Archives: September 2008

Paulson's Plan Irrelevant?

by TwoCentsEditor
Published on: 09/29/2008
Categories: Current Events, Economics, Financial Markets
Tags: , , ,
Comments: 3 Comments

This morning the local financial press was carrying the staggering news that the Federal Reserve was pumping an additional $630 Billion into the financial system through the use of currency swaps and their already in place TAF.  This announcement is only the latest in a seemingly never-ending parade of liquidity injections. As of the end of July, the TAF had totaled $735 Billion, and the TSLF an additional $647 Billion. August and September’s numbers notwithstanding, the total injection to date is a whopping $2.012 Trillion. 

As this blog entry is being written, the US House of Representatives is debating and preparing to vote on a $700 Billion bailout package for the US banking system crafted and backed by the US Treasury Secretary. There is much hype and disagreement amongst politicians regarding this package, but in truth, the Fed has been doing much of what the bailout bill proposes for the past year or so. Why then must we rush to judgement on this bill? The Fed has asserted all along that it is in complete control of the financial turmoil so why the big hurry?

It seems to be rather likely that once again the devil is in the details. Whatever poor excuse for legislation finally makes it through Congress must be analyzed carefully as it will most almost assuredly either legalize something that the Fed has been doing all along or will seek to accomplish something well beyond the scope of the Fed’s activities.

Doesn't take AIG long

by TwoCentsEditor
Published on: 09/24/2008
Categories: Current Events, Economics
Tags: , , , , , , ,
Comments: 5 Comments

AIG dipped into the Fed’s $85 Billion credit line as the company was unable to find appropriate private financing. The company also cut its dividend to common stockholders. The devil is in the details though; according to the agreement, AIG effectively never has to actually make another dime. If it needs money to make interest payments, it can just borrow from the credit line. I am sure that when the credit line is exhausted, it will quietly be extended ad infinitum. The government will own 79.9% of the company through preferred stock, will get 79.9% of any dividends paid, and will get to vote on shareholder matters even though preferred stock rarely enjoys voting privileges. 

 

In other news, the $700 billion bailout plan is running into resistance. It is election time and the general upshot seems to be that if we’re going to sign away the entire kit and caboodle then we’d better make sure the little guy thinks he’s getting something besides just the bill. WIth that in mind, riders are being debated about executive salaries, the prevention of foreclosures (what about HR 3221?) and perhaps even another economic stimulus. Fed Chairman Bernanke and Treasury Secy Paulson yesterday tried their best to employ scare tactics saying that if the sweeping powers they requested aren’t granted immediately, and without revision, that terrible times would be upon us.. Sound familiar?

UK Regulators temporarily ban short-selling

by TwoCentsEditor
Published on: 09/18/2008
Categories: Current Events, Financial Markets
Tags: , , ,
Comments: No Comments

In perhaps the boldest move yet, UK market regulators placed a temporary ban on short-selling. The ban is in place until January 16th, 2009, but will be reviewed in 30 days.

Legitimate short-selling (not naked short selling) is an important function of markets as it helps markets to cleanse. Banning it is an obvious attempt to try to make the markets go up without issuing more fiat money in order to do so. Intervention has now climbed to new levels. Will the next step be to force sales to occur only at a higher price than the past sale? Read the brief article on this below:

Britain bans short-selling, citing ‘extreme’ market climate

Think it won’t happen here? Within 5 minutes of the posting of the above notice from the UK, the following article appeared on several major US Financial websites:

It’s draconian, yes, but why not bar all shorts in U.S.?

Notice how the article seeks to now blame short-sellers for the failure of Lehman and AIG rather than the fundamental conditions. The powers that be clearly need a scapegoat for all the turmoil.

Discussion on the current environment

by TwoCentsEditor
Published on: 09/17/2008
Categories: Appearances, Current Events
Tags: , , ,
Comments: No Comments

Andy Sutton was recently interviewed on www.contraryinvestorscafe.com and their ‘Soapbox’ series. He discussed the current financial climate in the aftermath of the Lehman Brothers bankruptcy and Merrill Lynch sale this past weekend. Listen to the interview here:

CICN Soapbox

Bailout #5

by TwoCentsEditor
Published on: 09/17/2008
Categories: Current Events, Economics, Financial Markets
Tags: , , ,
Comments: 5 Comments

Yesterday the Federal Reserve engineered bailout #5 of 2008; this time for mega-insurer AIG. Despite their earlier assertions that taxpayer money not be used, when push came to shove, the Feds did exactly that. While some will argue that the Federal Reserve doesn’t use taxpayer money, we know otherwise. While the Fed doesn’t collect taxes per se, they control the VALUE of our money. So when they pledge billions to back up the malfeasance of these financial companies, they are using OUR purchasing power to do so. 

So far in 2008, the bailout list stands at 5 in addition to the hundreds of billions of dollars already cranked down the rat hole since last year to keep the financial system from imploding. Let’s take a walk down memory lane…

Bear Stearns – 03/16/2008

Fannie Mae – 09/07/2008

Freddie Mac – 09/07/2008

Lehman Brothers  - 09/15/2008

AIG – 09/16/2008

Who’s next?

Dodd plants seed for next stimulus

by TwoCentsEditor
Published on: 09/16/2008
Categories: Current Events, Economics
Tags: , , ,
Comments: No Comments

We have been talking about this for a while. Now Christopher Dodd is talking about the next helicopter drop of cash to American consumers.

Dodd mentions possible stimulus

Markets can't dodge Lehman bullet

by TwoCentsEditor
Published on: 09/16/2008
Categories: Current Events, Economics, Financial Markets
Tags: , , , ,
Comments: No Comments

Yesterday the major indexes succumbed to what was described by a floor trader as ‘complete and utter panic’. Truly, it was a spectacle to behold as billions in shareholder value was wiped out in a span of 7 hours. In fact, half a trillion dollars was wiped out as measured by the DOW Wilshire 5000 total index which captures the market capitalizaion of the top 5000 companies by value. The rest of the world did no better, and in fact Tuesday’s session which is now over in Asia, and well underway in Europe looks in fact to be WORSE than yesterday.

Unfortunately, there is not going to be much of a respite as AIG now appears to be well on its way to insolvency as it scrambles for funds. Ironically, the the beleaguered company sought $40 billion yesterday (see story below) from the Federal Reserve – the lender of last resort – in order to prevent its demise.

AIG seeks $40 Billion loan from Fed

If this morning’s pre-market action is any indication of what is to come, AIG’s road to ruin will be short. It’s share price, after already losing almost 62% of its value yesterday has already lost another 40% in pre-market trade today.

It would seem now that the financial system was lucky to dodge the Bear Stearns bullet back in March. Unfortunately, there are more bullets out there; lots of them. And it would appear that the rate of fire is getting faster, not slower as we have been assured these last 12 months. Since September 5th, we have had $5 Trillion of liabilities put on the public’s balance sheet in the form of Fannie and Freddie, the Fed has kicked at least an additional $200 billion into the financial system, Lehman has gone bust, and the focus is now shifting to AIG and mortgage giant Washington Mutual who saw its bonds downgraded to junk status. This will make it considerably harder for the firm to get additional capital.

The Fed and Treasury put up a good front with Lehman, maintaining that public funds should not be used. Will they be able to maintain such noble aspirations in the face of multiple simultaneous failures? My guess is no, and it will be back to business as usual – bailouts, bailouts, and even more bailouts.

Lehman its own Hurricane

by TwoCentsEditor
Published on: 09/12/2008
Categories: Current Events, Economics, Financial Markets
Tags: , , ,
Comments: No Comments

This weekend, we actually have two hurricanes to worry about. The first is the dreaded impact of Ike on the Texas coast. The second is in the form of a financial hurricane, this one about to hit Wall Street.

For the second weekend in a row, the Fed and US Treasury are faced with another financial crisis. A rather weak attempt is being made to put forth the idea that the government (read taxpayers) will not be forced to backstop the latest in a series of catastrophes originating from the blowup of the housing market and related securities. This time the victim is Lehman Brothers. Granted, this should come as no surprise to anyone. The firm has been on the hotseat for some time now. However, its stock price has plummeted this week as investors hit the exits in alarming fashion. Late Thursday and all day Friday, the firm almost frantically searched for a buyer giving the distinct impression that it might not last through the weekend.

The Treasury Secretary’s contention that government funds should not be used in Lehman’s case because the markets had time to react puts on full display his complete misunderstanding of the situation. To be honest, Hank’s golf game will be thankful that the markets didn’t react sooner. If they had, he might be dealing with two or three catastrophes this weekend instead of just one. This toxic debt is quickly taking the form of Kryptonite; anyone or anything that touches it dies.

The contention that this financial crisis is somehow contained is a joke. The notion that it is nearly over is an even bigger one. Folks everywhere had better batten down the hatches; not just those living in Texas.

Another? So Soon?

by TwoCentsEditor
Published on: 09/11/2008
Categories: Current Events, Financial Markets
Tags: , , , , , , ,
Comments: No Comments

I joked last weekend with a friend before my weekly radio show about starting a pool to try to guess when the next big bank/brokerage firm would need a bailout. The wager was sealed before the ink on the Fannie/Freddie stories was even dry.

Little did we know at the time that our sidebar gentleman’s wager might come into play just a week later. Here we are, heading into another weekend, and the rhetoric about the Fed/Treasury now stepping into to bail out Lehman brothers is reaching fever pitch. In case anyone hasn’t noticed, their stock (NYSE:LEH) is down over 90% in the last year, and a whopping 70% in the past two weeks as their situation continues to deteriorate.

A required bailout of Lehman would bring the total bailouts for major firms this year to 4. Rumors on the street have it that Washington Mutual is next in line after Lehman. They’d better get one of those gadgets they use at the cold cut counter at the grocery store where you take a paper ticket then wait for them to call your number. I have a feeling these firms are about to start dropping like flies. Soon FDIC and PBGC will be at the Fed/Treasury begging bowl with hat in hand.

Disclosure: Short XLF

Bailout is nothing but a pile-on

by TwoCentsEditor
Published on: 09/08/2008
Categories: Current Events, Economics, Financial Markets
Tags: , , , ,
Comments: No Comments

While media pundits’ cheers resonated the world over and global stock indexes soared on the news that Uncle Sam finally stepped in and nationalized Fannie and Freddie, many sane individuals are left shaking their heads. True we have known for some time that this would happen. It had to. The pain of the purging of decades of overconsumption must be prevented at all costs during this political season. This is now two major bailouts for the US government in the last 6 months and NOBODY Is asking the most important question: Where is the money coming from? Clearly the Federal deficit is going to soar over this. Not to mention the hundreds of billions the Fed has thrown down the rathole to keep the banking system liquid.

This not just a bailout, but a pile-on. At the end of the day, the US taxpayer is on the hook for this bill. The only question is how the bill will be paid – through inflation, taxes, or a combination thereof. Grab your wallets folks, this is only getting started. Next in line – FDIC, SIPC, and PBGC in no particular order.

I covered this issue in depth last night on ‘Beat the Street’. Listen to the broadcast here:

Beat the Street – 09/07/2008

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