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*Prescription*

Damned fingers!

# Malcolm Says:
October 14th, 2008 at 9:14 am

And sorry Justme, I don’t mean to knock your logic, but how is a quarterly report going to show the effectiveness or failure of something that is two weeks old?

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Malcolm, what I'm saying should be taken in the context of my first post on this thread. (way on the top). I'm simply concerned that the stock market initially over-reacted positively to the bailout plan. I think reality may set in once some of the earnings reports are out. The ongoing slide in the markets this afternoon is a case in point.

I really haven't made any claim of the effectiveness (or lack thereof) of the bailout plan. Time will tell,

Semicomer says : CDS is more than 56 trillion dollars, more than the whole world’s GDP. Dumping $700 billion into the market is like dumping a piece of mud into a pond

CDS (Credit Default swap) is like an insurance against default.
The numbers going around the web regarding the loss in wealth is Exaggerated. The actual loss cannot exceed the underlying credit which is insured. In our case, thats the loss in mortgage loans when people walk away from home and bank has to sell it at a lower price.

For example ( analogy)
Lets say ,we can have a big hurricane in florida and ALL the homes in florida are lost.The loss of the home value is either to the home insurance company or to the people.It cannot be to simultaneously to both, for the same house. We cannot keep double counting things.The problem is that if this kind of event causes insurances industry to disrupt or default.Nobody will build new homes in the absense of insurance. Thats what the Govt is trying to address.

I am not saying that every thing is fine and dandy, but we have to look at things as they are.
The total loss to us as a nation cannot exceed the amount of money we have loaned in excess to what it should have been according to case shiller index (around 12 T) thats it..period. Every things else is financial disruption, lost trust in the financial industry, consumer/investor sentiment.

MST sez: Demography is Destiny

Amen to that.

justme Says:
October 14th, 2008 at 10:41 am
"I think reality may set in once some of the earnings reports are out."

Sorry justme, the radical notion of stock prices being determined by actual earnings and performance of companies is just not going to fly in today's world :)

TOB, I noticed that too just between my gen x group and my gen y friends. I catch myself saying, "growing up we only had the networks and limited cable" so we all watched the same stuff. There is a huge difference now, which is why I think gen y is so open minded on things because they had the benefit of multiple sources of information. They are very enlightened and good at filtering out biases.

Oh Ho snmr, how terribly wrong you are.

Since CDS are UNREGULATED, ANYONE can take a CDS against ANYTHING.
For example, Ford issues bonds which are bought by, say, a pension fund. The pension fund buys a CDS from AIG to make them whole in case Ford defaults on the bonds. The transfer of risk was from the pension firm to AIG.
However, in the CDS world. Goldman Sachs, who holds no bonds, can bet with UBS about the likelhood of Ford defaulting. Goldman pays a 'premium' on the default insurance to UBS. If Forddefaults, then UBS pays Goldman.
How insnae is that?
Becasue now Goldman gets all of its Hedgie customers, with their trilllions of dollars, to naked short Ford into default.
That is what you get with no regulation.
That is why CDS can be much larger than the undelying problem. That is why you can get totally unregulated segments affected.
As a further example, given that the knowldeg about credit worthiness was TOTALLY Asymetrical (becasue Fitch, Moodys and Standard and Poor stink) Goldman Sachs can approach University Bike Shop and say, " Moody's says Ford is AAA, so the default risk is 1 in a 1,000. How about we pay you $2k, which is twice the default risk of Ford, if you will pay us $100k if Ford defaults." The bike store is stoked as this is easy money (and pretty near their monthly income anyway). Now when Ford pops, University Bike Store liquidates and cannot pay the $100k. But Goldman Sachs does not care since it had another CDS arangment about Univeristy Bikes goingunder.
The whole thing is sick.

Malcolm, I agree, that would be radical. On the other hand .... this just came out:

U.S. Stocks Retreat as Earnings Concern Overshadows Bank Plan
By Lynn Thomasson

Oct. 14 (Bloomberg) -- U.S. stocks fell a day after the market's biggest rally since the 1930s as a worsening outlook for earnings at PepsiCo Inc., Microsoft Corp. and Intel Corp. overshadowed the government's plan to buy stakes in banks.

PepsiCo lost as much as 14 percent, the most since October 1987, after lowering its profit forecast as customers cut back on snacks and soft drinks. Microsoft and Intel slid more than 4 percent as analysts said demand for computers is slowing. Morgan Stanley, Citigroup Inc. and Merrill Lynch & Co. added more than 16 percent, sending banking shares to a third straight advance.

I was defintiely a child of the 80s but I wasn't consumed by the big hair band poser culture that I though was ridiculous growing up. I had all the same toys, same clothes etc, liked the pop culture movies and shows, but found the notion of abortions abhorrent and recognized the emerging boomer materialism early on. Again, from yesterday, George Carlin was a big influence on that mindset, obviously not on abortion views though, but definitely his 'too much stuff' bit left an impact.
No, I was too busy building RC airplance kits, and shooting BB guns to really care what was going on around me.

From a CNN/Money article:

http://money.cnn.com/2008/10/06/real_estate/Drastic_plan_slashes_mortgage_costs/index.htm?postversion=2008100917

As part of the initiative, Bank of America will cut monthly housing payments, including mortgage, property taxes and insurance, to no more than 34% of gross income. The move is expected to help keep as many as 400,000 troubled borrowers in their homes.......

Depending on each borrower's circumstances, Bank of America might freeze or lower a loan's interest rate or even cut the principal loan balance.

A little "principle cut" may unstick a few Bay Area homes.

It would be funny though, if the 34% was based on the liar income the borrower used when he applied for the loan.

TOB,

Liked your observation about televison etc.

Here's how I think about it: TV is basically about pandering to the audience, and then selling them stuff while they are susceptible, during or after the feel-good experience.

What is new in TV is that there is now micro-targeted pandering to just about every small segment of the market. In other words, the granularity has become very fine. It used to be that people would talk about "my TV show" (virtual eye roll), but now it has been taken to a whole new level.

I think this means that the "normalization" you talked about perhaps is not working so well anymore. But in any case, I agree that TV has indeed always served as a guideline for what is socially acceptable. It always amazed how US college kids just to take behavioral cues from what they had seen on TV (once I figured it out).

So we're on a seesaw, the markets over react to the panic, and then overreacted to the bailout.

I wonder if people are drinking less Pepsi because times are hard, or because they are trying to get healthy. I know I have all but cut soda out of my diet.

Headset,

I think BofA is desperately afraid that people will realize that they are better off just walking. I bet there will not be a lot of Principal reduction until banks get REALLY desperate, though.

BofA: Hey, er just cut your payment by 25%
Homedebtor: How many years of payments did you add?
BofA: Uhh, well, uh, you see, ....

Justme,

LOL!

Especially if the debtor can do a "principle reduction" by purchasing the similar house across the street, for half of what his current mortgage is. I saw an ABC news report on Californians doing just that.

Headset,

I made up a name for that type of transaction: I'm calling it a "1099 exchange"
(Get it, huh? huh? :-))

Yup, I think. A reference to the 1031.

Wouldn't a 1099 apply to forgived principle, and not to default? Possibly to neither after some horrible law was passed?

Another reason to walk......!

Duke says : However, in the CDS world. Goldman Sachs, who holds no bonds, can bet with UBS about the likelhood of Ford defaulting. Goldman pays a ‘premium’ on the default insurance to UBS. If Forddefaults, then UBS pays Goldman.

Well , you might say that , even the loss in home loans is a transfer of wealth and nothing more. I might have to agree with you there.
In the end, it looks like , the loss is more to our economy's ability to function and produce something valuable. The damage has already been done in the past 8 years, where wealth distribution had very little to do with value creation.

Intel posts higher quarterly earnings !!

The worse part of CDS is insurance providers collecting premiums on products knowing they would never be able to payback in case of default. That's stealing.

Still, some are calling into question Intel's EPS number since the company was taxed at a far better-than-expected 28 percent rate, instead of the normal 33 percent. If the usual tax rate was used, Intel's EPS would be driven down 30 cents a share.

If you dig deep enough, you would get lot more clarity.

Headset, yeah a pun on a 1031-exchange.

snmr, yup, will be interesting to see how "the market" likes the the q4 somewhat uncertain guidance.

All these anti-foreclosure, anti-clog-up measures are extremely inflationary.

There was an interview earlier last week by the Aussie Central Banker Glenn Stevens which is very telling, this guy is the straightest shooter among all CB heads that I have heard. He said, (from memory, so there maybe slight variation of verbage), "we RBA has unlimited ability to provide AUD swaps, and the FED has unlimited ability to provide USD swaps, so it is a matter of time for the capital injection to work".

I think the $700B is just for show (primarily to our creditors), as if the printing is still restrained, not completely out of thin air. The Fed has already expanded its balance sheet by over $500B in the last 12 months, to be precise, the last 2 months, I don't see them seeking Congress approval for that. In about 12 months, we will have easily printed over a few trillion, easy.

On PBS Newshour with Jim Lehrer today: Discussion of bailout plan preferred stock purchases.

Dean Baker of the Center for Economic and Policy Research posed the question why the taxpayers get 5% interest rate while Buffett gets 12% on Morgan Stanley preferred. He also thinks the taxpayer should get voting rights, and that CEO pay should strictly defined, not just lip service.

To all who are against the bailout in the first place, should we not now concentrate on getting the taxpayers the highest possible return? In other words, write your US representative and complain!!

Side note: Richard Sylla of NYU piped in that the government (that is you, the taxpayer) should not be in the business of making a profit. Sure, privatize the profit, socialize the risk, yet again.

Here is a scary development that has largely gone under the mainstream radar: Money market funds are getting the go-ahead to pretend that their NAV is 1.00 based on estimated value of portfolio contents.

http://www.cranedata.us/news/#item-1898

In the grand scheme of things, the $700B doesn't matter.

In 24 months, when all is said and done, we will look back and laugh at how we actually cared so much about the $3000 per person, because that $3000 won't be able to buy much, at least the expectation will be as such.

What they are doing is using $700B as a distraction of attention so that they can print freely in the background. Watch Fed's balance sheet. Where did the Fed get its $500B in the last two months??? Anybody, anybody, Mueller?

The Fed cannot be seen as straight printing from the air, that will lead to instant collapse of the financial system because nobody will trust USD any more. So every once in a while, they put on these shows as if the money comes from the taxpayers, what taxpayers, this country won't have enough taxpayers.

I maintain, the $700B is just for show. The real printing going on in the background is completely unrestrained.

justme Says:
"To all who are against the bailout in the first place, should we not now concentrate on getting the taxpayers the highest possible return? "

Excellent point.

When bufffet can make good bargains, why can't US govt with so much more capital and bargaining power make such deals ?

something is definetely broken. Conflict of interest ? mr paulson ?

Correction, Buffet appears to be getting 10% not 12%. Still ....

Look at the terms that Mitsubishi got:

Under the revised deal, Mitsubishi UFJ receives $7.8 billion of
preferred shares that convert to stock at a price of $25.25, down from
the previous level of $31.25.

The remaining $1.2 billion is in non-convertible preferred stock. Both
classes pay a 10-percent dividend. The $900-million interest payment to
Mitsubishi UFJ is about 16 percent of Morgan Stanley’s adjusted net
income next year, based on the average of nine analysts’ estimates.

Buffett bought $5 billion of perpetual preferred stock in Goldman, the
Wall Street firm that has best navigated the credit market turmoil. As
part of the deal, Buffett secured the right to buy an additional $5
billion of common stock at any time in the next five years. His
preferred shares will also pay 10 percent interest.

I maintain, the $700B is just for show. The real printing going on in the background is completely unrestrained.

True, but compared to amount of $USD being destroyed via deflation its still a lesser amount.

It is not USD deflation, it is de-leveraging.

It is debt being destroyed faster than printing, so here is a little bit of glitch. But don't you see that the worldwide government can guarantee ALL deposits and different degrees of inter-bank lending over a weekend? Where does the guarantee money come from? Falling from the sky?

So as always, the government is half a step behind. They are a bit behind in printing, and they will be very behind in containing inflation when they eventually catch up with printing.

The nice thing is, after this crisis of the century which will go down in history book as the ultimate blowup of our financial system, the Fed will go along with it. The Fed is insolvent now. All it can do is to print until its FRN loses credibility entirely, and at that point, it will be gone.

Market Reflation Indicators:

http://www.financialsense.com/Market/wrapup.htm

But don’t you see that the worldwide government can guarantee ALL deposits and different degrees of inter-bank lending over a weekend? Where does the guarantee money come from? Falling from the sky?

You do not need money to guarantee anything, at least not if you are a government.

They are trying to prevent the invocation of those guarantees.

All it can do is to print until its FRN loses credibility entirely, and at that point, it will be gone.

Not if ECB is losing credibility faster.

Where does the guarantee money come from? Falling from the sky?

The same place all fiat currencies come from; thin air.

The trick is how much you print and where it goes.

Consider this scenario, for example. The central bank prints a $100 bill. Skipping the fractional reserve lending part; this is then ultimately lent out to a citizen.

If they turn around and invest it in equities or commodity futures; or use it for consumption (ultimately pushing up demand for equities and commodities), that would be inflation.

If they burn it in their furnace; its deflationary.

Now imagine the scenario that they lend it to their neighbor at some small interest rate and its the neighbor that burns it in the furnace; defaulting on the loan.

Again we have deflation. And this is what is happening on a global scale. People *all over the world* borrowed money during the credit boom they have no chance of ever paying back.

So the first party is pissed it didn't get paid back and doesn't want to lend out any more of its cash. So the central bank gives them a 'do over' by printing up a new $100 bill and handing it over to them. The net money supply never changes. This can never be inflationary.

This *can* work in the long term as long as all the parties get dinged in the process, including the central bank. Then they all learn their lesson and hopefully exercise better diligence in the future. Otherwise we end up in moral hazard territory and everyone just takes bigger risks next time.

In fact, people think our current predicament is a result of the many bailouts of past.

Actually you do need money to guarantee, because a lot of these banks are in fact insolvent. If it is not a bank run, it will be something else that can bring one of these down.

You cannot count on 100% of the people NOT cashing in on your guarantee, if 1% cashes in and find out your guarantee doesn't work, the whole system will fall apart.

You can't have a FDIC with $0 in the coffer to guarantee anything. People are not that stupid, they know it is printing.

I wonder, if and when the economy does get traction, will the Fed have to jack rates (Volker style) to contain the the massive inflationary scenario it has put in place.

On a global scale, the currency with the worst fundamental is moving up the fastest, which says to me, is a result of deleveraging, not deflation. It's because US-based financial companies and USD-denominated assets are getting the most margin calls.

Deflationists believe that governments are sane and rational and far-sighted. Stagflationists like myself believe that governments are comprised of insane power-grabbers who are so reckless that they don't care if the world goes down just so they can remain in power for one more day.

The economy will NOT get traction. It will just be the favored banks getting sprinkled money betting on the last bubble, commodity, because it has fundamentals to support such a bubble. After that will be complete collapse and deflation to no end. I am not extrapolating, this has happened in history repeatedly, must be human nature.

The economy can only get traction if the money is sprinkled evenly to everyone, so Americans can go on their patriotic shopping trip again. Right now only the chosen ones get the fresh supply of money, and the only thing they can bet on is basic human necessities that we have to consume no matter how expensive they are.

The biggest problem with printing has always been, you cannot direct precisely where your printed money go and there are always unintended consequences. 1970s was lucky for us because we actually had quite a bit of savings, and a strong manufacturing base. Now the Fed cannot raise interest for another 10 years, we are stuck in ZIRP until the entire world recovers. Or else if we raise interest rate alone, we will have no industry left in this country.

I am not extrapolating, this has happened in history repeatedly, must be human nature.

Gresham's Law is immutable. Bad debt will always crowd out good.