Thursday, January 10, 2008

Bernanke and Countrywide - Blue Light Specials of the American Economy

Thanks to the TWO that left comments on the last post. Again I apologise for the brain block. I think tonight's post will be pretty fun. Just a small request: if you do enjoy coming here and reading the material, please leave some feedback from time to time. Great discussions often start in the comments section and I like feedback. For the two that did leave comments last night, there will be some content at the end for you both.

Bernanke and Countrywide - Blue Light Specials of the American Economy
I had a stunning thought cross my mind today as all the various news was flooding in across many fronts: IT IS ONLY JANUARY 10th!!!! We have gone from a span of FED viewed "moderate growth" to "Hit the Panic Button" in about 1 months time. Remarkable stuff. They say over at Minyanville that the current economic juncture is unique in history and I whole heartedly agree!

First up was the Bernanke speech in which he showed exactly where the FED stands in regards to more rate cuts:
Chair: Fed Willing to Cut Interest Rates
Thursday January 10, 6:02 pm ET By Jeannine Aversa, AP Economics Writer
Chairman Bernanke Says Fed Ready to Cut Interest Rates Again As Needed
WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke pledged Thursday to slash interest rates as needed to prevent housing and credit problems from plunging the country into a recession.
The Fed chief made clear the central bank was prepared to act aggressively to rescue a weakening economy. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.

Incoming information suggests that the outlook for economic activity for this year has worsened and that the "downside risks to growth have become more pronounced," Bernanke warned.
"Bernanke was very clear: He rang a siren call. The economy is ailing and it needs stronger medicine -- a good shot of adrenaline," said Brian Bethune, economist at Global Insight. Bethune predicts a half-point cut on Jan. 30, followed by other reductions that would lower the Fed's key rate to 3.25 percent by the late spring.
"It's hard to imagine after hearing such strong comments from Bernanke that the Fed will not cut by half a percentage point," said Richard Yamarone, economist at Argus Research. "Anything less would roil the financial markets," he added.

There is so much going on here it is hard to know where to start.
It is finally time that the FED stops playing the "eye on inflation" game and just comes out and states they are in full slash and burn mode. I appreciate the honesty. The stock market has been acting very badly, basically forcing Bernanke to show his real allegiance. Now there can be no doubt. Bernanke is a market whore, just like his predecessor Alan Greenspan. In fact another Yahoo Finance headline lauded the merging of the two after the speech:
Analysis: Bernanke Adopts Greenspan Tone
Thursday January 10, 5:43 pm ET By Martin Crutsinger, AP Economics Writer
I hereby now give Ben Bernanke his new name: Ben BernanSpan
It rolls off the tongue and even better, in shorthand abbreviation you can just use B.S. and it still fits!

The move today by the FED chair BernanSpan is a clear signal that the FED will fight, with it's last bit of credibility, the war against slower economic growth and the housing bust. The FED needs to get the Treasury on the same page though. Just this past Monday Hanky Panky Paulson was out saying a housing correction was "inevitable and necesary". I know it can be tough to stay on message with things changing by the hour, but really.

Gold loved the new position of the FED, but the Dollar sure did not like the BernanSpan move. Just to recount, here is position of the FED and the government in regards to the economy:
  • Rate cuts will be coming, fast and furious
  • Tax cuts/rebates and a stimulus plan in the works
  • FED auctions now a "permanent and useful" tool
  • Mortgage Rate Reset Freeze plan extending to ALL mortgages
  • Free chicken for every pot (kidding but you never know it is an election season)

As our president Bush himself said; "The fundamentals of the economy are sound and robust". So glad they are or we would really be in trouble! What would the government do if the fundamentals were terrible? You got it! Exactly what they are doing right now. It would be nice if we did not have to pretend, even if it was just for one hour.

Countrywide Financial - The Fix is In?

In Monday's post I noted the extreme action in CFC stock and made the observation "Countrywide Financial - Something Wicked This Way Comes". I put up a new poll which asked what was going on. Sure enough, we get news today that Bank of America may be buying the troubled mortgage lender. The readers of this blog voted overwhelmingly that to be the case, and so obviously the readers here are very smart. The headline:

Stocks Rise on Potential Countrywide Buy

Thursday January 10, 5:39 pm ET By Madlen Read, AP Business Writer
Stocks Rise on Report That Bank of America Is in Advanced Talks to Buy Countrywide

At this point n time I do not want to speculate on buyout details, or whether the buy will even happen. There is still too much to learn to make too many assumptions. If you do like assumptions however, Hank Greenerg in his blog at MarketWatch had these observations:

We’ll know it soon enough, but with the leak that Bank of America is near acquiring Countrywide, several things would appear apparent (at least while we’re playing the guessing game):
1. The Fed is behind the deal.

2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.

3. As part of the deal, the government likely agrees to guarantee BofA against Countrywide-related losses.

4. Lost in the in the noise yesterday was that Moody’s downgraded the ratings on 30 (count ‘em — THIRTY!) tranches of Countrywide’s mortgage debt by more than a few notches. They did something similar before American Home Mortgage filed for bankruptcy.

5. Investors bid the stock higher assuming a premium when it’s likely that BofA still needs to fully assess the value of the assets before the deal’s full value will be known.

6. Big question, of course, is what Countrywide investors will get.

7. Rule of thumb with bankruptcies: Stocks often double on their way to zero.

8. BofA gets a free bank and a put to the government.
Menawhile, Jon Najarian of writes, “To say there was HUGE unusual activity in Countrywide Financial ahead of today’s news that Bank America was close to finalizing a deal to buy the troubled mortgage giant would be as surprising as seeing Dennis Kucinich end his presidential run! We show over 304,000 calls traded against 248,000 puts, but the interesting thing here is that the bulk, some 76 percent of these calls were bought before the announcement! To us this means the likelihood of someone being tipped off was quite high. Like Burj Dubai Tower high!”

Hard to argue with any of that. The funny thing is that BAC technically may have regulatory issues buying CFC (one bank cannot have 10% of bank deposits, BAC sits right now at 9.88%) yet not even a few hours after the rumor was out stories abounded about how regulators could overlook such a rule due to some thrift bank loophole. Convenient?

Add to that the crazy action in CFC stock this week and BernanSpan promising to 'Be all he can be" for the economy and things start to look sinister. There are things going on behind the scenes to try and save CFC. The 50 Billion they borrowed from the Federal Housing Loan program was sure to be lost, and a rescue is being attempted. Whether the leak and rise in CFC share price now puts that into question we will have to wait and see. What is clear at this point is the rigging of the market to save a bank that should rightly go down in flames. At some point in this unravelling mess the FED will have to be upfront with the taxpayer as to what the total bill for all this is going to be. I am not arguing that they should not/will not bail out everything that is possible, they will anyway,I just wonder how much it is going to cost. I will keep updating the story as it unfolds.

Comments Section

For Gdub, I have fished for basically everything except Tarpon. I would like that very much. My best fish story was a time I caught a true 7 pound Smallmouth Bass from the mighty Quabbin Reservoir. That thing was enormous. After taking a quick look at the fish, I released it unharmed back into the water. The fish must be around 11-13 years old to be that size up north . A magnificent catch.

Watchtower, that Trans Am was a sweet car! My two favorites are the 1970 Plymoth GTX with the 426 HEMI and the 1967 Z28 (302ci) Camaro built for Trans Am racing.

Have a good night.


watchtower said...

Ah yes, the GTX, and the Z28, both leave me with that warm fuzzy feeling inside (diminished somewhat by the knowledge of peak oil)(I knew I should have taken the blue pill).

Sparhawk said...

Reading this blog is like reading tomorrow's headlines today.

My brother works at CFC actually, he keeps saying as the stock goes lower he'll keep buying. Unfortunately he's drunk the CFC kool-aid. Some of his 401k is CFC stock, but fortunately merely CFC's match as CFC matches in stock, not cash. I keep telling him to divest whatever part of the CFC stock he's allowed to sell ASAP.

CFC also had to deny talk of bankruptcy again earlier this week. I'd say that's probably the second worst headline a company can possibly have: denying bankruptcy (behind, naturally, actually declaring bankruptcy).

You're right: there's a lot of evidence that behind-the-scenes shenanigans are happening to try to save CFC.

Oh yeah, and these rate cuts are starting to kill my return on liquid cash plus returns on my (considerably more lucrative) credit card balance transfer arbitrage. I prefer to keep arbitrage cash as liquid cash, but I might grab some CDs to protect my return for a few months.

GeorgeNYC said...

The question is how is more cheap money going to help the problems that were caused by cheap money?

People can only afford to pay back so much debt. When they reach that limit, they default. It is that simple.

People will only buy houses when they make enough money to afford them again. Unfortunately that will not be for a long time from now.

We will need to build factories again and make things that others will want to buy.

We will need to start saving again and stop buying crap from foreigners with money we borrow from them. At least not until they start buying crap back from us.

I do not mean that trade is bad. I just mean that we cannot keep on having these huge imbalances and expect to keep on going.

We need real leadership. Not just these hacks that take their cut and cover their asses. The more they try to keep this thing afloat the worse it will be when it falls. But I cannot really blame them as it is clear that there is absolutely no real accountability. Corporate CEO's are treated like our kids in Kindergarden where the are told they are all exceptional and given prizes.

Not to moralize, because it is not really about that, but we need hard times to come back to force accountability on people. Really for the past 15 years (aside from that little dip in 2001) everything has really only gone up.

We are like the gambler at the table wit a really lucky run. We are sitting there and the house is buying us drinks and sending over the cute waitresses. The crowd is gathering and everyone if feeling good. Just keep us there long enough for reversion to the mean to kick in.....

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