It may reach 60 degrees tomorrow. I am looking forward to that possibility. The last vestiges of winter need to go away and give me some peace. Fishing still seems so far away.
New Regulatory Plan Song and Dance I have actually read through most of the Treasury plan for more (maybe?) regulation of big bad Wall Street. Pretty useless as a whole, it basically amounts to reshuffling some organizational charts and, well that's about it. All that build up and all those announcements and this was all they had to say? Pretty weak. Add to that Mr. Paulson himself says none of this is going to happen before years end! Waste my time why don't you! This kind of baloney move fits perfectly with the theme I have discussed over the past few weeks of delusion and appearance dressing. There is nothing that will change anything in this plan. There is nothing that would have stopped the mortgage issues we are seeing from happening if these new ideas were in place. Just by going through the motions, the markets are soothed I guess. Whatever.
What IS interesting is that Hank Paulson, between giving speeches and interviews, has been on the news an awful lot. The poor guys voice is about gone at this point. I wonder if it just all the speaking, or if he has been screaming at all these secret meetings and all night planning sessions? Oh to be a fly on the wall!
Do You Want the Good News or Bad News First? Lehman Brothers (LEH) came out after the close with an announcement about raising some capital. They are looking to raise 3 Billion dollars through a Convertible Preferred share deal. The final details are a bit hazy at this time, so I will wait to see the exact specifics.
LEH, who stated this week that they have all the capital they need (here we go again) apparently wanted to show everyone that they can get even more if needed. In fact, the cash raising is just for instilling confidence! How about that? From Bloomberg story is this quote:
"Lehman Brothers Holdings Inc. ... is selling at least $3 billion of new shares to U.S. institutions to reassure investors it has ample access to capital."
So to prove LEH has capital access, it is going to issue a boat load of new shares, pay out dividends on those shares, and attach a convertible premium to those shares, all to reassure investors? OK. I would be reassured.
What is interesting here is if you like conspiracy theories, I have two of them:
The FED is buying the offering - The FED has arranged to buy the offering on the same day of the Treasury Departments big revamp. This timing has the effect of projecting a new found market confidence. Remember one of the new departments for the FED is going to be a "stability team" or some crap. Maybe they got started early? A nice and smooth 3 billion dollar cash infusion to an investment bank as troubled as LEH could be just the confidence booster the FED wants to get out there.
LEH is Going Bankrupt, but FED Promised Bailout Makes Preferred Shares Guaranteed Money - LEH is going to go bust and the necessary FED bailout (you know to avoid a "world ending credit event") is easy money for the buyers as the FED will pay some crazy amount to make the bond holders and preferred shares whole.
I am not even sure either of those 2 theories are that insane. A few years ago, yes, but not now.
I think that LEH should have to disclose just WHO is buying this offering. I would love to know if it is indeed the FED. If not the FED, I want to know who I can make fun of for buying into LEH. What about more transparency? I say we start right now with the LEH deal! Vote in the new poll on the LEH deal.
This presents another funny Street angle. The CNBC folks were all happy about the deal. Their logic was that LEH is able to raise capital, at poor terms of course, and this is bullish for the financials. This is of course silly logic. LEH is in big trouble and has to offer heavy terms to attract financing, but they are able to find some crazies to buy the offering? Good news or bad news first? If you just found out the bad news that your wife was a hooker, would it be good news that she is a high priced one making big bucks?
Cold and windy today. Stopped at the Home Depot to buy some trash barrels and bought a bunch of seeds to plant. Turnips, cucumbers, and the wife wanted sunflowers. This garden idea is taking on a life of its own. If the weather ever improves, I am actually going to have to do some real work! Wonderful.
Case Closed on The FED as a Market Manipulator Over the years I have followed finance, there has been a debate on whether the FED has been complicit in market manipulation or not. Some observers argued that the FED was independent. They said the FED was concerned with monetary issues and not the markets in general. They stated the FED had no interest in the day to day market gyrations.
All those folks can now be silenced forever. The FED and the Treasury have proven beyond a shadow of a doubt that their basic mission is to act as a market prop. There can no longer be any real argument about this. The myriad of FED auctions, the forced Bear Stearns buyout, the surprise rate cuts on option expiration days, and a host of other actions have finally elucidated the facts.
The FED has become a market pumper, not unlike any other pumper on CNBC. A new mandate to in effect make rising markets occur is clearly a priority. What does this mean? While most astute players have known this for some time, a general acceptance of this prop will now take hold. Take a look at this quote from a Citi analyst in regards to troubled Lehmen Bothers and their liquidity position: "With $34 billion in liquidity at the parent company, the ability to get access to over $200 billion in liquidity from the Fed's primary dealer credit facility, and its ability to tap the term auction facility, access to liquidity is a non-issue," Bhatia wrote in a note to clients." As you can see free and total access to unlimited amounts of cash has now become a "market expectation" that buy recommendations are based upon. And you know how the FED loves to make sure expectations are met, yes?
New Expanded Role for Federal Reserve From our "Stupid Government Ideas" news desk we get a report that a new and expanded role is planned for the Federal Reserve. As if destroying the dollar, failing to curb inflation, and printing enough money to bailout the universe were good things that we needed more of. At least with more direct control over things the FED can engineer a Depression that much quicker. I am a fan of expedience!
The list of new powers is long, and mainly regulatory in nature. The puzzling thing is that the FED will now be able to look into the books of ANY firm that "threatens to destabilize" the system. What the criteria for destabilization is I have no idea. I would wonder how wise it is for the FED to be opening their balance sheet to banks and entities if they have no current idea of the books for those firms? The best roundup I have found was from the Prudent Bear site, and I recommend it as a glimpse into the future regulation likely to come from this: http://www.prudentbear.com/index.php/RandomWalkHome
The market hates "uncertainty" and I do not see how more oversight from the FED is going to be a good thing for the financial sector going forward.
Cooked Books Now Standard Procedure For the past few years the readings on inflation have been very low, even in the face of rapidly escalating prices. The data was sliced, diced, and massaged to "make the numbers" sort of speak with regards to the inflation reports. Fannie Mae practiced creative booking of revenues in order to smooth out their earnings reports. Mortgage applicants opted to use "stated income" paths to inflate their earnings. The list goes on and on. It seems that while the USA does not actually produce anything useful, it does lead the world in the production of cooked books.
Key section; But one part of the letter stood out to me, providing an excuse for companies to ignore a market value if they don’t like it (italics added): “Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.” There it is. Ignore prices that are deemed too low, and magically everything is wonderful once again.
This makes sense, and is the logical extension of our entire financial system. There is simply too much bad debt, impaired assets, non payable insurance, and lack of hard capital to backstop all the paper written on it to EVER HAVE A REALISTIC PRICING applied to them. All the delay tactics being practiced right now (FED auctions, treasury swaps, etc) must be viewed through the lens of perpetuation of fantasy.
It has long been a central belief here at Economic Disconnect that the US is able to play these types of games because the foreign holders of our debthave no choice but to play along. The Chinese, Japanese, and the like hold so many dollars that they are in no position to call bullshit on our practices. This clear and obvious creative accounting should be the final straw which effectively finishes our credibility, yet it is just another story in another paper that gets little notice.
So here we are. The FED is poised to take over banking as it exists here in the US. Banking speculation that resulted in astounding losses will be spread out over the taxpayers. The same firms that have caused all the damage will be backstopped by you and me so they can continue to pay out their bonus plans to their employees. The foreign holders of US debt will stay quiet and buy more. This is truly a unique time in history indeed! I would love to end with a statement that none of the plans will help, that things are going to crack, and that reality will descend upon us. But I do not think it is going to happen. The silliness has become so apparent and so blatant with no repercussions that I am forced to accept that this dance could continue forever. I can still complain though!
Had a bit of icy snow overnight and this morning. It is amazing to live in New England and see what happens after a late snow storm. No less than 4 major car accidents on the way to work this morning ended up with an cool hour and a half commute! Massachusetts residents are so arrogant and think they are so smart, but a total inability to operate a motor vehicle in light snow surely disagrees with that mindset.
Friday Blowoff Had dinner with he wife and mom in law, so very short on time. There is a TON of material out there, and I will have a full post tomorrow. If you need a fix, Mish and Minyanville have been especially good the last 2 days, so stop over there.
I for one am going to have a Friday Blow off, and try and provide quality entertainment for my readers on a Friday night.
First up, score major points with the wife by showing her this picture: see more crazy cat pics You are welcome!
A while back I mentioned a scene from the awesome film "Lone Wolf McQuade" where Chuck Norris blasts out of the ground with his supercharged Dodge Ram truck. Impossible? Yes. Absurd? Uh huh. Totally awesome? Absolutely! I love that he douses himself with a beer first!:
Rock Blogging anyone?
"Summer of 69" from Bryan Adams:
If you have ever seen Ozzy live, you know he takes a full pipe organ with him just for the song "Mr Crowley". here is the live version with the immortal Randy Rhoads on guitar:
I love Metallica's cover of "Whiskey in the Jar". Excellent tune (warning video is a little over the top):
Obscure song time! I like theme metal, and Manowar was a great band for just that. Check out the song "Defender" with an intro from Orsen Wells!:
Last tune for the night. Try a little Tommy Tutone with the always memorable "867-5309":
Okay, it is going to be wet snow here tonight. As it will not accumulate, I guess i can let it go. Enough already with this stuff!
Wall Street Knows All, or So They Say One of my favorite things about the markets and market participants is how they always come up smelling like roses. Take homebuilder Lennar (LEN) and their earnings report today. from Yahoo Finance: "Lennar reported a loss of $88.2 million, or 56 cents per share, in the three months ended Feb. 29 compared with profit of $68.6 million, or 43 cents per share, in the year ago quarter. The results included a 38 cent-per-share charge related to valuation adjustments and write-offs of option deposits and pre-acquisition costs. After those adjustments, Lennar's loss was 18 cents per share. The adjusted results were better than estimates on Wall Street, where the mean estimate of analysts polled by Thomson Financial was for a loss of $1.07 per share. Some analysts include write-down estimates in their predictions, while others do not. Sales fell 62 percent to $1.06 billion from $2.79 billion in the year-ago period. The average selling price fell 8 percent. Deliveries of new homes were down 60 percent to 3,596 homes. New home orders were down 57 percent to 3,045, with a cancellation rate of 26 percent. Now forget about LEN as a stock, it is dead money for 4-5 years so the movements make ZERO difference in the scheme of things. What is funny is Wall Street was "estimating" a loss on the order of $1.07 a share for LEN. Now look at these numbers for a second:
LEN lost 56 cents a share this quarter
Deliveries were down 60 PERCENT!
Orders were down 57 PERCENT!
So in order to have lost $1.07 a share as the minds on the street estimated, their sales and orders would have had to have been ZERO. That's right absolutely ZERO. So was this upside "surprise" really a surprise? It depends. If you believe that the street thought LEN would not have sold even 1 home last quarter than yes, this was a huge upside surprise. If not, it is just more play math and moving the goalposts. (Note: I understand write-offs can account for a huge earnings difference. I purposely left that out to highlight a common practice by the CNBC crowd. As for write-offs, with such small write downs, I would watch LEN the next few quarters, there may be a downside surprise!)
There has been a bit of conjecture along the lines that estimates and expectations are so low that anything better than expected will be huge. That would be fine if the stock markets reflected RIGHT NOW any of the dour forecasts. Looking at the markets, they are priced as if Goldilocks is alive and well, the financials have bottomed, and the economy is accelerating. All points that are incorrect. And this is the point I am trying to make (I do have one!): The stock pumpers would love to rally on anything from these levels on the excuse that things are not as bad as expected. All fine and good. The problem is that the markets are priced as if things were never that bad to begin with. As they say on Minyanville, risk is high should these contrasting realities ever reconcile.
Credit Crunch - Call It What it is: A Debt Crisis I am a huge fan of misdirection and the use of phrasing to convey particular emotions. An excellent example is the current issues which are affectionately called "The Credit Crunch". from Wiki; "A credit crunch is a sudden reduction in the availability of loans (or "credit") or a sudden increase in the cost of obtaining a loan from the banks." The media, the government, and especially the financial folks would love for you to think of the current state of things as a simple lack of access to cash, ie liquidity, which is of course nothing to get too excited about. A simple "liquidity injection" or other such maneuvers would in this case solve the underlying problems. Seems both simple and harmless.
So what's all the fuss? The problem is that the problems faced by the banks and the economy are not due top a lack of available cash (credit), but a massive over accumulation of DEBT. Now take a good look at the Wiki definition for Debt; "Debt is that which is owed; usually referencing assets owed, but the term can cover other obligations. In the case of assets, debt is a means of using future purchasing power in the present before a summation (monies) has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy. A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in many cases, plus interest. Historically, debt was responsible for the creation of indentured servants." Read the definition again. Then email it to all your friends. It is a stark and clear definition of debt for what it really is.
Debt is a means of using future purchasing power in the present before the actual money has been made. Mortgage borrowers took out a massive amount of loans predicated on ever rising prices. Banks happily and heartily extended the loans. Now this has all gone to hell, and all that is left is the debt incurred. Not credit. Debt.
There is no credit crunch. There are no liquidity issues. There is only a debt crisis. The name should fit the situation. So should a headline read something like this: Credit Crunch Hits Banks - Banks struggle to find liquidity in the current mortgage mess Or should the headline be: Debt Crisis Hits Banks - Money lent out not to be repaid due to mortgage mess Which do you think is more applicable to the current situation? Vote in the new poll and let me know!
You see, credit is good, and debt is bad. Hence we have a credit problem, but not a debt problem. Compare the headlines about the debt, sorry, credit crunch with this alternate analogy: Heroin Crunch Hits Dealers - After overdosing a record number of customers that are now dead or vegetables, dealers face hard times as things dry up.
Too much debt, and a slowly changing recognition of that fact is core of the problem. Liquidity is not the issue. Let us at least be honest.
About 50 degress here in Massachusetts today, and if the wind was not so strong, it would have been a grand day. Still, I am not complaining. The potatoes I bought last week (to get buds for a new planting) still have not sprouted any buds! They had better get going soon. I had to do a presentation at work today, and even though I have spoken many times in front of fairly big groups, I still get nervous. What is it about public speaking that gets most of us nervous?
Happy Birthday and Sign the Petition The highly recommended blog, The Mess That Greenspan Made, turns three years old today! Congratulations to Tim Iacono for his excellent work. The Mess That Greenspan Made was one of the blogs that inspired me to start my own in an attempt to wake some people up about the situation at hand. I thank Tim for all his great content over the years.
Always trying to actually make a difference, Karl Denninger over at Market Ticker has a new petition up that you would do well to check out. It is worded a bit strongly, but the facts are strong. Please take a look and see if the petition works for you. I have signed on, and I can guarantee that your information is safe and you will not be contacted by any outside party. Check it out! http://market-ticker.denninger.net/2008/03/not-durable-durable-goods-and-more-bear.html
Entitlement Society - You Get What You Deserve When I read various pieces concerning the housing bubble, employment, social security, and the like I am sometime overwhelmed by the overarching sense of entitlement that pervades our American society. Here is a short list of the most common things the average American is expecting is "due" him/her:
A "good paying" job
Said job cannot be taken away
A Home
Health Insurance
Social Security
Funding for higher education
Credit on demand
Cheap Gas
Cheap Food
Appreciating stocks and Real Estate
Freedom from responsibility
Protection from ones own foolishness
Now certainly NOT ALL of the above apply to EVERY SINGLE American out there, but it is a fair compilation. Use the comments section to suggest others.
When I read news stories I always run across the familiar theme: "I am in trouble with my (BLANK) and so (Blank) must do something about it." or " I deserve (BLANK) and so (BLANK) must provide it."Really? You mean to say something did not go as you thought and now someone else has to fix it? Why so? Since when? Who says? You deserve things do you? Again, says who?
This mindset is manifested most clearly in the current housing mess. You have seen plenty of examples. I wonder when this entitlement consciousness became so strong? At this point the US is a country filled with whiny crybabies that cannot endure any hardship or setback. If things continue to deteriorate in the financial sphere and banks are faced with any more major trouble (likely) we are going to see if down deep this country still has the stuff that our grandparents were made of. I hope we will be up to the task.
A bit short on time tonight, but what can you do? It might break 50 degrees here tomorrow! I may just pass out.
Home Prices Still Falling Basically Everywhere I am sure the readers here have seen the new home price decline numbers as reported by the Case-Shiller index today. Good old Charlotte North Carolina showed an impressive 1.8% gain. Places like Phoenix and Miami are sporting amazing 15% plus losses year over year. Want to get an idea how much further prices could drop? Just take a look at some comments picked up in a Yahoo Finance article about the price drops: AP Home Price Drop Signals Tough Spring Tuesday March 25, 5:48 pm ET By Vinnee Tong, AP Business Writer Spring Home-Selling Season Could Disappoint if New Data on Falling Prices Is Indication NEW YORK (AP) -- Home prices plunged by record levels in January from a year ago, with almost no major cities immune from the spiraling market. Analysts worried that even the usually reliable spring selling season would fall flat. In Las Vegas alone, nearly half the homes currently on the market have seen their prices reduced at least once, according to an analysis by ZipRealty, a discount real-estate firm. Greg and Barbara Abbott have already cut the price twice on the two-bedroom condominium they are trying to sell on the Las Vegas strip. They're asking $669,900 now -- and an offer in the $650,000 range means they'll lose money. Abbott thinks hesitant buyers don't realize how reasonable the current price is. "They're not really being realistic about what the place is worth," he said. Rising foreclosures have become the biggest factor driving prices lower, Moody's Economy.com chief economist Mark Zandi said. There were already too many homes on the market, and foreclosures bring even more property -- priced at a deep discount -- into the mix. Zandi said while prices are still falling steeply, demand seems to have stabilized. "The psychology of the market has completely shifted," Zandi said. "Sellers do realize that homes are worth fundamentally less than they thought." So we have the Abbott's, who are obviously illiterate and have not been informed of the mortgage mess and overpriced housing. They seem to think silly buyers are not aware what their Vegas condo is worth. Mr. Zandi in the same piece seems to think sellers indeed understand homes are not worth what they thought they would be. I say they have no idea. The sales number and prices seen right now are what the banks are getting for thier REO properties and foreclosures sales. Oblivious fools like the Abbotts have yet to get scared. Soon they will. When the average Joe runs for the doors prices will fall even further than anticipated.
Dry Erase Board Musings When I am dealing with a complex project at work, I will employ the dry erase board to map out an experimental strategy to get the job done. Plenty of erasing and rewriting is done until a plan comes together. What kind of planning session may be going on at the banks right now? Lets put out a scenario that, due to FED overactive intervention, may be credible at this point.
Make a Run, then Walk the Stock Up Say a huge investment bank or regular bank gets it's most influential and capitalized clients together. They isolate a few vulnerable smaller banks, whose exposure and liquidity issues they know well. Say they select one which is trading at $50. The group thenaggressively shorts the common stock, while at the same time publishing reports calling into question said bank's solvency. After a while the concern spreads, and the stock falls to $20. The consortium then initiates a credit squeeze on the target bank, and margin calls to boot. The bank faces a collapse, and the irrational fear of "Financial Armageddon" crops up. The FED comes in to bail out the target bank, and sets up a deal with the guilty group to take over the target with full FED backing. The organized group can make big dollars by shorting the target to basically zero, then buying stock at the cheap before the FED bailout price is set at a higher level. Cleaning up on the way down and on the way up.
The wrinkle here is that the bailout MUST occur. The FED, by acting in a panic and in bad faith, has now provided credible evidence of the bailout intention. It would totally shock me if this kind of manipulation strategy has not at least found it's way onto some planning boards at several institutions. The law of unintended consequences due to inept FED actions.
I just heard there is a potential snow storm on the way for Tuesday night! This had better be the last one, I am at the end of my rope for this winter. Fishing season seems so far away.
Wild Imagination is Now Strongly Encouraged What can you say about a day like today? With so many out there wondering if the Bear bailout was the market "bottom" I can offer this; It was the inflection point where Wall Street decided to suspend any rational thinking and simply start pretending and imagining on a whole new scale. With so much information pouring out today, it can be hard to isolate the most important developments. I will give it a try.
Bear Stearns Benefits From a Legal Miscue: A small one line rider was slipped past the JP Morgan lawyers which basically put JPM on the hook for a ton of BSC losses if the deal did not close. I mean, what do you want for a Sunday afternoon rush job, perfection? Faced with an amazing new bargaining tool, the deal was pushed up 5X in price from $2 to $10. Word is the FED, to sidestep any "bailout" accusations, told JPM that $2 was going to be THE price. Of course now that the market had "expectations" that this deal would go through, the all clear was given immediately to the new sale price. Why BSC stockholders will stop at $10 is beyond me. They should push for more. Come to think of it Countrywide shareholders may want to rethink their deal with BAC and get more money too. Take Home Point: This deal which has allegedly saved the Universe was so poorly put together it had to be redone at a 5 times price difference. Instills allot of confidence, yes? Bullish obviously.
Housing Sales Rebound Baby!: Existing home sales ticked up from month to month by 2.9% (whoopee) but are down 24% from a year ago levels. This report was seen as a sign of the real estate turnaround, and helped push the market higher. A largest in history price drop was seen as a non issue. Take Home Point: Sales down huge, and prices collapsing at faster levels certainly does not help the problems faced by the banks. falling prices can only impair mortgage assets further, yes? Who cares, 2.9% rise in 1 month is what dreams are made of. Bullish.
Fannie Says Loan Defaults Accelerating as they Prepare to Buy More of Them: The unifying theorem that Fannie and Freddie are going to pour cash, government backed cash, into the mortgage market has had Wall Street sporting wood for two weeks. Today we are told by miss Fannie herself that loans defaults are accelerating at an alarming rate. While Fannie only buys the best paper there is, even the best is pretty bad. Take Home Point: Withe ever escalating losses now may not be the time to extend the buying power of FNM and FRE. The market has expectations that they will, so even though they will be adding to loses, at least they are still buying! BULLISH BABY!
Morgan Stanley and Lehman Fizzle on a Euphoria Day: Both MS and LEH turned strongly negative even in the face of a bull run today. Late day downturns on heavy volume are not usually good signs. Not much attention was paid to this move, but no matter. If they go any lower, FED bailout time baby. Even the Wells Fargo CEO went on the record saying he was open to FED assisted mergers! See what you started Bernanke?
Wrap it all Up Today we had solid information that stated in no uncertain terms;
Mortgage Loan Defaults are INCREASING
Home Prices are falling further and faster
The BSC deal was rushed and poorly executed
The FED is going to have to print a lot of money to absorb the losses they are going to hold (hide?) for the banks at months end
In the face of all this, the markets were on fire, the dollar was gaining ground, gold was still being battered and CNBC was all smiles. The FED has succeeded in their efforts to wave shiny objects in front of the market and get a party started. I think this could last quite some time. 2 days? 2 months? 2 years? Who can say. The willful and deliberate suspension of disbelief gripping the markets right now is too strong to argue with. When you see quotes floating around that the FED will buy anything and everything that goes bad, silly season has arrived. Delusion will be the major market driver for the next segment of time, this time span is impossible to give a duration for. I would guess it to be about 2-3 months. 2007 market highs are an absolute real possibility. I have a new poll up along these lines.
Only another major failure will wake the markets up, and even that may not be able to make a dent. While the FED can pat themselves on the back for this recent effort, they have set up a situation where risks and due diligence will not be reasonably considered going forward. With a pocket filled with the FED balance sheet and a way to stash losses, banks are not going to sit tight, rebuild their balance sheets, and lend under good terms. Speculation is ready to run again. In this regard the FED may regret their kid glove treatment of this debacle, as they are only encouraging more of the same. Witness the BSC slap in the FED's $2 stock deal face as proof positive of an atmosphere without fear.
Happy Easter Sunday. It was actually pretty nice here today, very sunny and about 40 degrees. I am going to watch the 3rd episode of the HBO series "John Adams" tonight. HBO does a great job putting together short series. The series "Rome" was one of my favorite shows ever, and the "John Adams" series looks very good as well. Did you know John Adams defended the British soldiers responsible for the Boston Massacre? I didn't!
The Only Option is to Pretend I was disappointed that I could not get a concerted response to my question from last night about what exactly is the "crisis" we are trying to avoid. I found a UK article that is all doom and gloom as things pertain to derivatives: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xml But this article too is lacking in any real detail. I think that the problem is that nobody really has an idea what could happen. Which I guess is sort of ironic, think of it this way;
Due to massive leverage, fractional reserve lending, and derivative contracts in the TRILLION dollar range there is no practical way for the actual assets that all these things are built on to pay for the myriad of paper written against such a small hard asset base. The entire system is in fact a fictional notion that exists nowhere in reality. It is therefore in EVERYBODY"S best interest to continue the fantasy world where this stuff all makes sense.
Hilarious really. Only brilliant minds like those in finance could have brought the world to a place where pretend is the only option.
The telegraph article I linked to at the start says that there are over 500 TRILLION dollars in derivative contracts outstanding. Say that 1%, or 5 trillion were totally bogus and would not ever be paid off, that's 5 trillion dollars right there. Think the FED can backstop that? How about 2%? 5%? Oh my god, what about 10%? Still think the FED can print all that up? Talk about pretend!
The banks and the FED seems to be betting that they can just wait out the housing price bust and then all the crap paper they have will magically become full value once again. Based on the acceleration of defaults, I would hazard a guess that they will do no better on this bet than any of the others they have made. Nothing worse than a degenerate gambler that pretends he can win.
The only thing keeping things up right now is that the fools that have bought the enormous amounts of US debt have to pretend they are ever going to get paid back. Those countries have built their entire financial systems on monies owed them by the US. They cannot simply stop pretending and face collapse either. And this presents an attractive opportunity.
I propose we as a nation adopt an aggressive pretend campaign. As long as nobody can stop us or risk a "financial Armageddon" or some other calamity, it would allow us to ramp up our pretend scale to a high new level. The government should newly mint all US citizens millionaires as of May 1st. Every household will be allotted 5 Million dollars on that date. This way we can really all be big time players in the pretend pageant of life. Worried how we are going to pay for it? Why worry, pretend our debts will be repaid and push the paper off onto China and Japan. We KNOW they cannot ever "Mark to Market" our debt, so why worry?
While I am obviously joking, the sad fact is that this system of playing pretend certainly allows for the possibility of such an action. Look at it like this;
It is widely known that almost every major US bank is technically insolvent if a fair and honest reckoning of their operations are made. That the US financial system is not at an end right now is proof that pretend is a powerful thing. Is it really such a leap to extend the fantasy to a higher level? It is less of a leap than outright collapse, yes?
That is my take. If you are going to have a reality based on pretending, why not really get pretending? Why even bother playing the game if it is in fact false? We should all be millionaires, no billionaires tomorrow. Pretend is FUN!
Still pretty cold up here in Massachusetts. Maybe another 3-4 weeks until a sustained warm up takes hold. I really need to go fishing. I was halted on the road from the house this morning by a group of wild Turkey's (7 of them) that decided to take a slow stroll down the middle of the street. Pretty wild! Kevin, are the Turkey's going to eat my potatoes?
Book Recommendation I have a few books that are collections of the best Sci-Fi short stories of the last century. When I am short on reading material, I read a few of them. I read a great one the other night by Harry Turtledove called "The Road Not Taken". There are copies of it online, and it is very short and I loved it. I was looking over some other works from the author, and I went to Barnes and Noble to get them and I saw William Fleckenstein's new book "Greenspan's Bubbles" on the shelf. I got it today and read it earlier. It is pretty short page wise, but VERY illuminating indeed. I STRONGLY recommend getting the book. I will not go into it too much right now, but safe to say that Sir Alan was indeed lost when it came to monetary policy. No reason to think the new FED head is any different.
The Current Financial Crisis: What is It? After review of the morning money shows and a trip around the financial net this evening I was struck by the now accepted idea that the FED and the US government now will have to start buying up mortgage backed securities and other big losers in order to stave off a "Financial Crisis". It is truly amazing to go from "we need lower rates" a few months ago to "Nationalize all bank loses to avoid a Depression".
While I would dearly LOVE to spend about 10 hours on the debate of whether to nationalize things or not, the point is now lost. There is no longer any need to argue and fight against such a foolish and retarded way to go, it has already begun and cannot be stopped. Nationalization is on the way and there wasn't even a debate or a vote. Oh well.
Instead what I want to find out is what this major "Crisis" is in reality. I see the words Depression, Hyperinflation, Japan rerun (deflation), and others floated out without any supporting evidence of any of them. As we move forward with the government (you and me and the future children) assuming the ownership of private bank assets, can we at least ask and get an answer to what it is we are trying to avoid? I think it only fair.
How dangerous and scary are things? Bad enough that Wall Street could only muster $130 BILLION dollars in bonuses for their employees at the 2007 end of year payout. I mean, that's just terrible! Imagine things being bad enough that the Bear Stearns employees, working for an insolvent company, only collected 3 BILLION in bonuses before locking the doors. Truly deplorable!
I hate fear mongering on any level. The threat being used right now is that we must do these things or else. What is the "ELSE"? Nobody has stepped forward to flesh that out. Does anyone even know? I call on big names like Roubini, Delong, Calculated Risk,Denninger, and Krugman to explain in some general terms what they are talking about.
Japan had a "Lost Decade". But I do not think the populace burnt Tokyo for fire wood or resorted to cannibalism to survive the winter. Last time I checked, Japan seemed to be ok. If the current "Crisis" goes on, will Americans have to spend some time getting by on much less, or are we going to have to live in caves and eat our pets to survive? Who knows? The point is before the reins of finance are passed on to the government (Katrina response was soooo good right?) and we accept basic communism as a national goal, somebody needs to persuade me that we are indeed trying to avoid some terrible fate and not just trying to avoid poor bank earnings for a year or two. The time is up for using a term like "Crisis" without any meaningful idea what in fact is the crisis. Here is a challenge: explain in some basic detail what is in fact the crisis being averted at any cost without using terms with no meaning like "banking failure", "systemic meltdown", "depression" and the like. Are things indeed so bad? Not so bad? Acceptable or not?
Friday night at last! This week seemed very long indeed. Cannot wait to kick back, drink some beers and relax. Here's to another wild week!
Dick Bove Calls Market Ticker! In a few posts, especially my last one, I hit analyst Dick Bove pretty hard for his calls on the markets. I was not the only one, and the guy must be getting pretty sick and tired of it because he actually contacted Karl Denninger who runs the excellent site Market Ticker! I strongly urge you to read the Ticker from tonight: http://market-ticker.denninger.net/2008/03/dick-bove-bear-stearns-and-controversey.html
Lots of great back and forth. I still think Mr. Bove is both wrong and trying to push his own firms holdings, but you absolutely MUST have full and total respect for a man willing to take on his critics one on one without hiding. Mr. Bove, if you ever come across my posts, I admire your integrity and courage, and we can still agree to disagree mightily on the financial sector. It's not personal, it's business.
Automotive Interlude With all the comments last night that related to things automotive, I thought I would depart from the usual stuff on an off day and discuss cars, engines, and things of that sort. If you are not interested, no need to read on.
I am going to share my own personal car experiences with the readers here. I love cars. I love driving. There is nothing like a powerful, balanced machine surrounding you. After driving a car for a while I can feel when a spark plug is getting carbon build up, the PVC valve needs to be replaced, when an ignition coil is not firing correctly, you name it.
My Cars Here is my car owning experience to date.
1983 Renault Encore: No I did not buy the thing! My first car was a gift from my Dad. He got the thing from some guy he worked with for $100 in 1993. The thing had 210,000 miles on it and a blown head gasket. My Dad said if I could fix it and get it running he would register it. And so began my education in car engine rebuilding and upkeep. 3 months later, after many mistakes, the Renault lived! My first car! The thing had no power (rated at, get this, 95 horsepower!), the suspension was shot, the ignition timing of the engine was way off (could not fix as it had an internal chain drive which NOBODY made replacement parts for) but I loved that car all the same. Your first car always has a special place in your heart. I can still remember what the interior smelled like.
1979 Chevy Camaro: My first MAJOR adult age mistake was buying this car. This car was built by my cousin. It was a 1979 Camaro body but had a heavily modified 383 stroker motor (chevy 350, bored out and increase stroke of crankshaft=383 cubic inches) which pushed over 400 horses. I thought it would be a fun car to drive. It wasn't. If you do not properly upgrade a suspension you cannot hook up that much power. If you do not increase the braking power, all that muscle can be tough to slow down! When gas was just $1 a gallon, that thing still ate most of my meager income in college. Bad idea
1989 Hyuandai Excel: The second mistake of my adult life! Forced into a smaller compact car for budget reasons, I ignored all advice about Hyundai and bought a crappy used one cheap. You get what you pay for, and that thing basically fell apart. One day literally! I was leaving work, which was 35 miles form my home, and I turned on the motor. I heard an ungodly noise and saw something roll out from underneath the car. I got out to investigate, and it was the entire front assembly of the crankshaft including the pulley and main drive belt. The junkyard was the cars last stop. Good riddance.
1985 Chevy Cavalier: With a budget of $300 I got this car cheap in 1996. After a complete tuneup and a distributor replacement, the thing ran pretty well. After a while the radiator went bad. I replaced it, and then the water pump went dead. I traded it in and got $600 for it! I doubled my money!
1994 Mitsubishi Eclipse: My first Japanese car, and it was awesome. The car had great power for a 4 cylinder, and handled like a dream. I really loved that car.
2000 Pontiac Grand Prix: And not just a Grand Prix, a 2000 Grand Prix GTP Daytona 500 Pace Car. One of only 2000 made. The 3800 series V-6 had a nice 9 pound Eaton Supercharger to boot! The car was fun, but it had so many problems like rainwater leakage, poor brake wear, and very noisy dashboard (lots of rattles!). I WANTED that car so much, but having it was a sort of letdown.
2005 Infinity G35X: After test driving several cars, I tried driving a G35x. Unreal is all I can say. This car is the most powerful car I have had. Yes, more USEFUL power than the camaro. With an all wheel drive system, there is only total tire hookup, no grip issues. The car can take a corner at 80mph and with little body roll. The engine does not redline until 6800RPM, though you never need to wind it past 4000 for full power. The engine makes a nasty, angry growl as well which reminds me of old engine days gone by. I love this car. It is my favorite car. I cannot wait to trade it in for the even more powerful 2008 G35x this summer.
That's my car experience. I had not thought about it all together like that before. It was fun. Sorry to bore anyone out there.
Car Films
Cars in film can be good. Here is my car film best list;
"Christine": The Stephen King Novel was better, but the film was pretty well done. What could be better than a vintage plymouth demonically possessed and that can fix itself? Cool!
"Cobra" : The shaved and lowered old mercury drive by Stallone in the film is as cool a car as you will see. very nice.
"Lone Wolf McQuade": Chuck Norris drives a Dodge ram bronco, and the scene where he blasts out of the ground is totally worth watching.
I am sure there are more, but I am out of time. Take care this weekend everyone.
If you are the sort that celebrates Easter, then Happy Easter Weekend! I sometimes get Good Friday off, sometimes not and this year I do not, so one more day in the week. Quite a bit to cover and a little short on time, so lets have at it!
A Fine Line Between Courage and Stupidity A few nights ago you may recall a funny quote after the Bear Stearns deal was announced that an analyst made, it was "This is the crescendo of the crisis". I poked fun at the statement at the time and filed it away as a candidate for dumbest line of the year. Well apparently the same guy wants to enter more than one entry into the contest, and so he ramped up his hyperbole today. Check it out: US financial crisis is over, says Punk Ziegel's Bove March 20 (Reuters) - The U.S. financial crisis is over but problems facing the economy are not, said Richard Bove, financial analyst with broker Punk Ziegel, adding that this was a "once in a generation" opportunity to buy bank stocks."I do, in fact, believe that the crisis is over. There will be more negative developments but they will be meaningless," Bove wrote in a note to clients."This comment sounds ridiculous given the conviction on the part of most commentators that the worst is yet to come; the extent of the decline is unknown; and that the length of the decline is similarly unclear," Bove wrote."An environment has been created that will pump profits into the American banking system," Bove said."Investors are so focused on the potential for loan losses and the flawed valuations created by an obscenely invalid accounting rule supported by a soporific SEC (Securities and Exchange Commission) that they are missing this fact." And thus Richard (Lets call him DICK) Bove takes a stand. I actually admire the guy, he has a position and he is putting it out there.
I guess I would give his call more weight if his commentary made any sense. The financial crisis is over, but the economy is still on the rocks? OK. Negative developments will be meaningless? All right. using the ultra lax SEC approved book cooking rules hides real profits? Whatever. I think Mr. Bove was on recreational drugs when he made these statements. I could spend all night on this hilarity, but I think you know why this call is foolish and wrong. Time will tell who is right, and who is dead.
Again, I cannot help but think back to the amazing steps the FED has done to throw money at this problem. This is getting a bit dicey as analysts like Bove are calling the bottom, but the bottom is based on more access to FED cash. There is only so much, but the street wants to believe the cash is indeed infinite. Moral Hazard again, as implied FED rescue form every problem is beginning to permeate the markets. Check out CIT today. This company has to tap its credit lines to stay afloat, and all the talk is about how if the company is in trouble, the FED will bail it out anyway. The floodgates are open.
The FED Cannot Spawn Qualified Borrowers While helicopter cash drops and bank bailouts may be available to the FED, as far as I know they cannot clone humans or spawn good borrowers. Plus, cloning of humans is illegal in the USA, but who knows what special authority the FED has these days?
The problem facing the housing market right now (and filters into the mortgage paper, banks, etc you know the progression) is that HOMES ARE TOO EXPENSIVE. Prices must come down. Nothing can stop that now. Because risk has been severely mispriced, it is now going to swing the other way and become at least somewhat accurately priced. This headline sums up the FED dilemma all by itself: AP Leery Lenders Demand More From Borrowers Thursday March 20, 5:33 pm ET By Alan Zibel and J.W. Elphinstone, AP Business Writers Banks Remain Wary of Home Loans; Lending Standards As Strict As They Were 20 Years Ago
And with that GAME OVER. The article tells the tale of mortgage insurers not accepting applications from basically all of the hot areas. California, Arizona, Florida, and Massachusetts are all blacklisted. This means that in order to qualify for a loan you will now need:
With immaculate credit, you need 10% down
With great credit you need 20% down
With poor credit, you are going to need allot of help
So that's it, and that's all. Going forward, if these lending standards are kept, the housing market is finished for years. Even just 5% down, and good credit will end housing as a major driver of the economy. This is what the FED, Mr. Bove, and others simply do not get. The only way to reignite the housing market to to re institute liar loans, no doc no money down, negative amortizing ARMS, and the like. That will not happen. Prices can only rise with an ever expanding amount of buyers. New guidelines for Fannie an Freddie mortgages will only qualify a select few borrowers. And most with real cash and great credit will not be so dumb as to chase prices higher as they are falling.
So unless the FED can print enough cash to return the ultra lax lending that was the norm for years, I think we are in for more problems. Commercial loans are now JUST STARTING to go south, and residential loans are picking up the default pace at rates NEVER seen before in history. The FED can spawn dollars by the ton, but they cannot spawn qualified borrowers.
Another interesting day for all things finance. Can you remember the days of old when maybe there was one or possibly 2 newsworthy headlines in a week to mull over? Seems like another lifetime ago! The law of Entropy theorizes that all systems increase towards a more random state of disorder, so maybe that explains it all.
Profit Taking Tanks Markets A pretty ugly day on the heels of the mega rally had the usual suspects shaking their collective heads today. When pressed the most cited reason for the sell off was "profit taking". I remember that term from the go go days of the Nasdaq boom. With a 420 point up day on the DOW followed by a 300 point down day, that only leaves 120 points of "profit" on the table!
So why was the market down? Who can say. I just find it amusing when stocks go down, they go down for no reason, but when they go up, it is all about solid fundamentals! This puts me in mind of a post I wrote some time ago which included the observation "Speculation is Good Unless its Bad". The pieces I have read have been bemoaning the "speculation" that is pushing oil prices, food prices, gold prices, all kinds of prices higher. This is clearly bad. Also mentioned with pure disdain is the short types "speculating" that perhaps another investment bank may go kaput and shorting the financial sector hard. That's bad too.
Speculation as it relates to real estate is great though, and in fact we need much more of it to push home prices back up where no one can afford one. Speculation in Google and Baidu is also welcome. Speculation that the FED will hand off their entire balance sheet to the banks is also welcome speculation.
So you see, it is all very simple. Stock go up on solid fundamentals. Home prices and tech stocks are the correct ways to speculate. All that other stuff is evil. Perhaps the treasury can get the government to pass a bill outlawing such practices? I wish I was kidding, but in this environment you never know.
I Tried to Save Bear Stearns and All I Got Was This Lousy T-Shirt! I had mentioned the action in BSC stock last night. All kinds of buying and swings. Many simply dismissed the action as a bond type coverage thing, but a look at the volumes and the price action seemed to me to be more than just that. Today we get this report: AP Joseph Lewis May Act at Bear Stearns Wednesday March 19, 5:58 pm ET British Billionaire Joseph Lewis Plans Action to Protect 8.4 Pct Bear Stearns Stake NEW YORK (AP) -- British billionaire Joseph Lewis plans to take action to protect the value of his 8.4 percent stake in Bear Stearns Cos., which is being acquired in an emergency deal with JPMorgan Chase & Co., according to regulatory filing Wednesday. In a Securities and Exchange Commission filing Wednesday, Lewis reported holding 12.1 million shares of the New York-based investment bank. He holds the stake through Aquarian Investments Ltd., Cambria Inc., Nivon Inc. and other entities. Nivon bought more than 500,000 Bear Stearns shares on March 13 for $55.13 apiece, just days before Bear Stearns agreed to be acquired for $2 per share. Lewis said the shareholder group will take "whatever action that they deem necessary and appropriate to protect the value of their investment in the shares," including encouraging Bear Stearns and third parties to consider an alternative transaction. One small note about this: Remember when you hear or read people saying "this is what the big boys are doing with their money, and they know what they are doing" is about as useful as a 20 cent stamp. This was a big boy money move and it resulted in buying BSC at $55 and then watching it collapse. Good move!
My main point tonight again channels my post from last night, and it is that the FED has no idea what it is getting itself into. The reasons why "moral hazards" and "intervention concerns" should be taken seriously is perfectly encapsulated by this story. If those consideration were not important, they would not need quotation marks!
The FED moved quickly to dissolve BSC and have JPM take them over. The problem is that the FED is now dealing with the same banking fools that:
Think they know everything
Think they are smarter than anyone else
Thought they could accurately price mortgage risk
Thought things would never go wrong
Are terribly greedy
Will not accept anything that does not conform to above points
So instead of taking the $2 and their lumps, major investors in BSC stock are trying to wiggle out of the FED rescue deal, and either re-float the company, or get MUCH better terms of sale. Possible litigation could be a problem, as well as any possible alternate bidder.
And who is to blame for this? The FED of course! BSC shareholders have seen the FED open up their balance sheet for the investment banks disposal (they will dispose of it all right!), given a 30 Billion dollar backstop to JPM to take over BSC, lowered the FED rate yet again, and allowed Fannie and Freddie to loan even more money than they have available. With all those changes, why not try and get something out of BSC? In this new environment, could BSC survive on it's own? Who knows, but when $2 a share is staring you in the face when you bought a boat load at $55, anything seems reasonable.
And thus we arrive at the crux of the FED's problem. Wall Street is not just going to sit tight and say thanks to every move by the FED. They will want more. They will want things done on their terms. They will want to dictate various things. The FED is supposed to be an independent entity, but now it is just another big hedge fund with a US Seal on their office doors. Welcome to the mud pit Mr. Bernanke, I think you will fit in quite nicely.
It is so awesome that the shareholders are giving the FED the finger over this. Ungrateful?, Yes. Brazen?, yes. Smart move?, Nope. It is highly unlikely any other option can be done for BSC. The FED would look absolutely ridiculous if their force fed rescue failed to materialize. This event will occur more and more as the FED tries to solve problems as they arise inside of two hours instead of stopping and thinking about the long term view.
Burning Question So was the entire financial system on the brink of collapse last week? If BSC went broke, would we have to live in caves, trade beads, and use rock coins? Would a disaster have occurred? Or would things have been basically fine? I don't know, and neither does anyone else.
If we had transparency from the banks about what in the hell they are doing. If we had truth from the FED. If we had journalists and a media that was interested in REPORTING FACTS and not sound bites. If we had people that were responsible for their action. If, If, If...
If we had these things we could make a call. If we had these things things would be less dangerous. We do not have any of them, and so the game goes on.
Quite the ripper of a day, Yes? Wild times indeed. On the garden note, I was looking through a bunch of the websites suggested by loyal reader Kevin and I think that I will try to grow carrots and onions to go along with the potatoes. Seems easy enough, but those are famous last words! I think it might be nice to have super fresh veggies that I grew myself. Hopefully it will go well. I can splice genes together and sequence DNA, but growing veggies may be something more difficult! Wish me luck.
On Moral Hazard There has been tons of talk about "moral hazard" as it relates to the current efforts by the FED to save the galaxy. To start, lets define what it is exactly and go from there, from WIKI:
"Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his car, because the negative consequences of automobile theft are (partially) borne by the insurance company."
Obviously the FED's action concerning the banks meets this criteria and then some. That is not the point I want to discuss. The issue I would present is the total disregard for the "moral hazard" concept. Major market players have been saying things like "The FED has to act to save the financial system, we can worry about moral hazard later" or other gems like "Forget moral hazards, the banks need a bailout". This is not fringe thinkers, but folks like those at PIMCO, Paul Krugman, and others.
When one disregards major concerns like moral hazard, they are behaving in a reactive way. It is of course impossible to think or correct a moral hazard AFTER THE FACT. Putting aside important questions is a good way to mask intentions and desires. Think of the following example: "Forget about weapons of mass destruction, the war in Iraq is about spreading Democracy!" See what I mean? Ignore important questions if you want, but do so at your own risk. It is a disturbing and bad omen for the future that the clear hazard invoked by bailing out banks that are broke is passed by without real debate. Which leads nicely into my main topic tonight........
Does the FED Know that their Balance Sheet is at the "Disposal Of the Investment Banks"? " This kind of Government knows how to help business...to encourage it... What I am saying is, we have now what we have always needed, real partnership with the government." - Hyman Roth in "The Godfather II"
The dominant theme today on CNBC was the euphoria over what was seen as the FED now opening up their entire balance sheet of treasuries to the investment banks. Goldman Sachs and Lehman Brothers were on fire today with that thought in mind. I saw this idea repeated verbatim no less than 30 times in the 1 hour I watched of it when I got home. This "relief" for the banks was seen as the big catalyst for the upside move, even after a less than desired 75bps rate cut.
And thus, we arrive at the problems of avoiding moral hazard. Perhaps the FED thinks that they are doing nothing more than providing short term funding to supply "liquidity" or whatever they are thinking. The problem is that the investment banks now regard as part of the solution complete access to the FED's cash stash. I cannot stress enough the importance of this development. I expect better coverage of this meme in tomorrow's big blogs and maybe even the mainstream media.
Consider this progression;
Investment banks create CDO's, SIV's, MBS', and other exotic mortgage backed paper
The loans are terrible, and getting worse all the time
Massive loses start to pile up
The banks start hemorrhaging money as problems mount
The FED has to step in and save the banks
The banks reload with cash and can start the same behavior that resulted in the mess
This is the ultimate free pass of all time. At months end the banks can start to park their severely stressed assets at the FED, take out cash based on mythical valuations of their cruddy paper, and find new and exciting ways to lose it all. Can there be any real debate about this?
Right now the idea of having total access to FED cash has taken root. Once that happens, the problem for the FED become the infamous "managing expectations" game the FED plays. What if this idea is not what the FED wants? If they balk, the markets will tank as the illusion of endless cash evaporates. The FED has created a monster with their fast and not well thought out actions of the past few months. By promising ever escalating levels of help, they cannot fail to deliver on every whim of Wall Street unless they want to risk a major dislocation. It seems that the banks have been successful in making enough noise to pressure the FED to do exactly what they want.
The Hyman Roth quote above fits very well here. The banks, after screwing themselves royally, have now enlisted the government as new capital partners Things could not be worse or more fitting. How any of this is seen as a positive (regardless of stock prices; I am talking philosophically and ethically) is beyond me.
Odds and Ends
Interest rates - Now at 2.25% after today's 75bps move. I have seen a ton of discussion implying that the FED is done cutting, or going to slow down the cutting. Simply put and in no uncertain terms, anyone thinking that way is F#ING BRAIN DEAD. No offense meant, just stating a fact. Don't bother me with parsing the language of the FED statement that included some crud about inflation. It usually is not standard procedure to cut rates by a whopping 25% if you are indeed concerned with inflation. The FED could not stop cutting anyway, the markets would crash. Not that rate cuts are helping, or will help, but that idea is still stuck in peoples playbooks. Rates will be at 1% by June, and then we can discuss a possible end to cuts.
Bear Stearns - Given the bailout mania that the FED has now caused on Wall Street it comes as no surprise that the BSC stockholders might want a better deal. The action on the stock, which is set at $2, is amazing. I have read that this is some bond buying scheme or something, but that is not the talk on the street. Stockholders want a better deal, and heck if the FED's cash is now on demand (see this issue cropping up a bit do you?), I do not feel they are wrong! BSC bears (haha) watching.
FED Out of Bullets - The more I hear Alan Greenspan talk, the more I am convinced he had no idea what the hell he was doing while at the FED. Can Bernanke be much different? The faith and confidence in the FED should be taking a beating, but alas, it is not. With only 2.25% to work with, there are not many bullets left in the gun. To borrow a Minyanville term, the FED only has a few bullets left, and the last one is of course going to pointed at themselves!
Can things get more interesting? Another banner day in the financial world. During an average day I can run through feelings of mirth, anger, outrage, glee, and sadness. Crazy times indeed. Thanks to all that continue to stop by and provide feedback. I hope I am able to provide content that is both entertaining and helpful going forward.
Headline News - Presentation and Perception I like headline reading because you can gleam quite a bit of information by how objective data is presented in order to garner a particular perception. You can learn the bias of the piece as well as the desired take home point. This is not a commentary for or against such practices, surely I use my own topic headlines in this way, just an observation that many would do well to understand. When you are reading Yahoo Finance, CNN Money, CNBC, or any major news feed you need to know that the information will be presented in a certain way that best fits the worldview of that source.
There have been a bunch of headlines over the past 24 hours that have covered the buyout of Bear Stearns as if it was the single greatest thing of all time. Headlines like "FED and JP Morgan Avert a Crisis" or "FED Rescues Troubled Banks". The tenor of the splashy headlines are one of relief and congratulations for a job well done. What if the headlines printed today read instead:
"FED Forced to Use Depression Era Tactics to Prevent Banking Collapse" or perhaps "FED and JP Morgan Postpone Realistic Pricing of Worthless Mortgage Paper". All the headlines are true enough in their own right, but convey very different visions of current events. I know that most people that stop here can figure this out for themselves, but I thought I would point it out anyway!
Question for the FED: Where Do You Draw the Line? I am not going to rehash the whole moral hazard argument concerning the recent wild activity by the FED. Any reasonable person with half a brain can see that what is going on here is criminal and wrong. There is not much to debate.
Instead I wanted to try and some answers from the FED as to where, if at all, they are going to draw the line on bailing out the banks that are toasted. I in no way expect an answer, but I thought I would ask anyway!
So where does the FED draw the line? Obviously BSC was deemed too important to let collapse fully, hence the sale to JP Morgan. How about Morgan Stanley? Lehman Brothers? What about the local mini bank? What is the criteria the FED is using? Again, we do not know, and they will never tell us, but it is an important point.
How much money will be made up and promised to help the banks? 500 Billion? 1 trillion? 2 trillion? We have no idea. This is also extremely important.
There are quite a few more questions I have, but my take away point is this; The FED is acting fast and furious right now and they may be setting precedents that are hard to deliver on later. By all serious analysis we are still in the early stages of this banking crisis. The commercial real estate end of things has yet to start to crumble for crying out loud! Even if just residential real estate gets only slightly worse, many banks are going to get killed. What is the FED plan for a large scale issue? By acting so fast and without regard to future conditions, the FED is providing a potentially false backstop for troubled banks. Add to this that banks now are going to hold on for dear life and play the mark to model game to make it the end of the month so they can cash in on the new TSLF funding facility.
It is clear to this blogger that the FED is stalling for time. How much time can they buy? I guess we are going to find out. The FED rate cut is coming tomorrow and that may give an idea how bad the FED feels the situation is. Markets are now fully expecting 75bps, but really 100bps is what is seen as "good". The Dollar had it's usual pre FOMC runup today by day's end, so the FED may go for the 100bps. Anything less may cause Wall Street to have a furball fit. Should be interesting.
Easter Bunny Comedy If I was a kid I would be terrified if this Easter bunny showed up! SCARY!
I had a truly remarkable bone-in "Cowboy" ribeye steak at Ruth's Chris Saturday night, and I have to say that eating anything else seems almost criminal. That steak was so good I almost wanted to cry when I was finished. Truly remarkable. There is something purely evil about the human dietary evolutionary mechanism. I mean we SHOULD be strongly attracted to broccoli and carrots for the best long term viability, but instead I could down a big fatty steak every day and be very happy instead. Just mean if you ask me.
Something Broke Last Week I wanted to expand a bit on Friday's post. The Bear Stearns collapse and the silly FED "liquidity" gymnastics has presented us with a real test of confidence and belief in the system. I was pleased to see this kind of thinking was permeating the better blogs and financial sites (like Minyanville, Calculated Risk, Market Ticker, etc). This week promises to be every bit as exciting as last week.
My main point for this post is that I believe something broke last week. You can strain belief up to a point. You can batter confidence a bit more than you think. It is possible to stretch and squeeze hope for a while. Eventually something has to give. I feel we are at that point in time. Consider the following macro dynamics at work as things go forward:
The Average Person on the Street FINALLY Grasps that the Actions of the FED are Eating His Financial Future: While Easy Alan Greenspan cut rates to 1% nobody noticed the damage to the dollar as their home prices went parabolic. Now, with every cut in the FED funds rate, the dollar erodes to levels never seen before. The difference is that now even people that have no interest in the workings of the money system are AWARE that a dropping dollar is killing them in the price of oil and gasoline. No fewer than 4 people at my work have correctly paired the dollar crash to gasoline prices. How long until they figure out the food connection as well?
Add to this that mortgage rates are going nowhere but up, and the man on the street cannot understand why the FED cuts are killing him, not helping him. The banks in the current credit crunch are simply pocketing the yield differences, and not passing the lower rates on to the consumer.
The massive "liquidity injections" the FED keeps pushing out (now at around 400 BILLION and counting) are correctly viewed as pushing debt further down the line onto our children. This money is not coming from assets, but through debt issuance. This is another point that has recently been elucidated.
Finally, the FED is actively encouraging wild behavior by banks in the future. Now they are ABSOLUTELY SURE that faced with a systemic breakdown caused by ridiculous behavior, the good old "Too Big To Fail" rescue line is guaranteed to come in. At least in the past there was some degree of uncertainty on this point. No longer.
The Bold Faced Lying Now Extends to Every Aspect of Society: I am cynical by nature. So are most folks. They expect their politicians to be basically full of it. They are not shocked to get a bunch of BS from the car dealer. The list goes on. There is a big difference between being full of baloney and trying to be vague versus the outright misinformation and blatant lying going on right now at all levels of leadership. Bear Stearns screams for day that they are not facing any problems, then in 24 hours require a massive bailout? Treasury secretary Pauslon runs his mouth bemoaning any attempts to bail out "flippers" and "speculators" then orchestrates deal after deal to do that very thing. Ben Bernanke stands at the ready to cut rates to zero, but has the gall and the balls to say he sees inflation moderating in the future.
The level if distrust in the banking system stems form the fact that these mythical value mortgage paper is held by all the banks in large amounts. Every bank knows this, that is what is causing the credit crunch. Unfortunately the level if mistrust now extends to all corners of our society as the obvious lying has reached a level where you cannot give the benefit of the doubt to anyone. We are approaching a "Oh yeah, show me in no uncertain terms" kind of interaction phase.
FED is Betting the House on Bear Bailout: The hurried BSC bailout is even now being rushed through. JP Morgan will probably announce a buyout tomorrow. This is it. THIS HAS TO WORK. The FED is betting the house on two independent events and they had better be right;
The BSC turnover will progress smoothly - With over a TRILLION dollars in complex derivatives and counterparty exposure, it is simply not possible to unwind the BSC positions. They must be seamlessly transferred. The FED is betting this can be done. We will see.
No Other Major Bailout is Needed - I want you to consider a very real point; What if Morgan Stanley or Lehman Brothers had the same blowup this week or next? What if BOTH did? Can the FED really supply THAT MUCH LIQUIDITY? If two or more entities bought the farm we could be looking at dollar values in the Trillion range for assistance. What would that do to the dollar? What would that do to the US's credibility of EVER paying up on our debt? The FED is really gambling the house on this second point. As they say over at Minyanville, "Risk is extremely high".
All right, theres my 2 cents. I will work on a new poll question for tomorrow night. Leave any ideas in the comments section.
Thanks to loyal reader Kevin for the tips on growing potatoes. I remember when I was in high school an uncle of mine would grow potatoes and such in his garden. Those potatoes tasted excellent! Maybe it is because they are fresh or maybe it has something to do with growing your own, but they were great. I am going to give it a whirl this season and see how green my thumb is! Warning, the spellcheck is not working again!
Bear Stearns - This is What Happens When We Get Information Unless you slept all day today, it was impossible to miss the news that Bear Stearns went belly up today. One of Wall Streets oldest financial firms (rip off artists) finally had to face the music that began playing last August. From Yahoo Finance for posterity: Fed and Rival Bail Out Bear Stearns Friday March 14, 6:09 pm ET By Stephen Bernard and Joe Bel Bruno, AP Business Writers On the Brink of Collapse, Bear Stearns Gets a Lifeline From a Rival and the Feds NEW YORK (AP) -- On the verge of a collapse that could have shaken the very foundations of the U.S. financial system, investment bank Bear Stearns Cos. was bailed out Friday by a rival and the federal government. The near-miss raised new alarm about the credit crisis -- and whether other big firms might be in jeopardy. The rescue came from JPMorgan Chase & Co. and, in an extraordinary step, the Federal Reserve, both rushing to pump new money into the venerable Wall Street firm after its financial state deteriorated so much in a 24-hour period that it threatened to fail. Bear Stearns stock lost nearly half its market value, about $5.7 billion, in a matter of minutes, and pulled the broader market down with it. The Dow Jones industrial average fell nearly 200 points. If Bear Stearns were to go under, "it has the potential of bringing down the whole market," said Richard Bove, an analyst at Punk, Ziegel & Co. "This is the crescendo of the crisis." JPMorgan and the central bank agreed to extend loans for 28 days to Bear Stearns, the nation's fifth-largest investment bank and the one hit hardest by the subprime mortgage mess. Two hedge funds managed by Bear Stearns failed last summer, setting off a credit crisis that has swept up banks and brokerages around the globe. In backing up JPMorgan, the Fed dusted off a rarely used, Depression-era provision to provide loans. It also said it was ready to step in to fight an erosion of confidence in the nation's largest financial institutions. Officials from the Fed and the Securities and Exchange Commission held conference calls throughout the day Thursday to assess the potential impact on the broader economy, according to a Treasury official, who spoke on condition of anonymity because of the sensitive nature of the discussions. Stunning and expected at the same time.
I have some bad news for Richard Bove quoted in the above piece with saying "This is the crescendo of the crisis", if by using the word crescendo he is thinking of the literal meaning he is off the mark. From the Wikitionary: Crescendo: A gradual increase of anything, especially to a dramatic climax Now maybe Mr. Bove went to school at the S&P University for the Hopelessly Optimistic (affectionately called U-HO), but the BSC news is not the final climax to the mortgage mess.
Bear got mauled because it had to come clean and actually price it's assets to what it could get for them. In effect this was the first instance where we had SOME idea what the situation was. Coupled with massive leverage, BSC was exposed as insolvent in a way that could not be papered over any longer. BSC hung around from August to now hoping and praying something would change their fortunes. Didn't happen. Let me ask you out there in Internet land, do you think BSC is the only one? Is it even possible given how entwined and duplicated these positions were that BSC is the only bank screwed?
Financial System Red Alert The BSC news has become the perfect example of so many things that are seriously wrong with our financial system. In no particular order, here are the major issues of the day;
Willfull and Deliberate Lying - Quite a few, one as recently as Wednesday, BSC top dogs were out in force assuring the markets that they were ok. Not just ok, but that they had no liquidity issues whatever! The CEO and CFO both made stops at CNBC and reiterated that BSC was in good shape. Now, in a 24 hour span, they need FED rescue? Either the BSC top brass are immensely retarded (a distinct possibility I fully acknowledge) or they are obscene liars. Faced with a possible run on their business, the only thing they could have done was not say a word. Instead they ran out and deliberately LIED to try and save the ship. Should be illegal to mislead investors, but I do not expect anything to happen. Don't forget the golden parachutes for the top dogs, they deserve them!
Standard and Poor's Now Totally Irrelevant - I know that nobody here believes anything the ratings agencies put out anyway, but others still (amazingly!) do. S&P gets the gold medal for total bafoonery with a week unparalleled in history for getting things wrong. First the maintenance of AAA ratings for monoline insurers that are every bit as broke as BSC was bad. Then the hilarious report S&P put out estimating the mortgage writedowns were largely over (was that counting the BSC mess? Just checking!). Today S&P took the bold and courageous step of downgrading the BSC long term counterparty rating! Great job guys! Nothing like downgrading debt after the place closes the doors. And after ENRON we were all told that would not happen again. I am picking on S&P, but the other ratings fools are just the same. Games and smokescreens that no longer need to be paid any attention to.
Liberty Dies With Thunderous Applause - Now you would think that the 5th largest investment bank going flatline would be a bad thing. One may come to the conclusion that if the FED had to employ a bailout technique not used since THE GREAT DEPRESSION things may be going poorly indeed. Not Wall Street! After years of reaping gargantuan profits from mortgage paper and derivatives that were all an illusion, now the same good old boys get to get bailed out by Uncle Sam. You, the tax payer (and really your kids in the future) will get to pay for all the golden toilets and silk kleenex the big boys use. The government stepping in and basically taking control of the nations private finances? How many points to the upside is that worth for the DOW? Capitalist freedom took a shot to the heart today. Instead of correctly seeing the FED having direct control over private banks as a disturbing event, the market loves the idea. Liberty truly does die to thunderous applause.
The Thin Veneer of Confidence Must Now Be Gone - There can be no doubt that even perma bulls and people not really into financial things are going to start asking some introspective questions now. How is it that if 10% of mortgages default, the whole economic system will collapse? How much is the FED really involved in close quarters with private banks? Will the dollar survive the next major rate cut next week? If the dollar loses another 30% of its value, is a 10% increase in stocks really a relevant thing? the whole system only operate because everything is always in motion. Now that plenty of things are stopping dead, difficult questions will emerge. Dangerous times indeed.
Friday Rock Blogging After a banner day that should have finally gotten the truth out there was delayed by the FED for another month, we all need to get ramped up for the weekend. Some musical selections to try and send you off happy.
Kansas with "Dust in the Wind". Fitting song for BSC going bye bye!
Rusted Root with "Ecstasy". Sorry for the cruddy video with the song, all I could find!
Every song on the Kill Bill soundtrack is outstanding, take a listen to "Bang Bang" it is top notch;
Totally cool scene from the film "From Dusk till Dawn" with really great music, and SalmaHayek does not hurt either! Warning a bit on the wild side!
