Category Archives: TEOTWAWKI

Bailout not just for mortgage debt. Paulson wants to take any “troubled assets.”

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Better brush up on your Sun Tzu and Machiavelli if you want to survive in this investment climate, because now we know what rules they are playing by.

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Jeez. I wrote the following this morning, but I thought I was months ahead, not hours, and who knew they would use US tax dollars to bail out foreign banks? That is a surprise, but they don’t call it the international banking cartel for nothing.

I wrote: “The plan is to have the government take banks’ bad mortgage debt (will they add credit card, auto, student and corporate debt?)…”

Now I find this on Bloomberg this evening:

U.S. Treasury Widens Scope of Bad-Debt Plan Beyond Mortgages

By Dawn Kopecki

Sept. 21 (Bloomberg) — The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.

The U.S. Treasury submitted revised guidance to Congress on its plan, referring to its proposal to purchase so-called troubled assets, a change from its original plan for investments tied to home loans, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.

Firms that are headquartered outside the U.S. will now be eligible, in another change from the guidance sent to Congress yesterday, according to the document. The size of the plan remains unchanged.

“If you must break the law, do it to seize power: in all other cases observe it.”

– Julius Caesar

They have long since crossed the Rubicon, and are playing winner take all.  Who know our bankers were such good students of history?

I can already hear the pro-Obama suckers saying, “what can you expect from the Bush administration and the Republicans? They are such fascists, always ready with a handout for their wealthy buddies.”

Well, take a look at Obama’s top donors and see if it isn’t a bunch of bankers who happen to be favoring him over the straw man from Arizona (here, here, and here). Besides, who better to enact a New Deal and get us into a really big war (Wilson, FDR, Johnson) than the Democrat wing of the ruling party?

Bond sell-off just a correction. Bailouts will not stop deflation.

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Bottom line: Paulson brings a bazooka to an H-bomb fight.

Bond update first:

As usual of late, today’s action in Treasuries was the exact opposite of the stock market: a massive sell-off.  High bond prices reflect fear, which hit a new high earlier this week. Today’s action was not just a short-squeeze. It was collective relief, a pause for our nerves. We will need them for what is yet to come. Here are the bonds (Bloomberg):

Click image for sharper view.

Does he even know how that thing works?

Like all of the bailouts, the planned socialization of (admittedly bad) mortgage debt puts another chain around Lady Liberty’s neck for the short-term of benefit of a few bankers. But hey, what’s another trillion or so when taxpayers are already on the hook for $100 trillion?

Here’s Paulson on the program’s ostensible goals:

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

*Opposite rule of government action

According the rule of opposites (the most reliable indicator for predicting the outcome of government actions), we now know that the program will threaten the economy, not protect the taxpayer, cost far more than the alternative, and impede economic expansion.

The Sum of All Debts

And yes, these kinds of programs are highly inflationary, but they still pale in comparison to the size of the debt and equity that is imploding. The Fed’s balance sheet is 900 billion and growing, the deficit next year will certainly be over $1 trillion, and GDP, which used to ostensibly be $13.8 trillion, is shrinking fast. These figures put upward bounds on the payload of government’s bazooka.

To put this in perspective, Paulson’s gang is squaring up against the following:

  • Private debt is roughly $50 billion (Federal Reserve: sum of domestic non-financial and domestic financial).
  • The total capitalization of the US stock markets is roughly $15 trillion.
  • Total residential real estate has been estimated at over $23 trillion.

The amounts by which the latter figures are contracting exceeds the government’s reflation efforts by some multiple. Deflation will continue — accelerating in the near term — and not abate until so much wealth has gone to money heaven that government’s expenditures finally surpass its rate of implosion. Despite the bailouts, and what will surely be a new New Deal and probably an expanded war in Asia, that point of equilibrium will arrive years from now. In the meantime, cash is king once more.

Risk hangover

One more point on the banks: they may be relieved of their bad debt and provided with fresh reserves, but the inflation machine will remain impaired because individuals and corporations have just learned a very hard lesson about debt and will be averse to borrowing for many, many years to come. Borrowing like we have seen in recent decades requires an appetite for risk, but the stuff now makes people nauseous.

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*Rule of opposites as applied to government action: Every action that government takes results in the opposite of its stated intention. (credit to Mish for identifying this law of nature)

  • Affordable housing programs make housing unaffordable.
  • Deposit insurance makes the banks unsafe.
  • The SEC creates risks for investors but does not protect them.
  • Free trade agreements are thick books of rules restricting trade.
  • Social welfare programs create poverty and poor health.
  • The Ministry of Peace (er, I mean Department of Defense) conducts offensive wars.
  • Homeland Security makes Americans feel insecure at home and relaxed abroad.
  • FEMA inhibits recovery from emergencies.
  • The FDA keeps Americans hooked on drugs, many of them dangerous, and inhibits accurate labeling on food.

The list goes on ad infinitum.

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PPS — For a full rundown of why these bailouts won’t stop deflation, read chapter 13 of Robert Prechter’s Conquer the Crash. He predicted this exact scenario years ago.

SEC intends to ban short selling. Government boxcars reported in Greenwich.

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Hedge fund managers said to pack dirt under fingernails, roughen hands on bricks to avoid suspicion and possible shipment to North Dakota re-education camps.

These days it seems like we are living in an Onion article (1 , 2). It would be funny if it were not the end of the world as we know it.

I’ve been a bear since spring of 2006, preparing for a depression since early 2007, and have had no illusions about the death of the idea that was America. I saw these events coming a mile away, but the speed with which they have arrived is shocking.

By edict of the Duma…

I figured that the shorting ban (WSJ article) would pop up somewhere near the midpoint of the bear market, maybe Dow 8000, but this train to Animal Farm is an express. When will they ban international money transfers? Unapproved foreign travel? Gold?

The speed with which our leaders are dropping any pretense of respect for markets just makes me that much more bearish. 8000 could be next month, not next year as I had figured. And I have to rethink my bottom target of 3500. Really, that would not be the end of the world — this market started at 800 back in 1982, and you have to remember that equity values go POOF after an economy gets as leveraged as ours is. 75% stock market drops are not black swans. They follow credit bubbles like day follows night.

Markets are so bourgeois, anyway.

The possibility of Dow zero just ticked up a standard deviation or two. What happened to the Moscow stock exchange after 1917 anyway?

The end of the stock market? Impossible, right? Well, if our Bolsheviks enact their desires to use government funds to buy all manner of securities (as the Russians are now doing), they could eventually own everything, not just the mortgage market and a huge insurer.

Buyout mania, with a twist.

If a security’s market price is $10 and the government offers $20, that is not ‘market support’, that is a buyout. Of course, there are limits to this sort of nationalization, namely the difference in scale between the Fed’s $900 billion balance sheet and the many tens of trillions of dollars in US private equity and debt instruments, so at first they will be very selective (ahem), but they do have two tools to help them work around those limits: printing presses and guns. In a few short years, when the former lose their potency, the latter can be brought to the fore.

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PS — Of course, my opinion is that this rally (futures are up 2% on top of today’s dramatic close) is just a short squeeze and dead cat bounce. The air pocket under stocks just got a whole lot bigger. 90-day T-bills last traded at 0.07%. The stall warning light is still on.

SEC determined to drive hedge funds out of US

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From Bloomberg:

Sept. 17 (Bloomberg) — The U.S. Securities and Exchange Commission, responding to a market rout this week, may require hedge funds to disclose their short-sale positions and plans to subpoena the funds for their communication records.

Hedge funds and investors managing more than $100 million in securities would be “required to promptly begin public reporting of their daily short positions,” Chairman Christopher Cox said in a statement today. The enforcement division will obtain “disclosure from significant hedge funds” regarding “past trading positions in specific securities,” Cox said.

Lawmakers including U.S. Senate Banking Committee Chairman Christopher Dodd and regulators say short sellers may have contributed to a market crisis by spreading false information and using abusive tactics to attack companies. Hedge funds and other investors argue that poor business strategies are to blame, not short sellers.

“A lot of hedge funds don’t like being forced to disclose their long portfolios, so they’re really not going to like this,” said Sean O’Malley, a former SEC lawyer and now a partner at Goodwin Procter LLP in New York. “There is going to be some push back from hedge funds, but they may not get any sympathy in the current market environment.”

When people lose money they need a scapegoat, and short sellers always top the list. And when there’s a crisis, bureaucrats and politicians can’t help but make more rules, even though it was government meddling that caused the whole problem by granting bankers a blank check to blow bubbles.

The five SEC commissioners must approve the rule, which would be adopted on an emergency basis, for it to become binding. Hedge funds, which are private pools of capital whose managers participate substantially from any profits on invested money, prefer to keep their positions secret to prevent other traders from stealing their strategies.

There are all kinds of legitimate reasons for secrecy, not just to prevent copycating.

The agency’s plan to subpoena communication records will mark the second time the regulator has sent information requests to hedge funds in three months. In July, the SEC subpoenaed hedge-fund managers and Wall Street’s biggest firms seeking evidence they were manipulating shares of financial companies.

These financial companies are insolvent. No manipulation is necessary. The proof is that when Lehman sought a buyer last weekend, with the market closed, nobody offered a dime.

Morgan Stanley, the second largest U.S. securities firm, tumbled the most ever today after a government rescue of American International Group Inc. failed to ease the credit crisis. In a memo to employees, Chief Executive Officer John Mack said the management committee is “taking every step possible to stop this irresponsible action in the market.”

Morgan Stanley

“There is no rational basis for the movements in our stock,” wrote Mack, who added that he was in contact with Cox and Treasury Secretary Henry Paulson. “We’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down.”

Does Mack think he is fooling anyone?

Democratic New York Senators Hillary Clinton and Charles Schumer urged the SEC today to impose a temporary ban on short- selling of all financial stocks, saying it would “help restore a measure of stability to our financial markets.”

You can always count on these two to pick up a hammer for the coffin of America.

There’s a Capitalist in the Senate?

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Jim Bunning, a Repuplican from Kentucky on the banking committee, has been sounding like Ron Paul lately. Bloomberg has the interview:

“I sincerely believe that Henry Paulson and Ben Bernanke should resign,” said Bunning, a Republican from Kentucky on the Senate Banking Committee. “They have taken the free market out of the free market.”

“We no longer have a free market in the United States, we have a government controlled free market,” Bunning said in an interview. Paulson, a former chief executive officer of Goldman Sachs Group Inc., “is acting like the minister of finance in China.”

Bunning, 76, criticized Paulson’s successful effort in July to obtain congressional authority to pump unlimited amounts of money into Fannie and Freddie to keep them afloat.

“When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turned out it was socialism here in the United States,” he told Paulson at a July 15 Senate Banking Committee hearing.

Following Paulson’s Sept. 7 announcement of the takeover of Fannie and Freddie, Bunning said he now feels like a citizen of China.

Former Phillies Pitcher

“No company fails in communist China, because they’re all partly owned by the government,” said the former pitcher for the Philadelphia Phillies.

Bunning accused Paulson of deception when he told Congress in July that the Treasury’s plan would instill such confidence among investors that it would never have to be used.

Paulson “saw and knew what was happening, and didn’t tell the truth to the banking committee,” Bunning said yesterday.

Mr. Bunning hits the nail on the head, but the brand of socialism ascendant in the US should more properly be called fascism, as it heavily favors an oligarchy and is served with equal helpings of nationalism, militarism and surveillance.

SEC planning re-education camps for short-sellers

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Also, LEH is has agreed to sell all of its level III assets to the Tooth Fairy, but is providing 90% non-recourse financing:

If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.

Treasury Secretary Hank Paulson issued a statement: “I am delighted that SWFs (Sovereign Wealth Fairies) continue to express confidence in the terrific values represented by American financial institutions. As I have been saying since August of 2007, this shows that the crisis is now over.”

Get the rest of the story here.