Monday, November 12, 2007

How Many Bailouts are We Talking?

The best blog post I read today really summed up what I have been feeling about the US middle class for some time, check it out:
http://robertreich.blogspot.com/2007/11/after-next-recession.html

Key quote in regards to the end of easy money:
"The splurge is over, folks. As the days of easy money come to an end, what will America look like? Maybe we’ll see a recession in the short term, but more importantly over the long term: the American middle class will have a truer understanding of what it can and cannot afford; a truer sense of what’s really happened to its paychecks; and a more realistic view of where and to whom the economic gains of the last dozen years have actually gone."

Middle class does not mean Mcmansions, Hummers, plasma TV's in every room, Ivy League College for junior, and vacations 3 times a year. The illusion of what the middle class is was bought on debt, not earnings. A period of readjustment will be painful for those who have no idea what their income can actually support.

Et Tu E-Trade?
from Marketwatch today:
E-Trade halved on warning, sell rating
Online broker backs off outlook, citing securities portfolio
NEW YORK (MarketWatch) -- Shares of E-Trade Financial Corp. lost more than half their value Monday, plunging as the company faces more subprime-related write-downs and as analysts at Citigroup suggest a possible bankruptcy for the online broker.

So E-Trade was in on mortgage backed paper? An online trading company tried to boost earning playing with so called "AAA" rated paper that was really "poopoo"rated? Say it isn't so! Is there any company that is not going to have to write off a ton of this stuff? The irony here is of course Citi coming in late to the party and suggesting bankruptcy for E-Trade. I wonder what an honest reading of Citi's situation would be from the same analysts?

Bailouts to the Left of Me, Angry Investors to My Right
Today Fitch ratings downgraded 37 Billion dollars worth of CDO's from AAA to junk. Calculated Risk does an excellent job of collecting the ever expanding list of downgrades and I recommend checking in daily to get an idea. Here is the Fitch News:
http://calculatedrisk.blogspot.com/2007/11/fitch-downgrades-372-billion-of-cdos.html

As things are progressing a disturbing trend is emerging. There are going to be loads of CDO's and related crap downgraded severely. As the downgrades come in, the investors that bought the previously rated AAA stuff will be forced to sell in many cases because they must hold only AAA rated paper. This will act as an ongoing price discovery machine which will submarine prices for the asset class. This brings up an important point: Who gets bailed out here?

Obviously the FED's first concern is going to be to provide the magical "liquidity" to major banks. The banks will need a bailout. In the same arena, the holders of now impaired assets are going to have colossal shortfalls in their holdings. The problem is that the investors will include entities like the California Teachers Pension Plan, Union Pension Plans, Municipal Plans, etc. Do you think those kinds of folks are going to say "Well, we tried for better returns and got burned. Sorry about that!" or more so something like "the ratings agencies were liars, wall street is all crooks, and we need to be made whole again!". Quite the dilemma.

The issue here is that the political muscle many of the big losers in the mortgage mess have is going to guarantee some kind of reparations are made. Can the FED really bail out the Banks and the investors? The bailout of Long Term Capital Management was relatively easy as the investors were usually mega rich people and other banks. In this case it will be scores of government workers and unions. Just how many bailouts are we talking? It is about time that Boom Boom Bernanke stops giving speeches about useless topics and starts to address this issue. The taxpayer should know what is in store for them. Especially before the next election.

The situation is now coming undone very rapidly. The time to try the "containment game" is over. Right now the FED, the Banks, and the investors need to come clean on exactly what is going to happen going forward to deal with massive losses and to limit this kind of speculation in the future. Play time is over, its time to get serious.

Have a good night.

13 comments:

Anonymous said...

Well today I went out and got me another .5/oz. of Paul Kuger....

G

PS It's nice to see the metals take a beating once and a while! My metal dealer always laughs b/c I show up on down days!

Anonymous said...

It's nice to see the metals take a beating once and a while! My metal dealer always laughs b/c I show up on down days!


Gold may go to 690 and silver to 11.80 be careful G this correction isn't over.

Mining stocks got slammed today on carry trade unwind and stronger dollar, I think they have a couple more down days to go. IMHOP

Kevin

Anonymous said...

Does anyone else find it interesting that all this happened on a Bank Holiday? Also can someone else please confirm that treasuries were also on hold today?

G

PS: The only way golds coming down is if the dollar strengthens, oil drops and rates rise.... or when pigs fly:

youtube.com/watch?v=kEZnPtbi77g

Anonymous said...

"The only way golds coming down is if the dollar strengthens, oil drops and rates rise.... or when pigs fly"

G, I'm telling you man don't get cocky as it is a sure way to get your head handed to you betting on the sure thing that everyone and their brother already know about. Gold looks like it is forming a head and shoulders top and so does oil. Just MHOP. Sometimes Wall Street puts lipstick on pigs. I don't know if you read charts or not but if you do go to big charts and type in the tickers GLD, SLV and OIL.
Good Luck and I mean that sincerely. I could and have been wrong before.
Kevin

Anonymous said...

Kevin,

You know something it's rare for anyone to care these days. I am keeping my eyes and ears open. Thanks for caring about the Anon--G.

getyourselfconnected said...

I agree with Kevin, gold and silver are not sure bets going forward. If we have a major correction in the markets metals are gonna get blasted. Im thinking around 20-30% lower. Use stops to protect the gains you have made.

Anonymous said...

G

I like young people and want to see them succeed, part of that is to give them a subtle warning when I see them doing something that may not be in their best interest. Like buying a house in 2005. I think gold will go to 1000 and silver to 22-25 longer term maybe over the next couple of years but I would like to get as much grave out of that as I could. I bought silver # 4+ and gold at 400 and I'm holding it but if I wanted to buy now I just think it would be prudent to wait.
Kevin

Anonymous said...

G

I like young people and want to see them succeed, part of that is to give them a subtle warning when I see them doing something that may not be in their best interest. Like buying a house in 2005. I think gold will go to 1000 and silver to 22-25 longer term maybe over the next couple of years but I would like to get as much grave out of that as I could. I bought silver # 4+ and gold at 400 and I'm holding it but if I wanted to buy now I just think it would be prudent to wait.
Kevin

Anonymous said...

Well the best I can do is $ cost average purchasing over a few months/year. Remember I am buying the real deal, not stocks, not eft not bullionvault.com garbage. I find security is the accumulation of physical wealth. I only buy in the dips and will plan to sell at the slightest hint of massive rate hikes. Any thoughts on when rake hikes might occur?

G

Anonymous said...

G

I understand dollar cost averaging trust me, In my case it is usually because I paid to much for a stock and I'm trying like hell to get out of a bad situation. I know you are buying the real deal but anyone who bought gold at it's inter day high on January 21st 1980 @ $878 is still underwater and would have had a lot of opportunities to average down.
As for wealth it's all an illusion predicated on someone being willing to buy it from you for more then it coast you. This has been true threw out history think Bennie babies. If you ever want to know what something is worth go to a yard sale. My son-in law routinely buys old silver coins for less then the silver content at auctions and sales them on E-bay for a nice profit.

Having said all of that as far as rates I think they will go lower due to a global slow down but the key for gold may be the credit markets and the ease of obtaining a loan. If money is tight gold may get hit anyway as people look for any asset they can sell.

Gold broke 800 today I look for 763 as next stop should have some support there. That would be a 10% correction. IMHOP.
Kevin

getyourselfconnected said...

Kevin,
I agree with your thoughts. I was hoping you had some idea about Annuities? I understand that insurance companies sell them, and they are quite popular with the older crowd near retirement. I was wondering if annuities may get caught up in the CDO/SIV crappy paper mess? I tried to read a few prospectus and it was not clear to me how the insures generate a return that is guranteed. If you have any knowledge, I would appreciate it.

Anonymous said...

Ted

Sorry I can't help you with annuities my guess is they are up to their neck with this stuff but that is only a guess. I took a cash out from my pension plan when I retired and rolled the money into IRA's. That may have been a mistake but I just don't trust having some clown who gets paid regardless of whether the thing goes belly up driving asset prices up using OPM especially if mine is involved.

Kevin

Anonymous said...

Over the last few years I woke up to the way our system is run. Until a physically backed currency makes it way back into our monetary policy we have an END GAME SCENARIO coming soon. You can't keep printing money and running on credit forever with growth. Guys I really really appreciate this dialog and take all advise into consideration. I am weighing more than just a few things into my purchasing of metals. Personally I don't see Ron Paul or Mike Gravel making it to be a presidential candidates. Second I get a bad feeling with all the new signing statements, laws, Patriot Acts that have been instated over the last 5 years. As an American I can see how the freedoms I had growing up wont be there for my son to enjoy. Anyone else feel like we are getting boxed in here?

G