Greetings from the metropolis of Cedar Crest, NM.  Where my weekends are filled with  youth football, soccer…and then some.  As I yell at my boys from the sidelines to hustle and tackle and kick….the number 700 billion creeps into the forefront of my mind.  What in the heck is 700 billion?

What can one say about 700 Billion?

 
What does that number mean?  I cannot even fathom seven hundred billion.  I am used to using such a label on the number of stars in a constellation (I am sure I am off a billion or so).  How about the number of grains in a sand pile.   How about how old the earth is (okay…I am exaggerating now…right?)  How about the number of cells in one’s body?

Next question is …how does someone come up with the number “700 billion” as the magic number to bailout our financial institutions?

Am I the only one that finds that odd…? “Oh….700 billion should do the job!”  What is the bank failure formula?

Either way…something must be done….right?  Either way….we are going to pay for it right?  By the time this blog is posted….congressional leaders will have approved a bailout plan of some sort….at least some of us hope so.

I am not sure where I stand on this….and I realize that it does not matter.  But what I do know is there will be a lot of opportunity for those who prepared for this.  Everyone else will be in survival mode.

What is the truth?

The urgency of our congressional leaders to act was strongly worded by Bernanke during a commercial break at the most recent congressional testimony……..

“Senators, we live in a world that has bonds and bad construction loans and those assets need to be bought by men and women with balance sheets. Who’s going to do it - you, Chairman Dodd? You, Senator Schumer? I have a greater responsibility than you can’t possibly fathom. You weep for Bear Sterns and curse the banks just trying to get their collateral; you have that luxury. You have the luxury of not knowing what I know: that Lehman’s bankruptcy, while tragic, probably saved firms and that my existence, while grotesque and incomprehensible to you, saves markets. You don’t want the truth, because deep down in places you don’t talk about at parties, you want me buying assets - you need me buying assets. We use words like “foreclosure,” “Discount Window” and “TARP.” We use them as the backbone of a life trying to defend something. You use them as a punch line. I have neither the time nor the inclination to explain myself to a group of media hungry politicians who rise and sleep under the blanket of the very liquidity I provide and then question the manner in which I provide it. I would rather you just said “thank you,” and went on your way. Otherwise, I suggest that you purchase a defaulted option arm and pay par. Either way, I don’t give a dang what you think the American taxpayer is entitled to.”

Well….700 Billion seems to be the magic number NOW……unfortunately….there will probably be another magic number in the near future.

Until next time…..rob

Photo Courtesy: Jakerome - No way, no how, no bailout.

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Tags: $700 billion, bailout, bailout bill, bank, banking, mortgage bailout

As a little boy I used to ask my grandmother to tell me stories of her life as a young girl in Germany. She was always reluctant to talk about it, but I was usually able to coax something out of her. I didn’t understand until I was much older, but her reluctance was a result of the pain those memories caused.

One of the stories that she would tell took place after the First World War. Germany lost and, in so doing, agreed to the Treaty of Versailles. In addition to the loss of geographical territory, the German Weimar Republic was forced to pay enormous sums in reparations. In essence, the Germans had to pay for all of the damage done in the war. Germany did not have the financial means to pay these damages and their solution was to just print money.

Catastrophic Consequences

As this new money moved into circulation the impact was devastating to the German economy. The inflation rate was absolutely staggering. A few years after the end of the war the German economy had an inflation rate in excess of 300% per month! The economy had essentially collapsed and the country was experiencing a depression of enormous proportions. This set the stage for the rise of the Nazi party several years later.

Which brings us back to my grandmother’s story. She would tell me how her father and brothers, all coal miners, would get paid twice a day. The currency was devaluing so fast that it needed to be spent as fast as it was earned. My grandmother told of collecting the money and going shopping for food. The grocers didn’t even bother counting it, they just estimated the amount by how large the stack was. A loaf of bread could be purchased for two bags of money in the morning, by the afternoon the price might be three bags. The currency had so little value that people would burn it in their stoves for heat because wood had more value than the money.

We Are Getting $700 Billion From Where?

The US dollar is a fiat currency. That means that it is not backed by gold or any other asset but instead is backed by “the full faith and credit” of the United States Government. As we increase the national debt we are destroying faith that the rest of the world has in our economy. As that faith erodes the dollar will fall further, and imported goods (read oil) will cost more and more. The inflation that we are already experiencing can quickly turn to hyper-inflation if we keep spending money that we don’t have.

Hyper-inflation is an end-stage terminal cancer to any fiat currency. However that inflation does not immediately follow the event that caused it. In Germany the Weimar republic began printing excess money in 1919, but the hyper-inflation didn’t take hold until a few years later. It may be several years before we see the real effects of the proposed bailout that we have before us.

No Simple Solution

There is little doubt that something needs to be done. My initial reaction is to let these businesses fail and have the chips fall where they may. Capitalism follows the law of the jungle in that it is truly survival of the fittest. However, it is not so cut and dried in this case. This crisis touches everyone whether they realize it or not. We are now faced with choosing the lesser of two evils, let the economy collapse or get this bailout deal done and hope it doesn’t collapse anyway.

My grandmother was a simple woman

who was never more than a blue-collar worker. Yet somehow she managed to buy her own house and live a decent life. She had a great work ethic and believed that people should earn the things that they want, not have them handed to them. One of the most difficult things that I ever had to do was to give the eulogy at her funeral, yet it was also one of my proudest moments. I can’t help but wonder what she would think of this mess if she were still here among us. I’m sure she would want to know how we let this happen.

A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation. -Ross Perot

Tags: $700 billion bailout, economic crisis, hyper-inflation, inflation

We all know by now about the $700 Billion Paulson rescue plan he’s been attempting to stampede through Congress for the last week. But do you really know what’s in it? Do you know what those against it want in the plan before they sign on?

What Hank Wants

Let’s take a look at the three most important measures in the Paulson Plan:

(1)The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets [Sec. 6].

Let’s look at this more closely. This measure will allow him to purchase the mortgage “related” securities. The verbiage is really important here. Notice the plan doesn’t say “mortgage-back securities or whole mortgage, but mortgage “related” securities. The reason for this is the truly underwater investments crippling the balance sheets of investment institutions and banks, is the mortgage derivative investments.

A mortgage derivative is an investment product that really increase returns when things go well, and REALLY rack up loses when things don’t. Racks up losses so quickly and so large it freezes the whole secondary market function for mortgage capital…at least that’s what Paulson is contending. These investments are then sliced and diced into sub-products many of which are worthless now with no hope of recovery.

Can buying worthless investments make the banks whole again and by proxy then free up the secondary mortgage market? If you were contemplating bankruptcy due to some bad “investment/purchase” decisions and decided to have a garage sale to unload all your bad choices. Do you think selling me your 50 inch Plasma TV for $100 is going to make you whole again?

It won’t…but I digress. I’ll discuss whether the plan “works” or not next week.

(2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [Sec. 10];

Pretty self-expalinatory…the Fed lends the US the money and in order to allow the Fed to print the money, the national debt ceiling must be raised. This is what puts taxpayers on the line for the payment of this rescue plan.

(3) best of all: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency” [Sec. 8].

This proviso is what I call the “Hank as King” measure allowing the Treasury Secretary to act without impunity, supervision, or regulation with his decisions on what to buy, what to pay, and what to ask for in return.

Isn’t it the lack of oversight, regulation, and prudent financial choices that created this mess in the first place. Now we are being asked to allow it again?

Wow! Paulson has no shame adding that power in to Section 8. It’s funny a “Section 8″ is also the code which allows for a military discharge for being crazy…and I think Hank is a little crazy if he thinks anyone is going to sign on to this!

Want Dissenters Want

The Congressional leaders who are currently voicing opposition to the rescue plan say they won’t pass anything that doesn’t contain provisions that have some accountability, require the government to negotiate an equity position in exchange for their investment (ala AIG), limit corporate executive compensation and/or the paying of dividends to stockholders, and mandate loan modifications to help home owners in foreclosure on mortgage assets the government buys.

Time will tell if this is more grand-standing than real objections.

Would this Paulson rescue plan work even if it passed? Could it make things worse?

That’s the topic for next week…so stay tuned…

Tags: $700 billion, bailout, Economy, Hank Paulson, housing, mortgage bailout, paulson, rescue plan

As our great and venerable (throat clears) leaders continue to debate the bailout of banks and millions who cannot afford their homes, I thought that I’d share some quotes that might bring some perspective to the issue:

On the value of money nowadays:

And to think, $50 billion use to sound like an unimaginable amount of money. Now the way people throw around the world billion, $50 billion sounds like milk money.

I bet with the inflation our country is going to go through after this bailout, you will actually need close to that for milk. - Jason F.

On WaMu failure and Funding of the FDIC:

WOW! The FDIC prefers to move in and take over at 5pm on Fridays to give them the weekend to clear things up and so people can’t panic as much-that shows just how bad things were for WaMu if they couldn’t wait 24 hours.

On a WaMu side note-we just got a new client at my firm in the past month, her father passed away and surprisingly left her 2.5 million. 750k of that was in WaMu CD’s. I was trying to get my boss to really press them to get the money out asap, regardless of penalties, but they wanted to wait on the “death put” (in case of death a cd can be paid out without penalty) to avoid losing out on any money. Talk about Penny smart, Pound foolish! Please people, DO NOT keep more than the FDIC limits in your bank accounts. I know that may be hard for some business accounts but you never know who and when this is going to happen to next.

Next order of business for congress-bailing out the FDIC. With all the talk about ‘bailouts’, you’d think there was a sinking ship around here… - Bob H.

On the bailout stall in Congress:

Good. I am glad the House Republicans are stalling this. We need serious debate over this issue, before we hand over 700 billion dollars of our money. This reminds me of the Patriot Act. Legislation was rammed through Congress so fast that watchdog groups had little time to examine the bill.

Extraordinary legislation deserves extraordinary due diligence. - Matthew G.

On the Bailout:

An outright bailout of people and institutions reinforces bad patterns that emerge again down the road in a new set of clothes. I’m not sure if nothing can be done now, but it seems like there must be some sort of middle road where financial solutions can be reached while still keeping the people on the hook that made poor decisions. - Scott S.

On the Consequences of a Bailout:

Every action has an equal and opposite reaction. Unfortunately the reaction isn’t always obvious. This bailout will cause problems that can’t be foreseen now. How often has the government done something only to have it backfire? - Richard W.

On government intervention aka. Bailout:

I think it’s preposterous and tampering with the free market. I believe that one of the reasons we’re in this mess is because the Fed forced rates to stay low for so long after they were due to increase, which led to the buying spree, inflated prices, and further blowing the bubble. - Alan B.

Tags: bailout, congress, Foreclosures, housing, housing bailout, Mortgages, paulson

In a move that should surprise no one, the FBI, says CNN, has opened an investigation into Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc., and American International Group, the four companies now at the very heart of the proposed $700 billion dollar theft–I mean taxpayer bailout–plan being pushed by Bush and gang in Washington.

This apparently brings to 26 the number of financial insitutions under law enforcement scrutiny just in the past year.

CNN quotes two law enforcement officials as saying the FBI is looking for “potential fraud” by the four giant and now collapsed companies.

Faster, Faster, Faster

Meantime, perhaps the FBI should also take a closer look at why the Bush administration is in such a hurry to ram through the Congress this enormous rip-off of the American taxpayer in order to rescue some fat-cat Wall Street big wigs who drove their companies and the U.S. economy into the ground.

We are being told we must act quickly…yesterday if possible. Don’t ask any questions. Don’t provide oversight. Don’t permit judicial review. Don’t hold hearings. Don’t consult experts. Don’t hold anyone accountable. Just hand the $700 billion over to the very sleeze bags who brought the country to its fiscal knees.

Don’t help people who face forclosures. Don’t limit executive pay for the CEOs of failed companies. Don’t attach amendments to increase unemployment insurance. Don’t change the bankruptcy laws to allow judges to change the terms of a mortgage to help keep someone in their home.

No. Don’t do any of these things. Just fork over the greenbacks. Sign the big check. Shut your mouth. Close your eyes. Plug your ears. And, while you are at it, hold your nose because the stench from this crap will burn through your throat.

Recently, China executed some key industry executives who were responsible for tainted products being exported to other countries, tarnishing China’s still developing reputation.

Maybe China is on to something? The Chinese, after all, brought us citrus fruits, gunpowder, paper, fireworks and now, corporate executions. Isn’t there something to be learned,then, from the Chinese when it comes to dealing with this financial crisis??

Tags: AIG, fannie, FBI, fraud, freddie, lehman, mortgage-fraud

Trust, value, respect for one another, confidence, a person’s word plus a laundry list of other descriptives comprise not only our social fabric but our national financial landscape. If it were otherwise, we’d all need to walk around with pistols strapped to our leg.

That is my segué into a nasty trick Wall St pulled on a few million investors. You may be one and not even know it. The investment at the root of the trick goes by the acronym ARPS.

ARPS stands for auction rate preferred shares. I like the sound of auction preferred shares. Don’t you? It has a flair and bon vivonce about it almost unequaled in Wall St fictions.

You should also know these things called ARPS go by the names of other cash and cash alternatives. You should also know these were mainly, and still are, found in money market mutual funds.

History of Cash and Cash Alternatives

Other cash and cash alternatives have been around for a good number of years. At least 20 years by my research. They were simple little instruments that were safe and paid like clock work.

There was little or no risk to an investor’s principal because like the letter A – auction – said, the major players in the game conducted an auction in which they set the interest rates. All above board because it was done with the blessing of the SEC and, mind you, done in the public arena.

I use the verb were in the above paragraph in its strictest sense because this past February Goldman Sachs, Citigroup, Merrill Lynch and every other brokerage house quit bidding. This nasty trick immediately evaporated liquidity. I mention these three houses because they were the ones who created the auctions.

The lack of liquidity means people with money in this fund cannot take their money out. The fund is still carried on the holder’s statement at par (face) value because the underlying Triple A rated bonds are still in the fund’s portfolio and these bonds are still paying interest but the money simply isn’t available to the fund’s owner. In other words, the owner is not getting a dime from their account.

I bet if you are like me, you are incredulous and either can’t, or refuse, to believe what you just read. If you have money in one of these funds, you are nodding up and down and screaming out loud to anyone who can hear not to invest a cent in these boat anchors.

Of course Wall St still charges its fees and expenses just as if nothing has happened. There is a lot of speculation as to why the brokerage houses quit bidding but that doesn’t help the fund’s owners one bit.
The government has stepped to the plate to relieve the fiasco in the CDO and SIV markets but hasn’t done a darned thing to help ARPS owners. There is a lot of speculation as to the why of that non governmental action but that doesn’t help the fund’s owners one bit either.

I think there is something rotten at the U.S. Treasury. Just an opinion but if one looks at the man at its helm one sees deep Wall St roots probably still being watered by the good ole boys sitting in the leather chairs in the board room.

Joe Citizen is denied access to his funds but the creators, promoters and hucksters behind CDOs get a nice bailout. By the way, did anyone notice not only the Merrill-BoA “merger” but the $85 billion dollar bailout this last week… not to mention the MASSIVE $700 million bailout?

Tags: bank crisis, banking, cash

First some background. The Great Depression that followed the stock market crash of 1929 saw an unprecedented wave of bank failures. At the time we didn’t have the banking giants that we see today, most banks were of the small, neighborhood variety. There was no such thing as deposit insurance, Federal or otherwise and when these banks failed the depositors lost their money. A failure at one would lead to a panic at another, which, in turn, caused that one to fail as well. As the panic spread more and more banks failed. It became an epidemic that led to financial ruin for many.

The panic in the banking and financial markets caused the Government to step in (sound familiar). In 1933 the Federal Deposit Insurance Corporation (FDIC) was created to insure deposits and stop the panic. The law that created the FDIC was the Glass-Steagall Act. Lesser-known provisions of this act actually played a much greater role in the economic recovery that followed. Some of these provisions were designed to control excess speculation and clearly delineated the roles of banks, insurance companies and investment firms.

For decades the banking, insurance and brokerage industry clamored for the repeal of this act. The brokerage firms wanted to enter the banking and insurance industry and banks and insurance companies wanted to be able to offer stocks, bonds and other investment instruments to their customers. All sides said the competition would benefit the consumer. Various administrations, both Democrat and Republican, had rejected this call for repeal since the 1960s.

Unintended Consequences

There were many that said that the Glass-Steagall provisions were no longer needed and competition would regulate the marketplace. We see now how that has worked out. The increased competition and the thirst for profits ultimately had a lot to do with the housing bubble, foreclosure crisis, failures of major brokerage and insurance giants as well as the current wave of bank failures. The banks, insurance companies and brokerage firms all got what they wished for with the repeal of Glass-Steagall, now they are paying the price.  Ultimately we will all foot the bill for this in some way, shape or form.

There are many in this country that pine for the days of the Clinton administration. They talk of their beloved Bubba as a great multi-tasker who could balance the budget while, at the same time, chasing interns around the Oval Office. They blame the current administration, whose mistakes are too numerous to list, for everything from a hangnail to the current financial mess. But with one stroke of the pen President Clinton repealed the Glass-Steagall Act on November 12, 1999 and may have planted the seeds for a financial crisis of epic proportions. Do you remember where you were?

Leaders are responsible not for running public opinion polls but for the consequences of their actions. -Henry A. Kissinger