Monday, April 20, 2009

Playing Musical Chairs of the Deck of the RMS Titanic

I just got the new Allen Brothers meat catalog in the mail today. Looking through that thing makes me so ready for the outdoor grilling season. Soon, very soon.

I Love the website LOL FED, which uses pictures and captions much like the LOL Cats site "I Can Has Cheezbuger". Today's post on the Bank of America Earnings was classic! Here is the picture with caption:

Full post here.

Treasury Department Operates as a Rogue Branch of Government
The ever evolving plans and actions by the Treasury Department would in normal world make anyone with a brain run for the hills, and thus far away from any US debt offering. Since we live in a world based in make believe, things have gone fairly smoothly thus far.

The Treasury (and by extension the FED and the administration's entire economic team) has so badly managed the economy that not even a Congress that cannot say no to any spending request has made it pretty clear they are done approving blank checks for the time being. It is indeed a sad day in history when you cannot count on the US Congress to rubber stamp a spending request.

Faced with, GASP!, restrictions on what they can do the Treasury has resorted to using clever tricks to bypass a vote in Congress on additional funding. The opening shot was using the FDIC to administer the PPIP program, forever corrupting the FDIC and damaging their credibility. The second salvo was fired today.

The New York Times has the details of the new scheme to give banks more help by converting TARP loans to banks into common equity:
U.S. May Convert Banks’ Bailouts to Equity Share
WASHINGTON — President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.
While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

There are quite a few well reasoned opinions about whether this move is "good" or "bad". I would like to focus instead on the following thought experiment as I think a very real chance exists that the Congress is going to have to stop an irrational arm of government very soon. Consider:

-Assume for the sake of argument that the conversion of loans to common equity is the single worst idea ever put forward in history. What could be done to reign in a Treasury Department that is out of control?

I am not as well versed in civics as I would like, but I would advise the US Congress right now to become well aware of what options are available to them to enact a "cease and desist" order against the Treasury. The Treasury crew are making it up as they go along and now every effort is being made to make sure no further Congressional approval (oversight) is needed. This is a dangerous development.

Playing Musical Chairs of the Deck of the RMS Titanic
There has been discussion about the latest market rally and how fake it all seemed. Zero Hedge has been covering the angle of "Quant Momentum Funds" and the general lack of real participation in said rally. The position here at Economic Disconnect has been that the current rally was engineered to pump up banking stocks so that secondary offerings could be made. If today was any indication, that goal may have vanished for all but Goldman Sachs who moved fast enough to capitalize (pun intended)on the fake rally.

Evidence of just how skittish the markets are about the banks, the very sector leading the rally to this point, was on full display today. Early in the morning there was a supposed "leaked" memo detailing some results of the bank stress test. I will not direct any further traffic to that site as it is clear the writer has serious issues with their credibility. Even in the face of a blog post by non credible source, the banks were taken to the woodshed and pounded.

Adding to the drama, the Treasury Department came out and said they had no information on the stress test results, and thus no details could have been leaked. While this is obviously a boldface lie, it serves to show how nervous all involved are that an official denial was forced by a blog post. The comedy show that is the US system has reached new levels.

Over the last two weeks we have been told that the worst is over and that the banks were well on their way to recovery. Several sketchy earnings reports and some serious stock price movements to the upside seemed to offer some hope.

And then today happened. One blog post and a BAC earnings release that was in no way any less fictional than the GS and C reports and market players were rushing for the exits. Now some "profit taking" would be understandable after such a rally. But BAC was chopped almost 25%! Citi was lower by 20%! Losing a quarter or a fifth of your value in one day is not "profit taking" it is acknowledging that the entire game may be up.

Think of it as a game of musical chairs:
Musical chairs is a game played by a group of people (usually children), often in an informal setting purely for entertainment such as a birthday party. The game starts with any number of players and a number of chairs one fewer than the number of players; the chairs are arranged in a circle (or other closed figure if space is constrained; a double line is sometimes used) facing outward, with the people standing in a circle just outside of that. A non-playing individual plays recorded music or a musical instrument. While the music is playing, the players in the circle walk in unison around the chairs. When the music controller suddenly shuts off the music, everyone must race to sit down in one of the chairs. The player who is left without a chair is eliminated from the game, and one chair is also removed to ensure that there will always be one fewer chair than there are players. The music resumes and the cycle repeats until there is only one player left in the game, who is the winner.

The part about this game being played by mostly children is especially fitting.

The bank rally is fake. There is nothing behind it but another looting run. Traders and market players were playing "bid up the banks" until the music skipped this morning and then they all rushed for a seat. I am sure there must be a player somewhere that was eliminated from the "game" today.

What these "smart money" types cannot see, because they are of the micro view sort, is that they are destroying whatever credibility the market has left. There is no private investor any where that is going to want to take a substantial stake in the banks when their stock prices are going up 200% in 3 weeks only to dump 25% in 10 minutes of trading first thing in the morning.

While many may think a game of musical chairs is fun, especially if you KNOW you will get a seat should the music stop, they may be missing the bigger picture. If you are playing musical chairs after your ship (the RMS Titanic for example) has smashed an iceberg and water is flooding the holds it will not matter that the chairs are reserved for you. You are still going to sink.

The lack of faith in the banking sector is going to rule out any substantial private investment. This leaves only the US government to be the "buyer of last resort" for bank cash infusions. With the section above about Treasury bypassing Congress for funding approvals, I think you know how this is going to go.

Have a good night.


watchtower said...


"Icy North Winds From The Blogosphere Stunt Growth Of Newly Emerging Green Shoots"

getyourselfconnected said...

Funny! Bring on the permafrost!

Lisa said...

Read Financial Sense wrap-up tonight by Ron Kirby. Fed Reserve has been monetizing without telling :) Great charts, too. Loved your post tonight GYSC, aren't you going to the tropics soon?

Lisa said...

Chinese Government economist, Yu Yongding said that the current strong demand for US Treasury products has provided China with an opportunity to make a partial withdrawal from the market - People's Daily


getyourselfconnected said...

I am on countdown to the Bahamas on Saturday the 25th till the next Saturday!
I will check out the FS piece. I really liked tonight's blog myself!

getyourselfconnected said...

Great financial sense piece, but.....
every time I read about these huge US dollar settlements and reduction of US debt holdings I always ask myself "what would that look like in the real world?" and as yet nothing can confirm such a move. This does not disprove, but only argues against.
Todays action may have killed my gold entry at sub $800 and silver at sub $10! Thanks alot market!

Anonymous said...

Just wait until I buy on Friday then it will go back down right after I walk out the dealers door.



Anonymous said...

The U.S. Treasury's plan to purge toxic assets from banks' balance sheets is vulnerable to fraud and abuse and needs tough rules against conflict of interest, the government's bailout watchdog said on Tuesday.

Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program (TARP), said in a report that subsidies for public-private investment partnerships (PPIP) to buy assets could expose taxpayers to higher losses without corresponding increases in the potential for profit.

"Aspects of PPIP make it inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering," said Barofky's second quarterly report since he took office in December.

One of the good guy's, I'm glad to see that there are still a few left.