Tuesday, September 30, 2008

Stocks catch a bid

Eric Mangini, the Jets coach, summing up the Jets 56-35 victory over the Cards said "There were a lot of points scored in a short amount of time," said Mangini. "I like them when they're ours and don't like them when they're theirs."

Yesterday the market fell apart. It reminded me of the Jet game Sunday, when Favre, thought the Cards jumped offsides, and threw an interception, thinking it was a free play. I had to turn the TV off, only to turn it back on a few minutes later.

It was a great game, and Favre had a career high 6 TD's. That's like this market. You have to stay in the game. And just when you are ready to give up, it becomes fun again!

Now we hear that the FDIC is going to expand insurance. What took them so long? Did they see what Ireland did?

DUBLIN (Dow Jones)--The Irish government Tuesday announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.

"It has done so following advice from the governor of the central bank and the financial regulator about the impact of the recent international market turmoil on the Irish banking system," the government said in a statement...

The guarantee runs from midnight on Sept. 29, 2008, and expires at midnight on Sept. 28, 2010, and follows the decision last week by the government to guarantee deposits in Irish banks up to EUR100,000.

The government said it aims "to remove any uncertainty" and "maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy."

With the U.S. Congress rejecting the planned $700 billion bailout of financial institutions there late Monday, Davy Research analyst Scott Rankin said: "The Irish government has taken out its bazooka."

Now that's a bazooka!

There was also rumblings of an emergency ECB cut in rates, and the market's new savior-the abandonment of mark-to-market accounting! Oh that will really help! Make the entire banking system Level 3! Do these political hacks think they can fool Wall Street? Now we'll have banks marking up their assets like the hedge funds. Anyone wonder why we had such liquidation pressure?

But they'll dress up the mark-to-model so it won't look like the mark-iup that it is, so this rally should have some legs. The TARP can work in a rainstorm but not in a hurricane.

But it looks like we already had that!

Tender rates skyrocket in Europe

LONDON (Dow Jones)--European banks abruptly hiked the rate of interest they are willing to pay for central bank overnight funds Tuesday as liquidity tensions deepened following the collapse of a bailout plan for the U.S. banking sector.

The single rate paid in the European Central Bank's regular one-day dollar tender hit 11.00% Tuesday, almost quadruple Monday's 3.00%. The weighted average accepted rate in the Bank of England's overnight dollar repurchase operation more than doubled to 5.211%, from 2.408% Monday.

The ECB also said it would offer a further $50 billion in an overnight dollar tender later Tuesday.
The surge in rates in both auctions comes despite the announcement by the U.S. Federal Reserve, ECB, Bank of England, and seven other central banks Monday that they were dramatically increasing the amount of dollar funding available to ease strains in short-term funding markets.

It follows the rejection of a $700 billion bailout plan for the banking system by the U.S. Congress, and indicates banks are willing to offer much higher rates in order to have the certainty of being able to secure funds.

The dollar overnight London interbank offered rate fixed at 6.875% Tuesday, up very sharply from 2.56875% Monday.

The ECB said it received 57 bids totaling $77.339 billion for its one-day dollar tender, in which it allocated $30 billion.

The BOE said demand for its overnight dollar auction of up to $10 billion picked up slightly to $13.65 billion from $13.06 billion Monday. The bank allotted the total amount on offer.

By Natasha Brereton and Emese Bartha, Dow Jones Newswires; +44 20 7842 9254

Monday, September 29, 2008

Where's the Plunge Protection Team's money?

Remember the $50 billion Exchange Stabilization Fund? The Presidents Working Group on Financial Markets?

A provision in the bailout bill pending in Congress (Section 131) forbids the Treasury secretary from ever again tapping the $50-billion Exchange Stabilization Fund “for the establishment of any future guaranty programs for the United States money market mutual fund industry.”

With the consent of the President, required by law, Treasury Secretary Henry Paulson tapped the fund to offer insurance to money-market fund investors to stop a run on the funds, which hold well over $3 trillion and are now critical to short-term financial of American business. The Fund, created in 1934, is essentially a war chest for the Treasury to use to defend the U.S. dollar on world currency markets.

The bill also says that a presumably small slice of the $700 billion that the Treasury is authorized to spend on the bailout shall go to reimburse the Exchange Stabilization Fund for anything it ends up spending on money-market funds. The insurance applies only to money in money-market mutual funds as of Sept. 19

Remember Paulson's recomendations from the PPT in March?

1)Stronger transparency and disclosure.
2)Stronger risk awareness on the part of regulators and all market participants.
3)Stronger risk management by all participants.
4)Stronger capital management. Well-capitalized institutions are better prepared to deal with challenges, foster economic growth, and enhance market confidence.
5)Stronger regulatory policies.
6)Stronger market infrastructure. http://www.mortgagenewsdaily.com/3132008_Presidents_Working_Group.asp

Unless you're asking for $700 billion!

But don't cut off your nose to spite your face!

That was the message of the markets to Congress today!

1 out of 3: We are in a depression

As people on Wall Street and Main Street hold their breath to see if a federal bailout of the nation's financial institutions will work, Americans are starting to speak — not whisper — the word "depression."

In a sign that anxiety is growing, 33% of 1,011 adults surveyed over the weekend by USA TODAY and Gallup said the economy already is in a depression (though by economists' measures it is not). Just 12% said that 10 months ago.

Economists don't even say we are in a recession!

The gold standard-The administration's worst fear

The Daily Reckoning had an interesting article:

The reason is easy to see if you read the article backwards, in that there was a question about central bank buying "last week, when gold saw a record single-day gain", especially Chinese central bank buying of gold, which is already the ninth-largest holder of gold in the world but which holds only 1% of its foreign-exchange reserves in gold, although it actually said it would like to hold more. And Mark O'Byrne at Gold & Silver Investments says that he would "be surprised if the Chinese hadn't been nibbling at the gold market,", which leads to the news that Asian banks "are seen as keen buyers" of gold, which leads to the news that "other central banks are now far more likely to be holders of gold", which leads us back to the second paragraph that "Turbulence in the financial markets and recent U.S. dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework", which leads to the opening paragraph of "Central banks may be starting to turn one of the few assets in which they can invest; gold."

In short, those crafty Chinese, a fifth of the world's population, may be getting ready to issue a gold-standard money, which will instantly make their currency the strongest in the world, which is just what a country needs if it wants to import a lot of things cheaply so as to respond to demand for internal economic growth without stoking inflation in prices!

And, fortunately for those of us who both love to have large profits handed to us and who also own gold, a Chinese gold-standard may soon make a dream come true as gold would skyrocket when priced in suddenly depreciated dollars.

And from Dow Jones:

Austria Ctrl Bk Official: Some Central Banks May Buy Gold

KYOTO, Japan (Dow Jones)--Central banks that currently have little or no gold in their reserves could be considering buying gold to mitigate foreign exchange movements, Austria National Bank's manager of foreign reserves said Monday.

"I can well imagine that some central banks that don't have gold reserves are thinking about buying gold. But it's not about raising the percentage of gold in proportion to their foreign reserves to similar levels like Western banks," Peter Zoellner told Dow Jones Newswires on the sidelines of the London Bullion Market Association conference in Kyoto, Japan.

What people used to consider far fetched, is now getting discussion.

Don't want $700 billion? Take off 777 points.

And Congress fiddles while Wall Street burns.


Wachovia shakes market

Wachovia looks like it is changing hands. Credit default swaps are soaring, and it looks like they have a run on the bank.

The NY Times said Wells Fargo and Citigroup were fighting over the carcass and wanted to bid $2, and then supposedly Wells Fargo walked away when they couldn't get the Jamie Dimon deal.
The problem with Wachovia is their paper. It's owned everywhere, and their CD's are jammed in every money market fund in the country.

And you can't continue to do these sweetheart deals where the depositor is saved and shareholders and bondholders get wiped out, and all the benefits accrue to the acquiring bank!

These sweetheart deals cause runs!

Bob Steel, President and CEO of Wachovia put out this letter on their website:

September 26, 2008

Dear Wachovia Clients, Shareholders and Friends,

Financial markets and our industry are undergoing unprecedented change. We are watching these events carefully and must plan and remain flexible. Therefore, we are strategically protecting and managing liquidity and capital in this challenging environment.

Wachovia has many advantages: excellent service across our businesses, an exceptional retail franchise renowned for customer satisfaction, one of the largest brokerage platforms covering the affluent markets and expertise to meet the specialized needs of our many corporate customers.

Our core franchises are extremely valuable and continue to operate well relative to our competition.

We remain optimistic that our leadership in Washington will provide comfort to the markets with a plan to stabilize the housing and short-term funding markets.

For years Wachovia has been a forward-thinking force to help fuel business growth, create and manage personal wealth and build strong communities. We intend to remain focused, continue serving customers like no other competitor and utilize our many skills and talents in order to protect the value of our franchise.

Thank you for your trust in Wachovia.


Robert K. Steel
President and CEO

Anyone think this boilerplate letter will stop the run?

Buffett buys batteries

Buffett takes 10% of Hong Kong battery maker for electric cars.

Sunday, September 28, 2008

No "clawback" for bonuses?

Anyone have an idea how much Wall Street gave out in bonuses the last four years? $137 billion.

Anyone have an idea how much of that will be given back?

At least the second question is easy!

The Fed's "quid pro quo"

Pass the bail-out bill, and the Fed cuts intermeeting.

Be prepared for that!

Section 132 &133 of bailout bill

SEC can suspend mark-to-market accounting and they will study it and report on it in ninety days.

WaMu's bailout math

JP Morgan paid $1.9 billion to the FDIC for WaMu. It was an exceedingly sweetheart deal. WaMu had $296 billion of assets, and $265 billion of liabilities. So mark the assets down by $31 billion. That's what JP Morgan did; a figure that conveniently wipes out the debt holders, and allows JPM Morgan to contribute the $1.9 billion to the FDIC fund for the purchase of WaMu.

In 2010, JPM now assumes they will now earn over $5 a share, with .60 cents coming from this acquisition, and that WaMu will be $12 billion additive to capital by 2011. Over 600% on the acquisition.

Not a bad price. Mark down the loans by $30 billion one hand, and then declare you will make $12 billion on the deal the next three years! Taxpayers should make sure these loans don't get sold to the government. WaMu shareholders and debt holders alreay paid the bill!

Remember what S&P had to say about WaMu on September 16?

S&P acknowledged that WaMu's deposit base appears to be stable and the company has enough liquidity to meet all fixed obligations throughout 2010. "The bank is operating with adequate capital positions from a regulatory perspective and has demonstrated funding resilience as the deposit franchise has remained stable," the rating agency said.

And what CreditSights had to say afterwards?

``It seems that WaMu's major debt holders have been stranded by regulatory intervention,'' David Hendler, an analyst at bond research firm CreditSights in New York wrote in a report today. ``The deal structure seems to be unprecedented in that it excludes bondholders at the holdco and bank levels from the major assets and liabilities of the operating bank.''

WaMu has $28.4 billion in outstanding bonds, with Los Angeles-based Capital Research and Management Co. its largest noteholder, according to data compiled by Bloomberg.

Bondholders' only recourse may be the capital remaining at the holding company, Washington Mutual Inc., which Hendler estimated at $2.8 billion. It's unclear whether bondholders at the holding company or at the bank subsidiary level will have first claim on the cash because regulators may force the money to move to support the bank subsidiary, he wrote.

Holding Company Investors

If the holding company keeps the cash, holders of $4.1 billion of Washington Mutual Inc. senior unsecured debt may see a recovery of more than 50 cents on the dollar and investors in $1.6 billion of subordinated debt may get back as much as 10 cents, according to CreditSights. In that scenario, bondholders at the bank level may get an ``extremely low recovery,'' the report said.

If the money is moved to the bank, holders of Washington Mutual Bank's $14.8 billion of senior unsecured debt may recover ``in the mid-to-high teens'' and the holders of $7.9 billion of subordinated debt may see a ``minimal recovery,'' Hendler wrote. Holding company bonds would have an ``extremely low recovery'' in this scenario, he said.

Washington Mutual Bank's $1 billion of 5.65 subordinated securities due in 2014 tumbled 24.75 cents to 0.125 cent at 10:10 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Worst Case

``The worst case developed for the major credit instrument holders,'' wrote Hendler, who didn't immediately return a phone call seeking comment.


Now why will the $700 billion bail-out work? Look at the fudge factor. The government can buy these marked down loans at above market prices, and in effect, give a cash infusion to the banking system.

They'll get the same action as Jamie Dimon!

Bailout agreement

The picture says it all.

Saturday, September 27, 2008

The Fed blesses BofA's marriage with Mother Merrill

Anyone see this nugget after the close Friday regarding Merrill Lynch and it's shares of Blackrock?

Item 5. Interest in Securities of the Issuer.
(a) As of September 25, 2008, the Reporting Persons beneficially owned, in the aggregate, 52,396,167 Shares and 12,604,918 shares of Preferred Stock. The beneficially owned Shares represent, in the aggregate, beneficial ownership of approximately 44.7% of the Common Stock outstanding. The Reporting Persons constitute a “group”, within the meaning of Section 13(d)(3) of the Exchange Act. Accordingly, each Reporting Person may be deemed to beneficially own any Shares that may be beneficially owned by each other Reporting Person.

On September 25, 2008, ML&Co, MLGSI and the Issuer entered into a consent and waiver (the “Consent”) with respect to the Amended and Restated Stockholder Agreement (the “Stockholder Agreement”), dated as of July 16, 2008, between ML&Co. and BlackRock. The Consent permits ML&Co. and any of its relevant affiliates to take advantage of the Federal Reserve Bank of New York’s (the “Federal Reserve”) recent expansion of eligible collateral under the Primary Dealer Credit Facility by, among other things, entering into one or more repurchase agreements (each, a “Repurchase Agreement”) with the Federal Reserve for all or a part of the Shares owned by MLGSI. The Consent and the Stockholder Agreement are attached hereto as exhibits 7.04 and 7.05 respectively, and are incorporated in their entirety into this Item 6.

The Consent expires upon, and any Repurchase Agreement will mature according to its terms immediately prior to, the consummation of ML&Co’s proposed merger with Bank of America Corporation. If ML&Co and MLGSI do not meet their obligations under a Repurchase Agreement, neither the Federal Reserve nor any subsequent owner of the Shares will become subject to any of the terms or provisions of the Stockholder Agreement. In that event, ML&Co. will remain bound by all applicable terms of the Stockholder Agreement.

Merrill Lynch, now can take their Blackrock paper to the Fed window (PDCF) the Primary Dealer credit Facility and loan it to the Fed for cash, and hold unto the cash until their merger with Bank of America goes through!

BAC closed at 37.50. (Disregard the scam late print that the specialist got.) The ratio of the merger is .86, meaning Mother Merrill, and 27 and change is now worth $32 of BAC which is heading higher, and now this merger has been officially blessed and kissed by the financial pope/rabbi, Mr. Ben Bernanke.

Blackrock closed at 210, and 52 million shares means that Mother Merrill has gotten a boatload of cash from the Fed. And it's $10 billion dollars.

The same amount Goldman Sachs raised Wednesday by investors and Buffett.

The same amount that JPM raised Friday in a stock offering.

And it will probably be the same amount that Morgan Stanley raises next week!

$10 billion dollars, and you can't short the stocks.

Anyone think this number will go higher Monday? Especially when we get a resolution on the $700 billion bail-out?

If you are long Merrill you are now twice blessed!

And if you are short Morgan Stanley, you had better cover. Come hell or high water, $10 billion is coming their way!

The Government and Buffet bail out Goldman Sachs?!?!

Say it ain't so Lloyd Blankfein!!

But is that accurate? Let's go over and view the details in this story!

What did AIG say about AIGFP in December?

AIGFP maintains the ability opportunistically to economically hedge specific securities in a portfolio and thereby further limit its exposure to loss and has hedged outstanding transactions in this manner on occasion. AIGFP has never had a payment obligation under these credit derivatives transactions where AIGFP is providing credit protection on the super senior risk. Furthermore... no transaction has experienced credit losses in an amount that has made the likelihood of AIGFP having to make a payment, in AIGFP’s view, to be greater than remote, even in severe recessionary market scenarios.

On February 28, AIG said this:

Included in both the full year and fourth quarter 2007 net income (loss) and adjusted net income (loss) were charges of approximately $11.47 billion pretax ($7.46 billion after tax) and $11.12 billion pretax ($7.23 billion after tax), respectively, for a net unrealized market valuation loss related to the AIG Financial Products Corp.(AIGFP) super senior credit default swap portfolio.

From no material exposure to $11 billion in two months.

Now when AIG was on the ropes, Goldman Sachs, on September 16th said it's exposure to AIG was "not material."

``Our exposure to AIG is not material,'' Lucas van Praag, a Goldman spokesman, said today in an interview. ``We have always managed our exposure to single names extremely conservatively. That was the case with Bear and Lehman.''

That statement was as accurate as AIG's December statement! In fact, Goldman Sach's exposure to AIG was $20 billion! Look at today's NY Times:

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

"Our exposure to AIG is not material?" Did they read AIG's playbook? Look at what I wrote about Goldman Sachs on September 13th.

Goldman, however has been able to offset these losses with Level 3 gains on derivatives. As of their latest quarterly report Goldman had economic exposure to these derivative contracts of $78.7 billion dollars after all netting and cash collateral has been subtracted out. So it's true counterparty exposure.

What is the ratings of Goldman's counterparties to these derivaties, in May, before the all holy hell which is now currently engulfing Wall Street?

AAA 11%
AA 33%
A 27%
BBB 12%
BB 15%
Unrated 2%


AIG then was a AA counterparty, and 33% of 78.7 billion is $25 billion. Goldman's exposure to AA credit AIG in swaps, according to the NY Times was $20 billion.

Now we know why these derivatives are in Level 3! And why AIG and Goldman were in bed together.

They have the same definition of material!

Friday, September 26, 2008

FDIC's Blair: We have many buyers for banks


Why is it, that everytime that a bank supposedly is going to be bought, it goes to zero? Are these really buyers, or are they people that really just want to look at the assets on the books of these banks ands see how bad they really are? Then go out and short all the debt and common that you can get your hands on!

Once any light is shined on the banks, they are toast.

So if you don't want burnt toast, don't advertise a sale!

Banks used to give a toaster when you made a deposit.

Now if you take a look at their assets, you don't need the toaster.

They are already burnt!

And that's deflation. The burning up of assets.

Last month, the Federal reserve was worried about inflation and Fisher from the Fed, for the first time in five meetings, finally acquiesced to not voting for a rate increase.

What planet are they on?

The same one with the posturing politicians!

Gold coin sales halted again

The rush by retail investors into gold on Thursday forced the US government to “temporarily” suspend the sales of the popular American Buffalo one-ounce bullion coin after depleting its inventories.

The shortage of gold coins is the latest sign of investors seeking a safe haven into bullion amid Wall Street woes. Gold prices this week surged above $900 an ounce, up about 20 per cent from its level before the collapse of Lehman Brothers.

Safe-haven buying spurred by a weakening dollar and rising inflation on the back of high commodity prices have also benefited gold sales, analyst said.

The US Mint said in a memorandum that “demand has exceeded supply” and, therefore, it was “temporarily suspending sales of these coins”. “We are working ­diligently to build up our inventory and hope to resume sales shortly,” it added.

Spot gold in New York on Thursday traded at $875 an ounce, down $5 on the day. Traders said bullion prices came under pressure from a strengthening in the dollar. Gold set a record of $1,030.80 an ounce in March.

The US Mint said it has sold 164,000 ounces of gold in American Buffalo one-ounce bullion coins since January, almost 54 per cent more than in the same period of last year. Demand for other gold coins from the US Mint is also very strong.

Last August, a shortage of American Eagles one-ounce bullion coins, another popular gold investment, due to “unprecedented demand” also forced the US Mint to suspend sales and later to place limits on the number it ships to dealers.

The US Mint has sold since last January about 419,500 ounces of bullion in the form of American Eagles coins, more than double the 198,500 ounces it sold during the whole 2007. In 2006, it sold 261,000 ounces.

The scarcity of gold coins comes as investors in bullion-backed exchange traded funds (ETFs) have amassed a record 1,054 tonnes of bullion, becoming the largest holders of gold after the reserves of the US, Germany, the International Monetary Fund, Italy, France and Switzerland.

Thursday, September 25, 2008

Presidential flops!

We had the largest mortgage players in the country, FRE and FNM fail. And they were quasi governmental agencies!

We had the largest insurance company in the world, AIG fail.

We had BSC and LEH fail.

We had the world's largest industrial company, GE, a AAA credit with a 5% dividend yield, pre-announce lower earnings and have to spend time to re-assure Wall Street on it's solvency.

We then had the world's largest thrift, Washington Mutual fail.

Now we have had the world's largest financial bail-out, a $700 billion deal orchestrated by Treasury and Bernanke fail.

And we have a Republican Presidential candidate, who professes not to know much about economics, thinking he can come to Washington to play economic Superman saying, "I'm an old navy pilot, and I know when a crisis calls for all hands on deck" so he won't have to debate with Obama tomorrow night!

He should just keep his hands on his wife's top, and we would all be better off!

Bernanke should call their bluff. Cut rates. We were at 2% in 2003 when we were infinitely better off than we are now.

And if he cuts rates, he'll take the spotlight off all these political pretenders!

JP Morgan takes over WaMu's deposits

And shareholders get wiped out, along with debt holders. $16.7 billion in deposits left WaMu since September 15, and the regulators ushered in the shot-gun marriage.

They were quick to say, however, that the FDIC fund would be untouched!

While the exact structure of the transaction wasn't immediately known, J.P. Morgan is expected to acquire Washington Mutual's deposits and branches, as well as other operations. The deal isn't expected to result in any hit to the Federal Deposit Insurance Corp.'s bank-insurance fund, according to a person familiar with the arrangement. But it's likely that another arm of government would have to pick up the tab. Some analysts have worried that a WaMu failure could cost more than $20 billion.

No hit to the FDIC? At least JPMorgan is used to the Fed's accounting! Yesterday, in Bernanke's testimony, he said that home equity loans were worth only pennies on the dollar. Thank goodness JP Morgan only has "high quality" HELOC's. At their latest quarter, they owned $95.1 billion in home equity loans. They charged off $2 billion worth of them, and 3.61% were over 30 days delinquent. Now last December, they had unused home equity lines of $74 billion; in June it was down to $66.7 billion, and the amount of home equity loans outstanding remained at $95 billion meaning even JP Morgan has been closing down unused HELOC's. However in Q2, JPM did $5 billion of new home equity loans. Without these $5 billion of new HELOC's their deliquency rate on HELOC's would of been 3.82%. It means that even JP Morgan's affluent customers are getting squeezed. Or it also means, that Chase mortgage, which was one of the last to quit offering HELOC's, was still underwriting suspect paper, or that the $35 billion of HELOC's in California, Florida, Ohio, Michigan and Arizona are causing significant problems.

Now JPM has a ton of Level 3 assets, courtesy of the merger with Bear Stearns. But if we exclude that $41 billion, JPM still moved $13 billion of mortgage assets into Level 3 the first six months of this year. But with JPM, none of this matters. The bank is too big and powerful for the shorts to attack.

That's why JPM is the Fed's bank. They have a great CEO, and they have the complete confidence and trust of the market. And they do the Fed's bidding.

How else would the market swallow the idea that the run on WaMu wouldn't affect the FDIC fund? (The FDIC "fund" isn't a fund. It's just an entry on the government's balance sheet. And who then, absorbs the $31 billion writedown? But the fund is untouched! More here:) http://www.securagroup.com/news/archives/articles/2008/AB080827.pdf)

The market buys it, because Jamie Dimon and his bank is too credible.

And now they have the deposits of WaMu!

The FT on Goldman Sachs

A must read-Treasury and Bernanke finally panicked when Goldman was on the ropes.

"A lot of people used to think that Goldman Sachs ran the US economy. Now we know it does.

On Tuesday morning, Hank Paulson, the US Treasury secretary and former chairman and chief executive of Goldman, testified to Congress about his plan to buy $700bn of mortgage securities. He wants to scoop up these assets as rapidly, and with as little interference, as possible in a manner yet to be fixed.

On Tuesday evening, Goldman declared that Warren Buffett, the legendary investor, was handing it $5bn of new capital in the form of preference shares and the bank would follow up with a $5bn equity sale. For investment banking rivals that have fallen by the wayside, or had to hunt overseas for funds, it showed who is top of the heap.

Mr Paulson’s stewardship of the crisis-hit economy – despite the role that investment banks have played in bringing it down – and Goldman’s bravura capital-raising are typical. Goldman partners are not only smarter than the average Wall Street bear, but often turn up in “public service”, running finance ministries and central banks.

They have been very adept at first making money for themselves and then trading the financier’s life for that of the power broker. Even in a Wall Street-induced crisis, it feels safer to have Mr Paulson at the US Treasury than Paul O’Neill, or John Snow, his Main Street predecessors. His bald pate and manner are scary but he is no ingenue.

This Wall Street crash, however, has made the latent conflict of interest between Goldman’s public and private faces uncomfortably real. Mr Paulson insists that, in his current job, he cares only about “the American taxpayer”, yet Goldman has been one of the prime beneficiaries of recent interventions by the Treasury and the Federal Reserve. Even if you accept, as I do, that Mr Paulson is a man of principle who tries his best to put his country first, this is troubling.

It places him in a more awkward spot than Robert Rubin or Steve Friedman, who ran Goldman and went on to become Treasury secretary and director of the White House Economic Council respectively; or Jon Corzine, the former Goldman head who is New Jersey governor, or Mario Draghi, a former Goldman partner who runs the Bank of Italy.

It might not be so awkward if Goldman had suffered just a little more from the credit crisis. But it has instead emerged, along with Morgan Stanley, in the last pair of large investment banks standing. The Securities and Exchange Commission has protected them and other institutions from short-selling and the Fed has allowed them to become fully fledged banks.

Wall Street is widely reviled at the moment, but even Wall Street is bitter about Goldman. Former employees of Lehman Brothers, which was left to fail by the Fed, complain that Mr Paulson and Ben Bernanke, the chairman of the Fed, saved their $700bn (€474bn, £377bn) shot until last week. They pulled out the big gun when it looked as though Goldman and Morgan Stanley were in trouble.

Now, to compound matters, Goldman could make a bundle if Mr Paulson’s $700bn fund clears Congress. Unlike rivals such as Lehman and Bear Stearns, Goldman marked down its exposures to subprime mortgages and real estate so aggressively that it has only $28bn of illiquid assets, of which a mere $1.7bn related to subprime mortgages, on a $1,000bn balance sheet.

It would be a bit rich for Goldman to turn round and make a profit by selling this stuff at a higher price to its old boss. But it need not be quite so blatant: even if Mr Paulson’s fund buys comparable assets, Goldman will be able to mark up its own book. Furthermore, it is already thinking of using Mr Buffett’s largesse to buy more distressed securities.

Goldman can hardly be blamed, of course, for navigating the Wall Street crisis better than others. It did not expose itself so disastrously to one highly leveraged play on the US mortgage market. It hedged against the credit turmoil and cut its losses swiftly rather than crossing its fingers that the market would turn.

Yet Goldman got a helping hand from the authorities and stands to get another one while Lehman was – rightly, in my view – allowed to fail and Bear Stearns’ shareholders were nearly wiped out. Would the Treasury and the Fed ever have allowed Goldman to follow and its partners to lose their wealth? I doubt it.

The fact is that Goldman, having started out as a humble commercial paper house in 1869, has worked its way to the heart of the financial and political establishment. It has become the modern-day General Motors by convincing politicians and regulators that what is good for Goldman Sachs is good for the US economy.

It does not hurt that so many Goldman executives become public officials. They no doubt go to the capital with the best of intentions, but they bring with them Goldman’s view of the world. Bear Stearns was “too inter-connected” with markets to be allowed to fail, but Goldman has embedded itself far more deeply in Wall Street and Washington.

Most of the time, this intermingling is not pernicious. Goldman partners tend to be clever, hard-working people. I also share Goldman’s views on the benefit of free markets and globalisation, and the belief that wealthy institutions and individuals should use their clout and money both for philanthropy and to improve standards of government.

But, at the moment, Wall Street is embroiled in a crisis of liquidity and credibility. Mr Paulson is due to step down by January as Goldman Sachs’ latest Treasury secretary. The next president should recruit his successor from elsewhere.

RIMM screws shareholders

Remember this interview on September 11?

What the puck? But then again, didn't he back out of buying the Pittsburg Penguins and Nashville Predators?

Tax rate knocked .05 off earnings, so there is a sliver of hope at the afterhours price of 77.

The Fed's auctions

Take a look. They are a mess.

For release at 10:00 a.m. EDT

On September 8, 2008, the Federal Reserve conducted an auction of $25 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.670 percent

Total propositions submitted: $31.638 billion
Total propositions accepted: $25.000
Bid/cover ratio: 1.27

Number of bidders: 38

For release at 10:00 a.m. EDT

On September 9, 2008, the Federal Reserve conducted an auction of $25 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.530 percent

Total propositions submitted: $46.237 billion
Total propositions accepted: $25.000
Bid/cover ratio: 1.85

Number of bidders: 53

For release at 10:00 a.m. EDT

On September 22, 2008, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 3.750 percent

Total propositions submitted: $133.562 billion
Total propositions accepted: $75.000 billion
Bid/cover ratio: 1.78

Number of bidders: 85

Anyone wondering why banks won't loan to each other? Why the TED spread is blowing out? Why banks lie on LIBOR or why it doesn't come down? In the first TAF; bids exceeded money by $6 billion; the 2nd by $21 billion, and the most recent, just 10 days later by $58 billion!

Show me the money! The banks are as tight as Joe Sixpack! BofA won't even loan to McDonald franchises anymore. You need a 700 FICO score to get a car.

Don't think this bail-out bill won't be passed with whatever restrictions the Democrats need.

Meanwhile, McCain, trots back to Washington, and says he can't debate Obama because he needs to work on the bail-out bill.

Whatever happened to multi-tasking? Clinton wasn't happy unless he was doing two things at once. Didn't he make phone calls while .....?

So the bail-out bill gets passed Friday. And we get the relief rally again!

CFTC probing silver market manipulation

With silver prices falling this past summer, silver bugs world-wide set out to prove that their metal was in short supply and market manipulation was at work. They bombarded federal regulators with hundreds of emails crying foul play and demanded answers.

Though such pleas proved futile in the past, this time the rousing chorus grabbed regulators' attention. On Wednesday, the Commodity Futures Trading Commission confirmed that there's an investigation into the silver market....

Silver investors have argued that a handful of U.S. banks have been controlling a large portion of silver's short positions -- or bets that prices will decline -- on Comex division of the New York Mercantile Exchange. Official data from the CFTC showed that two U.S. banks had increased short positions in the silver futures market between July and August by 450% and controlled 25% of the total open interest.

"The proof that this selloff was criminal lies in public data," wrote Theodore Butler of Cape Elizabeth, Maine, in August in a silver newsletter. "The concentrated sale of such quantities in such a short time" caused silver's fall, wrote Mr. Butler, who for many years has been vocal about purported silver-market manipulation. In September he reiterated to readers that they should email the CFTC.

Here's the story on the manipulation.

Wednesday, September 24, 2008

Who benefits most from the "urgent" bail-out plan?

Sept. 22 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.

``Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment,'' Jeffrey Rosenberg, Bank of America's head of credit strategy research, wrote in a report dated yesterday, without identifying particular banks.

What's the difference between this "urgency" and the "urgency" to invade Iraq? It's just who is pumping the idea. Bernanke had this to say yesterday:

Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions.

Secretary Paulson said this:

"We want this to be clean, and we want it to be quick, and it's urgent that we get this done."

Is everyone miming Foreigner?

Remember Bush's "urgency" speech on October 7, 2002 about Iraq?

Tonight I want to take a few minutes to discuss a grave threat to peace, and America's determination to lead the world in confronting that threat. The threat comes from Iraq...

While there are many dangers in the world, the threat from Iraq stands alone -- because it gathers the most serious dangers of our age in one place.

how urgent this danger is to America and the world..

And that is the source of our urgent concern about Saddam Hussein's links to international terrorist groups....The risk is simply too great

If the Iraqi regime is able to produce, buy, or steal an amount of highly enriched uranium a little larger than a single softball, it could have a nuclear weapon in less than a year. America must not ignore the threat gathering against us..

We have an urgent duty to prevent the worst from occurring

Some have argued we should wait -- and that's an option. In my view, it's the riskiest of all options, because the longer we wait, the stronger and bolder Saddam Hussein will become.


It looks like Foreigner has moved from the White House to Treasury!

You say its urgent
Make it fast, make it urgent
Do it quick, do it urgent
Gotta rush, make it urgent
Want it quick
Urgent, urgent, emergency
Urgent, urgent, emergency
Urgent, urgent, emergency
Urgent, urgent, emergency
So urgent, emergency
Emer... emer... emer...
Its urgent

Where's the line about "We refuse to live in fear?" Oh that's right. That happens after we pass the bill!

I'm not saying we shouldn't do a bail-out. But all this pumping, and urgency being floated is just getting too much!

And if this is so "urgent" why can't Congress do some work on their recess?

Pickens' funds slammed

Lately, T. Boone Pickens would get better marks as a policy advocate and author than an energy investor.

The 80-year-old Texas oil magnate has bankrolled a massive public campaign for improved U.S. energy independence, and his new book, "The First Billion is the Hardest," is a best seller. But the downturn in energy has blindsided the industry veteran, leaving one of his hedge funds that focuses on energy stocks down almost 30% through August. A smaller commodity-focused fund is down 84%...

All in, the funds have lost around $1 billion this year, a figure that includes $270 million of personal losses. "It's my toughest run in 10 years," said Mr. Pickens, a former geologist who earned billions by building an oil company and investing in energy. "We missed the turn in the market, there's nothing fun about it."

Until lately, money had gushed from Mr. Pickens's trading desk as energy prices climbed. His energy-stock fund, which started the year at $2 billion, has returned a compounded annual return of 37% over seven years, according to an investor. The commodity fund, which started the year at about $600 million, has had similar strong performance. That fund relies heavily on borrowed money, resulting in the deeper losses

You can read more about Pickens here.

I said that on oil prices, "A good scam, always suckers in a believable billionaire. Higher prices seems to do that. This time it was T. Boone Pickens and the "85 million barrels produced, and the 87 million barrels oil needed" mantra."

The deleveraging of markets is painful. But T. Boone will be back. But now we know why his wife Madeline sold 1,100,000 shares of Clean Energy Fuels the last two weeks.

Just sobering news.

Tuesday, September 23, 2008

The FRE and FNM pop

FRE and FNM, left for dead, popped nicely today, up 55% and 65% to 1.31. There was a couple of items that probably affected their trading. First we had the short selling restrictions. Secondly, institutions own over 111% of the outstanding shares in both of these numbers, indicating a significant naked short position in the shares. Considering that these stocks were favorites of the retail investors, if you add these shareholders into the mix than it's possible that a very significant naked short position clearly exist. Thus you could have significant upward demand pressure from the buy-ins from those shorting "fake" shares.

The $700 billion housing bail-out will affect the prices of homes, and the problems at FRE and FNM exist because of declining home prices. This bill will mitigate some of those problems.

You also had other speculation helping these stocks. Regional banks are asking for hand-outs from the Fed because of the decimated value of the preferred shares. If they get help, will other shareholders? And at these prices, you have a warrant on the upside value of the business, with the possibility of some good news.

You also had speculation on some websites that the financial position of FNM was superior to that of FRE, and that they shouldn't have been forced into this government bail-out.

"A little birdy at Fannie Mae told me the other day of some anger issues there. Apparently, when the federal government finished the audit of both companies’ financials, Fannie Mae was showing to be adequately capitalized while it was Freddie Mac that seemed to be in the deepest debt."

Despite what Wall Street seers will tell you; these stocks do not trade on the penciled value that some quant determines. The public only knows that there is a housing bail-out, and FNM and FRE are the bets that they will take to play it. After all, the government, doesn't yet have any shares. They just have an unexercised warrant.

So you get plenty of action, without much cost to play.

So they'll play them. And they'll probably go higher than what most people think that they should.

After all, wasn't AIG at $1.25 last week?

The Buffett bottom

Goldman Sachs is up nicely in the after-hours on news Buffett is putting in $5 billion, and getting warrants to buy Goldman at $115. The stock ramping shows that the market trusts Buffett's judgement.

Earlier today, Buffett said, in regard to the $700 billion Treasury plan "that it is exactly what I would do."

So tomorrow, the Goldman investment, and his endorsement of the bail-out will make the news.

Next, we'll have a Becky Quick interview with Warren on CNBC.

With no shorting in the financials, and news of a $700 million raise by Capital One, a $5 billion investment in Goldman Sachs by Buffett and a concurrent $2.5 billion stock offering, you have to like this market at these levels.

It looks like we got the retest.

Time to get out the rose colored glasses again.

Buffett to invest $5 billion in Goldman

Wow! What a squeeze tomorrow!

More on credit default swaps

A house insured for more than its value is always considered a fire risk. But home insurance is regulated and arson is a criminal offence. That keeps most people honest, most of the time. The same cannot be said of the credit default swap industry. The private, over-the-counter market allowing two parties to bet on the likelihood of a company defaulting on its debt had, by the end of 2007, grown to at least $62,000bn in notional amounts insured – more than all the credit outstanding worldwide. Contracts, however, are registered nowhere but in the books of the partners. Nobody really knows the real volume of trading, the method(s) of prices discovery or, in President George W. Bush’s phrase, the “interlinks” of risk.

CDS, of course, cannot be blamed for the excessive leverage in the system, or for the lack of visibility into the quality of credits bundled up into complex structured products. But the pressure to hedge has led the most liquid contracts to overshoot, in effect pricing in absurd default risks and recovery rates. These same prices are then used as supposedly objective indicators to value the securities the CDS contracts were designed to hedge – hence the spiral of over-hedging and overstated marked-to-market losses. David Paterson, governor of New York, seems convinced that bringing parts of the sector under the control of insurance supervisors will make things better. He is wrong. They are not up to the task. These were the same people that allowed AIG, the largest insurer in the US, to dice with death with CDS. The priority, rather, should be to move trades on to already regulated exchanges. That would mean buyers and sellers of protection were matched more efficiently and transparently. A central clearing house would reduce counterparty risk and enforce bigger margin requirements. This would also price out some of the chancers.

Standardising decades-long bespoke contracts would not be easy. But the great deleveraging and asset price correction is already painful enough. That this vast, opaque market underpins everything is not helping.

Bernanke on AIG

In the case of AIG, the Federal Reserve, with the support of the Treasury, provided an emergency credit line to facilitate an orderly resolution. The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG's obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy. To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm's owners, managers, and creditors. The chief executive officer has been replaced. The collateral for the loan is the company itself, together with its subsidiaries.1 (Insurance policyholders and holders of AIG investment products are, however, fully protected.) Interest will accrue on the outstanding balance of the loan at a rate of three-month Libor plus 850 basis points, implying a current interest rate over 11 percent. In addition, the U.S. government will receive equity participation rights corresponding to a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders, among other things.

Now that Bernanke has touted the AIG plan, does that mean it is in jeopardy? According to the NY Times:

Major shareholders of American International Group were scrambling on Monday to see if a better deal was possible than the anticipated restructuring of A.I.G. under the Federal Reserve, which they feared would all but wipe out the value of their stakes.

If the shareholders are unable to redirect the Fed’s restructuring plans, they have shown interest in buying some of A.I.G.’s operating subsidiaries. The subsidiaries are mostly insurance companies with solid books of business, as well as other profitable businesses like aircraft leasing.

The shareholders are being represented by Michael Kantor, the former commerce secretary and United States trade representative during the Clinton administration.

He issued a statement at the end of a meeting with the shareholders group on Monday, saying they represented “millions of people who invested their savings, pensions and retirement funds” in A.I.G.

Mr. Kantor said he believed that both the shareholders and the taxpayers would be better off if a new restructuring plan could be devised. The meeting ended without a clear plan of action, but Mr. Kantor said the discussions would continue.

Many hurdles, including money, stand in the way of the shareholders getting an increased role. The Fed stepped in with an $85 billion emergency loan for A.I.G. only after the company’s efforts to raise money from the private sector failed.

Nor is it clear yet whether the shareholders group has the legal authority to force a change of course from the board, which has already agreed to work with the Fed and has drawn down some of the loan.

The loan has a high interest rate, and all borrowings must be paid back in two years. That has raised fears that the Fed will rapidly dismantle the global insurance company to raise the money to make good on the loan.

A.I.G. also promised the Fed a warrant giving it the right to own 80 percent of the company. But the terms of that agreement have come into question after the company filed conflicting references with the Securities and Exchange Commission.

Bernanke's testimony

Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk...

The Federal Reserve and the Treasury attempted to identify private-sector approaches to avoid the imminent failures of AIG and Lehman Brothers, but none was forthcoming...

In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized--as evidenced, for example, by the high cost of insuring Lehman's debt in the market for credit default swaps--that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures....

Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

Whatever. Look at this post on April 3, by Mike Shedlock, regarding the Federal Reserve and Treasury. He had the script before it happened!

Thursday, April 03, 2008
Fed Uncertainity Principle

Most think the Fed follows market expectations. Count me in that group as well. However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn't the market to blame if the Fed is simply following market expectations?

This is a very interesting theoretical question. While it's true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.

For example: If market participants are expecting the Fed to cut on weakness and the Fed does, market participants gets into a psychology of expecting more cuts on more weakness. Here is another example: If market participants expect the Fed to cut rates when economic stress occurs, they will takes positions based on those expectations. These expectation cycles can be self reinforcing.

The Observer Affects The Observed

The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg's Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

To measure the position and velocity of any particle, you would first shine a light on it, then detect the reflection. On a macroscopic scale, the effect of photons on an object is insignificant. Unfortunately, on subatomic scales, the photons that hit the subatomic particle will cause it to move significantly, so although the position has been measured accurately, the velocity of the particle will have been altered. By learning the position, you have rendered any information you previously had on the velocity useless. In other words, the observer affects the observed.

The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.

The Fed cannot change the primary trend in interest rates. However, the Fed can exaggerate the trend, temporarily slow it, or hold the trend for an unreasonably long period of time after the market (without Fed distractions) would have acted. This leads to various distortions, primarily in the direction of the existing trend.

A good example of this is the 1% Fed Funds Rate in 2003-2004. It is highly doubtful the market on its own accord would have reduced interest rates to 1% or held them there for long if it did.

What happened in 2002-2004 was an observer/participant feedback loop that continued even after the recession had ended. The Fed held rates rates too low too long. This spawned the biggest housing bubble in history. The Greenspan Fed compounded the problem by endorsing derivatives and ARMs at the worst possible moment.

In a free market it would be highly unlikely to get a yield curve that is as steep as the one in 2003 or as steep as it was just weeks ago when short term treasuries traded down to .21%. In other words we would not be in this mess without the Fed, or if we were, the mess would at least be smaller than the one we are in.

Would the market on its own accord be setting rates at the current Fed Funds Rate of 2.25? It's possible, but there is no way to tell.

It's even possible the Fed is behind the curve by not acting fast enough. This is of course all guesswork. I don't know, you don't know, and the Fed does not know what to do. This is part of the "Fed Uncertainty Principle" and a key reason why the Fed should be abolished. After all, how can you give such power to a group of fools that have clearly proven they have no idea what they are doing?

The Fed has so distorted the economic picture by its very existence that it is fatally flawed logic to suggest the Fed is simply following the market therefore the market is to blame. There would not be a Fed in a free market, and by implication there would be no observer/participant feedback loop.

The Fed hints at "possibility" of recession. We are already in one.

Today's headline reads Bernanke Nods at Possibility of a Recession.

In his bleakest economic assessment to date, the Federal Reserve chairman, Ben S. Bernanke, said Wednesday that the American economy could contract in the first half of 2008, meeting the technical definition of a recession, and he encouraged Congress to help homeowners caught up in the mortgage crisis.

My Comment: Bernanke is passing the buck. If housing continues to collapse Bernanke will attempt to blame Congress rather that point the finger at the number one culprit in this mess: The Fed, for micromanaging interest rates and blowing bigger bubble after bigger bubble.

Mr. Bernanke, testifying before the Joint Economic Committee on Capitol Hill, said the economic situation had weakened since the Fed last reported at the end of January but that it could revive later in 2008 because of the $150 billion spending and tax cut package enacted this year.

“It now appears likely that real gross domestic product, or G.D.P., will not grow much, if at all, over the first half of 2008 and could even contract slightly,” he said. “We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies.”

My Comment: Bernanke clearly does not understand what is happening, or if he does, he is not telling the truth about it.

Uncertainty Principle Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

According to America's Research Group "Seventy percent of consumers who have received their 2007 income tax refund are using it to pay off credit cards and bills, the first time in 20 years that figure has topped 50 percent." See March Auto Roundup And Retail Sales Forecast for more on this topic.

Think you are going to get stimulus out of Bush's stimulus plan? Think again.

In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.

My Comment: Supposedly the Fed could not see the possibility of a derivatives chain reaction coming until after it started, even though this has been openly discussed in the news media for years.

Please see Who's Holding The Bag? and scroll down to the section "Warren Buffett vs. Greenspan" for a clear warning about derivatives.

By the end of his comments, it was also clear that he and the Fed were not entirely pleased with the “blueprint” for regulatory changes issued on Monday by the Treasury secretary, Henry M. Paulson Jr.

That proposal called for an overhaul and consolidation of the financial regulatory system. The Fed chief, in an almost classic case of damning with faint praise, said Mr. Paulson’s blueprint was “a very interesting and useful first step” for Congress to consider.

My Comment: The Fed is angling for still more power. This is a very dangerous situation.

Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Mr. Bernanke, making his first public comments about Bear Stearns, spent a considerable amount of time defending the Fed’s actions in arranging for Bear Stearns to be acquired by JPMorgan Chase at a fire-sale price, and with the help of a $30 billion loan from the Fed.

Providing new details about the deal, which was arranged behind closed doors during the weekend of March 15, Mr. Bernanke said he and his colleagues at the Fed did not know until March 13 that Bear Stearns faced bankruptcy and that they quickly realized a failure to act would create a global crisis.

My Comment: It's clear the Fed acted illegally. I will have more on this below.

“With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence,” he said. “The company’s failure could also have cast doubt on the financial positions of some of Bear Stearns’s thousands of counterparties and perhaps companies with similar businesses.”

My Comment: Clearly the Fed learned nothing from the collapse of Long Term Capital Management (LTCM) to have allowed banks like JPMorgan (JPM) take on trillions of dollars worth of derivative positions.

Uncertainty Principle Corollary Number Three: Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Caroline Baum Blasts Fed Decisions

Caroline Baum hit one out of the park with her assessment of how the Fed handled the Bear Stearns problem. Please consider Fed Should Clarify Link to Bear Stearns Assets.

Watching the evolution of Fed policy in the last six months from focused on inflation to fearful of systemic risk; the series of aggressive, rapid-fire rate cuts; the creation of an alphabet soup of new lending facilities [TAF, TSLF, PDCF]; and the orchestration of a fire sale of Bear Stearns to JPMorgan, one has to wonder about the Fed's M.O. It all has a make-it-up-as-you-go-along quality.

Faced with what it thought would be a series of cascading financial failures if Bear Stearns went down, the Fed probably knew what it wanted to do, knew it had to do it quickly, and then had to figure out "how to get it done within the confines of its legal structure," DeRosa [a partner at Mt. Lucas Management Co.] said. "The Fed used legal sleight of hand to reconcile what they wanted to do with what they're permitted to do by law."

Bernanke is sure to be grilled about his actions when he testifies before the Joint Economic Committee of Congress today and the Senate Banking Committee tomorrow. A wee bit more transparency would be nice.

Then again, if the Fed is acting first and finding legal cover later, there's a benefit to keeping the details murky.

Fed's Actions Blatantly Illegal

John Hussman has this to say in his weekly column Why is Bear Stearns Trading at $6 Instead of $2?

The Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”

The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The “loan” falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a “loan” to J.P. Morgan was true, J.P. Morgan would be obligated to pay it back, period. The only point at which the value of the "collateral" would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.

Not only was the action illegal, the vote itself was illegal. The Fed needs 5 members to vote on such actions and only 4 members were present. Fed Governor Mishkin was missing in action. Was he opposed to this illegal hijacking? There was an excellent discussion of this idea in the comments section of the California Housing Forecast.

This leads us to....
Uncertainty Principle Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Let's Recap.

Fed Uncertainty Principle:
The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two:
The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three:
Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Mike "Mish" Shedlock

Posted by Michael Shedlock at 12:07 AM

Fed to Private equity; please invest in banks

WASHINGTON -- The Federal Reserve, unleashing its latest attempt to inject more cash into the nation's ailing banks, loosened longstanding rules that had limited the ability of buyout firms and private investors to take big stakes in banks.

It marks the latest move by the Fed to rewrite the rulebook in response to the financial crisis. Regulators have grown worried about a shortage of capital at banks, in particular smaller thrifts and regional institutions. The Fed has been crafting this policy for at least two years, and private-equity firms have been aggressively lobbying for more lenient policies.

Monday's move should encourage private-equity firms, government investment funds and others to buy stakes in banks, transferring capital from those that have it to those that need it. Previously, if the Fed determined that a private-equity firm had a controlling stake in a bank, it could classify the investor as a "bank holding company," directly supervise the parent firm and impose restrictions on outside investments. The rules were designed to prevent investors from abusing their bank stakes to benefit their nonfinancial investments.

Monday, September 22, 2008

NY to regulate some CDS contracts-Finally!

SAN FRANCISCO (MarketWatch) -Gov. David Paterson said Monday that New York will begin regulating part of the $62 trillion credit default swap market next year because a lack of regulation in that area of finance has contributed to the current credit crisis.

At Paterson's direction, the New York Insurance Department issued guidelines on Monday that establish some types of credit default swaps as insurance, subjecting them to state regulation.

CDS are a type of derivative contract that pay out in the event of default. These types of derivatives have grown very quickly in the past 10 years because they allow market participants to hedge against the risk of holding debt, while also letting traders speculate more easily on the fortunes of companies.

While the market has ballooned, it remains lightly regulated. That's sparked concern that problems in the market could exacerbate stresses in the broader economy and other financial markets.

Paterson's office said the goal of regulating the swaps is not to stop sensible economic transactions, but to ensure that sellers have sufficient capital and risk management policies in place to protect the buyers, who are in effect policyholders.

A tale of two assets

Paper assets: The government makes it hard to short!
Hard assets: The government makes it hard to buy!

Anyone see oil and the dollar today? At least I turned bullish on oil, and bearish on the dollar at the exact low!

Anybody see the ramp in oil in the front month contract today? It hit $130! The shorts got squeezed. They wanted oil, not paper. What hard asset has the biggest short position? How about gold and silver! 169 million ounces short in siler; 8.6 million ounces short in gold. Anyone want to bet that they actually have the gold and silver to deliver? Or will they learn like the oil traders did?

Now when the US Mint stopped production of the gold and silver eagles, everyone ignored it. Then the Canadian mint stopped selling Palladium Maple Leafs. Now gold is over $900, silver is approaching $14, and oil, for the November contract is at $110.

It sure looks like someone wanted hard assets down and paper assets up! But that's not what the market wanted!

Today in oil, we saw what happens when people actually have to deliver the goods.

Who wants a counter-party in gold and silver? Get the physical metal!

This morning, there was supposedly bullish news on Goldman selling a piece of itself, at the same time that Morgan Stanley announced the stock sale to MUFG. What happened to that?

Doesn't Goldman do the bidding for the Plunge Protection Team? Is that why the government panicked when Goldman started breaking down?

But if you think the system started to meltdown because of money markets breaking the buck, wait until Main Street figures out how Wall Street rocket scientists srewed the public with derivative and counter party exposure in these swap-based ETF's.

If you bought property in Florida and California you were supposedly diversified. How did that work out? They all went down together!

Now you have ETF's that are supposedly diversified instruments, cascading under the weight of their depreciating assets, and you have swap-based ETF's cascading under the weight of their derivative and counterparty exposure.

When is a hedge not a hedge? When the hedge isn't a hedge!

And when one swap-based ETF fails, you'll have a run on all of them. Just like the money market buck break, even caused a run on government funds.

This bailout plan, instead of preventing a run on the banks, is now starting a run on the dollar. And on anything paper.

Why shouldn't it? Paulson said the banking system was "fundamentally sound." How did that work out?

What did he say about this bailout? Didn't he say that it would "promote confidence and stability?"

Using his track record, do you think that's a fundamentally sound statement?

Didn't the "annointed" one, Barack Obama say on televison today, that if he was elected, he would keep Henry Paulson on for the transition?

We'll be revisting that statement soon enough!

Morgan Stanley sells a piece of itself to MUFG

10-20% is sold depending on book value to Mitsubishi UFJ Financial Group.

Bullish news for Goldman also. So much for my rant!

Who is next after Goldman?

If you can't trust Goldman's marks, are you going to trust private equity? Private equity valuations are just Level 3 assets, not marked down.

How about hedge funds? Anyone have an idea of the redemption requests for hedge funds? It's the only industry where you pay somebody 20% to mark-up your assets! Who is going to fund these hedge funds?

How much light can this shadow banking system take?

But they were able to push the disclosure of their short positions for two weeks for "competitive" reasons.

Sunday, the SEC gave in slightly to hedge funds that were concerned that the agency's temporary rule requiring money managers to disclose their daily short positions to the public would reveal their trading strategies to competitors. The SEC said the managers would still need to file their positions but they would initially be made only to the SEC staff. The filings would become public two weeks later.

Now we have short selling restrictions in Australia, Taiwan and the Netherlands.

These hedge fund boys better spend some time more tweaking their algorithm and VAR models instead of the ones on the catwalk!

Shanghai up 7.77% to 2,236.41

At least we get China to offset some of the action here!

Goldman Sachs and Morgan Stanley are now banks

Here's the news release:

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF

Goldman's Chairman, Lloyd Blankfein had this to say:

“While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” Lloyd C. Blankfein, Goldman Sachs’s chairman and chief executive, said in a statement Sunday night. “We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”

At least he said "will be regarded." If their Level 3 assets weren't toxic but "exceptionally clean" they wouldn't have started the raid on Goldman, and the Federal Reserve wouldn't have acted so quickly. Just last week, Goldman Sachs said they weren't looking to buy a bank. Now they've become a bank. The Fed found the way for Morgan Stanley and Goldman Sachs to get the benefit of bank funding, without buying a bank, and keeping their assets in the dark.

Last week, Secretary of the Treasury Paulson said the banking system was sound. It's so sound we were days away from a financial meltdown. It's so sound that we need to jam this $700 billion stimulus bill through Congress yesterday. A bill, that doesn't create any jobs.

Monetizing the debt, instead of marginalizing it. You could give forbearance on mortgages, cut the principle and the rate, and start an economic boom with an infrastructure and alternative energy platform. We could do that if our banking system was fundamentally sound.

So we take the $700 billion plan because we don't have a choice. Does anybody really think that Goldman or Morgan Stanley wanted to become a bank? Did they have a choice?

Showing on Wall Street it's better to get scrutiny from the Fed than from shortsellers!

Sunday, September 21, 2008

Miami kicks the Pats 38-13.

It's not the only action in Miami. Vulture funds are circling Miami real estate. 32 offers were made last week. But bids and offers are still far apart.

As many as 100 investment funds are shopping for South Florida real estate, hoping to buy extremely low during the current crisis. Their main target: condominium towers where developers and their lenders can't sell enough units to pay off the loans used to build them...

Real-estate analyst Michael Cannon sees the fund industry overstating the crisis facing developers and their lenders. So far, he is seeing enough condo buyers closing on their units to let most developers pay off their construction loans as well as some of the secondary loans needed to build the projects

'Two very large hedge funds called me yesterday. Literally, they're flying into Miami,'' said Gregory Rumpel, a hotel broker at Jones Lang LaSalle, the day after Lehman Brothers filed for bankruptcy. 'These guys are saying, `Well, that's probably the shock to the market -- with Lehman and all the other jitters out there -- we need to see some stuff released.' ''

Here's a few of the "vulture" funds.

Call them, they are trying to cut some deals!

Lehman assets get re-adjusted downward

On Friday, there were a number of changes to the terms of the sale to Barclays. The originally agreed total sale price of $1.75 billion could be lowered by $100 million to $200 million. The British bank will take on $47.4 billion in assets and $45.5 billion in liabilities, instead of $72 billion in assets and $68 billion in liabilities. The drop in the assets reflects the decline in the value of Lehman securities during the past week.

The purchase price was lowered because of lower appraisals of real estate in New Jersey.

Has to give people comfort on the value of these Level 3 assets!

To much power for Paulson

One trillion dollars in two weeks?

FNM and FRE $200 billion.
AIG $85 billion.
Bailout $700 billion to start.

This bill stinks. Force it through without even a discussion? It's not even capped. $700 billion is the start. Paulson is trying to monetize the debt, instead of marginalizing it.

Marginalize it with an infrastructure boom; a rebuilding of bridges and highways, a new energy platform, instead of just allowing Wall Street to suck teat with the Fed's and the select group of asset managers that can make the vig off the dispositions of these mortgages.

Why should we buy into "the banking system is sound" Paulson? Only after Goldman Sachs got dinged did they go into panic move.

Let's hope China can offset this because it came to the position where now we don't have a much choice.

And that's because Bernanke and Paulson didn't see it coming.

But put some restrictions on this socialist/dictator bill!

Saturday, September 20, 2008

The $700 Billion carte blanche bill

Sec. 1.
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time...

$700 billion and no-one can sue!

Anatomy of a run

The Treasury put a program in to guarantee Money Market Funds. Here's what the NY Times had to say:

The federal government took two aggressive steps on Friday to restore confidence in money market funds, which consumers have long considered to be as safe as bank savings accounts, but which have come under increasing stress in the current market turmoil.

The Treasury Department announced that, at least temporarily, it would guarantee money market funds against losses up to $50 billion.

“For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund — both retail and institutional — that pays a fee to participate in the program,” the Treasury said in a statement.

And to make sure there is an adequate market if money funds have to sell assets to meet withdrawals, the Federal Reserve said that it would expand its emergency lending program to help commercial banks finance the purchase of asset-backed securities from the funds.

Make no mistake about it, it was the Reserve Fund that pushed the Treasury's hand. Here's the Reader's Digest version of the events that happened last week concerning the Reverse Fund, who "Make cash perform in ways never expected." Not quite what they had in mind.

The Reseve Fund had a $785 million piece of Lehman bonds, about 1.2% of their $62 billion of assets Primary Fund. With Lehman's bankruptcy, they wrote down this piece to zero, but not before those who panicked first, yanked out $20 billion of assets. Their money market funds were then written down to .97, along with their Yield Plus fund, and the International liquidity fund was cut to .91.

How big was the panic? Look at their statement on Friday. It speaks for itself. They halted all rights of redemption:

A Statement Regarding The Reserve Primary and U.S. Government Funds

New York, September 19, 2008 - The Reserve Fund, on behalf of two of its series, the Primary Fund and the U.S. Government Fund, today filed with the Securities and Exchange Commission (“SEC”) an Application for an Order to suspend all rights of redemption from either fund and to postpone the date of payment of redemption proceeds for a period longer than seven days after the tender of shares for redemption. The Staff of the SEC has advised the Fund that it intends to recommend the issuance of such Order.

The filing of the Application, pursuant to Section 22(e) of the Investment Company Act of 1940, was precipitated by the extraordinary market conditions of the past several days including the filing, on September 15, 2008, by Lehman Brothers Holdings Inc. of a petition for bankruptcy protection. These conditions contributed to unprecedented requests for redemptions for each of these two funds. The Primary Fund, which had approximately $62 billion in assets under management at the opening of business on September 15, 2008, has received redemption requests this week of approximately $60 billion.

The U.S. Government Fund, which had approximately $10 billion in assets under management at the opening of business on September 15, 2008, has received redemption requests this week of approximately $6 billion. With continued significant illiquidity in the markets, the Funds’ investment adviser is unable to dispose of securities to fund redemptions without impairing the net asset value of each fund.

The issuance of the Order is intended to ensure an orderly liquidation of securities in each Fund and that all shareholders in both Funds are protected in the process.


The Reserve is the oldest money market fund manager in the world. And they could of been put out of business in a day. $60 billion out of $62 billion in assets asked to be withdrawn.

Does anybody think Treasury had a choice? It wasn't just Hank Paulson breaking the neck of the shorts with a sledge hammer. It was about the solvency of the financial system.

What was Paulson supposed to do? The hammer of the market was overpowering the system!

And you can't gore the shorts or drive a railroad spike with a tack hammer!

Remember Buffy the Vampire Slayer?

Spike: I had a plan.
Angel: You, a plan?
Spike: Yeah, a good plan. Smart. Carefully laid out. But I got bored!

This time, Spike won!