I haven't written in awhile because my anger had turned to malaise in watching all the speeches and interviews and actions that the economic leaders of our nation have been putting forth on our behalf. It has taken a long time to read the plans and watch the interviews and review the speech and I have finally started to boil again. My reaction has come down to a single question.
What is their objective?
Now, the answer to that may seem easy if you believe Obama last night. They are looking out for us, the American People. Obama clearly believes that the best thing for us is growth, and he intends use the predicted 2.2 or 2.6 percent growth to pay for not only all the debt we are adding to stimulate the growth, but also for all the new initiatives included in his plan (health care, renewable energy, etc.) which will aslo account for some or most of that growth.
But are they really looking out for us? From the actions, I am not so sure they are not just looking out for the banks. Weather they believe that the banks honestly need to be rescued at any cost, or if they believe armageddon will ensue, or if they are simply worried about losing the power they have attained, I don't know. But clearly their priority is saving the banks (including Wall Street), and the people are secondary.
I am one who believes that any President, be it Bush or Obama or Clinton or Reagan or Carter, genuinely has the best interests of the country at heart. I also believe Obama is a smart man. Last night he was asked about the stimulus and how we are really going to pay for all this. On 60 minutes he was asked if we have reached the limit on how much we can borrow to pay for it. Obama's dodge insisted healthcare reform and green energy will spur growth, but he flipped the question around claiming if we don't spend, we can't grow and the deficit will be even worse.
Huh? Less spending means a higher deficit? Does he REALLY believe that? What on earth are those meetings with Geithner like? Is Volcker in any of these meetings? Obama is a smart man, but if he really believes this, then I wonder what his priorities are.
And then there is AIG. All the outrage in the press, and from Congress, and from the President himself on the bonuses, when not only are the bonuses less than a fraction of a percent of what has been spent on AIG, but all the players have completely lost sight of what is really happening at AIG (or have they?). During all the bonus outrage, AIG also released the list of the top receivers of the payments made from the bailout money. And who were they? Goldman Sachs, Societe General, and all the banks. Bank after bank after bank. Turns out bailing out AIG is just another way to give money to the banks without saying we are giving money to the banks. Number one on the list was GS and ain't it funny how the first fed meeting back in September about what to do with AIG was attended by Paulsen, Giethner, a bunch of other government and Fed officials and one Private bank's CEO. Want to guess which company had a seat at this "governmental" meeting? Yes Goldman Sachs.
This stinks so bad.
It is obvious that Washington is made up of three kinds of people. Blind people, people who don't understand, and evil people. Unfortunately those are the only people who can get elected or appointed because they are the only ones the banks will give money to to run for office. I think Obama is blind. I think Barney Frank doesn't get it. I think Paulsen is/was evil. Ron Paul, who recently introduced a bill to abolish the Federal Reserve Bank may be the only one who managed to get elected despite his ability to see, understand, and care. Remember Ron Paul? The presidential cantidate who looked and sounded like a nut? The guy nobody gave a shot in the GOP race? He is getting more and more floor time lately in congress and it is no wonder. He is turning out to be right.
I can see a silver lining though. For all those who worry about the next generation having to pay for all this, I say no need to worry about that. The USA will have defaulted by then. And default means you don't have to pay back your debts because they have been written off. So as long and Ben and Tim and Barry try to avoid writing off all those bad loans by moving them to the taxpayer's balance sheet, that is how long it will be before the economic recovery will begin. And the more debt they try to pile on in avoidance of that, is how much longer it will take to recover. Welcome to the new Great Depression.
Wednesday, March 25, 2009
Saturday, February 28, 2009
The real reason we're in such trouble
Everyone mostly blames the downfall of real estate for the economic crisis we face these days. And while that surely has contributed to the problems banks face today, it would not be nearly as bad if the derivatives market had been regulated at all. But it wasn't. And AIG was/is at the center of the whole mess.
AIG is about to post an even bigger loss than before and come to the troth for government funds again. And there is little reason to think the government will not help out still more. Why? Because the government knows that letting AIG fail is basicly spreading banruptcy to probably every major bank in the world, let alone other countries as well.
I am re-printing this article by Joe Nocera of the New York Times because posting a link may require you to join . I feel this is a mandatory read for anybody trying to understand the heart of the problems we face.
*************************************************************
Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup — “only” $15.4 billion and $8.3 billion, respectively — pale by comparison.
At the same time A.I.G. reveals its loss, the federal government is also likely to announce — yet again! — a new plan to save A.I.G., the third since September. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. It has softened the terms it set for the original $85 billion loan it made back in September. To ease the pressure even more, the Federal Reserve actually runs a facility that buys toxic assets that A.I.G. had insured. A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock. Not that it’s worth very much; A.I.G. shares closed Friday at 42 cents.
Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.
•
When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”
As a huge multinational insurance company, with a storied history and a reputation for being extremely well run, A.I.G. had one of the most precious prizes in all of business: an AAA rating, held by no more than a dozen or so companies in the United States. That meant ratings agencies believed its chance of defaulting was just about zero. It also meant it could borrow more cheaply than other companies with lower ratings.
To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.
These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.
Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.
That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.
Second, in many of its derivative contracts, A.I.G. included a provision that has since come back to haunt it. It agreed to something called “collateral triggers,” meaning that if certain events took place, like a ratings downgrade for either A.I.G. or the securities it was insuring, it would have to put up collateral against those securities. Again, the reasons it agreed to the collateral triggers was pure greed: it could get higher fees by including them. And again, it assumed that the triggers would never actually kick in and the provisions were therefore meaningless. Those collateral triggers have since cost A.I.G. many, many billions of dollars. Or, rather, they’ve cost American taxpayers billions.
The regulatory arbitrage was even seamier. A huge part of the company’s credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.
How did banks get their risk measures low? It certainly wasn’t by owning less risky assets. Instead, they simply bought A.I.G.’s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.
•
At its peak, the A.I.G. credit-default business had a “notional value” of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) And unlike most Wall Street firms, it didn’t hedge its credit-default swaps; it bore the risk, which is what insurance companies do.
It’s not as if this was some Enron-esque secret, either. Everybody knew the capital requirements were being gamed, including the regulators. Indeed, A.I.G. openly labeled that part of the business as “regulatory capital.” That is how they, and their customers, thought of it.
There’s more, believe it or not. A.I.G. sold something called 2a-7 puts, which allowed money market funds to invest in risky bonds even though they are supposed to be holding only the safest commercial paper. How could they do this? A.I.G. agreed to buy back the bonds if they went bad. (Incredibly, the Securities and Exchange Commission went along with this.) A.I.G. had a securities lending program, in which it would lend securities to investors, like short-sellers, in return for cash collateral. What did it do with the money it received? Incredibly, it bought mortgage-backed securities. When the firms wanted their collateral back, it had sunk in value, thanks to A.I.G.’s foolish investment strategy. The practice has cost A.I.G. — oops, I mean American taxpayers — billions.
Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.
I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”
That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.
That would be us, the taxpayers.
AIG is about to post an even bigger loss than before and come to the troth for government funds again. And there is little reason to think the government will not help out still more. Why? Because the government knows that letting AIG fail is basicly spreading banruptcy to probably every major bank in the world, let alone other countries as well.
I am re-printing this article by Joe Nocera of the New York Times because posting a link may require you to join . I feel this is a mandatory read for anybody trying to understand the heart of the problems we face.
*************************************************************
Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup — “only” $15.4 billion and $8.3 billion, respectively — pale by comparison.
At the same time A.I.G. reveals its loss, the federal government is also likely to announce — yet again! — a new plan to save A.I.G., the third since September. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. It has softened the terms it set for the original $85 billion loan it made back in September. To ease the pressure even more, the Federal Reserve actually runs a facility that buys toxic assets that A.I.G. had insured. A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock. Not that it’s worth very much; A.I.G. shares closed Friday at 42 cents.
Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.
•
When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”
As a huge multinational insurance company, with a storied history and a reputation for being extremely well run, A.I.G. had one of the most precious prizes in all of business: an AAA rating, held by no more than a dozen or so companies in the United States. That meant ratings agencies believed its chance of defaulting was just about zero. It also meant it could borrow more cheaply than other companies with lower ratings.
To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.
These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.
Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.
That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.
Second, in many of its derivative contracts, A.I.G. included a provision that has since come back to haunt it. It agreed to something called “collateral triggers,” meaning that if certain events took place, like a ratings downgrade for either A.I.G. or the securities it was insuring, it would have to put up collateral against those securities. Again, the reasons it agreed to the collateral triggers was pure greed: it could get higher fees by including them. And again, it assumed that the triggers would never actually kick in and the provisions were therefore meaningless. Those collateral triggers have since cost A.I.G. many, many billions of dollars. Or, rather, they’ve cost American taxpayers billions.
The regulatory arbitrage was even seamier. A huge part of the company’s credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.
How did banks get their risk measures low? It certainly wasn’t by owning less risky assets. Instead, they simply bought A.I.G.’s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.
•
At its peak, the A.I.G. credit-default business had a “notional value” of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) And unlike most Wall Street firms, it didn’t hedge its credit-default swaps; it bore the risk, which is what insurance companies do.
It’s not as if this was some Enron-esque secret, either. Everybody knew the capital requirements were being gamed, including the regulators. Indeed, A.I.G. openly labeled that part of the business as “regulatory capital.” That is how they, and their customers, thought of it.
There’s more, believe it or not. A.I.G. sold something called 2a-7 puts, which allowed money market funds to invest in risky bonds even though they are supposed to be holding only the safest commercial paper. How could they do this? A.I.G. agreed to buy back the bonds if they went bad. (Incredibly, the Securities and Exchange Commission went along with this.) A.I.G. had a securities lending program, in which it would lend securities to investors, like short-sellers, in return for cash collateral. What did it do with the money it received? Incredibly, it bought mortgage-backed securities. When the firms wanted their collateral back, it had sunk in value, thanks to A.I.G.’s foolish investment strategy. The practice has cost A.I.G. — oops, I mean American taxpayers — billions.
Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.
I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”
That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.
That would be us, the taxpayers.
Monday, February 23, 2009
The "Fight Club" Solution
One of my favorite bloggers is Rolfe Winkler over at Option Armageddon. He hits the nail on the head time and time again and I appreciate it. Among the many financial blogs I read when I can, his is the one that is the most educational and honest and forthright. This past weekend he mentioned the "Fight Club" Solution. One of my favorite movies, in which two guys plan to blow upthe buildings of all the credit card companies. Actually that is just a side plot, but it is amazingly funny how it relates to the situation we are in today. As Rolfe points out:
The good news is that this will eventually happen. In a way it already has started. Our major world banks are insolvent and it is only a matter of time before our governments are forced to recognize this fact and close them down in their present form. How do I know this and the government doesn't? Good question. I listen to what the markets tell me, and when Citi is under $2 and Bank of America is under $3, that tells me the market is only waiting for certain events to happen (nationalization among them) before dowgrading to zero. But nationalizing the banks, which even some Republicans are beginning to endorse, will not fix the problem. Because then the government would become the bank that won't write down these assets. Which will put the government in trouble instad of the banks. Not good. (Unless you are short the US dollar).
Restoring confidence in the financial system can only be acheived when the financial companies themselves become honest about their activites. Which means admitting their assets can't cover their equity/liabilities. Why why why won't/can't the government and the banks see what we americans can easily see? I used to ask this question every day, but I found my answer even though I secretly (from myself) already knew it: "it would be most painful for those with the most to lose."
The banks and the politicians are the ones with the most to lose.
Few appear to recognize the depth of the crisis we face. Most still aren’t
prepared to ask the hard, fundamental questions about our economic system.
Anyone who mentions the gold standard, for instance, is treated as a
novelty. Nevermind that fractional reserve banking—or perhaps our central
bankers’ management of it—is the most important contributing factor to the
crisis.The problem, I think, is that so many of our leaders are tied immovably
to legacy ways of doing business. A man will make himself believe most
anything if his salary depends on it. Lots of salaries are at risk, so
lots of heels are digging themselves in.Anyway, as I’ve argued for awhile, the only way to “solve” the crisis is to let asset prices fall. And that means the balance sheets on which those assets currently reside need to recognize substantial losses. Call it the “Fight Club” solution*—everyonegoes back to $0. This would be highly painful for ALL Americans. But it would be most painful for those with the most to lose…
The good news is that this will eventually happen. In a way it already has started. Our major world banks are insolvent and it is only a matter of time before our governments are forced to recognize this fact and close them down in their present form. How do I know this and the government doesn't? Good question. I listen to what the markets tell me, and when Citi is under $2 and Bank of America is under $3, that tells me the market is only waiting for certain events to happen (nationalization among them) before dowgrading to zero. But nationalizing the banks, which even some Republicans are beginning to endorse, will not fix the problem. Because then the government would become the bank that won't write down these assets. Which will put the government in trouble instad of the banks. Not good. (Unless you are short the US dollar).
Restoring confidence in the financial system can only be acheived when the financial companies themselves become honest about their activites. Which means admitting their assets can't cover their equity/liabilities. Why why why won't/can't the government and the banks see what we americans can easily see? I used to ask this question every day, but I found my answer even though I secretly (from myself) already knew it: "it would be most painful for those with the most to lose."
The banks and the politicians are the ones with the most to lose.
Friday, February 20, 2009
Weekend of Doom?
The Dow gapped down 200 points on heavy volume this morning and is weakening every minute. Citibank is under $2. The banks are taking a pounding. Is this the reckoning? Are we looking at S&P 500 at 500 by Monday? Is Nationalization upon us? This just feels big.
Funny how all americans seem to know the banks are insolvent, but the markets still value them at even $1. Betcha that won't be the case anymore come Monday...I wonder how many banks will be gone...Citi, BofA, both under $4. That's two Dow components for goodness sake. Wells Fargo under $10. Who am I missing here?
Funny how all americans seem to know the banks are insolvent, but the markets still value them at even $1. Betcha that won't be the case anymore come Monday...I wonder how many banks will be gone...Citi, BofA, both under $4. That's two Dow components for goodness sake. Wells Fargo under $10. Who am I missing here?
Tuesday, February 17, 2009
Can't get Worse, you say?
YIKES! This from Marketwatch:
So we are about to witness the first ever amalgamated LOSS for the S&P, according to estimates. Of course 80% of the red ink comes from the Financials. Have I mentioned I am short S&P Financials by way of owning SKF (ProShares Ultra Short S&P Financials)?
And I still see pundits on NBC and Fox (yes I watch both) talk about finding the bottom! The bottom of what? The toilet? I had told friends to look for the S&P to test 600 in this quarter (which hasn't come true yet). But a smarter trader I know has reset his target to 450 based on technical analysis of many charts, and I'd have to say that the Fundamentals now seem to agree with him.
"A sixth quarter of negative growth (in the S&P) ties the prior record
set when Harry Truman was president, running from the first quarter of 1951 to
the second quarter of 1952.
“‘Next quarter, we’re expecting a new record of seven quarters of negative growth,’ said an analyst.
“As of the close of business Thursday, [he] calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share."
So we are about to witness the first ever amalgamated LOSS for the S&P, according to estimates. Of course 80% of the red ink comes from the Financials. Have I mentioned I am short S&P Financials by way of owning SKF (ProShares Ultra Short S&P Financials)?
And I still see pundits on NBC and Fox (yes I watch both) talk about finding the bottom! The bottom of what? The toilet? I had told friends to look for the S&P to test 600 in this quarter (which hasn't come true yet). But a smarter trader I know has reset his target to 450 based on technical analysis of many charts, and I'd have to say that the Fundamentals now seem to agree with him.
Friday, February 13, 2009
Stimulus and Bank Bailout Won't Work
Spend Spend Spend. These days republicans and Democrats may disagree on the nature of the stimulus, Democrats want jobs and social spending and Republicans want tax cuts, but they both agree that something has to be done now. Even waiting to examine the plan for mistakes is too big a mistake in itself. Obama tells us we need stimulus to avoid disaster. Bush told us the same thing last year. This is an emergency. Nevermind that the first stimulus and the first bailout didn't work. We need action! And Fast! It doesn't matter what caused our problems, spending has always worked in past recessions, so spending is the answer to this recession. Hurry!
But what if this is not a recession? A friend of mine recently told me "nobody I've seen has started calling this a depression yet. things haven gotten THAT bad!" Well I fear that depends on who you ask. It has gotten that bad for more people than you think. And its going to get worse, because spending your way out of debt is non-sense and we all know it. Fundamentally, we all know this can't work.
Here's a chart showing the debt to income of the USA. This doesn't include "off the balance sheet" obligations like Social Security and MedicAid. It also doesn't include the stimulus bill that just passed (which will add another 30%) or the final cost of the actual bank bailout. Our GDP has grown at 3-5% per year, yet the growth in debt has been much faster. It is taking increasingly larger units of debt to fuel the same unit of growth in the economy.
And that is the biggest lie of all. GDP. It is not Gross Domestic Product any more. We are not producing anything, we are consuming it. It is really GDC, or Gross Domestic Consumption that our government is trying to grow. And we all know on a very fundamental level, that once you borrow enough, you have to stop spending, if only because you are forced to by your creditors, who stop extending credit.
What is happening to America today, is we are running into a wall, and the government is pushing us head-first into it by moves like the spending bill that just passed. Supposed to be about creating jobs, infrastructure and tax cuts, it instead has items like a $8 billion for high speed rail lines, $200 million in compensation for WW2 injuries, $2 billion in grants and loans for battery companies, money to build schools in towns who are losing population, an AMT rollback costing $70 billion, and much much more that simply doesn't relate to the task at hand, regardless weather or not they are good programs.
Honestly, instead of giving me $13 back per paycheck, Obama and Congress should be asking us for $26 and sinking it into a better healthcare plan for all the people who are losing their jobs.
But what if this is not a recession? A friend of mine recently told me "nobody I've seen has started calling this a depression yet. things haven gotten THAT bad!" Well I fear that depends on who you ask. It has gotten that bad for more people than you think. And its going to get worse, because spending your way out of debt is non-sense and we all know it. Fundamentally, we all know this can't work.
Here's a chart showing the debt to income of the USA. This doesn't include "off the balance sheet" obligations like Social Security and MedicAid. It also doesn't include the stimulus bill that just passed (which will add another 30%) or the final cost of the actual bank bailout. Our GDP has grown at 3-5% per year, yet the growth in debt has been much faster. It is taking increasingly larger units of debt to fuel the same unit of growth in the economy.And that is the biggest lie of all. GDP. It is not Gross Domestic Product any more. We are not producing anything, we are consuming it. It is really GDC, or Gross Domestic Consumption that our government is trying to grow. And we all know on a very fundamental level, that once you borrow enough, you have to stop spending, if only because you are forced to by your creditors, who stop extending credit.
What is happening to America today, is we are running into a wall, and the government is pushing us head-first into it by moves like the spending bill that just passed. Supposed to be about creating jobs, infrastructure and tax cuts, it instead has items like a $8 billion for high speed rail lines, $200 million in compensation for WW2 injuries, $2 billion in grants and loans for battery companies, money to build schools in towns who are losing population, an AMT rollback costing $70 billion, and much much more that simply doesn't relate to the task at hand, regardless weather or not they are good programs.
Honestly, instead of giving me $13 back per paycheck, Obama and Congress should be asking us for $26 and sinking it into a better healthcare plan for all the people who are losing their jobs.
Thursday, February 12, 2009
The Geithner/Paulsen plan
I have to admit it. I really hoped and even thought maybe Obama would and could change things. But the new plan to save the banks that Geithner presented on Tuesday is basically the same thing as Bush/Paulsen's plan. No details. Give the banks money. And one more thing, "Transparency." But it is basically just a government-backstopped credit call option available to private investors, that exposes taxpayers to even further losses presuming asset market prices are artificially high.
Why won't the government just let the market determine a value on its own? Yes we know it will not be pretty, but as long as government tries to claim that all these mortgage backed securities are worth what people paid for them, this sinkhole will just get bigger and bigger. Printing money only leads to inflation. And at the rate Geithner is accelerating matters (this plan will cost $2 Trillion after Paulsen's failed $700 billion plan), we are looking at some serious hyper-inflation.
The problem is nobody is sure who is solvent and who is not. Can GM survve? Starbucks? Citibank? Your neighbor? When the governmentjust props them all up and won't let any of them fail, then nobody is going to loan anybody any money. Which means no new buildings, no new business to pick up where things are falling. No new jobs to help those in need pay for their rent. And eventually no food on the shelves of the local grocery store. And not enough money to buy what is on the shelf.
I know it is hard to believe that is where we are headed. Take a trip to Best Buy and it all looks the same as two years ago. And inflation? I must be crazy. Have you seen the price of a car lately? Or gasoline? I know I know. Prices are going dOWNN. And for now they are. But believe me, our government's policies are taking us down a dangerous road. Much more dangerous than the also painful road of raising taxes, raising interest rates, and letting banks fail or even nationalizing them. No self respecting Republican or Democrat seems to agree with me (except Ron Paul)
Obama says we need bold moves, but is not delivering them.
Here is Goldman Sachs' research department on the "new" Geithner plan:
KEY POINTS:
1. As expected, the Treasury's financial rescue plan will work within the constraints of existing TARP funding (of which about $350bn remains), attempting to catalyze private sector funds to purchase bad assets and restart the securitization process. However, the speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months.
2. Bank stress test. A key feature of the program will be a "stress test" for all banks with assets >$100bn. This will be used to determine which banks need to be recapitalized, or shut down. However, details on the exact nature of the stress test are scant. The Treasury will make additional TARP funds available to purchase convertible preferred shares that will be converted to common "if needed to preserve lending in a worse-than-expected economic environment."
3. Public/private bad bank. Rather than a fully government-funded bad bank, the Treasury will attempt to catalyze private sector investment via a "public-private partnership." This will start at “up to” $500 bn in size, and potentially expand to $1 trn. It is clear from Geithner's remarks that this is a concept at this point, rather than a fully designed entity -- Geithner mentioned getting public comment on the potential structure. Supposedly, private sector investors will determine the prices (perhaps with the benefit of cheap financing or partial loss protection from the government).
4. TALF expansion. As leaked repeatedly prior to the speech, the Fed's Term Asset-Backed Securities Lending Facility will be scaled up by a factor of five to $1 trillion and expand to backing CMBS and possibly RMBS. The goal here is to restart securitizations and thereby expand the flow of new lending (this is not an approach to deal with bad assets). While potentially an innovative approach to restarting securitization, it remains to be seen how effective this program will be. The Treasury's commitment to this would be $100bn rather than the $20bn currently earmarked and would be drawn from the $350bn remaining in TARP.
5. Transparency and accountability provisions. Not many surprises here, though it bears emphasis that the provisions apply to new extensions of aid rather than to those already supplied. Institutions that accept new help will be required to pay only $0.01 per quarter in dividends, refrain from purchasing shares and from pursuing new acquisitions. Geithner also outlines a number of additional reporting requirements intended to keep the pressure on institutions to make new loans.
Why won't the government just let the market determine a value on its own? Yes we know it will not be pretty, but as long as government tries to claim that all these mortgage backed securities are worth what people paid for them, this sinkhole will just get bigger and bigger. Printing money only leads to inflation. And at the rate Geithner is accelerating matters (this plan will cost $2 Trillion after Paulsen's failed $700 billion plan), we are looking at some serious hyper-inflation.
The problem is nobody is sure who is solvent and who is not. Can GM survve? Starbucks? Citibank? Your neighbor? When the governmentjust props them all up and won't let any of them fail, then nobody is going to loan anybody any money. Which means no new buildings, no new business to pick up where things are falling. No new jobs to help those in need pay for their rent. And eventually no food on the shelves of the local grocery store. And not enough money to buy what is on the shelf.
I know it is hard to believe that is where we are headed. Take a trip to Best Buy and it all looks the same as two years ago. And inflation? I must be crazy. Have you seen the price of a car lately? Or gasoline? I know I know. Prices are going dOWNN. And for now they are. But believe me, our government's policies are taking us down a dangerous road. Much more dangerous than the also painful road of raising taxes, raising interest rates, and letting banks fail or even nationalizing them. No self respecting Republican or Democrat seems to agree with me (except Ron Paul)
Obama says we need bold moves, but is not delivering them.
Here is Goldman Sachs' research department on the "new" Geithner plan:
KEY POINTS:
1. As expected, the Treasury's financial rescue plan will work within the constraints of existing TARP funding (of which about $350bn remains), attempting to catalyze private sector funds to purchase bad assets and restart the securitization process. However, the speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months.
2. Bank stress test. A key feature of the program will be a "stress test" for all banks with assets >$100bn. This will be used to determine which banks need to be recapitalized, or shut down. However, details on the exact nature of the stress test are scant. The Treasury will make additional TARP funds available to purchase convertible preferred shares that will be converted to common "if needed to preserve lending in a worse-than-expected economic environment."
3. Public/private bad bank. Rather than a fully government-funded bad bank, the Treasury will attempt to catalyze private sector investment via a "public-private partnership." This will start at “up to” $500 bn in size, and potentially expand to $1 trn. It is clear from Geithner's remarks that this is a concept at this point, rather than a fully designed entity -- Geithner mentioned getting public comment on the potential structure. Supposedly, private sector investors will determine the prices (perhaps with the benefit of cheap financing or partial loss protection from the government).
4. TALF expansion. As leaked repeatedly prior to the speech, the Fed's Term Asset-Backed Securities Lending Facility will be scaled up by a factor of five to $1 trillion and expand to backing CMBS and possibly RMBS. The goal here is to restart securitizations and thereby expand the flow of new lending (this is not an approach to deal with bad assets). While potentially an innovative approach to restarting securitization, it remains to be seen how effective this program will be. The Treasury's commitment to this would be $100bn rather than the $20bn currently earmarked and would be drawn from the $350bn remaining in TARP.
5. Transparency and accountability provisions. Not many surprises here, though it bears emphasis that the provisions apply to new extensions of aid rather than to those already supplied. Institutions that accept new help will be required to pay only $0.01 per quarter in dividends, refrain from purchasing shares and from pursuing new acquisitions. Geithner also outlines a number of additional reporting requirements intended to keep the pressure on institutions to make new loans.
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