Saturday, October 4, 2008
I hope everyone is having a great weekend. I wanted to talk a little about AIG today. According to The New York Times, AIG has already burned through $61 billion of the $85 billion bridge loan given to them by the Fed:
"The American International Group said on Friday that it had already drawn down $61 billion of the $85 billion emergency bridge loan it received from the Federal Reserve two weeks ago, an announcement that startled credit ratings agencies.
The emergency loan was supposed to buy the company time to sell its troubled assets in an orderly manner. But the sell-off has not yet begun, and now the insurer faces the additional pressure of trying to sell the businesses at a time when potential buyers are having trouble borrowing money.
Moody’s downgraded A.I.G.’s senior unsecured debt on Friday and said it might downgrade other types of the company’s debt, which could make it more expensive for A.I.G. to borrow money and do business.
A.I.G.’s chief executive, Edward M. Liddy, told securities analysts on Friday that $53 billion to $54 billion of the Fed’s loan had gone to shore up A.I.G.’s troubled structured-finance unit and its securities lending business. Another big block of the Fed’s money has been used to support A.I.G.’s daily operations, Mr. Liddy said in a conference call, because demand for the company’s commercial paper has dried up as a result of the worldwide credit crisis.
“The $61 billion draw to date on the facility is much larger than we had previously anticipated,” said Rodney A. Clark, an analyst with Standard & Poor’s, explaining the change in outlook.
A.I.G. is required to pay back its borrowings from the Fed within two years. Mr. Clark said that to raise the money, the rapid drawdown of the loan made it likely that A.I.G. would have to sell off more businesses than Standard & Poor’s had expected.
In response to questions, Mr. Liddy said it was impossible to say exactly how much money A.I.G. would have to raise to pay back the Fed and emerge from its crisis as a smaller company with adequate capital.
“It’s kind of a Rubik’s Cube,” he said. “We need to be very flexible” because of the fluid economic environment.
He said that in addition to using the $85 billion Fed loan, A.I.G. would be able to participate in the $700 billion bailout program signed into law by President Bush on Friday. The additional help from the Treasury might ease some of its financial burdens, Mr. Liddy said."
This was startling to me. This is a great barometer to measure how bad things really are out there. We all wonder how bad the balance sheets are inside of our financials. The burn rate of AIG through this Fed bailout money is a good indication that they are probably much worse then any of us realize. Whats scary here is AIG isn't even a bank. Its an insurance company. I would guess some of the banks are in worse shape because they are less diversified.
This article also tells me that the taxpayers aren't getting their money back for awhile. I love the stipulation in this loan that AIG is supposed to pay this money back within two years. HA! Yeah right. Like that's gonna happen. Its a good thing Christmas is coming because they need a "Hail Mary" gift from Santa Clause in order to pay this loan back. Do you think Santa can get $85 billion down a chimney and under a Christmas tree?
Folks, there is no way $85 billion is going to be enough money to allow AIG to navigate through this mess. They have pissed away almost all of it in a matter of a few weeks! Expect this to cost the taxpayers much more.
Let me repeat: If things are this bad within AIG, what in the hell do the banks balance sheets look like? This was a frickin insurance company!
This also shows you how pathetic this $700 billion "rescue plan" is. One company has burned through almost $85 billion in a matter of weeks. How can the this rescue plan "save" the financial system when one company has burned through 1/7th of this amount in weeks?
You can rest assured that AIG will be heading back to DC with their hands out asking for more money. Expect Paulson to be doing the same after he burns through his $700 billion.
We need to start asking ourselves where does it all end? When do we start saying NO like any good parent does when a child throws a temper tantrum when they want something that makes no sense?
Washington DC needs to wake up and realize they need to get out of the bailout business before they ruin this country.
Friday, October 3, 2008
Lets all give The Fed's a big round of applause for saving the market! Nothing like a 500 point reversal into the RED after passing the largest bailout in the history of the US.
Does anyone feel like their 401k should be renamed a 201k? I actually am surprised the reversal was so violent today. I thought we would at least get a 1 day rally out of this.
Anyone notice how each Bailout rally is getting smaller and smaller. Bear Stearns stoked a two month rally. The Fannie/Freddie nationalization gave us a couple day bounce. The AIG "bailout" lasted about one day. The Paulson plan monster rally was what? A few hours? Yikes!
I thought this bailout was going to stabilize the markets and help restore investor confidence? Hank, you promised us this would settle things down! NOT! The bailout seemed to have the exact opposite effect. This plan will create more intervention into the markets which will do nothing for confidence in the markets. The Treasury will be buying securities without having a clue as to what their true value is.
I can't see any distressed buyers stepping up to the plate and buying mortgage debt right now as the economy implodes. I mean look at the jobs report today. Who on earth wants to buy any bad debt right now unless its sold at distressed prices? The whole economy is tanking!
This will continue to lower the value of houses. No distressed buyer is going to stick their toes in the water right now until things stabilize, or the price is right which means pennies on the dollar!
The problem for the taxpayer is we all know the Treasury has announced they plan on overpaying for these subprime sandwiches. Thanks guys! Enjoy pissing my taxdollars down the drain!
They have really backed themselves into a corner here. Why? IMO, the Treasury will have to give these securities away in order to set true market prices, and we will know about it based on the on the plan was written.
Let me explain:
The problem the Fed has with this particular plan is they must announce what they paid for these crap sandwiches within I believe its 48 hours. This was written into the bill.
So for example, lets say the Treasury goes to a bank and buys $50 billion of subprime sandwiches at .65 on the dollar. They will be forced to tell us exactly what they paid for them within a couple days.
Now lets suppose they hold an auction and receive no bids for the paper at .65 on the dollar. Lets say the best offer they receive is .30. What in the heck does the Treasury then do?
Do they tell the banks "no deal" and risk holding onto these securities as the economy continues to spiral downward, or do they sell them at a huge loss? If the the Treasury decides to sell them at .30 and take a huge loss, they will see torches and pitchforks outside their windows because the taxpayer will know they got bent over.
If they decide to hold onto the securities thinking they can get a better price, we are right back where we were with zero transparency and no clue what their value is except with one exception: The Treasury(US taxpayers) now owns the bad debt. So my question is how does this solve anything in the long run?
The way I see it its a lose/lose proposition for the Treasury. Either they take the loss and Americans start rioting in the streets, or they hold onto them which does nothing to solve the transparency problem and potentially end up taking huge losses down the road as the economy worsens.
This is why this plan was plain stupid. Now of course we all know why this was done. China and Europe basically threatened to stop buying treasuries unless they got some of their money back for the sh*t sandwiches that we packaged up and sold to them by the pigs on Wall St.
Take a look at this article from The USA Today:
"BEIJING — Wang Jun has been reading up on the U.S. financial crisis. Books on the subprime mortgage meltdown are hot sellers here in the Chinese capital.
But until recently, Wang, 33, had seen the debacle as a long-distance drama. Now, out house-shopping with his wife, he's worried that Wall Street's woes will force the Chinese government to impose new mortgage regulations and possibly drive the cost of a home beyond his reach. "The crisis seemed so far away," says Wang, who works for a Beijing publishing house. "But sometimes it's so near."
Despite his worries, Wang is sure about one thing: China shouldn't help bail out flailing U.S. banks and investment firms. "I don't think China has the financial power to help America," he says. "We have our own problems. To look after our own business first is the best policy."
Brimming with cash — a world-leading $1.8 trillion in foreign exchange reserves — China looks like a potential white knight for Wall Street's distress. But the Chinese are wary, burned over the past year on investments in U.S. financial firms and caught in the quicksand of a sinking dollar. Few analysts expect China to be a leader rescuing the U.S. financial system.
The value of Chinese acquisitions in the U.S. is down 73% so far this year — to $914 million from $3.4 billion in the first nine months of 2007, according to Thomson Reuters. The 2007 figure was inflated by the Blackstone deal.
China could play another role in Wall Street's rescue: buying the Treasury securities the U.S. government will auction off to pay for the $700 billion bailout.
China is already a big investor in the Treasury market. China owned $518.7 billion in Treasury securities on July 31, second only to Japan's $593.4 billion. Investors have been fleeing to the safety of U.S. Treasuries amid the turmoil on Wall Street, driving the prices up and yields down.
"Asian investors are rushing into U.S. Treasuries because they have been extremely risk-averse," says Chi Lo, head of investment research at Hong Kong-based Ping An of China Asset Management. "The $700 billion rescue is a new matter."
Europe's bonds a better deal
Lo says Chinese and other Asian investors — governments, banks, firms and individuals — will be reluctant to finance the Treasury bailout plan without higher interest rates as a sweetener. For now, Europe's top-rated bonds look like a better bargain: "U.S. bill and bond yields will have to go up to attract Asian buyers," Lo says. He sees yields on the benchmark 10-year Treasury bond rising to 4.3% from less than 3.7% now."
As you can see, China is already using the bailout as leverage and the bill hasn't even been passed yet!
Being an owner of half a trillion dollars in treasuries gives China a lot bargaining power. This is why this bailout was passed folks. Without China buying treasuries, we can't afford finance our debt and the game is over. China also happens to own huge amounts of the bad mortgage debt pie that Wall St. baked up.
IMO this was a $700 billion diplomatic solution that ensures China will continue to buy our treasuries. This gives us more time to continue to play musical chairs with our debt.
The problem here is the "musical chair" game is about over and there are two people left and one chair.
The reaction to the passing of this bill couldn't have been worse. UBS Trader Art Cashin(a man who I deeply respect) said on CNBC this morning that the "worst case scenario" later today would be if the bounce we saw this morning got sold off aggressively into the close.
He explained if we see this, the stage is possibly setup for a major plunge on Monday or Tues.
That exactly what we saw folks. Stay extremely conservative over the next two days. Lets see how the credit and stock markets digest the Paulson Plan. Today was the knee jerk reaction. Lets see how we trade when things settle down. My gut tells me that its not going to be pretty.
I wouldn't be surprised to see a Fed cut if we start to tank. The market and government are in a complete panic right now. They are running out of options, and nothing they have tried to do has fixed the problems. Expect the Paulson Plan to be a complete disaster.
Our financial Tsunami is gaining huge momentum, and I don't know what can be done to stop it.
Thursday, October 2, 2008
Quite a day today wasn't it? The stock market plummeted over 3% today as credit continues to tighten globally. I saw fear and panic in the eyes of the traders today as they practically got on their hands and knees and begged Congress to pass the rescue plan.
I think you saw the market sell off big for three main reasons today:
#1 The credit markets are virtually shut down.
#2 Many believe the rescue plan is too little and too late.
#3 The continued financial meltdown in Europe.
I also think the markets sold off because they wanted to send a strong signal to Congress that they seriously need help.
The credit markets are flat out ugly folks. You practically need a crowbar to pry money away from a bank right now. Corporate lending has almost come to a complete halt. How bad is it?
Well lets put it this way: Last month was the worst month ever for corporate credit despite the world's central banks pumping an unprecedented $1 trillion dollars into the financial system:
"Oct. 2 (Bloomberg) -- Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world.
The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.
``It's going to get much, much worse,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The credit markets are effectively shut, the CP market, which there's not enough focus on, is under complete duress. That can't be sustained, as that's the lifeblood of corporations funding themselves.''
The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low."
What can I say folks. This is terrifying. The credit markets are how many companies fund themselves for things like payroll and buying inventory for things like the holiday season. If they have no availability to credit, they can no longer operate.
There is practically no money out there folks. Zero. Zilch. Squadoosh. The central banks pumped $1 trillion dollars into the banks and it did nothing to free up lending. This leads me to a little question here: If a $1 trillion liquidity injection did nothing to cure this problem, how in the hell is our measly $700 billion rescue plan gonna help?
Take a Look at this additional piece of data on Fed loans to the banks:
"Oct. 2 (Bloomberg) -- Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze.
Loans to commercial banks through the traditional discount window rose about $10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today. The total surpassed the previous record after the 2001 terrorist attacks."
One week borrowing from the banks was nearly half the amount of the bailout bill! This "rescue plan" is like giving a guy a twenty when he is short $1000.
The problem in the credit markets is two fold. One, the banks have no money to fund the credit markets because they are sitting on too much debt. Two, they don't trust each other. Every bank is afraid they are lending to another bank because they are worried they are insolvent. As a result, they refuse to lend and hoard the cash to take care of their own funding issues.
The problem with the Paulson plan is its not enough money to rid the world's banks of their mortgage debts, and it does nothing to restore trust. Regardless, I fully expect Congress to pass this bill after watching what happened in the credit markets this week. Its not going to work, and this little blogger can't wait to write about it when it fails!
Just a couple stories here from Europe. Take a look at the ECB's Trichet's comments today. He was much more dovish on interest rates. Inflation worries look to be off the table. Expect rate cute across the pond folks. Currencies will be interesting to watch over the next few weeks. The dollar soared today today based on Trichet's comments and further signs of European weakness.
How bad is it in Europe? Take a look at the bank runs that are occurring in Greece:
""The Greek government has issued a blanket guarantee of all bank deposits after panic withdrawals by customers in Athens and Thessaloniki, creating an unstoppable stampede across Europe for an EU-wide bail of the financial system."
Be prepared for a Japan like classic deflationary death spiral folks. I hate to say it but the signs are everywhere. Gold and commodities were pummeled again today. This is a classic deflationary signal. Houses, cars, and all other assets continue to drop in price and value. Students are unable to get school loans. Expect education long term to also drop in price as a result. These are all signs of deleveraging and deflation. Its going to be painful process, but it is inevitable.
We simply don't make enough money to afford the level at which it costs to live. Something has to give and its going to be prices via deflation.
My advice is to get out of debt as fast as you can. If you have wealth, deflation actually will make you richer because everything drops in price and the world will be on sale when we come out of this. Make sure you protect your wealth in safe investments like treasuries and bank CD's. When we come out of this economic reset, you will then have money, and you will be sitting pretty.
Let me close by warning everyone that the deflation thesis can always be taken off the table if the government decides to print. All bets are off then folks. However, I highly doubt our government is that stupid, but if it gets bad enough they may consider some form of it.
Watch the vote tomorrow from a short term trading perspective. I think the market could move violently up or down tomorrow if the plan is approved. Confidence in the plan seems to be lacking so we could see a "sell the news" drop in the markets. However, never underestimate the "bubble boys" and how they love to take the market higher on bailout news!
I plan on entering some more short positions on any bounce from our FANTASTIC, WONDERFUL "RESCUE PLAN"! What a joke.
Always remember folks, when the government knocks on your door and says "hi we're from the government and we're here to help you" , lock the door and run as fast as you can!
Wednesday, October 1, 2008
Well, it appears that the world economies are in a race to the bottom! After digesting the fact that the "rescue plan" is actually a global bailout, I have come to some conclusions. We are all going down together!
As the negative news flow continues to pour out of Europe, its pretty obvious they are in as bad a shape or worse than we are. The problem here folks is that the the derivative markets have tied all of us together. They are woven together in a giant basket with each other.
As a result, if any of the "too big to fail" banks here or internationally goes BK, the global banking system could potentially go down with it. So we are left with a global problem. Congress as a result thinks we need to have a global bailout.
Folks, this is a bad situation. I don't think anyone has the answer here. It appears this situation is beyond fixing at this point. Blowups are occuring right and left. The financial meltdown is being exacerbated by the fact that we are also having a global slowdown a the same time.
We couldn't have picked a worse time to slide into a recession! The beginning of the financial meltdown marked the end of the bull market. This is a very dangerous situation.
What should we do now?
This is the million dollar question. I wish I had the answers. The pigmen are demanding that credit must become available or we are facing a financial meltdown because businesses will no longer be able to get loans. The problem we have here is there is no capital to provide this credit. Its like asking your dad for $100 when he is broke.
Supposedly the pigmen think that only the Treasury has deep enough pockets to pull us out of this meltdown. Sadly, I disagree. We do not have enough money to finance the world. Hell, I don't think we have the money to finance ourselves at this point.
There was an analyst on CNBC's Fast Money yesterday that said there are $14 trillion dollars of mortgages loans in the US alone. If 10% of these mortgages default, we have a $1.4 trillion dollar problem. Thats a big number. It would increase our national debt by over 10%. The fear here is if the economy melts down and the unemployment soars, defaults could move even higher.
We also need to keep in mind this doesn't even include all of the credit card, HELOC, automotive, and student loan debt that is floating around in the system. Who knows what the losses are there.
The bottom line here is we already have $11 trillion in debt heading into a global slowdown where our tax base is going to deteriorate. At the same time, our national debt is going to rise substantially from the pronblems I described above.
As a result, we need to be damn careful about where and how we spend our money. The one thing we shouldn't do is rush into this. What scares me is watching how quickly our government just wants to jump into this throwing money out of helicopters.
I realize they are being pressured from all sides but come on guys! Our future is at stake. Take a Xanax and relax.
I believe that we should do two things at this point.
#1 Do not throw $700 billion out the window without careful thought and consideration especially when most of the money could potentially end up outside this country. Maybe we need to cut our losses and let the rest of the world deal with their own problems. The current bailout needs to be taken off the table. We need to start worrying about our own problems versus everyone else's.
#2 Gather all of the best and the brightest and bring them to Washington and create a consortium where ideas can be shared and discussed. The majority of this consortium should be composed of third party economists and scholars. There should also be a representation of bankers there, however, their input and size should be kept to a minimum.
It's obvious they cannot come up with reasonable solutions among themselves. Every solution that I have seen from them allows these pigs to make a fortune at the expense of the taxpayer. The Paulson Plan is proof of this. Putting a bunch of bankers in a room to solve a financial crisis is ridiculous. Its like asking a group of crooks to sit down and come up with a solution that reduces crime rates.
Lets hope we can find a solution quickly. We are running out of time and credit conditions are deteriorating rapidly.
One thing we must not do here is overreact and respond to this crisis in a panic. This seems to be the path that we have chosen, and we will end up regretting it if cooler heads don't prevail.
I put this in the comments last night, but I wanted to make sure everyone watched this segment from Larry Kudlow's show.
Karl Denninger does a nice job explaining the repercussions of this below. Our rescue plan does nothing but guarantee that hundreds of billions of dollars will go right out of the country to bailout foreigners that bought our subprime sandwiches. In return. they will continue to buy our treasuries.
As I have said before, the game is over if foreign countries stop buying our treasuries. This is why Paulson and Bush are desperate to stop this. They have told the Senate that they will veto this bill without the provision that allows the Treasury to put buy back these subprime sandwiches, and put them onto our own balance sheet at the cost of the taxpayers.
We are not bailing out America with this bill. We are bailing out the world!
Do you have any desire to watch the US buy other countries bad debts with your taxpayers dollars? We cannot allow this bill to pass.
Here is the the section in the bill that allows The Treasury to buy this garbage:
"SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES AND CENTRAL BANKS.The Secretary shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101."
Tuesday, September 30, 2008
Anyone feeling bipolar after today? Whoaa, can you say BOUNCE? I expected a decent one, but 500 points! Its official, the inmates are now running the asylum.
Expect Washington DC to dictate where the markets head over the few weeks. I think the market was purposely sold off to an extreme yesterday in order to send a message to Congress that the bailout needs to be passed. This set us up for an extremely over exacerbated bounce today.
It appears that some version of the "rescue plan" is headed back for another vote by the end of the week. God only knows how this will play out. I smell a rat here, and I highly doubt that Congress would be heading back to the floor unless they were fairly confident that they had reached some common ground on a bill that will pass.
Now who knows what they have conjured up. I expect that its probably a much milder version of the Paulson Plan. The big rally in the markets is another indication that something is in the works. The credit market remains in disarray so I am sure both sides believe something must be passed.
You can only be assured of one thing. The new plan will result in more tax dollars being flushed down the toilet!
Its obvious they still don't understand that transparency is the key problem holding the markets back.
Today's news on the SEC's decision to not change the accounting rules is proof that they still don't get it:
"Sept. 30 (Bloomberg) -- The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, people familiar with the matter said.
The SEC and Financial Accounting Standards Board instead issued ``clarifications'' today on how banks should interpret existing rules that require them to review their assets each quarter and report losses if values have declined. A suspension isn't being considered, said the people, who declined to be identified because the plan hasn't been complete.
``In the past couple of weeks, fair-value accounting has been under attack,'' JPMorgan Chase & Co. analyst Dane Mott wrote in a report today. ``Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''
The SEC and FASB, in today's statement, said companies can rely more on their own judgments, such as expected cash flows, in determining the current value of assets that aren't trading. The regulators also said price quotes provided by brokers when markets are frozen may not be the most reliable way to determine how much securities are worth.
Norwalk, Connecticut-based FASB, which writes U.S. accounting rules, is preparing ``additional interpretive guidance on fair value measurements'' to be released this week, the SEC said.
``Suspending the mark-to-market prices is the most irresponsible thing to do,'' said Diane Garnick, who helps oversee more than $500 billion as an investment strategist at Invesco Ltd. in New York. ``Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings that already exists.''
Great idea SEC, give companies more power to mark down their own assets. This is just what the market needs! NOT! Is this a frickin joke or just a bad dream?
The SEC should be doing the exact opposite. Relying more on the banks to value and mark down their own assets is ridiculous. I would rather have Osama Bin Laden in there marking down assets versus the pigmen themselves!
Folks, allowing this type of accounting is a one way ticket to Japan part 2. Are you ready for a 20 year recession? This is what we will get if the "hide the sausage" insanity continues. In case you forgot, here is a look at the Japanese stock market since '84:
If this continues, our market is going to look the same 24 years from now. Until we mark these securities to market, stocks are going nowhere. This could go on for decades folks! It took Japan 8 years for them to finally force their banks to mark to market. This resulted in 20 years of economic misery.
The street continues to try and say that "there is no market "so how do they set a price? This is hogwash. If there is no market because these AAA subprime specials are sprinkled with too many shades of dog doo then break them up!
Hire private equity firms to come in and break down each crap sandwhich loan by loan. Place the crappy assets in a new securitization and allow distressed debt buyers to set a price. If its .02 on the dollar because almost all of the loans are bad then sell it. Take the hit.
The next step would be to take the prime loans out of the same securities and do the same thing. Who knows? You might be able to sell these without a loss! I think every AAA rated subprime sandwich needs to go through a process like this.
Transparency would then be back, and banks would know who they were lending to. We could then begin the rebuilding process.
The issue here is the banks don't want to do this because most of them can't survive if they have to puke up their losses.
Well you know what? Tough ****! If this allows us to avoid going through a depression, then the SEC needs to force them to cough up their losses. The Paulson "rescue" plan will do nothing but mark to market at a level in which the banks make out and Main St loses.
Prices will remain too high, and eventually, the same assets will need to be marked to market a second time in order to be priced where they needed to be in the first place. This will probably cost us another $700 billion.
Lets do this right the first time! We need to create a market for these securities based on what buyers are willing to pay versus the "marking to myth" Voodoo style plan Paulson proposes. I have no desire to give the government my tax dollars and then watch them overpay for assets that have no price.
Transparency is needed before we will be able to start to recover.
Monday, September 29, 2008
Wow, I don't know where to start. Today was one for the history books. The DOW suffered its largest point drop ever as stocks took their biggest fall since 1987.
"Sept. 29 (Bloomberg) -- U.S. stocks plunged and the Standard & Poor's 500 Index tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan to rescue the financial system.
The Dow Jones Industrial Average slid 778 points for its biggest point drop ever as $1.2 trillion in market value was erased from American equities. The MSCI World Index of 23 developed markets slid 6.9 percent, the most in 21 years.
`Unwind Into Chaos'
``There's a real opportunity for this thing to totally unwind into chaos if we can't get some real direction from Washington,'' said Russ Kamp, chief executive officer of Invesco Quantitative Strategies, which manages about $461 billion in New York."
Today was stunning ladies and gentlemen. The drop today of course was a reaction to the failure of the financial rescue plan today in the house. Its becoming clear that this is developing into a battle between Main St. and Wall St. The government is caught in the middle and doesn't have the answer to the problem. Even the experts seem divided on how we can fix this mess.
There are many reasons why this rescue plan failed today. I believe the main reason why it didn't pass was lack of trust. I don't think Congress or Main St. trusts Wall St. I believe many representatives really personally struggled on how to vote today. They already knew by a 300-1 margin that their constituents hated the idea of a Wall St bailout, but on the other hand they also understand that they have a responsibility to protect the country and make tough decisions.
I think when it came down to actually voting yes or no on the bailout, they just couldn't pull the trigger and hand over $700 billion to the same people that created this disaster through deception, fraud and greed.
I don't blame them. In fact, I applaud them. This was a tough decision because they all want to do whats best for the country. I think that at the last second, most realized this wasn't the answer. 160 economists told them this wasn't the answer. Wall St. was down 300 points before the vote was taken, so I don't even think they thought it was the answer.
I must say that I am proud to be an American today because I think Congress did the right thing. Was today painful? Yes. Did I lose money in my 410k? Yes. However, I think todays vote was more then just about trying to fix a financial crisis. This was a vote on principles, sending Wall St. a message, and doing the right thing for the future of this country.
No one wants to go through a recession. I dread the idea of going through one. However, we must go through one after periods of euphoria. It cleanses the system of excesses and greed. If we had allowed the bailout to pass, our children would have been stuck with the tab.
Where do we go from here?
This is the tough question. The Fed has a major problem with its balance sheet now that the Treasury isn't getting the $700 billion. Take a look at how the discount window has allowed the Fed's balance sheet to start looking like a garbage dump:
As you can seethe Fed is running out of options. All of these toxic mortgages that they took at the discount window have deeply contaminated their balance sheet. The Fed only has $800 billion at their disposal. More than half of it is now filled with the crap sandwiches from our financial system.
The only way we get out of this is through creating transparency within our financials. This will restore trust and get the banks back lending with one another. The second part of the solution is to simply allow the continued deleveraging of our system down to levels of affordability.
Americans do not make enough money to own a $600,000 house. We can't afford to spend $40,000 a year to send each child to college. We can't afford to have two $35,000 cars in the driveway.
The cost of simply living got completely out of hand! We could no longer afford to live without credit cards. We leveraged up the system as high as we could, and now we are facing the consequences of doing so. We must allow the system to revert to the mean no matter how painful it is to our financial system.
Trying to stabilize home prices at unaffordable levels fixes nothing. It just temporarily numbs the pain. You cannot prevent a bubble from bursting especially when its already started.
I compare this financial "innovation" era to the baseball "steroid" era of the 1990's. We all watched in awe in the 90's as Barry Bonds, Mark McGuire, and Sammy Sosa all broke Roger Maris's home run mark. Average players hit 30 home runs because everyone was taking steroids. Baseball's popularity soared as all of the players "leveraged" up by taking shots of the "juice".
After the euphoria wore off, questions started to be asked like "how did all of those players all of the sudden hit 60-70 homeruns?". Rumors started to swirl, books accusing different players of doping were written. BALCO labs was then discovered which provided evidence and admissions of guilt by its owners. The courts then began getting involved. Criminal charges forced players to testify under oath about their usage of steroids. Lawsuits then ensued. Sound familiar yet?
Congress then got involved and before you knew it "POOF!" the steroid era was over. The "deleveraging" of baseball then ensued via drug testing and regulations.
Baseball took a lot of heat for tainting the game. Players were booed and released as their skills diminished as the "leverage" of steroids was gone.
There were some that questioned if baseball would ever gain back their status as America's favorite pastime. Guess What? Over time it did. The game survived and got back to basics. In fact, the home run total this year in baseball was the lowest since 1993. The Red Sox broke the Babe Ruths curse in 2004 and the game hasn't looked back since.
We can recover just like baseball did. It will be done in the same way. We will come up with sound legislation that will regulate our financial game just like baseball found a way to regulate their game.
We all must realize that its going to be very painful as we get back to basics. Many banks will fail, 401k's will shrink, and many pigmen will end up going to jail. However, this too shall pass.
I think we took an important step forward today by shooting down legislation that would have bailed out a bunch of fraudulent bankers. The pigmen kicked and screamed on CNBC warning of financial Armageddon and another Great Depression. I thought the market behaved pretty well today given the doomsday scenario that we were told would happen if this legislation wasn't approved.
I didn't see Armageddon today did you? Maybe this will be like Y2K. All bark and no bite.
What a way to start off "National Bailout Day" as Congress prepares to cast their historic on the mother of all stick saves. Wachovia was taken over by Citigroup this morning. Wachovia's stock was trading under $1 on the news. The FDIC takes no immediate hit from the deal.
I bet the death of Wachovia has Wall St. shaking in their boots as the house gets ready to vote on the bailout . Will the Wachovia news change any ones vote in the house? Who knows! Lets see what happens.
Here is the Wachovia news from Bloomberg:
"Sept. 29 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, agreed to buy the banking operations of Wachovia Corp., the Charlotte, North Carolina-based lender best by mortgage losses and a 74 percent drop in market value this year.
Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the Federal Deposit Insurance Corp. said today in a statement. The FDIC will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants."
Meredith Whitney was on CNBC this morning as they discussed the Wachovia news and made some interesting points . Her assumption here is that Citi jumped on this deal and agreed to take Wachovia's stunning $42 billion in losses only after getting a wink and a nod from the Treasury that these loans will be taken off their books after the bailout passes at ABOVE market prices.
Folks, this bailout stinks to high heaven. The Treasury is going to rape the taxpayer by over paying for these loans. The bailout hasn't even been passed yet and its already being used as a giant mop that is going to be used to suck up bad assets at above market prices.
Meredith was also asked if she thought the bailout would make money. She flat out said "No" because the Treasury is buying the bad loans now as housing prices continue to fall. This almost guarantees that they will over pay because the cleansing of home prices is not done.. The Treasury said last night that this bailout will help stabilize prices. I say bull****.
How does this stop home prices from dropping? No one can buy the homes at these bloated prices because the lending products are not there to allow them to do so.
It appears to me that the banks that survive this mess will be so bloated from taking on bad banks like Wachovia that they will have no desire to lend. The bailout will help lighten the load by taking bad loans off the books, but it doesn't guarantee that banks will lend. We are heading into a serious slowdown, and banks are going to need more capital in order to survive the global slowdown. As a result, the bailout cash will be hoarded by the banks to ensure their survival.
Another quick story from Meredith this morning. She had a friend with excellent credit that went to get a jumbo loan from Citi last Friday. Her friend was approved for the loan but at an 11% interest rate! Not exactly a vote of confidence that they want to lend right now.
Hold onto your horses today. The DOW is down 160 points on the open. Not exactly a ringing endorsement for the bailout! Wall St. is slowly realizing that the bailout isn't going to be enough to solve this problem.
The house vote on the bailout is going to be very very close. Keep an eye on this today as well.
The Titanic continues to take on massive amounts of water. Stay nimble. The market is very shaky and confidence continues to detiorate.
Sunday, September 28, 2008
The media is trying to spin this as a done deal. I have heard that the House Republicans are working on another proposal that is based on the 160 economists that think the Paulson plan does not work and is a disaster.
This bailout is being shoved down are throats folks. Giving Paulson $800 billion to use at his leisure will do nothing to stabilize the markets.
If anything, I believe it will create more fear in the markets. Every financial institution will be scared to death if Paulson has this much authority and money. What if he forces weaker banks to sell their bad loans? What if he decides to pull a series of "Washington Mutuals" and forces weaker banks to sell their companies for pennies on the dollar.
JP Morgan bought Washington Mutual for $1 billion folks! He had previously offered a much larger sum when he approached WAMU several weeks ago with an offer. JP's Jamie Dimon has long been coveting WAMU's large deposit base because they have little exposure out west.
Why has the Fed anointed banks like JP Morgan as the "chosen ones" and then proceeded to hand over companies like Bear Stearns and WAMU for almost nothing? Why were Goldman Sachs and Morgan Stanley allowed to survive instead of Lehman Bros and Merrill Lynch?
Every investment bank was over leveraged with too many bad loans. Goldman and Morgan Stanley were going to go down too. Look at their plummeting stock prices after Lehman and Merrill were destroyed. Everyone on the street knew the investment banks were toast because they were all over levered.
When did the Treasury get the authority to decide who lives and who dies in our financial system?
We will be creating a monster if Paulson gets this $800 billion dollars! Who knows what Paulson will do if he receives this much money and power.
What if he turns into King Kong and starts gobbling down the weaker banks by forcing them to mark to market? Or even worse, what if Paulson does the exact opposite and takes care of his banking buddies by grossly overpaying for bad loans and taking them off their balance sheets.
The taxpayer gets stuck with the losses if Paulson overpays.
This will only create more uncertainty in the stock market. One man will basically be in charge of setting a price for all of these bad assets. We don't know what these securities are worth! What if no one wants to buy them at the prices Paulson thinks he can get? We get screwed if this happens!
How is giving one man this much power and money capitalistic? It Sounds more like socialism to me. This is equivelant to hiring dictator to run our financial system.
If you think there is fear in the markets now, you ain't seen nothing yet. Lets hope the House Republicans hold their ground and save our country from this financial catastrophe known as the bailout.
The market is tanking because there is no confidence in the system. No one knows what banks are worth due to a lack of transparency, and the banks don't want to lend to one another as a result.
In addition, the constant intervention into the markets by the government like preventing shorting has only exacerbated this lack of confidence in the system.
Government intervention kills confidence, and this bailout is the mother of all interventions!!!
Please make a call to Congress and say NO to the bailout.