U.S. Markets Head for A Crash

U.S. stock markets and institutional investors and traders wanted desperately to forget about Oct 2008 and the year-long pain that ensued. For them the Dow was back up and they wanted their bonuses. They did not care that careless decisions made by banks and insurance companies had brought the U.S. economy to the brink of total collapse and resulted in the greatest economic downturn since the Great Depression of the 1920s and 1930s.

The likes of JP Morgan Chase and Goldman Sachs had off-loaded bad loans to the government (i.e., Bear Sterns) and had changed their form of incorporation to benefit from the government bailout (as did Goldman when it gave up its investment banking classification to become a commercial bank) and they were sailing free.

Then in December 2010 came the election for a U.S. Senate seat in Massachusetts held by the Kennedy brothers for half a century. When the results were in, a Republican had won and joined the all Democratic Mass delegation.

The election served as a wake-up call for the President who realized that his financial advisers (Larry Summers and his protege Tim Geithner) were out of touch with the anger the American people held for what the banks had did to their jobs and retirement savings. The president realized that the people correctly saw that the banks were sailing free while they, the people, were feeling the pain.

The president remembered the words of a past Chairman of the Fed Reserve (Paul Volker) who had argued for the reduction in the size of banks and for the elimination of "casino-like" operations at the banks. The president called a press conference to let the banks know we was ready for a fight to change their ways.

The bankers realized they weren't smooth sailing yet.

The champions of the banks (Bernake, Summers, Geithner) started to worry about their jobs.

And the markets and investors headed for the exits.

Observers started to wonder if we would see a crash when markets opened on Monday.

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US Market (Dow) past 1 month (as of 1/22/10)












US Market (Dow) past 1 year (as of 1/22/10)

Fed Reserve Bank Comes to the Rescue and Piles on Liabilities

The "Real Time Economics" section in The Wall Street Journal has an overview showing how the assets (and liabilities) of the Fed Reserve Bank have grown since the start of this crisis. These assets no longer have to be marked to market values so there is no way to know what these are worth, but we do know how much cash the Fed let out. This ballooning letting out is what causes inflation.

I've broken out each additional burden the Fed Reserve has taken in separate charts below. Click to enlarge each chart.

Chart 1 - $0


Chart 2- add $48 billion for every day credit lines the Fed gives out


Chart 3 - add $508 billion to buy US treasuries; this is ongoing


Chart 4 - add $56 billion given to federal agencies


Chart 5 - add $237 billion to purchase mortgage-backed securities; new


Chart 6 - add $529 billion, direct lending starts (you notice how this has not happened before)


Chart 7 - repurchase agreements with companies looking for immediate liquidity


Chart 8 - $117 billion for AIG and Bear Stearns


Chart 9 - add $314 billion for central bank liquidity swaps with other central banks


Chart 10 - add $255 billion for more lending to banks


Chart 11 - add $5 billion to start TALF, Secretary Geithner's plan to buy up bad bank debt

Sheila Bair - Ready for the Job

If Tim Geithner does lose support from Republican U.S. Senators (many are already calling for his ouster) the person to replace him as U. S. Secretary of Treasury should be Sheila Bair, current chair of the FDIC.

Her clarity of vision on why we are in this Wall Street created economic quagmire and incredible articulation about how we get out is second to none.

I found her recent testimony to Congress a breadth of fresh air. She is saying look, we know how to clean up and regulate banks at FDIC, Congress gave us authority years go. What has been lacking is the political will to regulate non-banks. And so non-viable financial institutions like Citi Group are hanging around thanks to tax payers while viable banks - which also tend to be smaller - are at a competitive disadvantage.

There is no one in the federal government who is presenting the problem and the solution as clearly as Sheila Bair. She should be in-line to be Secreatary of Treasury and the way to get her in-line is for President Obama to appoint her to one of the deputy posts now vacant.

U.S Govt Tries Again, This Time FDIC Gets Involved

W.C. Fields is supposed to have said: "If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it."

This quote came to mind today as I was reading the new plan announced by the U.S. Treasury of Secretary Tim Geithner to buy what has been dubbed "cash for trash", the trash being mortgage-backed securities.

The new plan now gets the FDIC involved - why jeopardize the stability of the FDIC? The only reasons I can think of are: 1) everyone else is already involved - U.S. Treasury, Fed Reserve, Fannie Mae, and Freddie Mac; and 2) it's a source of new cash, i.e., the FDIC's credit lines with the Treasury which ultimately means more sales of U.S. Treasuries.

But how much more borrowing can the U.S. do?

As President Obama said on "60 Minutes" last night: "The limit is our ability to finance these expenditures through borrowing. . . . If we don't get a handle on this, and also start looking at our long-term deficit projections, at a certain point people will stop buying those Treasury Bills."

Private investors are cheering, sending the U.S. stock indices skywards today. And according to a source quoted in "The New York Times":

"One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday."

Now, the investors bidding up the stock market aren't the same ones buying U.S. debt. The stock market investors are happy today because the new plan gives them terrific leverage to make more money. Here's the example the U.S. Treasury gave today:

A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. TheF.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, the private investor contributes the remaining $6.

So for just $6, private investors will leverage $100 with backing from the tax payers. The only thing they have to lose is $6 but if that $100 loan package goes up in value to say $110, they benefit from $10 in profit. Of course some will go down too. But let's say it's 1/2 down, 1/2 up so that's $4 profit in this exmaple between the two, won't the govt get some of the upside? Well, AIG, Bank of America and other s paid out big bonuses but did they repay any of it to U.S. taxpayers? No. So the likelihood of any of the upside being shared is pretty low.

Senator Grassley Offers Way Out for AIG Executives

U.S. Senator Grassley in an interview with an Iowa radio station Monday night said of the AIG executives that he'd:

"feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, 'I'm sorry,' and then either do one of two things: resign or go commit suicide." - Senator Grassley

Well, at least this is a start. Up to now all we've heard from our politicians in Washington is: it's a contractual thing, you wouldn't understand.

More on bonuses: Citi Chief takes $38.2 million in 2008

This just in from "The New York Times:

"Citigroup gave Vikram S. Pandit, its chief executive, a compensation package valued at more than $38.2 million for 2008, even as the bank posted five consecutive quarters of multibillion-dollar losses and turned to the government three times for help."

That's almost 1/4 of the amount AIG is paying to its discredited executives.

Are you in shock? Well, you should be. Let President Obama know how you feel: http://www.whitehouse.gov/contact

U.S. Treasury Lost Track of 33% of TARP Bailout

According to the chairwoman of the Congressional Oversight Panel created for TARP, Secretary Paulson gave away 1 out of every 3 dollars to Wall Street banks with no record and no plans of getting any of it back.

Listen to the full interview with panel chairwoman Elizabeth Warren; it might set your hair on fire, but it also just might get you worked up enough to demand accountability from Congress and the President.

AIG to pay $100 million bonuses

[Correction on 3/15/09 - the total amount of bonuses as reported in the media went up by $65 million.]


Just as I finished a post on Robert Rubin's comments at a conference this past week about bonuses I read this headline on "The New York Times" Web site:

AIG to Pay $100 Million in Bonuses After Huge Bailout

What's more, according to the article, the bonuses will be paid to executives in the same business unit that brought the company to the brink of collapse last year.

U.S. taxpayers have already given $180 billion to save AIG, I guess in comparison to that $100 million is small potatoes.

Merrill's Million Dollar Men

While the investment bank Merrill Lynch was drowning in losses last year and looking for a savior to avert going out of business altogether (Bank of American eventually bought them), the following received million dollar bonuses:

[source: "The Wall Street Journal"]

• Thomas Montag: He was handed a $39.4 million pay package and Merrill stock awards valued at approximately $50 million. The stock awards were issued to replace stock he held in Goldman Sachs Group Inc., his previous employer.
• Andrea Orcel: He got $33.8 million in 2008. His 2007 package included a special $12 million bonus for advising Royal Bank of Scotland Group PLC and other acquirers of ABN Amro Holdings NV, a now-troubled deal.
• Peter Kraus: Given a $29.4 million contract and Merrill stock to replace his holdings in Goldman, where he used to work.
  
• David Gu: He made $18.7 million in 2008, down from $19.8 million in 2007.
• David Goodman: Merrill paid him $16.5 million in 2007 and another $16.5 million in 2008.

If you're wondering where your pay package is, contact your U.S. Representative or Senator.

U.S. taxpayer’s bailout of AIG: $180 billion

Today the U.S. Treasury announced that it is giving another $30 billion to the world's largest insurance company AIG.

Today AIG also had an announcement: a quarterly net loss of $61.66 billion.

Total amount now given to AIG: $180 billion.

The AIG funding eclipses the $50 billion that Citigroup has received from the U.S. Treasury, and the $45 billion that Bank of America has received.

From "The Wall Street Journal":

"The new deal, the government's fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG's value over a longer period."

In other words, the U. S. government is very afraid of AIG collapsing.

Meanwhile in other news, AIG's ex-CEO sued the company today.

Citi Bank Complaint: U.S. Govt is Too Strict On Us

After running the bank into the ground (see chart at the right for losses incurred over the past 5 quarters), Citi bank executives are complaining that the U.S. government is being too strict on them under the terms of the tax payer funded bailout.

This is like the kid who burns down his parent's home (and the entire block) and then complains when they take the matches away.

Citi's CEO, Mr. Pandit, has apparently met with everyone from
President Obama's National Economic Adviser to U.S. Representative from Manhattan looking for some sympathy.

But there still seems to be some who are having fun at all of this carnage. The Wall Street Journal reports:

" The scrutiny has Citigroup executives second-guessing everything, right down to the fresh-baked cookies offered at a recent corporate retreat in Armonk, N.Y."

Some of these bank executives just don't understand what they've done and how their actions have impacted our lives..

Consumer Confidence All-time Low, Stocks Rise Sharply

American consumer confidence hit a historic low today. Or at least so says a survey.

(Background: The Conference Board reported today that its February consumer confidence index fell to a historic low. The survey is based on a sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS, a very large Dutch media company.)

How low is confidence? The # cited in the survey is 25, in 1985 it was 100.

Another survey of sorts, the stock market, rose sharply this afternoon. The Dow Jones Industrial Average rose 3.5% (and climbing) as of around 3pm Eastern Time (US). Yes, that's a huge turnaround from yesterday.

Was there any other news? Yes, one thing, Fed Reserve Chairman Bernanke said he doesn't think banks should be nationalized even though the biggest among them (Citi and Bank of America) are worth less than the billions the U.S. government gave them as part of the TARP plan.

Mr. Bernanke had no other solution to offer.

So what's going on here? Answer: no one really know. Sure there will be a lot of talking (heads) on CNBC and Bloomberg and headlines in tomorrow's newspapers about the stock market rebound, but there really is no reason for enthusiasm. The insolvent banks are still insolvent and there is no solution on how to make them healthier.

“The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets.” - Mr. Bernanke

With what can only be called "irrational exuberance" Mr. Bernanke's comments seems to be following in the footsteps of his predecessor - blind belief in the ability for things to work themselves out.

Greenspan: Nationalize the Banks . . . US Auto Next?

“I understand that once in a hundred years this is what you do.” (Read more.)

- Alan Greenspan, former U.S. Federal Reserve Chairman

OK, read that one more time.

Folks, we have entered a new era. The problems US banks created are so big that no amount of throwing money at the problem is helping. And we're talking about a lot of money being thrown, $8.5 trillion and counting.

If we're going to nationalize the banks, then why not US car companies who are threatening to layoff 25,000 American workers? I think the French got it right in setting a zero layoff policy in return for government funds. When are American voters going to wise up?

“Renault and PSA have also committed not to close any production sites for the duration of their loan and to do whatever they can to avoid layoffs.”
- French President Nicolas Sarkozy

U.S. Treasury Says Banks Refuse to Increase Lending

Some of the largest recipients of aid from the government's $700 billion financial-rescue plan didn't increase lending to consumers and businesses in the last three months of 2008, the Treasury Department said.

Read more.

Treasury Department paid $254 billion for $176 billion of assets

Today Elizabeth Warren, chairwoman of the Congressional Oversight Panel examining the Troubled Asset Relief Program, or TARP, testified with some bad news for taxpayers: “Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value."

But that's good news for Wall Street firms. Now we know how they managed to pay out billions in bonuses.

“In the rush to do something, it isn’t always justified or wise simply to do anything."
- Elizabeth Warren commenting on the $76 billion gone missing.

Breakdown of U.S. Bailout - $8.5 Trillion

If you're wondering how big the U.S. bailout has gotten of U.S. financial institutions, you're not alone. Most media outlets could not explain it last week after the joint Treasury/Fed Reserve announcement that Citigroup would be next in line and would receive a massive $300 billion infusion from the U.S. govt.

Bloomberg news did the only analysis I've seen adding up the total already spent to $3.2 trillion of $8.5 trillion committed. How did the numbers get so big? Here's the analysis (click to enlarge):



As you can see, the much debated and approved Congressional legislation commonly known as "TARP" is only $700 billion of the $8.5 trillion available to either the Bush Administration or the Federal Reserve which is technically not accountable to either the President or Congress.

Are these numbers large? Yes, they are massive, amounting to 60% of the entire U.S. economy.

Keep this in mind next time you hear someone saying: we can't afford to bailout the auto makers and save American jobs.