ineffective. “The ultimate taxpayer protection will be the market stability provided,” Mr Paulson argues.
This is especially critical in deciding how the government will set the price for the assets it purchases. An impaired mortgage security might yield 65 cents on the dollar if held to maturity. But because the market is so illiquid and suspicion about mortgage values so high, it might fetch just 35 cents in the market today. Recapitalising banks would mean paying as close to 65 cents as possible. Those that valued them at less on their books could mark them up, boosting their capital. On the other hand, minimising taxpayer losses would dictate that the government seek to pay only 35 cents. But this would provide little benefit to the selling banks, and those that carried them at higher values on their books could see their capital further impaired.
To some, that would be fine. “If they choose to fail rather than sell their debt at its real market value and record the loss on the books, they should be free to take that option,” said Michael Enzi, a Republican senator from Wyoming. The failure of smaller regional banks may be tolerable. The FDIC offers a proven system for coping with failed entities (although it too may need a loan from the taxpayer) and other banks are keen to snap up their deposits. But the final result of big-bank failures would be a deeper crisis and a bigger cost in lost economic output.
Similarly, requiring participating banks to give the government warrants or cap their executives’ salaries might make them less willing to take part. Veterans of the emerging-markets crises of the 1990s say their effectiveness would have been crippled had their ability instantly to deploy cash as they saw fit been compromised. “There is far more risk that the authorities will have too little flexibility…than there is risk that they will have too much authority,” says Lawrence Summers, a former treasury secretary.
A more serious criticism is that buying assets is an inefficient way to recapitalise the banking system.
There have been several false dawns since the crisis began in August of last year. This could be another. The TARP may address the root cause, namely house prices and mortgage defaults, but the crisis has long since mutated. “The same underlying phenomenon that we saw in housing we’re seeing in auto loans, in credit-card loans and student loans,” says Eric Mindich, head of Eton Park Capital Management, a hedge fund. The crisis could claim another institution before the TARP’s effect is felt.
The TARP could conceivably slow the resolution of the crisis by stopping property prices and home ownership falling to sustainable levels. Some homeowners who are up-to-date with payments but whose home is worth less than their mortgage may stop paying, betting the federal government will be a more forgiving creditor. The Treasury is considering using the TARP to write down mortgages to levels that squeezed homeowners can afford. But in the meantime, buyers might be reluctant to step in while a big inventory of government-owned property hangs over the market. That’s one reason Japan’s many efforts to bail out its banks failed to revitalise its economy: the institutions that took over the loans were hesitant to dispose of them for fear of pushing insolvent borrowers into bankruptcy, says Takeo Hoshi of the University of California at San Diego."
This obviously went to print before all of the dramatic developments in Washington took place last night. I thought it was a great article explaining why the bailout in its current form doesn't work. It essentially does too much for the housing market, but at the same time doesn't do enough to address the other areas of the economy that have been sucked down by this mess.
There is also a severe risk that the Treasury will end up paying .65 on the dollar for assets that are worth .35 on the buck. This is nothing but a gigantic waste of US taxdollars because we will wind up paying the bill if the Treasury is forced to buy at .65 and then sell at .35. This does nothing but bailout the bankers. It does nothing for Main St!
As you can also see above, throwing the politicians into the mix makes it even more difficult to come up with a solution. DC wants to help fix the financial crisis but is afraid to because the solutions go completely against what their constituents are demanding.
America wants Wall St. to pay for this or fail and suffer the consequences like they have been forced to do. Wall St. wants their piggish pockets filled so they can get back to making billions. The politicians hands are tied because the public hates the proposals that are on the table, and there seems to be no consensus as to how to fix this. At the same time, they know they need to fix the economy, and Wall St. is crying the blues and threating finacial armageddon if they don't pass the bailout.
What a mess. I am glad I am not in Congress!
Pay close attention to the debates and developments over the weekend. I think some of the hardcore Republicans believe the only answer to this is to stay out of it and let capitalism run its course. They are beginning to come to the same conclusion that I have: There is no answer to this dilemma. Throwing money at an overlevaraged economy is the same as throwing money out the window.
I think that more and more Republicans are coming to the sad conclusion that its the only answer. Any true conservative would take this stance. Wall St. created this disaster via capitalism, and the only answer is to let the house of cards come tumbling down from the same capitalistic forces.
You can't rebuild an economy until the foundation of it is solid. Trying to fix the problem now as the walls are tumbling down isn't the solution. We need to start from scratch with a solid foundation and only then can we begin to work on making this country great once again.
The fat cats on Wall St. would also learn a nice hard lesson and we all will begin to realize that greed and fraud is not what this country was founded on.
Now do I think that Congress will allow this to happen? Nope
However, the Republicans look like they are ready to brawl over the weekend. I expect them to demand that the taxpayer is protected and for Wall St. to pay for their own mistakes.
What we will end up with from a legislative standpoint is something that sits somewhere in between both parties "solution".
In the end it doesn't matter who wins because neither piece of legislation will work.
The end result of this financial catastrophe will put this country in the most severe recession since WWII. It cannot be avoided. Unfortunately, it looks like Wall St. and DC still aren't ready to accept the inevitable.
Thursday, September 25, 2008
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"
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."
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."
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!
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.
Wednesday, September 24, 2008
It was another day of dramatic testimony in DC today. I wanted to try and look at what we might expect post bailout given the fact that it appears imminent that some form of this legislation will unfortunately be passed.
Stocks barely moved as investor's sit on the sidelines pending the approval of some form of this bill.
So where do we go from here?
Well, going forward, the war at home of Main St. vs. Wall St. will be replaced by a new war: USA vs. the world.
Wall St. has been telling us there is a crisis in confidence on the street, and the bailout must be passed. The world has been sending us a different signal:
"Sept. 24 (Bloomberg) -- Investors outside the U.S., who own more than half of all Treasuries outstanding, say the government's $700 billion plan to revive the banking system will diminish the appeal of the nation's bonds.
Treasury Secretary Henry Paulson's proposal, which seeks funds to rescue banks by purchasing devalued securities, would drive the country's debt to more than 70 percent of gross domestic product. The last time taxpayers owed as much was in 1954, when the U.S. was paying down costs from World War II.
``The image of U.S. Treasuries as a safe haven has been tainted by the ongoing financial debacle,'' said Kwag Dae Hwan, head of global investment in Seoul with South Korea's $220 billion National Pension Fund, which holds about $14 billion of U.S. government debt. ``A big question mark hangs over whether the U.S. can deal with an unprecedented amount of debt. That is unnerving all the investors, including me.''
The government depends on foreign money to finance the budget deficit, which UBS AG estimates will increase to $1 trillion next year from $407 billion if the bailout is approved. Investors outside the U.S. own 56 percent of the $4.8 trillion in marketable Treasuries outstanding, up from 42 percent of the $3.4 trillion outstanding five years ago, according to data compiled by the government."
It appears the world is already suffering from a crisis in confidence in the US government. They are beginning to question if we have the ability to handle our debt payments if this bill gets passed.
I don't blame them! Investor's realize that the success of this bailout is a crapshoot at best. The smart ones already see the writing on the wall that the bailout will fail big time.
The world realizes that we have a host of problems in our economy other than housing. The bailout will temporarily address the housing bubble. The problem is it exacerbates some of the other issues that we face in our economy!
For example, the bailout will pressure our dollar which of course ignites inflation. More importantly, and as seen above, it makes our treasuries less desirable to foreign buyers. Notice that the 10-year yield has not moved during the 3 day selloff this week. The 10-year has been sitting right around 3.8% after dramatically rising during the rally last week.
Usually during selloffs, the yield on the 10-year drops significantly as investors run to the safety of treasuries. Yields then drop as a result. Not this time! The 10-year hasn't moved this week despite the fact we have had a 600 point tumble in the stock market!
Consider this to be an ominous sign folks. If foreign investors start backing away from our debt, we could be in much worse shape than if the housing bill had never existed. The treasury sales to foreign investors are how we pay our bills.
If this spigot is shut off, and demand for treasuries drops to radically, interest rates could soar into double digits. The game is then over folks! Don't think it can't happen. The bailout hasn't even been passed yet and world's investors are already expressing fear.
Expect Hank and Ben to get their way with Congress regarding this pathetic bailout. I expect they will be forced to take some big concessions in order to get the bill passed, but its going to get done.
What will be interesting to watch is to see how Wall St. reacts to the modified bill that eventually gets passed. There is a decent chance that Wall St. won't like the bailout because "we the people" have spoken and have strongly opposed it. I have read reports that Americans oppose this by about a 10-1 margin.
Considering the fact that its election time, this bill may be surprisingly tough on Wall St.
The politicians don't want to risk going too far against their constituents that oppose this bailout by a 10-1 margin. As a result, I expect a couple of bombs to be included in this bill that Wall St. doesn't expect. Will it be exceedingly tough regulation or huge compensation penalties? Who knows? Time will tell.
Its time to prepare for the next stage of this crisis folks. Start focusing on the bond market and treasury yields. The world may react violently when this bill passes.
If yields shoot through the roof, the markets will take a huge tumble. Hank and Ben may end up wishing the bailout never happened.
Another bailout post this morning. I realize this subject is getting old folks. However, our future rides on how this plays out so it needs to be talked about.
The Treasury's plan isn't a bad one, its just too early.
Please read this piece from The Housing Time Bomb that I wrote back in early April. Sweden is a perfect example of how to dismantle a housing bubble.
We should have stolen their playbook. The biggest mistake the Treasury made is they are trying to jump in too early. Sweden waited until housing prices had bottomed until the government stepped in. Housing was down 50% and had reverted to the mean when they stepped in. Sweden's government also took stakes in the banks and made them pay an extremely high price for their greed.
The Treasury has the same idea, the problem is they are jumping in right in the middle of the housing decline. If this were a baseball game, the Treasury bailout would be same as putting in your closer during the 5th inning.
Ben Bernanke attempted to defend this idea on Bloomberg last night.
"Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.
``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''
Bernanke's remarks, an unusual departure from his prepared testimony, come as lawmakers and the Bush administration negotiate a rescue plan aimed at easing the worst financial crisis since the Great Depression. The Fed chief said paying prices higher than the bad assets would fetch in the open market would help ``unfreeze'' credit markets and aid the economy.
Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time. That is different from the mark-to-market model used by investment banks that prices assets at what they are worth on a given day.
The risk is that the model does not provide transparent pricing of the assets taxpayers are taking on, said Ann Rutledge, partner at R&R Consulting in New York, a firm that specializes in structured finance. Many of the securities ``are not going to pay at maturity,'' Rutledge said."
Bzzzzzz.......Wrong answer Ben! The best thing the Treasury could have done is allowed housing to drop all the way back to affordable levels like Sweden did and then swooped in with a bailout.
Jumping in and trying to stabilize housing prices at unaffordable levels is pure stupidity! How will prices stabilize if no one can qualify for a mortgage as lending standards tighten and interest rates rise. Its like putting a cookie jar on a 6 foot shelf and telling a 5 foot kid he can go ahead and take one. It doesn't work!
How does this stabilize housing if no one can afford to buy them? The Fed is very short sighted with their thinking here. The result of this will be the same as every other move they have made. It just delays the pain and slows down the bleeding.
We need to realize that there is no free lunch when you leverage yourself up as high as we did without thinking about the consequences. Its going to be very painful, and the Fed and Treasury to to just let it happen. We need housing to revert back to the mean.
If the financial system falls apart in the process then so be it. Its the only answer!
Let the banks limp along until housing corrects and then pull the bailout lever. You would then be able to buy the assets at full market value because the banks accounting departments will have already marked them down to mark to market values of .40 or so.
You then have room to maneuver by offering much cheaper mortgages to homeowners at affordable levels because you bought them at dirt cheap prices. Boom, housing crisis solved.
The Treasury is early folks.
Trying to buy these bad loans now at bloated prices will only lead to the the taxpayers eating huge losses. No private equity will show up at these auctions because the assets are priced too high. I can hear the crickets chirping already! The private equity guys buy "distressed assets" not "bloated pigs".
Hell, there isn't even a price on these bad loans right now. You know when the Treasury has their pockets filled with $700 billion that they are going to overpay for these bad loans. Bernanke admitted it in the article above.
How can they promise that the taxpayer will be protected if the assets they are buying that don't even have a price? The risk here is extremely high! This is insane. They need to wait!
Hank and Ben need to hop on a plane and head over the Atlantic to talk to the Swedes. Maybe they could even have some fun and learn how to ski jump while they are at it! They seem to love taking huge risks!
Tuesday, September 23, 2008
What a dramatic day in DC today. I listened to the hearings for most of the day. There was nothing earth shattering that came out of here in terms of news, but you could cut the tension with a knife.
One thing that was very noticeable throughout the hearings is Paulson and Bernanke have no idea if this is going to work. They seem to be flying by the seat of their pants, and this bailout is not well designed. This could easily blow up in their faces. Paulson seemed extremely defensive and dazed throughout the session.
Its also very apparent that the Senate is not comfortable with pulling the trigger on this bailout. I see this bill eventually passing, but it won't get done in its current form. The Treasury is going to need to make concessions in order to get it passed.
The longer it takes to get done, the more pain we will see in the markets, so I assume they will be working night and day to complete the legislation. The markets are hanging by a thread so if partisan politics start getting in the way, the markets could come tumbling down in a hurry.
I thought there was a great idea that was brought up by Senator Schumer in terms of restructuring the bailout. He proposed that we should start with giving the Treasury $150 billion for the next three months, and give this bailout a test drive and see how it works. I couldn't agree more.
Paulson admitted that it will take a long time for him to spend this $700 billion so why do we have to give it to him all at once? Lets piece mail it to him and see how successful he is with prying these bad assets from the banks. This will also allow us to see how much he plans on paying for them. If he starts gobbling up this garbage at .98 on the dolllar and the taxpayer gets raped, we can quickly shut down this massive dumping of taxpayer dollars.
Lets get to the news because there was some interesting developements today. First of all lets get to marvelous Meredith Whitney. This women has been dead on throughout the credit crisis. She is frequently highlighted on THTB.
Here is a news article on her most recent research report. She doesn't believe the bailout will work and the credit crisis is only going to get worse:
"Sept 23 (Reuters) - The credit crisis that began last summer has intensified so much that any U.S. government bailout plan has "little hope" of improving core fundamentals over the near and medium term, said analyst Meredith Whitney, who expects the country's GDP to take a hit from likely moves by state governments to cut costs.
The Oppenheimer & Co analyst cut her outlook on U.S. banks and expects further dividend cuts and capital raises.
Whitney also said home prices were not close to bottoming and expects prices to ultimately be at least 25 percent lower from current levels. She expects homeownership rate to decline further.
The analyst also noted that unemployment was up over 40 percent year-on-year in key states, and said unemployment is "headed materially higher."
Given that over 12 percent of the U.S. GDP is driven by state and local government spending, and with many key states' 2009 budgets being under-funded, governments will be forced to cut costs and this will weigh significantly on GDP, Whitney said."
Credit market disruption has had underappreciated consequences on the economy... A virtual suction of liquidity has occurred in the credit and lending markets, and consumer and corporate credit is already showing the effects," Whitney wrote in a note to clients.
"Since the onset of the credit crisis, over $2 trillion less liquidity has flown through the U.S. domestic capital markets than during the same time period a year prior," she added."
Yikes! That report couldn't have been more bearish. Meredith expects another 25% to the downside from here on homes. WOW!
Its amazing to read but I am not surprised. Like I said last eve, there is less money sloshing around in the economy folks. Expect assets to drop in price like a rock. This will be devestating to the banks if we go down 25% from here.
Home prices fall a record 5.3% in July/Interest rates are back on the rise.
This is a hell of a combination isn't it? This is from the AP:
"WASHINGTON (AP) -- Nationwide home prices in July fell a record 5.3 percent compared with a year ago, a government agency said Tuesday, and have now receded to October 2005 levels.
Prices were down 0.6 percent from June on a seasonally adjusted basis, according to the Federal Housing Finance Agency.
The national decline in home values coupled with reckless lending standards during the real estate boom are the driving forces behind rising mortgage defaults and foreclosures. They have spurred a credit crisis that has shaken Wall Street to its core and caused the Bush administration to propose a $700 billion financial industry bailout.
Lockhart explained the government had little option but to seize control of Fannie Freddie. Both companies, he said, were unable to raise money to gird against losses without aid from the government.
Without new money, the only other option was to do stop doing new business and shed assets in a weak market. "That would have been disastrous for the mortgage markets ad mortgage rates would have continued to move higher," Lockhart said.
But rates are creeping back up.The national average rate on a 30-year, fixed rate mortgage rose to 6.26 percent on Monday up from 6.11 percent on Friday as details of the government's rescue plan remained in flux, according to financial publisher HSH Associates. The rate had fallen as low as 5.87 percent last Tuesday."
Rates are on the way back up folks, andFannie and Freddie continue to reign in their lending. This is a devastating combination. I really don't see how this death spiral can be stopped.
One thing is for sure:
These idiotic bailouts do nothing but temporarily relieve the markets for a day or two. Once they are forgotten about, fear and insolvency concerns immediately become the main focus of the banks which leads to higher rates and a further tightening in credit conditions.
I have said this many times before and I will say again: Throwing liquidity at this market will not fix the problem!! Another $700 billion in taxpayer liquidity won't not help either! It doesn't address the problem!
Transparency and restoring trust is the only thing that will fix the markets. Confidence has been destroyed. The Fed needs to make the banks mark to market, and let the ones that failed go down! Playing hide the sausage is making the problems worse!
No one knows how to value financials right now, and investors are refusing to buy them as a result. There will soon be no bids on these stocks until we see the balance sheets. If we get into a "no bid" scenario in the market, stocks will plummet.
Stocks took another big dump today at the end of the session. The combination of uncertainty around the bailout and fear is killing demand for stocks. Investor's continue to pile into treasuries because they don't trust the market. Short term treasuries are now yielding under 1%! This tells me that the fear is as high as its ever been.
Are you surprised? You shouldn't be. No one can trust a market that's filled with intervention, fraud, and a lack of transparency.
I continue to be amazed at how poorly the government is reacting to this crisis.
Things are worsening folks and the bailout isn't going to cut it. Find a nice tall chair to hide under.
Monday, September 22, 2008
What a day today. Stocks tumbled today as fear and uncertainty continue to send shivers down the spines of Wall St. traders. The DOW and Nasdaq both tumbled giving back all of Fridays gains.
The bailout is already affecting the markets and it hasn't even been passed yet! It appears that there is no way to stop the passage of this bill. We are already seeing the consequences of such a costly bailout. One of my biggest concerns regarding this bailout is the effect it will have on the US dollar.
It didn't take long to see what the world thought of our bailout. The dollar plunged, sending commodities through the roof. Oil rose a record $20 to an intraday high of $120 barrell before pulling back to $115 at the close.
As for the dollar, a picture speaks a thousand words:
As you can see, the dollar plunged today as traders anxiously wait for the details of the bailout. I can only imagine what the dollar will look like after the bailout gets approved. This is what happens when you are about to add a trillion dollars to our national debt.
It appears Wall St. is getting increasingly concerned that the bailout won't as friendly towards them as first thought. The Democrats seem to be pushing for drastic regulation over Wall St, and a drastic reduction in CEO compensation.
Here is the latest on the bailout:
Bush team OK bailout terms;
Monday September 22, 6:00 pm ET By Julie Hirschfeld Davis
Bush administration accepts some of Dems' demands in bailout bill; Stocks plunge, oilsoars
WASHINGTON (AP) -- Scrambling for a quick accord on the $700 billion bailout, the Bush administration and leading lawmakers have agreed to include mortgage aid and strong congressional oversight along with unprecedented help for failing financial institutions, a key lawmaker said Monday.
Unimpressed, investors sent stocks plummeting anew, pushed oil up $16 a barrel and propelled gold prices ever higher as they searched for a safe place to park their money.
Under other additions the Democrats are asking to the administration package, according to a draft of the plan obtained by The Associated Press:
-- Judges could rewrite mortgages to lower bankrupt homeowners' monthly payments.
-- Companies that unloaded their bad assets on the government in the massive rescue would have to limit their executives' pay packages and agree to revoke any bonuses awarded based on bogus claims.
The proposal by Sen. Chris Dodd, D-Conn., the Banking Committee chairman, would give the government broad power to buy up virtually any kind of bad asset -- including credit card debt or car loans -- from any financial institution in the U.S. or abroad in order to stabilize markets.
But it would end the program at the end of next year, instead of creating the two-year initiative that the Bush administration has sought. And it would add layers of oversight, including an emergency board to keep an eye on the program with two congressional appointees, and a special inspector general appointed by the president.
The plan also would require that the government get shares in the troubled companies helped by the rescue.
Wall Street didn't seem comforted. The Dow Jones industrials were down nearly 400 points near the end of the trading day.
Investors were uncertain just how successful the administration's plan will be in unfreezing credit markets, which many businesses depend on to fund day-to-day operations, and for propping up the still-weak housing market."
What hit the markets today was the reality of deleveraging. The days of making big money via leverage are now over. Goldman Sachs and Morgan Stanley are now just banks folks.
This new reality forces the pigmen to be leveraged less than 20-1 on each dollar of capital versus the 30-1 or higher leverage they have been using the past several years. This is going to kill their earnings power, and their stock prices will now be forced to reflect this.
Folks, this leverage isn't just a banking problem. If they can't lend at 30-1 on capital, there will be much less money in the economy. The investment banks essentially were the capital markets on Wall St. If you wanted to raise large amounts of money to buy anything in any area of the economy, this is where you went to get financing.
This vehicle of borrowing big money is now essentially gone. Because the investment banks now must lend using lower leverage, the value of all assets will fall dramitically because there simply won't be near as much money available for lending!
In this new lending environmnet, how are overpriced assets like 700k McMansions ever going to keep their value? The answer is they can't.
This is why you saw the home builders get creamed today.
The Housing Time Bomb Warning!
Now is nowhere near the time to buy a house. Please please please wait until the smoke clears before even looking. Don't get sucked into believeing that prices are down and you its time to start shopping. This may be the case in a few selective areas in parts of Florida, inland California, and the rustbelt where prices are down 50%.
Please wait to buy if you live anywhere else.
Our over leveraged ponzi finance system has come to a complete halt. Wall St. is now shivering at the thought of a bailout versus cheering for one. I think this may end up being more of a "bend over" for Wall St. rather than a "bailout".
Stock prices have nowhere near priced in the reality of a lower leveraged economy. Earnings will drop dramatically in most sectors because there is going to be much less money in the system.
This new reality has not yet been priced into equities.
A little commentary this morning. There are times in the market where you need to just sit on your hands and watch. Now is certainly one of those times.
There are simply too many unknowns out there. The time to trade and invest will be after we get a good look at the Treasury crisis bill. This legislation will decide the fate of our entire financial system. Like President Bush said this morning "The whole world is watching".
Making trades before this bill is announced is pure gambling in my opinion. Stocks have drifted lower in early trading as traders try to digest all of the news from over the weekend.
The early reaction to the news of the bailout has weakened the dollar and given a lift to commodities. Gold has made a big move this morning. Its up around $30. its difficult to trade these knee jerk reactions long term because we simply don't know what the Treasury bill will look like.
The knee jerk reactions that we are seeing are predictable reactions to a huge bailout: A weaker currency which in turn helps put a bottom in on commodities.
There is news out on Goldman and Merrill. This marks the end of an era folks:
"Sept. 22 (Bloomberg) -- The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.
The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America."
Its kind of amazing isn't it? The investment banks are all gone. I bet many Harvard business majors are changing their major today. Who wants to go work for a bank and make a bank teller salary? Wall St. will never be the same in my view. The days of big money on the street are temporarily gone.
Conversation with a Wall St. banker
I spoke to a banking source last evening on the bailout and asked him his thoughts. His comment to me was "they better get this right". He also explained that he needs to see the details before he can really make a call on whether or not this fix will be adequate.
The one way this could work in his opinion is if the bad assets on the books were able to be bought by the Treasury at distressed prices. Lets say .30 on the dollar.
The new lender would then have a lot of room to deal with homeowners carrying mortgages. He gave me an example:
Homeowner bought a house for $600,000 and its now worth $300,000. If the new lender has the loan from the government at .30-.40 on the dollar, he could afford to redo the mortgage at $300,000 and give the homeowner the option of staying in the home at a 50% discount. Many would jump all over this in my opinion.
This banker also believed that Wall St. would run circles around the government workers who would be in charge of selling these distressed assets that Paulson buys.
His quote "When you match an experienced investment banker with a government 9-5er who makes $90k a year on his government salary, the banker is going to going to win that battle every time. It wouldn't even be close". This to me means the taxpayer loses big if Paulson is able to get these bad loans from the banks.
The Wall St. pigs will razzle dazzle the government worker, and buy the assets for a much lower price than the government could have gotten. Wall St. will then turn around and make a fortune. This is what happened in 1990 with the last trust according to this source.
Now, he also said that he doesn't see how the banks would ever let Paulson have the bad loans at .30 on the dollar because it would wipe most of them out. He needed more details on what Paulson plans to do and what he can buy the asssets for before he could comment further as to whether or not this can work.
In my opinion, its all going to come down to whether or not Paulson can talk the banks into dumping their bad assets at a cheap enough price. I expect a lot of wheeling and dealing between Paulson and Wall St. Paulson I would assume would offer many incentives that would entice the banks to dump the assets at distressed prices.
Some of the incentives could include a Treasury backing that guarantees their survival, and promises to merge others into banks in with other institutions which would keep them out of BK.
Of course, this is all speculation on my part and we need to see what happens.
My only hope here is that the banks have a "come to Jesus" moment, and agree to dump these assets at the prices the Treasury needs to make this work. They must realize that our financial system hangs in the balance.
Even if this all comes into place, I am not sure its enough to get us out of this mess. The banker I spoke with also agreed. There are consequences to taking such drastic measures. Some of the risks included foreign nations bailing on our treasuries, a crashing currency, and soaring inflation.
Lets see how this all plays out. I am very very skeptical, and it looks like Wall St. is as well. The DOW now sits down 156 points.
Sunday, September 21, 2008
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."
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.
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"
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.