Wednesday, July 9, 2008

The fan starts getting hit...

While Central Banks around the world worry about inflation.

We have deflation in our biggest asset, housing.
We have deflation in stocks.
We have deflation in 401K plans.
We have deflation in wages.
We have deflation in automobiles, gas guzzlers and SUV's.

With such deflation in asset prices, does anybody really believe that commodity prices aren't going down? Let's just look at the gang that can't shoot straight. Last month, Bernanke told us the economy was out of the woods. Yeh it's out of the woods all right. Out of the woods and going into a forest fire.

And today Janet Yellen warns us about a "wage price spiral" and Trichet of the ECB tells employers not to increase wages. Ask someone on Wall Street about jobs. They'll tell you about "career" deflation.

How can you have wage inflation with career deflation? Unlike the government, in the real world, incompetence doesn't get promoted.

We've had, according to government statistics, six months of declining unemployment. Do you think the worker has any bargaining power?

But consider what the market is looking at today.

So far, in the US, we've had $162 billion of writedowns, against $138 billion of capital raised. In Europe, they've had writedowns of $198 billion, versus $122 billion raised, and in the Far East, they've had writedowns of $20 billion versus $6 billion raised.

But now, the banks, are visiting the pawn shop. Merrill Lynch is selling their stake in Bloomberg back to Bloomberg, just like the consumer is selling things on eBay and Craigslist because they've already visited the pawnshop and sold the easy items. The banks can't sell their loans, because no hedge fund or private equity (the pawn shops) will buy them. So they dribble them out to less sophisticated retail and institutional clients, the "eBay and Craigslist" clearinghouse that is available to them. Both are hoping things will turn in a hurry; unfortunately it isn't.

If we think how much capital Fannie and Freddie Mac need, who we are told are "well capitalized" (where have we heard that before? Oh that's right. From every bank and mortgage insurer that is now on the ropes) then these figures look like we are only in the 3rd or 4th inning, and not the top of the ninth, unless we are in a twilight doubleheader.

Tonight the WSJ has an article on Fannie and Freddie:

The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familiar with the matter, as the stock prices of both companies continue to fall sharply.

For month's now? This administration just reacts. Why didn't they do this months ago when Cramer was screaming at them to do it?

These discussions have been going on for months and are part of normal contingency planning that the Treasury Department and other financial regulators regularly undertake. The talks have become more serious recently given the financial woes of the shareholder-owned, government-chartered companies, whose stability is vital to the functioning of the nation's housing market, these people say.

The government doesn't expect the entities to fail and no rescue plan is imminent, these people said. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily. Treasury officials are nonetheless talking about what the government could -- or should -- do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating.

They have 45 basis points of capital versus their assets. How much do you think they need? But they'll raise money "Lehman style" in drips and drabs!

"They can't be allowed to fail," said Peter Wallison, a former Treasury Department general counsel. "The losses would extend through so much of our economy, and so much of the world economy. There is simply no way that the United States government can let it happen."

Then why doesn't Paulson or Bush or Bernanke coming out and say they are "explicitly" back stopped by the US Government?

In addition, since the crisis struck last August, officials at Treasury, the Fed and other agencies have been discussing contingency plans known as "break-the-glass" ideas, referring to what takes place right before someone pulls a fire alarm. The plans were meant to prepare policy makers for the unlikely event of a broad financial crisis.

This is the definition of unlikely? We have one already. The WSJ is talking about the possible failure of Fannie and Freddie Mac!

There is at least one precedent for the government making concrete a financial obligation that was previously only assumed. During the crisis caused by the failure of savings and loan institutions in the 1980s, Congress passed the Competitive Equality Banking Act of 1987, making the government legally liable for obligations of the Federal Deposit Insurance Corp. Congress had previously adopted a joint resolution that the government would support the deposit insurance fund if necessary, but the pledge wasn't binding.

The FDIC has $52 billion of capital, on $4 trillion of assets (122 basis points) but no one cares since it is back stopped by the Feds.

Back stop Fannie and Freddie and no one will care about their capital either.

But what are the odds of this administration doing this in a timely manner? Instead, we get deflation in stocks.

And inflation in incompetence at the highest levels of this administration!

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