Monday, September 29, 2008

Who is stupid?

I am tired of hearing people say that the reason Main Street is opposed to the bailout is because we don't understand the consequences or potential damage not doing the bailout will cause.

Excuse me? I AM quite clear about the potential consequences. I also know that a whole shit load of people that are pushing this bailout haven't got a clue about what THEY are doing.

Why $700 billion? was a BIG number! Great. Today, the Fed added....$630 Billion in liquidity - without Congress, without the taxpayer, without ANYONE giving them permission.

I heard some moron tell me that McDonald's - an excellent credit risk - couldn't buy coffee because they couldn't get credit. Now tell me people, if I used my Visa card to buy a Starbucks coffee today, would you consider ME a good credit risk? How many companies use credit for daily operations? WAY, way too many.

We use credit like water and think we are smart. Businesses are using credit like AIR and think it is death to not have it. Well, sorry, but I have to get along without credit and there are millions and millions of people and businesses just like me. Oh, and where is the screaming about anti-trust?

I am certain we are in a recession and I am equally certain that we are at the cusp of a DEPression if the next 6 to 12 months are handled badly. After the last month, I have no hope that we can avoid it. Bailout or no bailout, the economy has to lose about 5-6 trillion in asset values. No matter how it happens, that is going to hurt everyone - frankly, I'd appreciate the idiots in Congress and on Wall Street to feel it just as bad as the rest of us.

Saturday, September 27, 2008

Who is bailing, what?

Many people have argued that the bailout is necessary because the damage that can be caused by NOT doing it is too much to ask American's to bear.

First, the people making that argument do not know what they are talking about. I have spent the last 10 days reading everything I could about what might happen and there is no one that has said, "this is what will happen".

So, here is what I think will happen, with or without the bailout:

2,000 hedge funds will fail. About a trillion dollars in wealth will go with them - most of that wealth is concentrated in the Street, sovereign wealth funds and foreign investment arms of international banks. The bond insurance firms Ambac and MBIA will both fail. The ratings agencies, Moody's, S&P and Fitch's will all be put under federal scrutiny. One, maybe all three will fail.

We will see the failure of several more banks, large banks:

Bank of America North Carolina 5,728 596,584,899
JPMorgan Chase Bank Ohio 3,108 439,996,000
Wachovia Bank North Carolina 3,103 314,850,000
Wells Fargo Bank South Dakota 3,255 263,664,999
Citibank Nevada 1,036 210,289,000
Washington Mutual Bank Washington 2,180 202,706,306
SunTrust Bank Georgia 1,747 114,579,848
U.S. Bank Ohio 2,590 113,097,080
Regions Bank Alabama 2,087 88,388,815
Branch Banking and Trust Company North Carolina 1,484 83,720,251
National City Bank Ohio 1,451 82,374,824
HSBC Bank USA Delaware 455 75,342,071

Which of these will fail? Wachovia is already being watched, US Bank, SunTrust and Wells Fargo are all in danger, but only JP Morgan is in relative good shape. RBS too big to fail? HSBC?

The hedge failure and the collapse of the derivative market will cascade. Already we have dozens of pension funds and other depositers like States with significant exposure to these markets and in many cases, they were unaware of it. Many of the firms that put those funds into risky situations will be facing legal actions. Auction rate systems will cause significant access limitations to funds by these agencies. Additional borrowing will be significantly limited and therefore those firms that have used short term borrowing rather than accessing long term investment pools will have no choice but to sell those long term investments into a down market. Florida, Ohio and Pennslyvania have already have some of these issues.

Already we are seeing consequences of the actions already taken. WaMu suffered because of Fannie and Freddie. How many banks, investments pools and funds hold securities that already are defunct but are still being carried on their books? Most of them. Sometime in the next week, financial institutions are going to close their books for the quarter and the damage is severe. The bailout will only change that if someone figures out a way to repeal Sarbanes Oxley - or at least the mark to market provisions. It would be a mistake to do so. I am not a fan of SO, but the only reason to NOT mark to market is if you plan on holding the instrument to maturity - something seldom done anymore. If I am going to use an instrument to borrow against, I am going to have to prove the value to the lender as if sometime in the near future a default requires the liquidation of that instrument.

So, we have serious impairment and failure of another 3-5 top 20 banks and a significant loss of funds in instruments that support ongoing operations of organizations or firms. The damage to those firms will cause operation impairments - people will lose paychecks. How many? Fewer than should. SHOULD? Yes. For exactly the same reason that people need to change their behavior when they are faced with the consequences of their actions, those organizations should have to change their behavior. How many companies should be borrowing to meet payroll, week after week? Who is responsible to keep those companies afloat? If we bailout the financial markets, we will take that responsibility. How many firms have something less than sufficient funds to meet their obligations to retirees? 10%, 5? It is a cinch the vast majority do not - neither do states, nor the Federal Government. We have borrowed the future and the bailout just extends that a little further. Like a payday loan, the interest is killing us, and we are only going to make it worse.

Even if we were to make a profit on the $700 billion, it will not happen for years. And in the meantime we will pay. IF, this bailout were sufficient to solve the problem, it might be worth it. But it is not. Here is why: 600 trillion in derivatives have to be unwound. Not all of them, not today. Real estate prices, not just in the United States, but in Europe, England and other places have to come back down to some realistic level. What that level is will be different from place to place, and from time to time so predicting it will be impossible. How much real estate changes will determine how much the derivative market needs to unwind. I took a look at the median income vs the median home prices in the 50 states. In 40 of the states, the median home was too expensive for the median income. Over the next year to 18 months, incomes are going to go down so median home prices will need to go further.

Why will incomes go down? No choice. We have been fudging the books. Unemployment has been higher as has been inflation that is being reported. In both cases, the outward reality is going to be harder to hide. Real estate is coming down. Despite the 'closing' price of the markets, people are seeing significant drops in their investments. Over the last 6 months 10-20%. Combined with real estate values, people are going to hold back new spending. Unable to hide the rising mess in the economy, we will get to see what is really happening....about November 15th.

This will make the bailout worse in two ways: lower revenues and lower asset prices. It will also not stop the falling of either.

We can't make asset prices be what they need to be. We can pretend they are not what they are - but that requires money, lots of money. Right now the overall real estate market is down about 10%, on it's way to 15%. If real estate was $20 trillion, we need $2-3 trillion to hold prices. $700 billion is a nice down payment, but it won't even cause a pause. Some have suggested that real estate may need to come down as much as 40% in some areas - ALERT, in some areas, it passed 40% before the summer. If we get to 30% (which is about where median incomes say it should be), then we need $6 trillion to hold prices. But holding prices is not what we need to do - we actually need prices to come down. That means letting them fall and establishing some level. The only way to do that is to let the markets deterimine what is an appropriate level.

How much will this impact the economy? The loss of $6-7 trillion in assets is going to hurt. If we get unemployment reaching 20 million, how much will that impact the overall economy? The $4 coffee industry? The $2 bottled water industry? The $65 manicure, $100 hair cut, $75,000 car industry?

The bailout can't work because the disease is incurable. At least not with anything we can actually use. We have $600 trillion in derivatives that have to be unwound. Someone is holding them as assets on a book somewhere. Those derivatives, in the end, are based on the value of real estate, which is worth considerably less than it used to be. We have to REPORT somewhere, soon, the loss of trillions of dollars, $700 billion will not change that, it may not even cause a little twitch.

The new President will preside over the mother of all recessions - it will not be caused by a bunch of money/finance geeks. It will not be even be caused by a bunch of politically connected, under supervised, greedy bastards. It will have been caused by 200 million people living beyond their means - but not just them, their employers and their governments too. Such is life.

We are in a recession. It will continue for the next nine to 12 months. It could get worse, if the attempted cure makes things worse. Adding debt, living beyond our means - collectively is not the appropriate cure.

Do, or don't, the bailout will not change things.

Sunday, September 21, 2008


I am a conservative. I believe that the Government is a necessary partner in the operation of our country. I also believe it is, or should be, a minor partner. Every day people and businesses make choices and those choices have consequences, for better or worse. When those consequences are good, we celebrate and cheer. When those consequences are bad, we suffer and hopefully, get back up to try again.

You know....I can't be real considered in this post. I am spitting mad. For the last 18 months I, and a lot of other people have been warning that the financial markets are in deep trouble and unless something changes, the consequences of years of bad choices were going make hash of our financial institutions. Well, every time some official told the world everything was ok and that the few doomsayers were part of the lunatic fringe, fewer and fewer people paid attention. The damage continued to grow every time a little effort was made to put a bandaid on a fatal wound. Fatal you question? Bear Stearns died and people congratulated the financial system. Fannie Mae and Freddie Mac have been put on life support and people cheered. This past week, Lehman Brothers and Merrill Lynch died and the markets were concerned; AIG needed a heart transplant and a few stutter-stepped. And then, in a perfectly healthy, strong economy, the Federal Government promised an entire market that their stupid, bad choices would have no consequences. And in reality, the only thing that happened was that every warning about doing the wrong thing was seen to be a laugh line in a comedy routine.

Too big to fail means that you need to make as many choices as possible to get big enough that no one will make you pay for your mistakes.

I have been told this week that we have no choice. The consequences of letting those institutions that made bad choice on top of bad choice is too much for the American Taxpayer to bear. So, the United States Government is going to make the American Taxpayer PAY....

We have no choice, we can not punish the stupid choices of firms and government because the cost to our economy is too much. The damage would be too great.

So, we will fire some people, trim around the edges of the wound, use a bigger bandaid. As one of the lunatic fringe, I am sorry to say, the patient might be alive, but only because the machines are keeping him that way. Soon enough....say January or February, the plug will not be pulled, the electricity will fail.

Enjoy Christmas.

Friday, September 19, 2008


This week, a dozen crackheads walked into Wall Street and warned them about withdrawal symptoms. The Fed and the Treasury said that would be terrible and so gave them all 1/2 of the needed hit. And promised the dealers they would cover future needs.

Congratulations. The rest of Wall Street cheered that the crackheads would be mollified, and celebrated.

Update: I do consider the cure to be worse than the disease.

Wednesday, September 10, 2008

Why me?

Ok, come on all you of the religious side of the blogosphere...why am I doing this?

Jesus was NOT a community organizer. He was a teacher, a RABBI! He went around, preaching and teaching about God. He did not get Jews all organized to petition the Roman Governor for better housing, new jobs, or better education. As a matter of fact, he wasn't even organizing Jews to petition their own religious leaders.

And for calling or suggesting that Palin was/is the same as Pilate, well, I am sure there are 49 other state governors that have issues with that characterization also.

Why am I having to do this?