Tuesday, March 24, 2009

More Authority for the FED and Treasury to Do What Exactly?

Last nights article was selected as an Editor's Pick over at Seeking Alpha today! I am easily excited so I was very glad to see that first thing this morning.

New World Reserve Currency
Last night I discussed the growing rumblings from China concerning a replacement for the US Dollar as the world's reserve currency. Ultra top secret discussions have now been completed between China, Russia, the IMF, and Antarctica. The new World's Reserve Currency will be unveiled soon, but you always have the inside track here at Economic Disconnect. Enjoy the first draft of the new dollar, courtesy of Geekologie:


Interesting Charts
Reader Watchtower alluded to a chart I check out on a weekly basis that is supplied by Calculated Risk via the site dsshort. The chart compares 4 bear markets of the last century. Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500:

Looking at this chart you can get a feel for just how drawn out various serious downturns have been.

With an eye to the vicious rally in stocks over the past week, I dug up another graph which shows all kinds of volatile price movements after the Crash of 1929:

As I stated in the comments, the most aggressive rallies occur in the midst of bear markets. My target of 15% more to the upside would only be a move (in total) of about 35% from the lows. This chart shows several moves of that size over a two year time period.

More Authority for the FED and Treasury to Do What Exactly?Today both Ben Bernanke and Timothy Geithner went before a congressional panel and talked about AIG. While most of the reporting was centered on the red herring of AIG bonuses (More of a Macguffin, really) there were several substantial revelations to be found.

The first notable item is a piece of revisionist history by FED head Bernanke. In the process of laying out why both the FED and the Treasury should be given even MORE powers concerning all things financial Bernanke let slip this item:
The government has given AIG over $180 billion in bailout funds since it first intervened last Sept. 16. The U.S. now owns nearly 80 percent of the giant insurer.
"If a federal agency had had such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders and impose haircuts on creditors and counterparties as appropriate," Bernanke said.

It is not clear that the FED/Treasury/FDIC do not already have this kind of authority, but did not want to use it in the case of AIG. I would love to see PIMCO lead man Bill Gross read that passage about haircutting bondholders.

This statement by Bernanke must be viewed as very shrewd. Ben would like you to think punishment for failure, or even no reward for total collapse, is a goal. The new bad asset plan screams the opposite. The FED head is simply all over the place on core issues.

The second newsworthy item was a slip by Geithner that makes the post from last night even more prescient. Lats night I wrote that the Treasury was using TARP and some other tricks to bypass government approval of actions. The line I used was "This clearly constitutes a bypass of the elected government."

Wait 24 hours and this data point was offered:
Still, there were a few pointed exchanges Tuesday.
Rep. Paul Kanjorski, D-Pa., warned Geithner about any requests by the Obama administration for more taxpayer money to support financial bailouts.
"I assume that you recognize there's not an awful lot of sympathy up here to necessarily provide additional funds -- not going on the merits of whether the funds are necessary," he said.

"We recognize it will be extraordinarily difficult," Geithner acknowledged.

I do not think Geithner plans on asking Congress for much else. Geithner admits that getting a gunshy Congress to play along any more is next to impossible. The fact is the Treasury is nowhere near done with funding needs. These funds are going to bypass Congress. I would caution all very strongly about granting any more autonomy to the FED or treasury concerning additional "tools" to be used on financial businesses across the spectrum.

The third piece of tantalizing information comes from probably the hottest blog on the net right now, Zero Hedge. In a post today titled "The Ridiculous Marks of Toxic Assets" the author relates the following:
The Treasury's arbitrary transaction price of 84 for the "pool of residential mortgages" seems to not have been all that arbitrary after all. In fact, as it may turn out, it was gloriously optimistic. A report by Goldman today on the PPIP caught my eye, with one chart in particular, indicating that bank are still marking the bulk of their "assets" at 90-95! Of particular note is Citi's delirious optimism on marks in its assorted asset classes, especially commercial mortgages.

A PPIP transaction at 70 is one thing, one at 95 is very much different, especially when the FMV is in the 30-40s, as the potential equity upside is very limited, while the downside is... well... much less so. Have not had much time to dig into this but present it for consideration and commentary. If banks have expectations for bid levels north of 90 on the bulk of TALF-mediated transactions, this could really end up being a lot of hot air, despite PIMROCK's enthusiastic endorsement of the proposal.
Please see the post and check out the Goldman slide. The marked prices of many mortgage backed assets are currently running around, on average, 95-98% of full value!

Looking over the listings in the post, I was struck by one thought: If the major banks are still carrying these assets at such high prices, just what were all the markdowns taken over the past 8 months covering? Forget suspension of "mark to market" this makes it clear that was never even in place regarding this stuff.

The FED and the Treasury want more authority, but they are not clear on what they would do if they had it. They are not clear on what they are doing with the powers they have already. Both agencies are all over the place.

I realize many think quick action is better than no action or even deliberate action. I disagree. The credit crisis has been with us for over 8 months now and we are still here and there are no "tanks in the street" as the former Treasury head Paulson threatened. Now is the time to slow down and come up with a REAL plan. No more half measures. No more "experiments" No more promises to come up with details of a skeleton plan. If the FED and Treasury cannot clearly state:
- What they wish to accomplish in real terms, ie no "stabilizing the financial system" baloney. If they want lending to resume, at what level? Under what credit tests? To whom and for what is all this lending needed?
- How they are going to go about it in 5 steps or less

If the smartest guys in America cannot answer those two questions clearly I would doubt ceding any more powers to them will help them figure it out.

Have a good night.


Anonymous said...

U.S. electricity prices are likely to rise 15 to 30 percent if a national cap on carbon dioxide emissions is instituted, according to a report by Moody's Investors Service.
And "the vast majority" of the burden of those higher costs will be borne by residents as large industrial users are likely to be successful in lobbying U.S. lawmakers for special rates and tariffs, the report dated March showed.


Anonymous said...

U.S. President Barack Obama said on Tuesday that a cap and trade system limiting greenhouse gases is the best way for the country to move to cleaner energy sources.
Obama said in a news conference that Congress must adopt A "serious" energy plan.

When your power bill goes up 15 to 30% you'll know who's champion the effort.

Anonymous said...

U.S. finance chiefs are mostly unimpressed by the Obama Administration's efforts to stimulate the economy, but optimism about their own companies increased slightly for the first time in three years, a survey reported on Wednesday. A majority of CFOs, 58 percent, said their confidence in economy has weakened since Obama's inauguration on January 20th, according to the quarterly survey conducted by Financial Executives International (FEI) and Baruch College's Zicklin School of Business.
The survey, which interviewed 334 corporate CFOs earlier this month, found optimism about the U.S. economy at an all-time low, with eight of 10 executives expecting no signs of a recovery until at least the first half of 2010.