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.