Sunday, September 28, 2008

The Deed is Done. Bailout Agreement Reached

Well, it looked as though Congressional Republicans were going to step up and stand on principal, but as it turned out, they moved a couple of commas around and pretended they looked after your interests. The bailout agreement has been reached and $700 billion tax dollars are about to be given away.

Of course, the healthy banks aren't going to participate. Better to absorb the loss than face the tax and equity consequences of participating in this rip off. The government will get bogus paper, issued by the now government owned Freddie and Fannie, by giving cash to the most incompetent lenders in the market. One of the stipulations in the bill is that the government renegotiate the loans that back this paper. In other words, they've been ordered to take steps to immediately devalue the investment they just made. If you are a mortgage holder and are not behind, you keep the deal you have. If you are in default, you get to negotiate a better deal. What do think that will do to the mortgage market? The feds get warrants in the companies that do participate (again, the weakest in the industry) and they'll have you believe we're all going to come out ahead on this venture.

They may be able to hide the losses since they now will own both the issuing authority and the bogus paper they issued, but you will NEVER see a return on this investment. Recall the Savings and Loan bailout was supposed to cost us around 50 billion dollars. In the end it cost 150 billion and that involved hard assets. There are many more middle men in this deal. Lawyers are going to make money. Taxpayers are going to get squat.

It was all designed to hide the fact that the government essentially ordered the give away of homes. Obama said today that the whole mess "started on Wall Street". Wrong. Wall Street is where it ended. They were the patsies intended to take the fall from the beginning. It started in DC. Now they're all laughing, all the way to the re-election campaign. They not only got away with it. They're going to be hailed as heroes for it.

Saturday, September 27, 2008

Help! We're Being Robbed!

The proposed bail out plan is allegedly making progress this weekend. Leaders of both parties have stated they expect a deal to be voted on Sunday or Monday.

The problem stems from Mortgage Backed Securities and Credit Default Swaps. You don't have to know exactly what these things are. Here's a great analogy:

You own a business. Someone comes to you with what they claim is a great product. You buy the pitch. In fact, you like it so much you borrow against your business to buy a whole warehouse full of this stuff. As it turns out, your customers aren't the least bit interested in what you've just acquired. You have nobody to sell them to. You can't pay back the money you borrowed to purchase the garbage. Sure the garbage has some intrinsic value. The material it's made of has some value if it's recylcable, maybe a penny on the dollar or less.

Instead of allowing nature to take its course, whereby your horrendous error in judgment causes your business to fail, the government steps in and offers to buy your worthless inventory for something like 75 cents on the dollar, with taxpayer money.

The above scenario would never happen in real life. The government doesn't give a damn about the small business, the engine and the real foundation of this economy. They will do exactly what I've described above for the banking community that's currently putting the squeeze on you because the government was complicit in pushing the lousy product that's now on their books.

They will justify it by saying that after they bail out the banks who made the aggregious errors in judgment, these banks will suddenly loosen up credit, lower interest rates and offer you access to cheap money. Do you really believe that?

We're being robbed. It's a bi-partisan robbery. I will not vote for anyone who in any way supports this fraud. Of course that means in the presidential election I'll either be voting for a third party or no one at all. Neither candidate has had the intestinal fortitude to even attempt to put a stop to this.

If this country is to preserve free enterprise, we the people must get angry. The only way to get the stink of fascism off ourselves from the passage of this bill is to toss out anyone who had anything to do with it. Most politicians, including both presidential candidates are completely divorced from your interests. They must be reminded who is really in charge here.

Thursday, September 25, 2008

Unwinding the Mortgage Crisis Scheme

We were told last Thursday that the financial market were days away from collapse. That Congress must immediately pass a $700 Billion buy out plan or we'd all be doomed. That was over a week ago. There has been no such plan passed and there wont be. The financial markets are no doubt headed much lower in the short term, but we'll get over it.

You have to ask yourself: "Why was there such immediate bi-partisan support and such urgency in trying to push this deal through?" The powers that be would have you believe that it's all too complicated for the average citizen to understand. But as the information seeps out, it's becoming evident that it really isn't that complicated.

Here's the story so far:

Back in the 90's liberal members of the Congressional banking committees and the administration decided that it was not fair to demand things like ID, proof of citizenship, or even proof of income from borrowers in "disadvantaged" neighborhoods. They didn't just encourage banks to lend to people who couldn't afford it, they threatened them with lawsuits and being labeled bigots if they didn't make more money available to the poor. To alleviate the risk, Freddie Mac and Fannie Mae (government created private entities) were permitted to buy up these risky loans, combine them in kind of a mutual fund an sell shares. These are the now infamous "mortgage backed securities" that many banks are holding and are unable to sell. The new system encouraged even more liberal lending. Brokers and lenders could initiate deals, make a quick buck and sell them to Freddie and Fannie. The new name of the game was volume. Originate and sell as many mortgages as you can. Odds are most of them will be okay, and since the bad ones will be bundled with lots of good ones, the theory was, everything will be hunky dory. Mortgages were no longer long term investments, they were day trading fodder.

When the house of cards came crashing down and the social engineering experiment failed, Fannie and Freddie were bought out by the feds, but there was still that pesky "mortgage backed securities" problem to deal with. If only the federal government could get hold of those too, they'd have both the mortgages and the securities tied to them on their books. It would be years before anyone discovered how little they were actually worth and by that time, all the current players would be long gone. "I know, let's tell them the world will come to an end if we aren't allowed to buy them." they thought. The plan was put into motion.

But Congress couldn't just rubber stamp the deal. There's an election in 40 days. They have to put on a show for their constituents. "Let's debate it for a couple of days, move a few commas and announce a bi-partisan rescue package." That's when the wheels came off. It turns out, the general public wasn't nearly as frightened of the collapse of the banks in question as the administration and Congress was. To make matters worse, some Republican lawmakers came out of the capitalist closets they've been hiding in for the last couple of decades and said not just no but HELL NO! While pundits like ORielly declared, "There's no alternative. What do we do, just let them go down?" Others answered "Yes, that's exactly what we should do."

This play isn't over. Maybe the bad guys will win this one, but I'm becoming more hopeful that they wont. Lying, cheating and stealing is not capitalism, it's just lying, cheating and stealing. It should be brought to light and dealt with. There will be players left standing and they're going to get a lot of great assets for a song and a dance. There is no need to panic. We just need to take out the garbage. The government is trying to dump it on you. A free, fair and transparent market, if left to it's own devices, will drop it squarely where it belongs.

JP Morgan Chase, Washington Mutual, No Bailout Necessary

Washington Mutual was seized by the FDIC in the largest bank failure to date. JP Morgan Chase quickly swooped in and purchased the company's banking assets. As a result, the FDIC will not have to dip into its funds to cover any accounts. As for Chase

"JPMorgan Chase said the WaMu acquisition would add 50 cents per share to its earnings in 2009, and said it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010."----AP

Chase also picked up some of Bear Sterns assets when that company went down. Of course there were losers in the WaMu deal. Chase didn't buy everything. Private equity investors lost their shirts, but that's life in the fast lane. Contrary to the rhetoric in DC, Main Street came out just fine.

This illustrates why the feds need to step back and let this scenario take its natural course. Poor investment decisions will result in huge losses and once in a lifetime opportunities. The market will right itself.


No Alternative? Really?

Members and supporters of both parties have agreed that a bail out of some kind is absolutely necessary. Why? Without it they say we'll have a failure of the financial system, bank failures, recession or even depression. They say this as if facing all of those things is out of the question.

Many of our founding fathers were told that if they did not support the crown they would be imprisoned or killed, their property confiscated and their families imprisoned or killed. They stuck to their principals and all of the above came about as they knew it would. All we're being faced with is financial difficulty. Are we really ready to dispense with free markets to avoid some financial pain?

John Stassel got it right tonight on The Factor when he said "Crisis Favors the State". They're counting on your fear of hardship to enable them to sieze more control of this country's resources and its people.

Call, write, email your representatives. Do not let this happen. We can take a punch. They can't. This is not about protecting you. It's about protecting themselves. They know that the real result of a financial meltdown is that the American people will dust themselves off, run the incumbents out of town on a rail, and rebuild. That's the terror you see in the eyes of the power brokers in Washington DC. I'm not seeing it in the eyes of public. Only anger, disgust, frustration.

The market has not failed us, the government has. Fannie and Freddie got this mess rolling. Guess who invented them? I'll give you a hint. It wasn't the free market.

Gingrich to the Rescue?

Newt Gingrich called the bail out plan, "the worst economic plan I've seen in all my years in public life" and "socialism at its worst" . He added that if credit worthy banks need to borrow cash from the treasury, that's fine, but for the government to buy their bad paper at make believe prices is nuts.

Many in the public at large have expressed the same sentiment I've expressed here that if preserving the integrity of the system means that banks will fail and we'll face hard economic times, so be it. The vast majority of the fear out there is among the $4,000 suit crowd. The public is uneasy. The elite are petrified. We know the consequences of not bailing out Wall Street. We're just not as scared of it as they are.

Hopefully, Gingrich will supply some support to lawmakers who want to oppose this deal. McCain may have bolstered the opposition as well, inadvertantly. Obama's camp can't afford for McCain's decision to suspend his campaign and go to Washinton to result in a bi-partisan deal that provides even temporary stability to the markets. Therefore, Democrats are likely to oppose anything that has McCain's name on it. In this case, gridlock is what's called for.

The absolute panic I've seen in the faces and voices of Benenke, Paulson, Congress and President Bush may be an indication that they need to forestall the inevitable for a few more months, so that the new guys can take the blame. The truth is, calamity in the financial sector isn't a future possibility. It's already here. It just hasn't come out from behind the curtain yet.

Wednesday, September 24, 2008

What the President Didn't Say

President Bush addressed the nation tonight and in 12 minutes, laid out the causes of the financial calamity the market is facing and the dire consequences if we don't give the culprits $700 Billion tax payer dollars. But he assured the public, that the FDIC has been insuring bank depositers for over 75 years and nobody has ever lost a dime in an insured account (insured up to $100,000) and that noone will lose a dime in an insured account in the future. That's technically true. What he didn't mention was that if the government has to pay claims on thousands or millions of accounts, the inflation rate will skyrocket and your $100,000 will buy you a used car if you act fast. Why? Because your deposited money didn't disappear. It's just no longer in the hands of the people you entrusted to keep it safe for you and there's no legal way to get it back. The recipients were suppliers, employees, brokers, other financial institutions, etc. The bank just spent and invested more money that it had, lots more. Reimbursing depositers from the federal treasury will balloon the money supply. Supply goes up, value goes down.

So here's the essence of the proposed solution: You go to work and make money. The government takes a chunk of your money for its own expenses and now will give a big chunk to the banking community. The banks need this money so they can loan it to you. After all, you're going to need it. Taxes, inflation and interest rates are all likely about to go way up. Of course you'll be paying interest on the money, so the banks get healthy and everybody's happy. Let's review. More of your money will be taken from you, given to somebody else, who will loan it to you for a fee. This is the system we're supposed to be upset about collapsing.

If the government were really primarily concerned with protecting the taxpayer and not the infrastructure that enables the ponzi scheme, they could simply give every man, woman and child in the country $2,000 in return for a national sales tax of say, 7% (24% if you throw in the elimination of all other taxes). In other words, instead of giving the money to someone else to loan to us. Just give us the money, cut out the middle man, we'll even pay it back with interest.

I heard Joe Kernan on CNBC empathizing with a poor former CEO who's net worth went from hundreds of millions to a mere 10 million. I have no qualm with being filthy rich. If you come by it honestly, more power to you. But when I lose money due to bad luck or poor judgment, nobody from the media or the government shows up to ask if they can help, and I don't expect them to. Believe it or not, one can scrape by on $10 million dollars in this country, maybe even a little less. Let the chips fall where they may. Learn what you can. Move on. If we have to endure a prolonged recession or even depression to preserve the principals of capitalism and individual accountability, let's do it. It'll be well worth the price.

The Goldman Standard

Wall Street was at least momentarily reassured today by Warren Buffet's $5 billion investment in Goldman Sachs. He also has warrants for the purchase of $5 billion more over the next 5 years.

Wall Street seldom gets it right on the knee jerk reaction. A closer look at the deal reveals a troubling precedent. Buffet got perpetual preferred stock yielding a whopping 10% return. Goldman can buy him out at some point, but must pay a 10% premium in order to do so. His warrants give him the right to purchase more stock at $115/share. That's about a 10% premium, even over today's price.

In effect, Goldman, and some of the most experienced financial brains on Wall Street, have accepted an enormous, long term financing deal at 10% interest. If this is the current market rate, that does not bode well for interest rates or inflation. Goldman is betting both are going much higher.

Paulson Determined to Overpay for Bailout

Treasury secretary Henry Paulson in explaining the bailout plan to the House Banking Committee seemed to suggest that he feels it's imperative for the government to overpay for the mortgaged backed paper that is weighing down financial institutions.

His reasoning is that the deal must be sweet enough to entice widespread participation in order to be successful. Warren Buffet voiced some disagreement with this sentiment on an interview with CNBC this morning. He suggested the government could actually make good money on this deal if it were to devise a mechanism to discover and pay actual market prices rather than "hold to maturity" prices. He said a good approach would be to buy a few of these securities and then turn around and sell them on the open market before making further purchases. That would give them a much better idea where fair market value might be for these things.

It seems to me, that in a reverse auction situation, less participation would actually work in favor of troubled banks. The fewer bidders, the better price they could demand. Besides, if a bank is healthy enough to turn down 60 cents on the dollar, why do they need a bail out? If they think they can do better in the open market, let them go to the open market.

The government's obligation is to the depositers they have committed to insure, not to the preservation of any particular corporate structure or entity. Liquidity will come back when the market decides it makes sense. I trust the market's judgment much more than any Washington committee.

Good decisions seldom come from an atmosphere of fear and panic. The fact that Bernenke and Paulson seem to be attempting to scare Congress into action indicates to me that doing nothing might, in the long run, be the better way to go.

Friday, September 19, 2008

Federal Government Bails Out Wall Street - What's Next?

It's going to be a historic day on Wall Street. The government of what used to be capitalisms home, now owns three of the biggest financial corporations in the world and has just announced their intention to buy the troubled mortgage backed securities from more banks. The SEC has also announced a ban on short selling for 799 publicly traded banks. All this on an options expiration Friday.

Of course stocks are going to rally, to put it mildly. Everything's great now, right? Well, unless you're an options trader, hedge fund manager or in anyway connected to the above. There will be blood on the streets in the options market today. Hedge funds will be devestated. Guess who owns a lot of hedge fund securities? You guessed it, the banks. Also, the folks who made their living selling these 799 securities short aren't going to retire. They're going to take a few days, do some homework and start shorting related securities that haven't been banned.

The joy will be short lived, and when things start going south next week, what are the feds going to do? Ban all short selling? Ban selling entirely? We are in a liquidity crisis and the government just made the market less liquid. It may take a little while for the market to realize this, but when it does, it's going to be ugly.

Monday, September 15, 2008

The Government is playing Russian Roulette with the Market

Bear Sterns was too big to fail. Lehman, evidently wasn't. Taxpayers are now on the hook for Fannie and Freddie's loans. They may soon be on the hook for AIG's insurance claims. NY State has relaxed regulations to allow AIG to borrow from its subsidiaries to cover operational expenses. If CEO's made these kinds of decisions on their own, they be put under the jail.

The elephant in the room is total lack of consistency. It smells like panic. While thousands of small businesses around the country are making it day to day, the billionaires are changing the rules of the game as it suits them.

Maybe they'll dodge some bullets and the market will recover. Everything will be hunky dorey. Maybe things get worse. Companies fail. Claims go unpaid. Lawsuits get filed, perhaps even criminal cases against government officials who broke their own rules because they didn't know what else to do.

It may have been better to let the big boys fail and get on with the business of cleaning up the mess. Now the government has set and broken so many precedents, it's not clear to anyone anymore exactly how our financial system works.

I've got nothing against multi-billionaires. I'd like to be one myself someday. But why is it okay for Main Street to roll with the punches, but not for Wall Street? This is not about class warfare, it's about fairness and consistency and the equal application of the law. I'm not suggesting Main Street get bailed out. I'm suggesting Wall Street live with the consequences of their actions and judgments just like the rest of us.

Alleged capitalists do the cause no favors when they throw out the rule book for a select few. This behavior, this fear of failure only bolsters the case of the collectivists. The government's function is to enable free and fair trade, not to micro-manage it. So our 401K's take a beating. The market crashes. The dollar plummets. As long as it's transparent and just, we'll get over it. Americans are very resilient. Stability is over-rated. North Korea is stable.