False hopes

I hope none of the readers of this blog (if there are still any), have any false hopes that the proposed bailout will help the economic disaster we are facing. It is far from a coherent solution to the fiasco. In fact, this bailout more closely resembles the Japanese version of zombifying banks by maintaining artificially inflated asset prices. It failed miserably in Japan and will fail here as well. You must address the underlying fundamentals. There are 3 clear things that must happen to do that.

1) Balance Sheet Transparency - institutions must be forced to disclose all of the assets that they have clearly. No offsheet assets, level 3 assets, etc... Until everyone knows what's on the balance sheet, there will be no confidence in the system. Yes, I know this will collapse some companies, but those companies for all intents and purposes are dead anyways. This bailout will only help keep the weak alive maybe only temporarily, but it is a misallocation of funds.

2) All over the counter derivatives must be placed on an exchange and the counter parties must verify that they are adequately capitalized. These derivatives will still be ticking time bombs regardless of this bailout. You have to have a transparent market to manage this.

3) All institutions must be limited to 12 to 1 leverage at most. There could be a time frame provided for the deleveraging to occur, but it must occur. Leverage ratios above that are unnecessary and completely at odds with any sensible risk strategy.

This is the only way to provide confidence back into the marketplace. The assets underlying these debt products will continue to deflate. They have to. We were at the peak of the greatest asset bubble in history. There is no possible way that current incomes can support the payment streams of these inflated assets. Trying to artificially support that is a joke at best and the joke will be on taxpayers. People may want their houses to stay at the current price, but like it or not, 9 times out of 10 that is just unrealistic. It sucks, but that is the price we pay for artificially low interest rates, loose loan standards and a stagnant income base. The bubble has to burst.

Forcing tax payers to absorb all the risk of a bailout aimed directly at propping up more than likely insolvent companies is criminal. Especially when there are plenty of coherent and sensible solutions to addressing this nightmare.

This bailout achieves only this:

1) Burdening taxpayers with 100% of the risk
2) Maintaining artificially inflated asset prices
3) Maintaining non-transparency at the corporate level
4) Further eroding confidence in the market (delayed reaction)
5) Continued obfuscation of the price discovery process of the free market
6) Weakening the dollar
7) Spurring commodity inflation

Please don't be fooled by any version of this plan. Because of what this plan doesn't address, you can expect trillions more in pain down the road. Only now there may be a few more companies on Wall Street and a few more hedge funds that will survive to bleed this country of more misallocated funds.

Colbert Report Funny

Last night in the Colbert Report, they made a funny. In discussing the bailout, they flashed up this title...

Hindsight is $2020 billion

Ken Lewis: Glass gonna be half full

Ken Lewis seemed to get caught off guard in an interview with Maria Bartiromo. Lewis was discussing how he thought the investment bank model and mid size bank models weren't viable long-term. This is a significant prediction from a high-level executive.

BARTIROMO: SO RIGHT NOW WE HAVE, WHAT, 9,000 BANKS? 9,000 BANKS IN THIS COUNTRY. WHAT WILL YOUR PREDICTION BE AS FAR AS HOW MANY THERE ARE IN THE NEXT FIVE YEARS?

LEWIS: GOSH, I HAVEN’T THOUGHT ABOUTTHAT. MAYBE HALF.“

Buffett gaming the system

Buffett is an extremely smart investor, but he is no savior. He is certainly gaming the system with his investment in Goldman. Not only is he making a killing on his preferreds, he is also basing his decision on the fact that GS is one of the main beneficiaries of the bailout. GS and Morgan Stanley more specifically are the big winners in Paulson's plan. Atleast Buffett is honest when he is trying to screw you.

On his investment in Goldman...

"If I didn't think the government was going to act I wouldn't have done anything."

Is that showing faith in the financial system or is that pointing another gun to the head of congress? Buffett knows congress is between a rock and a hard place and his ball-busting deal with GS will make him a killing if the government proceeds with a bailout. Mostly he will profit at the taxpayer's expense. Will the sheeple actually catch on to this? That's to be seen.

Such hypocrites

18 months ago in China, Paulson was touting free market principles to China. He lectured a Chinese audience that it was risking trillions of dollars in potential economic growth unless it freed its capital markets.

"An open, competitive, and liberalized financial market can effectively allocate scarce
resources in a manner that promotes stability and prosperity far better than governmental intervention," Paulson said.

How do you think China is accepting Paulson's views now?

The US has a consistent do as I say and not as I do foreign policy. Any wonder why the world view of our government is so poor?

Markets Give Paulson a Big FU!

The markets spoke today and they spoke clearly. FU Paulson and your blank check bailout!

This is what happens in a global economy when you start trying to implement policy that blatantly is an attempt to inflate your way out of a mess. These are the checkmate scenarios that I and many others have discussed. Paulson and the FED will have limited options to deal with this, especially when it comes to tanking the dollar. Their mistake is forgetting that although the US dollar is the world currency, the US no longer is the dominant provider of commodities as it was in the Great Depression. In the 21st century, any whiff of the printing presses will cause an immediate flight to safety and a thrashing on the US dollar. That will in turn spike commodities like oil. It will also, ultimately lead to our foreign loan sharks insisting that interest rates go up in exchange for their support of our trade deficit.

On July 15th, I had a post entitled CHECKMATE!!! . The main jist being that the Fed was all out of options at this point. Subsequently and right on queue, the Treasury began to step into the game. It was clear the Fed couldn't support the size of this problem. Quickly however, Paulson and the rest of the government "elite" will realize that they to are in a checkmate scenario. We no longer control our own economic destiny as a country. No debtor nation does. It was and has been a myth to think we did. This was allowed to continue because the unsustainable growth of the US also benefited the very foreign nations that funded this growth (China, Japan, Middle East). As soon as these loan sharks begin to see we are replacing dollars with slugs, that jig is up. Again, the markets spoke clearly at the first hint of this game.

Great stuff from John Hussman

This is truly a must read...

http://www.hussmanfunds.com/wmc/wmc080922.htm

Open Letter To Congress On The $700 Billion Paulson Bailout Plan

Please read the following from Mish. This is excellent.

Open Letter To Congress On The $700 Billion Paulson Bailout Plan

Paul Krugman on Bernanke

http://krugman.blogs.nytimes.com/2008/09/22/the-humbling-of-the-fed-wonkish/

This is an article today from Paul Krugman. He lavishes more praise on Bernanke than is deserved, but his last paragraph is spot on.

So Ben Bernanke came into his current position believing that central banks have the power,
all on their own, to fight Japan-type problems. It seems that he was wrong.

I've been ranting about this for months. Bernanke thought he knew exactly what the Fed did wrong in the Great Depression. What he failed to realize was that the Fed doesn't have the power at all to stop it. He spent his whole adult life preparing himself for a fight he could never win.

In Paulson We Trust?

If you follow the statements Hank Paulson has made over the course of the last year and a half, you can only come to one of two conclusions. He is either incompetent or he is a boldface liar. Neither traits make me confident in the wisdom of a bailout directed by this man, nor the fact that it includes a virtual blank check to buy and do anything he damn well pleases. Here is a history of Hanky Panky and his version of rockin' the economy 21st century style. Consider this in the context of plenty of intelligent people who not only saw this coming, but could tell you exactly why it happened and have been for years.

In March of 2007, after the first shock waves of the housing meltdown had already hit, the Associated Press reported Mr. Paulson's view that the credit difficulties linked to the housing slump would be limited.

In August of last year, after the second round of financial shock waves disrupted markets worldwide, Paulson commented, "We have the strongest global economy I’ve seen in my business lifetime."

Just last March he warmly endorsed a reduction in the capital requirements for Fannie Mae and Freddie Mac, saying "additional capital [invested in mortgages by Fannie and Freddie] will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market."

At every point along the way, Secretary Paulson has failed to see the extent of the crisis resulting from the collapse of the housing bubble. This raises serious questions about his judgement. Reporters should be discussing Paulson't track record in the context of this bailout proposal....

Deja vous all over again

As this crisis continues to unfold, some of the more research minded have been digging up news articles that appeared during the Great Depression. If you didn't know the dates and the names, you would have a hard time distinguishing when these were written. This is almost the exact same scenario with the exact same snap judgements from leaders and politicians. Even the whole short selling red herring and argument was a front pager, as it had been in the Panic of 1907. It's almost verbatim.

Why a country as great and prosperous as ours can choose willfully to repeat the same mistakes over and over again is a testament to how powerful corporate greed and government inadequacies are as a combination. Unfortunately, as the country grows and our status as the largest debtor nation grows, recovering from these cyclical crisis becomes less and less a certainty.

Why You Should Hate the Treasury Bailout Proposal

Here is an excellent piece on the massive flaws in the proposed bailout. It's a bit long, but a must read.

Why You Should Hate the Treasury Bailout Proposal

By Yves over at Naked Capitalism

The Underlying Basis of Finance & Credit

The following is from Barry Ritholz at The Big Picture. This has been a long standing theme and rant of mine. This is pretty good....

Here is an oddly interesting observation: Over the entire history of human finance, the underlying premise of all credit transactions -- loans, mortgages, and all debt instrument -- has been the borrower's ability to repay.

From 1 million B.C. up until the present, repayment ability was the dominant factor.
This goes as far back as when Og lent the guy in the next cave a few dozen clamshells in order to go and purchase that newfangled wheel. If Og didn't think his neighbor would be able to repay him those clamshells, he never would've entered into what we can describe as the first commercial loan.

Since real estate loans are at the bottom of all of our current credit woes, let's take mortgages as an example. The historical basis for making a loan for a home purchase was several simple factors: Employment history, Income, down payment, credit rating, assets, loan-to-value ratio of the property, and debt servicing ability. But for some crazy reason, those factors went away during the housing boom.

That may sound simple, but it becomes even more stark when viewed over a time line.

<-1 million B.C. --------------------------- 2002-07 ---2008->

Except for that 5 year period, the entire history of human finance was rather reasonable about the basis for making loans in general, and extending mortgage loans in particular.

Makes you wonder, doesn't it.

Backlash Over Bailouts Grows in Congress, Wall Street

Good article in Bloomberg. Some smarter and cooler heads are starting to rise from the walking dead.

Backlash Over Bailouts Grows in Congress, Wall Street

Scare tactics

Get ready for a slew of fear inducing statements from our leadership. They will need to scare the bejeesus out of the sheeple to get them to quietly accept the arse reaming we are being set up for in this bailout. This is a classic ploy by politicians to help grease the wheels.

Avoidable and manageable

Contrary to popular opinion this current crisis was not only avoidable, it was rather predictable and manageable if those in power either cared or bothered to do their jobs. I've been ranting for well over a year that the system was broke and heading for a major collapse. I was already late to the game. Many others were already out there clearly articulating the exact dangers, scenarios and outcomes that we are currently seeing.

Here are some extracts from a book by Michael Panzer, "Financial Armageddon" released a couple of years ago. It's chilling how accurate of a portrayal he predicts:

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation’s largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here’s some more from Chapter 6 (”Systemic Crisis”)

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure — not until it’s too late…

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity…

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems…

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first — or point and click — and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

$$ By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace… At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par — “breaks the buck” — because of shaky markets and holdings that turn out to be much riskier than expected.

The time to rant...

The government is now officially planning on crossing the line. The same idiots who got us into this mess are now responsible for loading the damage onto tax payers at an alarming cost to both our wallets and the principles this country were founded on. Ignore the consequences at your own risk, but do realize that each vote and your vocal denouncement of bi-partisan government policies do matter. If I stand alone in being sick to my stomach right now, I fear that the ignorant bliss of the lambs has sealed our fate.

Our government is blindly shooting at the hip right now and following almost the identical failed playbook from the Great Depression. These leaders had years to implement the changes to avoid this mess, yet we blindly follow their lead when they take mere days and hours to fix a catastrophe. Their solution is to massively backstop private losses with tax payer money without considering the long term ramifications. This is a stop gap measure only, with irreversible repercussions on the tax payer. It fails to solve the underlying problem and only delays the outcome. It ensures, however, who will be responsible to pick up the pieces. You the taxpayer (I'm still on the fence as to whether I'm a taxpayer this year).

These banks and financial companies have been bleeding the economy of 100s of billions of dollars in bonuses and salaries over the last decade, selling and packaging the exact crap that the tax payer is now going to be responsible for subsidizing. That's $1000s of dollars out of each of our pockets supporting the debt that 100s of people made millions and billions personally off selling. That is akin to an electrical company willfully wiring a government building with materials they knew would cause a fire and having absolutely no repercussions. If the government is to backstop ANYTHING...the individuals responsible for this mess must be held accountable with both their wallets and there freedom. Anything less and we might as well live in China and Russia as the principles of this country aren't worth shit.

Each and everyone of you who stays quiet is willingly handing over your personal checking account for the government to blindly write blank checks to support this mess. At this point, we are straying so far away from the principles that made this country so great, that I have no idea what it means to be a patriot and lover of our country. Is it to blindly hand over my checkbook for the good of the masses as in communism...or is it to stand up and challenge the powers that have willfully, recklessly and unlawfully allowed this to happen?

If I change just one opinion and awaken just one person to join in dissenting against the bi-partisan travesty that is occurring, at least I have done something. To stand by quietly with blank check in hand and a vote for either McCain or Obama is to accept the fate of a leadership that stands for nothing that this country was founded on.

Ye olde deflationary playbook

Does anyone remember the classic scene from the original (and best) Die Hard, where Hans promises a miracle to break the magnetic lock on the huge vault in the Nakitomi building? When the FEDs came charging in to save the day, they recklessly cut the power to the building, subsequently disengaging the magnetic lock.

Hans: "You asked for a miracle...I give you the F B I."

In another classic dialogue from that movie:

McClane: "Powell? What's going on?"
Powell: "Ask the FBI. They've got the terrorist playbook and they're running it, step by step."

Who would have known how appropriate that script would be for the crisis we are in now.

Paulson: "You ask for a miracle...I give you the F E D"

Tax Payers: "What's going on?"

Ron Paul: "Ask the FED. They've got the deflation playbook and they're running it, step by step."

It's amazing how similar the moves are when you compare similar deflationary crisis from today to Japan's to the Great Depression. There's one similarity between them all. They all failed to accomplish what they set out to do.

The US is not nearly in the fiscal postion to take on all of the current crap liabilities, not even considering the significant upcoming failures across banks, commercial real estate, corporate defaults, local and state governments. Not to mention individual industries like the airlines and auto. Toss in a crumbling infrastructure and you have an over-leveraged country that has just taken two steps into the abyss of insolvency. If you were worried about a meltdown on wall street...just wait until our foreign loan sharks begin to put the squeeze on our borrowing. We can't borrow, print or tax our way out of this mess. The path the government has taken is one to bail out the banks and lock this country in economic jail. To bad nary a tax payer has any idea what is happening.

Those responsible...

From a Mish post...

Before I continue let me provide a partial list of entities responsible for the financial mess we find ourselves in:

-Fractional-reserve banking, which is inherently unstable and entirely a confidence game
-Congress for passing the Federal Reserve Act and creating the Federal Reserve, the third central bank in the history of the US
-Woodrow Wilson for using the Fed to finance World War 1
-Benjamin Strong, the President of the Federal Reserve Bank of New York from 1914-1928, for inflating the money supply in the '20s to help out Great Britain which led to the Great Depression
-Herbert Hoover for his economic intervention from 1929-1932. He was not laissez-faire by any means.
-John Maynard Keynes for laying the foundation of a miseducated public
-FDR for banning private ownership of gold, enacting the New Deal, creating Social Security and Fannie Mae, and exacerbating the Great Depression
-The FDIC for lulling the American public into a false sense of security regarding their bank deposits and training the public to unquestionably trust the financial system
-LBJ for the guns and butter of the '60s
-Nixon for severing all ties between the US dollar and gold
-Reagan's intellectual duplicity, using free market, small government rhetoric while turning the US into a chronic debtor nation
-Alan Greenspan, one of the most duplicitous, arrogant, and incompetent individuals in the history of the United States. If I had to pin this crisis on any one man, it would be he.
-George W. Bush for cutting taxes while raising spending and his full embrace of Cheney's doctrine of "deficits don't matter"
-Ben Bernanke for following the Greenspan doctrine to its inevitable conclusion
-The heads of Fannie Mae and Freddie Mac for using artificially low borrowing costs to create systemically-dangerous housing institutions
-Christopher Dodd and Barney Frank for beating the socialist drum
-Christopher Cox for thinking a ban on short-selling will solve anything
-Hank Paulson for folding the hand he was dealt
-The ratings agencies for rubber stamping garbage assets as AAA
-The heads of the major banks and brokerages on Wall Street for turning a blind eye as their institutions were taking on massive leverage that threatens to take down the financial system
-The hedge funds that levered up structured finance to dangerous levels
-Generations of lawmakers for kicking the looming financial crisis can down the road
-Home buyers who lied about their income and creditworthiness
-Predatory lenders who put people into mortgages they could never afford

Households should prepare to hunker down

A good article in the the Philly.com website of all places. Just good basic info to the regular Joe. I wish the government had as candid and simple advice for the population.

http://www.philly.com/philly/blogs/phillyinc/Households_should_prepare_to_hunker_down.html

Stand alone investment bank model is dead

I've been having more conversations outside of this blog and spending less time on it. I've been telling people that Morgan Stanley and Goldman Sachs are done and they've been wondering why? Both of those companies will need to merge to survive as the investment model in its current form is broken. They just cannot survive in their current form alone.

Central Banks "Poor" Liquidity Into the System

Central banks around the globe have coordinated to inject up to $180 billion of new liquidity into the global marketplace. The markets and sheeple cheer...but why? This will fail as have all previous attempts to inject liquidity. Please note my earlier posts for a detailed why. Plain and simple, this is a solvency issue not a liquidity issue.

Liquidity vs. Solvency

Central banks are the big bad wolf to the brick house of deflation fueled by deleveraging of companies built on inflated asset models.

Contact!

Ben has finally started the engine on the Helipcopter. The process of expanding the Fed's balance sheet to support this mess has begun. God help us all.

``The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve,'' the department said in a statement today. ``The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program.''

Temporary my ass. If Helicopter Ben really thinks he can print his way out of this mess, than he really is a freaking lunatic. We'd be looking smak into a currency crisis and a spike in borrowing costs. Neither are scenarios that the US can afford right now.

I'm all for the government making strategic moves to help facilitate the graceful liquidation of assets. But the assets MUST be allowed to fall in value and fall as quickly as is possible. It's the only way that we can get back to a true functioning market based on reliable valuations. Yes, many, many companies will fail. They fucked up and they need to pay for that. So does everyone who invested in those companies. Just because it might cause some pain is no reason to bail out stupidity or a broken model.

Forest fires are a necessary occurence to clear away dead brush to make way for new and stronger trees and growth. The same thing can be said for a free market system. It's only when you try and manipulate the cycle that bigger problems occur. Studies have proven that putting out forest fires prematurely can ultimately lead to bigger and more devastating fires down the road. A series of smaller fires is preferred to get back to equilibrium. Financial markets are much the same, only we are now seeing why putting out the fire earlier in the decade was such a mistake.

Great Depression II

Might as well make the official call now. Welcome to the 1st inning of the Great Depression 21st century style.

Let the global depression begin...

Ladies and gentleman, this is a world-wide deleveraging event the likes we've never witnessed. The next phase will shift from the epicenter (US financials) to other countries now. Watch as the UK picks up the falling dominoes momentum (HBOS is the next to go). Don't kid yourself though, the US is far from done with this crisis. We haven't even witnessed the worst of prime MBS, commercial real estate and corporate defaults. Small banks across the country will start failing over the course of the next two years culminating in over 1000 failed banks. Corporate debt will default and those rates will start to spike in the next year as well. The equity markets aren't even close to representing the underlying fundamentals.

Prediction:

DOW - 9,000 - 9,500
S&P - < 1000

This should happen within the next 12 months, but it may take a bit longer. Not sure I would call that a bottom though. Fundamentally, it should go a lot lower.

Gotta love this...

From the headline of a CNN story today...

Investors breathe a sigh of relief that the central bank's outlook was not more bearish.

Wow...I feel so much better. Bernanke and his clown posse didn't predict the end of the world. Time to buy.

The stock market is the remedial class of the financial school system. The sheeple need to believe.

Nothing to see here...move along

Stock market's up today. Nothing to see here...move along.

We've officially crossed over to the Matrix. Anyone trading in the stock market might as well take their money to Vegas and play roulette. It's a guessing game, nothing is based on fundamentals in the equity world right now. The beacon of capitalism is a freakin' carnival side show. A crying shame.

GD talk picking up steam

From Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLURo6hlIPok&refer=home

"This is mind-blowing,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. ``You have to look back to the Great Depression for the last time something like this happened.''

The only thing increasing in the financial markets are the number of comparisons to the Great Depression. The market is starting to capitulate to a nasty recession/depression. That doesn't bode well for equities moving forward. The opportunity to get out of long positions is shrinking. The road back to profitability through equities will be long and hard.

Markets finally speak for themselves

Not much else to say today. Lot's going on, but the markets spoke. Let's see if they keep their wits or drink more koolaid.

Things we've never seen before are happening

Throughout the news this morning, there were two themes I heard from reporters and commentators.

"Nobody could have seen these things coming."
"We're seeing things we've never seen before."

That's been a theme of mine for the past year. Not everybody was caught asleep at the wheel, unfortunately all the parties responsible for the mess and overseeing it were.

Market's Closed! (July, 2008)
"Things we've never seen before are going to start happening over the next year or two. Considering we've already seen some once in a life time kick saves from the Fed and Government, that's saying alot. "

Jumping into the Poole (July 2008)
"Too many fools, too many shoes and way to late in the game to stop it. As I've said before. Protect your assets, eliminate debt, stay liquid and mobile and be prepared for the worst. Things are gonna happen over the next 3 years that nobody is ready for. "

Is the Fed the new Rumplestiltskin?

In some of the more scary news from this weekend, the Fed has updated its alphabet soup lending facilities to accept assets including equities now. Pretty soon if you draw a pretty picture on a piece of paper, the fed will give you a loan. Wonder why they had to do this? The banks only have bad debt on their balance sheets at this point. They offloaded everything of value. The zombies are starting to buckle under the deflationary pressure. The Fed is now clearly over stepping the authority it has been given. It's time for the government to step in and stop allowing the Fed to risk taxpayer dollars without any vote. Just rediculous.

What a weekend!

Not only do the Redskins pull a rabbit out of the hat, it seems that one of the two teetering financials has done it as well. After a crazy weekend, it appears that Lehman will go through a bankruptcy liquidation while Merrill gets acquired by B of A. There were some empty country club golf courses this weekend as CEOs and fed officials worked around the clock to try and duct tape the financial markets until the next crisis. Another Sunday kick save.

The markets should crap the bed tomorrow, but you never know what the bulltards will do with this news. It's beyond horrible, but they might just see it as an "offsetting fouls" do over. I've given up hope of trying to guess the equity markets at this point.

Karl Denninger's Latest

This is just great stuff. Please read...

http://market-ticker.denninger.net/archives/578-Another-One-Bites-The-Dust-Lehman.html

ZIRP on the horizon

If you're not familiar with Japan's Lost Decade, you can read about it here. Or you can just wait to experience it in the good ole USA. It's also known as the Japanese Asset Price Bubble.

http://en.wikipedia.org/wiki/Japanese_asset_price_bubble

The Japanese asset price bubble ("bubble economy") was a time of skyrocketing land and stock prices in the Japanese economy, that peaked from 1986 to 1990 and hit bottom in its valuation of the Nikkei index in 2003. It is one of the more famous economic bubbles in economic history.

One of the hallmarks of the Lost Decade in Japan was the ZIRP (zero interest rate policy). Basically the central bank ran into a wall lowering rates to stimulate growth.

You can forget all of the silly talk of rate hikes in the future from the Fed. That has been and is a running joke at best. Anybody familiar with true monetary policy knows that the Fed would never raise rates heading into the storm we are facing. That would be akin to pushing down the throttle on the Titanic full steam ahead. That leaves us with a rate cut in the future and quite possibly an emergency rate cut similar to earlier this year. The only problem is we're getting awfully close to ZIRP which is a giant brick wall that the Fed has been avoiding hitting.

This crisis is clearly a unique one to the US, but it will have eerily similar undertones to Japan's lost decade and almost 15-20 years of declining house prices if we continue to zombify the financial system.

Talking fundamentals

Take a look at the above chart showing Household debt. If you go on the fundamental principle that debt is driven by affordability. And you look at typical DTI (debt to income) ratios that have historically been used. And you also take into account that household income has been stagnant for the last 10 years. You would probably come to the conclusion that house prices and assets have depreciated over the course of the last 5-10 years and not skyrocketed. Why the disconnect?

Asset prices (especially housing) have not been supported by fundamentals, but completely by loosening loan standards and roll-over financing. These are unsustainable models that have to adjust regardless of whether Fannie and Freddie are nationalized. That only insures that borrowers with adequate finances can get access to capital. It should not provide access to capital to people who cannot afford the debt.

This should make you angry

The following should make you really angry and really understand how rediculous these financial bailouts have become. Do you have any idea what the total bonus compensation was for employees at Lehman the last two years? I do...here goes.

2007 --- $9.5 billion
2006 --- $8.7 billion

Any idea what the current market cap is for Lehman? $2.9 billion

ENOUGH FUCKING SAID I THINK!!!

Sighhhhh

U.S. Government Assisting in Sale of Lehman Brothers

Here we go again. Our great capitalist model of a country, has the government meddling in private business. Since the government is so good at getting things done, what pray tell does "assisting" mean exactly? Here are some guesses:

1) Assisting with tax payer funded backing of a deal (bailout)
2) Assisting with holding the door open for the smart people with actual earned money to make a deal.
3) Assisting with arranging hookers and golf trips (oops, that's the energy side of government)

I think the government puts the "ASS" in assisting...don't you?

Why bailouts are a socialist slippery slope

From Bloomberg: Senators Ask Fannie, Freddie to Freeze Foreclosures

U.S. Senate Banking Committee members urged Fannie Mae and Freddie Mac, the mortgage lenders placed under federal control this week, to freeze foreclosures on loans in their portfolios for at least 90 days.

Anybody else a little peeved at the notion that your hard earned money might go to people living an extra 90 days in a house for free? The majority of people who are in homes that are foreclosing will not be able to work out modifications. The main reason they are in foreclosure is because they couldn't afford the home under normal loan standards in the first place. Now that the initial discounted payments are over, they are stuck or can't afford the loan. Only an increase in income can fix that problem. UNLESS, the government decides to give a haircut to the loan balance in the modification. Each haircut would come directly out of the pocket of a tax payer for the sole purpose of bailing out a homeowner. Nice sign to send to all the renters out there who are doing the right thing by saving up for a house they can afford. That's only 50% of the citizens in this country thank you very much.

Baaaack in the U S S R...you don't know how lucky you aren't boy.

No where to run, no where to hide

As the storm cloud called deflation begins to set in across the globe, there is one truth that will hold true..."no where to run, no where to hide". Just ask anyone who piled onto the foreign markets, anti-US dollar and commodity bandwagon. They've been getting clobbered lately as the dollar rebounds, commodities crash and foreign stock markets continue to plummet. Hell, about a year ago I was ready to jump ship as well, but took my time to analyze the whole picture. I was close to calling Peter Schiff's investment company Euro Pacific and have him move all my investments into foreign stocks and diversified currencies. Something didn't seem right though, so I started breaking down the numbers. It pretty quickly became evident that the extreme money flows causing surges in those other markets was just a symptom of loose money trying to find large returns to keep their leveraged positions afloat. The fundamentals just didn't support the extremes that we were seeing. Sure emerging markets are a great story, but their exponential growth is completely dependent upon debt driven consumption from foreign economies. As deflation sets in and the global economies contract, the unwind of these positions creates a massive problem for leveraged models. We are just starting to see the beginning of this process.

Liquidity vs. Solvency

Ever since the Fed started intervening with their alphabet-soup lending facilities, I've been ranting that the Fed is helpless to solve the banks' problems because this is a solvency issue and not a liquidity issue. The Fed is providing liquidity to the banks by swapping cash for non-liquid assets like MBS. The Fed is not monetizing this debt. These are short-term repo loans that must be repaid. They do nothing to raise or prop-up the price of the underlying asset (mostly MBS). Eventually the undelying asset needs to be put back on the bank's balance sheet and marked-to-market. Therein lies the solvency issue. If the banks actually marked to market all of the existing assets on their balance sheets, you'd be hard pressed to find a bank that wasn't technically insolvent. Through Tier 2 and Tier 3 capital tricks, Fed alphabet-soup lending, off sheet vehicles like SIVs, the banks have been able to delay marking these assets to market. This has proven to be a big mistake.

From Bloomberg:

``Liquidity tools by definition can only have so much impact,'' said Dino Kos, former head of financial markets at the New York Fed and now a managing director at Portales Partners LLC, a New York research firm.

The Fed ``can alleviate the problem by helping institutions finance these bad assets,'' Kos said. ``But by itself, that doesn't lift the price of these assets. You still have an underlying solvency problem.''

The need for cash is exacerbated by rising credit losses and difficulty in obtaining capital to offset them.

The hope was that eventually this crisis would turn around and that the banks could wait out the bottoming process. This would allow the asset prices to rise again and produce more liquidity in the true marketplace. This was a false hope. Eventually these assets will need to be marked to market and slowly they have been. That is why you keep seeing the banks going to the confessional each quarter as they slowly mark those assets down. The problem is, evertime they mark down assets, they need to increase their capital base or sell those assets to stay within banking ratio regulations. Because they waited so long, the stock prices have collapsed and equity raises have become highly dilutive. Banks are now almost forced to either borrow at unsustainable rates (8-11%) in the bond market, sell assets at rock bottom prices, offload garbage for short term repo loans from the Fed (limited amount) or continue to hide the bad assets. These are all shell games that will eventually erode the banks long term sustainability, some quicker than others. The real differentiator in the financial arena is which companies contain the most bad assets (real-estate backed) and which companies were most highly levered. It's not too hard to tell that from financial statements and the results can be seen in which companies move to the front of the line in the ever growing domino effect of failing institutions.

The Next Bubble: Pessimism

The Next Bubble: Pessimism by Paul R. La Monica (CNN).

Personally, I think Paul is an idiot. He's been a headline permabull for CNN through this whole debacle and hasn't been right once. I do like this article though. If pessimism is the next bubble, then I got in at a great value. His point is valid, but attitudes as much as fundamentals drive markets. Pessimism has reached a true "top" when all the calls for a bottom have been flushed from the market. We're no where near that yet. Bulls will get crushed, bottom feeders will get crushed and anyone who tries to catch falling knives will get crushed (skewered...whatever). C'mon over Paul, the bandwagon is waiting for you. I will call a top to the pessimism bubble once every ounce of bs permabull cheerleading has been sucked from your clueless articles.

Goldman to swallow Lehman?

Don't be surprised if Goldman swallows up Lehman within the week. Lehman is dead and they will not be allowed to "fail". Shotgun weddings seem to be the choice de jour for failed financial institutions.

By the way, I have no idea who will swallow WaMu and eventually Merrill. The next on the list of zombie financials waiting for their fate.

Update: Seems that Golman threw-up when attempting to swallow Lehman. No worries though, the government is stepping in to save the day. Yippeeeee...hoooorrraaaaay. Nothing to see here, move along.

Pension Time Bomb

Hat tip to Dileep on pointing this article out to me. George Will writes an interesting piece on a favorite rant of mine.

Pension Time Bomb by George Will

Here's a good excerpt but the entire piece is well worth reading.

Vallejo is an ominous portent for other cities, and some states, few of which are accumulating financial resources sufficient to fulfill pension promises they have made to employees. Are you weary of the crisis du jour -- subprime mortgages and all that? Get a head start on worrying about the next debacle by reading Roger Lowenstein's new book, "While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis."

I've discussed this very topic in the past, because I think it is one of the most under-mentioned and potentially dangerous aspects of the economy moving forward.

Past posts...

Vallejo Woes...spreading
State pensions...tick...tock...tick

Unintended consequences

Fannie, Freddie Takeover Jolts Preferred Stock

Treasury Secretary Henry Paulson's takeover of Fannie Mae and Freddie Mac is roiling the market for preferred securities.

This is exactly what I talked about in yesterday's rants. Paulson's mixed signals destroy the financial system. By chopping the legs out from the preferred shareholders at Fannie and Freddie, Paulson has signaled to the markets that NO equity investment in a troubled bank (or any company) is safe. This will result in lowered preferred prices (as we are seeing) and an unwillingness from investors to take an EQUITY stake in these companies. This is happening at just the time these companies most need to raise capital. If you cut-off access to capital through equity investment, you are now looking at the bond market and those rates will be unsustainable under any of these models. You can't continue to borrow money at 8-11% while only making 5-6%. That is ponzi scheme financing. The unintended consequences of Bernanke and Paulson's lies, fudgery and poorly planned moves are having and will have a massive effect on companies ability to recapitalize. This is happening at the most innopportune time. There is no possible way that the government can step in and bailout all the companies that need to raise capital to survive. If you want the ultimate doomsday scenario, that is it. Private equity must be a part of the equation and it won't if the government continues with their current shenanigans. You can't continue to bailout failing companies without fundamentally changing the business models. That is akin to subsidizing not bailing. Subsidizing a failed model will only cause smart private equity to run for the hills. Especially if there is the risk that they lose all of their investment in a susbequent government bailout. What a mess.

Why government SUCKS!!!

The following is an excerpt from an article in CNN:

Sex, drugs and oil

I'm not sure which is worse. The clear lack of ethics and waste of tax payer money by the alleged employees or the massive waste of tax payer money investigating this crap.

The alleged transgressions involve 13 former and current Interior Department employees in Denver and Washington. Their alleged improprieties include rigging contracts, working part-time as private oil consultants, and having sexual relationships with -- and accepting golf and ski trips and dinners from -- oil company employees, according to three reports released Wednesday by the Interior Department's inspector general.

The investigations reveal a "culture of substance abuse and promiscuity" by a small group of individuals "wholly lacking in acceptance of or adherence to government ethical standards," wrote Inspector General Earl E. Devaney. Devaney's office spent more than two years and $5.3 million on the investigations.

There is not much I despise, but I really despise most of what our government stands for. Not what it was meant to stand for, but the current deformed beast that it has become. This whole article made me sick and makes me want to shove my IRS tax forms right up the ass of a government bureacrat. $5.3 fing million to investigate. $5.3 MILLION! What the fuck!

How many women did the investigator's screw, rounds of golf did they play and exotic trips to the places these "crooks" went did they take, to need $5.3 MILLION to know they were guilty.

Roubini Misses the Boat on Regulation

Roubini Misses the Boat on Regulation

This is a must read by Mish, one of the bloggers I respect most and follow religiously. He discusses the Roubini commentary I touched on yesterday and follows it up with some masterful insights. If you've read my most recent posts, you will see some strikingly common threads between his post and mine. Mish really, really gets this stuff though at its core. I'm getting better and I think I've got a pretty good grasp on what is happening, but he really is spot on.

Far too many people are focusing on the symptoms of this mess and not the ultimate cause. You can't keep treating symptoms while the cancer continues to grow unabated. You have to focus on the cause. The President, candidates for President, current Congress, Bernanke, Paulson, the Federal Reserve and all their cronies WILL NOT address the cause. We the people will need to stand-up and shake up the political spectrum if we are to avoid a continuing deterioration of this country for years and years to come.

Paulson's mixed signals destroy the financial system

Paulson's mixed signals, double talk and outright lies are destroying the financial system. Granted, it was broken to begin with, but he, along with Bernanke, are doing exactly what government's do best. They FUCK THINGS UP when they try to manipulate or manage the economy. Time after time during this crisis the Fed and Treasury have stepped in to try and manipulate or manage the market. Each time they cause even more confusion and hesitation on the part of the free market that actually has capital to invest.

Case in point, just a few months ago Paulson was urging, make that telling, the GSE's they had to go out and raise capital. He also leaned on banks to make those investments in the GSE's (let's hope not for a quid-pro-quo). So, the banks buy up billions in preferred shares of the GSE's. Seemed like a great deal at the time. Next Paulson, realizing that the GSE's were still undercapitalized, goes to congress to ask for federal funds. Of course he said he wouldn't need to use the funds. He called it his Bazooka. “If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.” The problem is, nobody was quite sure what Paulson would do, so he basically cut-off any possible capital infusion from private equity. Why would anybody invest if there was the possibility of government intervention. It wouldn't make sense. In essence, Paulson's uncertainty made certain that the GSE's would require a bailout.

So, now with this bailout, he basically wiped out the value of the preferred shares that the banks just invested in. What a great sign to send to banks and Wall Street. "If you invest, you may get whacked". If you don't, we will initiate a bail-out.

Confusion and lack of transparency in a broken market is one sure way to cease investment. For all intents and purposes, the very moves that Bernanke and Paulson are making are the very moves that are exacerbating the negative feedback loop. Governments are inefficient by nature and government's intervening in markets promote those same efficiencies.

I'm sick of hearing "if we don't bail XYZ out, then the entire financial system will collapse". That is horseshit. Smart money will always eventually work its way into viable business models if the market supports efficient, viable and sustainable models. By waving the magic "bail-out" wand around, Bernanke and Paulson are exacerbating the exact problem they are trying to solve...a lack of capital flowing efficiently in the system. The main reason, in my humble opinion, is they are trying to force capital into what is quickly being proven to be inneficient and unsustainable companies and business models. More specifically they want money flowing to insolvent banks and inflated housing debt, without those models being changed. Unfortunately their goals are at complete odds with what is best for the american people and the economy at large. Guess who they are trying to bailout....????

Nouriel Roubini lays the smack-down to the US

Wow! I'm a big fan of Roubini's and he has been WAY out in front of this entire mess. Probably the most vocal and correct of the bunch. He minces no words in this scathing rebuke of the US government's handling of this crisis and crossing over to socialist policies.

Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)

Here's an excerpt that gets to the point of the anti-capitalist moves by this administration.

The ideologue “regulators” who literally held a chain saw at a public event to smash “unnecessary regulations” are now communists nationalizing private firms and socializing their losses: the bailout of the Bear Stearns creditors, the bailout of Fannie and Freddie, the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities), the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders, the use of the SEC to manipulate the stock market (restrictions on short sales), the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market), the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression,to bail out non-bank financial institutions, and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgage for banks willing to reduce their face value).
This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China. So foreign investors are now welcome to the USSRA (the United Socialist State Republic of America) where they can earn fat spreads relative to Treasuries on agency debt and never face any credit risks (not even the subordinated debt holders who made a fortune yesterday as those claims were also made whole).

I find it hard to argue with a single point he makes.

Lehman to zero?

I've been predicting Lehman would be one of the next to fall in the financial markets. Back in June I had the following entry:

Na na na naaa, na na na naaa, hey hey hey, good-bye

Arivaderche, sayonara, adios, asta la vista, stick a fork in them. It's over baby. The fat lady is singing and she's sitting in front of an all you can eat buffet.

Looks like Lehman can't find anyone to pony up new capital and their stock today just got pounded by 40%. No capital...no dice. These guys have basically been a zombie for months, but the market is finally beginning to take notice. I wouldn't be surprised to see another shotgun wedding on the horizon. They can't survive much longer. As stated in my post in June...

This company will be lucky to be in existence within the next 6 months. It's guaranteed they are toast by 2010. The most likely outcome is they prop themselves up like Weekend at Bernies until they can manage a firesale to another sinking ship. Worst case scenario is we see another Bear Sterns attack on their liquidity forcing another "bailout". That would happen within 6 months if it does, maybe sooner.

How about a lot sooner. Nobody on the street will trade with these guys. They have no sustainable business and are mired in deflating mortgage and CRE related assets. This is an insolvent company and they will have a hard time finding a buyer that won't completely wipeout their current shareholders. Nice stock to have short...not fun if you had them long. You were warned.

Bailout, house prices and recession

http://calculatedrisk.blogspot.com/2008/09/housing-its-about-prices.html

The above link has some very good information on house prices. Includes real prices (inflation adjusted), price-to-rent ratio, and price-to-income ratio. This would show where house prices should/could revert back to based on statistical norms and also based on past (conservative) loan standards. The bail-out of the GSE's should help to free up liquidity and also may reduce interest rates a bit, but it doesn't solve the problem of asset prices being unsustainable under "normal" loan standards and risk models.

In my opinion, what the bailout does primarily is provide a very solid support to the housing market once it reaches bottom based on these models. A return to statistical norm. The risk was that with a failure in the GSE's (90% of all current loans), the market would completely collapse and we would overshoot on the correction. This is typically what would happen in a "free-market" correction. A large bubble is followed by an equally large and statistically proportionate drop below norm. Banks generally would not want to come in and provide loans until a true bottom had been revealed (the banks that survive that is). The fear of catching a falling knife. Therefore, generally the correction would overshoot and that would be catastrophic. A return to norm will be painful enough...an overshoot would have been a disaster.

The problem is, a return to statistical norm will still cause a massive deflationary event and there is still a tremendous amount of leverage built into the system that will continue to unwind along with house prices. Those charts should give you a good idea where house prices need to return to until the bottom is reached. There is still a long way to go. Fannie and Freddie will not be loosening their loan requirements under this bailout. If anything, they will become stricter. What won't happen is that someone who qualifies for a loan, would have trouble getting access to capital. That was a risk under the previous scenario.

What most people aren't touching on is that the primary driver of asset prices (in particular houses) is income. Factors such as interest rates have a much smaller impact on home prices under normal loan standards. The problem with this bubble was the primary factor in home prices was driven by "lowered standards". No doc loans and option-ARM loans allowed families making $60k to buy houses worth $800k with zero down. Those types of loans are gone forever (or for atleast a generation). There really is no market that can fill the void left by an almost 3-6 times income decrease in purchasing power by consumers.

If median income was $70k, then the "affordability" of homes was closer to $600k to $700k. Now we are looking at $210k to $280k for the same income level. That's a massive discrepancy in the purchasing power of consumers. That will be the primary driver of home prices. The only group really able to fill the void are investors and they will be looking squarely at the price to rent ratio before they get back in the game. There is ALOT of capital just waiting to get back into the game, but not until asset prices are attractive again. The government would love to try and artificially inflate house prices, because they know the impact it has on foreclosures, federal and state incomes, etc... The reality is they can't maintain these inflated values UNLESS they subsidize loans to people who wouldn't qualify for them in the first place. That would be a return to the lax loan standards of the last 8-10 years. I can't imagine any scenario where the american public and foreign governments would allow that to happen. Asia and the Middle East would be crazy to continue funding our current account deficit at these low rates if that were the case. You would see a spike in Treasury rates and that would convert to higher costs on ALL debt across that board. By explicitly linking mortgage debt to treasury debt, the government has in essence dropped the one method for hiding those losses and providing a lack of transparency. As in most ponzi schemes (and this fundamentally has been one for the last 5 years), eventually the game is up. One of the only reasons that foreclosures did not begin spiking 3-5 years ago was that people who were technically in default on their loans were able to refinance or sell there houses. That exit strategy is gone now and the ponzi scheme of rolling the debt over evaporates. Same thing is starting to happen with credit cards, autos, corporate debt, etc... Corporate debt is generally a lagging indicator. It's already showing signs of stress and in a recession, typically we would have 8-10 times the level of default that we have now. In my opinion (and based on past recessions) that will start kicking in heavily within the next year or two. There have already been some significant corporate bankruptcies this year because of heavily leveraged buyouts. The LBO debt in the corporate bond market is extremely high and is a house of cards during this credit contraction.

You may think I'm all doom and gloom and negative, but the reality is, we will be in a much much better place as far as our country is concerned if we flush out all the malinvestment. Recessions in my opinion are a necessary event to help eliminate the bad business models and to provide a mechanism in place that deters malinvestment. You cannot continue to socialize losses and subsidize bad models without major repercussions. Greenspan when he lowered rates to avoid a recession in early 2000 in some ways didn't anticipate the massive bubble he would blow in real estate. The combination of historically low interest rates and an unproven securitization model was explosive. Warren Buffet realized that and commented on derivatives. "The real weapons of mass destruction". He also subsequently sold off his massive stake in the GSE's. He once owned almost 10% of both companies. He liquidated long ago when he saw the model and transparency changing. It didn't take a genius to understand the model was flawed, just somebody who cared and had a stake in the outcome.

If the government is to step in and help stop an over-correction in the markets I'm all for that. They must, however, wipe out the investments that were made under the knowledge that they were "investments". They must also make sure that the models and transparency that are put in place are fundamentally sound based on KNOWN economic models. Not assumption and financial wizadry that has no proven track record. You can't burden the tax payer with losses that should have been sustained by a knowledged investor and at the same time continue to support the business model that failed initially. In some cases, asset prices must decline to get back to sustainable models. The government CANNOT and SHOULD NOT try to subsidize prices. They should only provide adequate liquidity and capital to allow the market to function efficiently under a viable and sustainable model.

GSE BAILOUT!!!

Looks like Fannie and Freddie will be nationalized this weekend. Look for a news release late Sunday / early Monday before the Asian markets open. What a fiasco. They better blow out all the common shareholders and give a major haircut to the prefferred and bond holders or I'm gonna be one pissed off American. Unfortunately, I think this may be the first of many bailouts. It will be interesting to see how the US dollar and treasuries do this week. Basically, we just flooded the treasury market with about $5 trillion more of government debt. Even though it was pretty much implied before, it's a done deal now. Not a good day to be a US taxpayer although readers of this blog already knew this was coming.

Nationalization of industries
That'll leave stains!
I can just see Ogre from Revenge of the Nerds now...
Bloomberg article

Volcker...Chicken Little???

"This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down. Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation. It is the most complicated financial crisis I have ever experienced, and I have experienced a few...Changes are going to have to be made'' to the global financial system."

-Paul Volcker, former Federal Reserve Chair, 1979-87

If you won't listen to crazy guys like me and some of the other doomsday bloggers...I think Volcker has a pretty good resume. The bandwagon continues to grow. The comparisons to the Great Depression will grow as well.

WOW

Bloody Summer In City: 125 Dead In Chicago, Double Number Killed In Iraq...

All I can say is WOW! That is a telling statistic. This country really has no stomach for conflicts regardless of whether the initial reasons were just. We cry for our soldiers who are paid and trained to fight and ignore our countrymen who die at home helplessly. Not a knock on our soldiers (bless them all), just a knock on the intestinal fortitude of the whiners in this country. There is a cost to the freedom's we've come to know and love and embrace. Will we stand up when needed? Those who cry about the human cost of war, may do better to focus their attention right here at home.

From foreclosure to zoo

Bobcats claim foreclosed house

Atleast somebody is making use of all these empty homes...

What's wrong with this picture

What's it gonna take for bulltard investors to finally realize that we are in a recession and it will be massively bad for company earnings. This market will eventually collapse, but there is a serious disconnect between equity valuations and reality at this point. Pretty telling picture of headlines next to an index value.

U.S. House Price Decline Could Be Worse than Great Depression

U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says

Shiller's been more right than he has been wrong in recent years. He understands the fundmentals and the fundamentals are horrible. Here are some highlights:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Babes and Bailouts

It seems that everywhere I look today, all I see are articles about Palin and bailouts. Now I don't mind change and I certainly don't mind Palin strutting her stuff on the Republican ticket, but the increasing talk about bailouts across the board is completely unacceptable. My vote is still going independent unless I can get clear direction from one of the candidates that they WILL not under any circumstances bailout industry after industry. I've written before about the looming bailouts.

Long and distinguished

Now today I see the auto industry asking again for $50 billion in government loans (bailout) to convert to alternative fuel cars. Gross from Pimco is again asking for the Treasury to backstop the housing market. The GSEs have essentially been bailed out or atleast the facility is in place. The airline industry is on the ropes and will be asking soon. Banks are teetering and the FDIC is going to be under water. We already bailed out BS. Who the fuck is next? When does the madness stop. As my momma used to say, "you can't get a little bit pregnant." Once you dip your toe into socialist waters, it get's harder and harder to stay dry. The more bailout talks that circulate, the longer this crisis will take as the price discovery mechanism in the free market becomes even more broken.

Wells Fargo says "Ooooooops!"

In July I wrote about my confusion regarding Wells Fargo raising their dividend. It just didn't seem right to me.

Wells Fargo raises dividend...hmmmm

I now know why it rubbed me the wrong way. They are fing idiots.

Yesterday Wells Fargo (WFC) raised $2 billion in a bond offering. The cost of the capital? 9.75%. When the top rate it can lend at is 6% the only way it can make money on this capital is to lever it.... increase the risk.

It stunk to me at the time they did it and it's rotten now...what in the world is a company doing raising their dividend when 2 months later they have to go to the bond market at 9.75%.

It's beyond comprehension what these financial companies think they are doing. It doesn't take a rocket scientist to know that you need to preserve your capital in this market. These companies will not survive if they keep trying to put lipstick on the pig. Eventually they will have to write down losses and the longer they wait, the more expensive and difficult it will become for them to access capital.

Raising their dividend was a complete sham and it will end up backfiring (already has it seems).