FED and Treasury Sticking US Taxpayer with Non Recourse Clause

Cold and windy today. Allegedly the weather will improve as the week goes on. I have had about enough of this winter and with only about 5 weeks until Caribbean vacation time I will just have to hang on.

China is Not Worried About Their US Treasury Holdings; Really They are Not
I am not sure who is on TV more often these days, President Obama with his almost daily reassurances that all is well or random Chinese financial officials making it well known that the Chinese pastime of buying as many US treasuries that can be printed is alive and well. After all, the economy is "fundamentally sound" and US treasuries are the "safest" investments in the world. Yup.

Housing Doom has a comprehensive compilation of China headlines, and I would suggest checking in and taking a look at the high volume of headlines from all over the world.

One dollar worry headline:
China proposes replacing the US dollar

Leads to several dollar happy headlines:
China keeps faith with U.S. Treasuries: central banker
China reaffirms commitment to U.S. debt purchases
China to Keep Buying Treasuries, Top Official Says

Based on headline count the pro dollar China story is the hands down winner. I am sure there is nothing to the notion that China may become a bit wary of US debt now that the monetary gymnastics have begun. Nothing to see here.

FED and Treasury Sticking US Taxpayer with Non Recourse Clause
I had a feeling I would be writing this post today. Over Saturday and Sunday as I was trying to "read through the lines" I was struck by the "conspiracy theory" bug. I wanted some time and more news to come and change my mind. Alas, I still have the same thoughts as on first take.

On Sunday I wondered why the FDIC was going to be so highly involved in the new Treasury plan. Couple that with my observation that Congress was now going to be extremely wary about passing any additional bailout proposals after the AIG mess and the base is set to account for some serious games being played by our financial leadership.

If you have followed the Treasury "toxic asset" plan (no cool acronym as of yet) you may have been wondering at what point the plan may be debated and voted on by Congress.

There will not be any debate or vote.

After TARP 1.0 actually failed in the house on first pass and the AIG mess now has prompted some in Congress to rethink blank checks for the Treasury, no more leaving things to fickle senators and representatives that get an earful from constituents. The new operating method for the FED/Treasury/FDIC is now to use backdoor fund allocation, misappropriation of funds, and hedge fund like leverage to get whatever they want without any more congressional petition.

Consider:
- The bad asset plan will utilize TARP money not yet spent. This way no new proposals will have to be floated and approved by Congress. Remember as well the very language of the TARP make it clear that once approved, the money will be used as the Treasury sees fit with no ability to interfere
- The TARP leftovers are small, so the use of leverage will be employed instead to act as a multiplier. Leverage always works out well as you all know
- The FDIC just asked for an open line to 500 Billion dollars, on face to support deposit insurance, but now that 500 Billion is clearly intended for use in the bad bank asset plan

This clearly constitutes a bypass of the elected government.

I understand that the US Congress is a bit weary and gunshy about handling the financial bills, more so after all the "Teas Party" demonstrations and the AIG screwup. Congress really cannot afford to punt on this one. The Treasury is co opting the FDIC (long a singular office with a singular goal) and opening up the FED balance sheet to start what amounts to a new hedge fund making blanket guarantees on the backs of the taxpayer. The Treasury is sticking the US taxpayer with a "non recourse" clause because they intend to operate beyond congressional checks through quarks of pre-approved spending.

I really do not have much more to say about this. Something very wrong and dirty is going here. While most are scared and confused there are things in motion that warrant scrutiny and analysis. Sadly the market rallying so heavily will incline most to look the other way.

Current Market Rally
The markets are going parabolic. While structural issues have not changed, sentiment is now very positive. The entire US financial system is built on sentiment, not fundamentals. April earnings are going to be terrible, but now bullish types can point to a credit thaw "in the pipeline" due to the Treasury plan. Poor reports will be ignored on the basis that they do not reflect the new atmosphere. This line of thinking can, and I believe will, extend to the quarter after next should those reports be poor also (they will be).

How far this run can go is impossible to know for sure. I would offer my 2 cents that the indices have another 15% to the upside from today's close. Again, it is sentiment, not reality that will drive this train. The worst side effect of the markets big run up will be that real bank reforms and a real cleansing of bad debt will be put off once again. The idea that the really terrible mortgage backed paper is unjustly valued and not actually worthless can exist if and only if a market uptrend is in place. Seems all so coordinated. I really have to get off this conspiracy mindset!

Have a good night.