patrick.net

From marketwatch.com:

Banks have until Nov. 14 to request capital from the Treasury. The minimum amount for banks is 1% of their risk capital, while the maximum is $25 billion.

The government will receive senior non-voting preferred shares and warrants to purchase common shares in return for the capital. The shares will pay a 5% dividend for the first five years and 9% after that, creating an incentive for the banks to buy back the shares from the government as soon as possible.

Biggest drawbacks: No voting rights. Pricing to be determined later (of course). Some say conversion rights would be better than warrants.

Malcolm, because INTC and JNJ and maybe CSX are the only really big and well-known companies on the earnings calendar TODAY. That's why.

No other big earnings news until tomorrow, when there be a larger amount of "leading" companies (abt, ebay, JPM, ko, WFC and others).

... and yeah, getting a feel for consumer sentiment is always useful.

Duke,

My assumption is government backing inter bank lending. I didn't think they were going to back stop banks. Banks still need to make prudent loans for them to be in business. I do know some people can misuse inter bank lending trust, I don't see it any different from managements using people's money to make fraudlent loans to benefit themselves.

Not sure I understand it completely.

The hope is that this will bring banks to lend again but the elephant in the room is average american that’s too loaded with debt to borrow any more.

Next up at the bailout feeding trough– the consumer.

Good point, but which consumers? A guy in "need" for assistance since he lost his job? He won't be borrowing again anyway. How about the short sighted man with the "loan reset?" We can "forgive" half the balance to make his payment affordable, but he also will not be in the market to further borrow. Do we pay down the balance of the guy who can pay his loan, just to free up his credit limit so he can borrow again?

The consumer variable is interesting and IMO how we got here. Good earnings today may translate to defaults tomorrow. Now, I'm reading about the credit card crisis, like we've never heard that one before. Crisis after crisis just like in Atlas Shrugged. Some may laugh but the solutions are starting to resemble the storyline solutions.

'Each consumer shall pay the same price for a house as they did last year....'

More and more behavior that doesn't benefit the ruling class (hidden behind the notion of the social costs) gets criminalized.

Yes, I'm for debtors prison in cases of fraud but now some of you are saying put someone in jail for defaulting? Come on!

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?

USSA does have a point, that restoring banks ability to loan at the consumer level is useless if the consumers are unable/unwilling to borrow. Maybe we will see tax code efforts to make borrowing cheaper while penilizing thrift. Such as:

Renter's Tax
Tax on FDIC insured savings balances
Tax credit in lieu of mere deduction for mortagage interest/local taxes
Tax on home equity (difference between assessed value and mortagage balance)

And more generalized, I would have to say that anyone who tries to decipher whether this plan is going to succeed or fail based on the emotional swings of the market should probably hang onto their money.

I was just thinking that Headset. On Youtube I got into it with someone because I said, "Well, no one has stopped offering credit to me.." I think Justme is correct, the consumers are the real key, that's why I believe in getting this country back on track by a bottom up approach. If we strengthen personal finance, and that means letting home prices fall, and actually get a manufacturing base again, a lot of these problems go away by themselves. I'd rather see a trillion dollars invested in real performing assets of infrastructure (and yes small business loans with partial guarantees) than this clusterfuck of a bailout.

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. Dow probably will hit 6000.

If we strengthen personal finance, and that means letting home prices fall, and actually get a manufacturing base again, a lot of these problems go away by themselves.

Yes! Besides, home prices will fall despite the bailout boys best efforts. For those people put out of work by the collapse of the debt industry, I agree that the gov should create jobs for them by funding infrastructure rebuilding rather that flushing away the money in Wall Street bailouts.

We need the infrastructiure, people need the jobs, the Wall Street folks do not need more compensation.

HeadSet Says:
October 14th, 2008 at 9:19 am
"USSA does have a point, that restoring banks ability to loan at the consumer level is useless if the consumers are unable/unwilling to borrow. Maybe we will see tax code efforts to make borrowing cheaper while penilizing thrift. Such as:"

Yesterday, I read Obama suggests letting people tap their retirement early, tax free. That's more palitable to me with the same outcome but an equally bad idea.

I read Obama suggests letting people tap their retirement early, tax free.

So what does this genius thing people will live on when they retire? Dependence on gov or charity?

It would be far better to cut back current consumption and leave retirement funds alone. Apparently, he is targeting people who do not really need to tap the retirement funds, since they have the option to leave them as is because of the tax penalty.

For fun take a step back and think about this....

We seem to generally agree (yes Randy, group think) that this country has a problem with debt. But then it is considered a crisis that defaults discourage lending. So the solution is to free up more credit.

I think I am living in a nightmare. I'm waiting for the thought control agents to show up in the white van in their white coats to take me away. I don't know if it's just me or if I and a relatively small group are the only ones who are sane.

Definitely not one of his better ideas, but I guess the goal is it will get some unencumbered spending going on. Even I would agree that someone spending real saved money would be refreshing as opposed to another 5 easy payments of......

"Apparently, he is targeting people who do not really need to tap the retirement funds, since they have the option to leave them as is because of the tax penalty."

The government resembles those moochers everyone knows. It is just running around going "He's got some money wow, maybe he can spend it. He's got a little wealth, let's ask him for some...." It's quite pathetic.

Even I would agree that someone spending real saved money would be refreshing as opposed to another 5 easy payments of……

Yes, but this is one of the last bastions of unspent savings in the US. I'm not a conspiracy nutter (well... not much anyway) but how many times do we have to see this and not think "They" have something against savings.

Meanwhile, let's go ahead and tax the RE equity of those few who are left with any, and what the hell, while we're there, go ahead and tax any paid-off autos that are sitting around not generating interest. And, yeah, now let's let the boomers hit their 401ks and IRAs early and often, and then get them indigent before they go to the old-folks warehouses to be turned into Soylent Green.

I am guessing O'bama's thinking is this:
If you lose your job and need something to live on, doesn't it stink to have to pay a penalty AND tax on a pension distribution?

Of course, this locks in the massive losses experienced by most pensioers.

The real trick would be to employ people so that raiding their retirement account isn't their only options.

Strangely, McCain makes Much more sence here. He knows that at 70 you are FORCED to withdraw money from your IRAs. Taking out money while its value is depressed froces you to realize the loss.

The pretext to all of this is that we can somehow magically get the DOW back to 14,000. Who believes this economy, or the global economy, can support DOW 14,000? Given what we know about the leverage at banks, the massive loss of weath, the quality of assetts, the job-market.

MST, you're right of course. The worst thing I keep coming across in my life is related to that mindset of trying to tap the wealth of someone who has it too easy. It is very easy for the government to see that thinking as a solution as they obviously are. I'm not a conspiracy nut either, I'm just shocked more and more every day about how creative these boomers are at taping into every segment of this country's resources for their own gluttony. It is like some sci fi energy monster that you cut off a limb and two more sprout out to tap into the energy supply. They just don't stop.

McCain the other day on TV, was talking about how the government needs to level with the next generation that there won't be social security for them. The boomers got more than any other generation and they are still whining that isn't enough.

Malcolm:

Exactly. Demography is Destiny. With the population pyramid turned upside down, the Ponzi scheme days of Real Estate, Social Security, Medicare, Perscription Drug Bennies, Automaker Pension Funds, and soaring National Debt WILL end. It is as inevitable as the sun setting tonight.

The flood of illegals (no, I'm not trying to start anything!) is obviously meant to prop up the system for another few minutes until TPTB get out with their asses intact so they don't share the fall when the walls come a tumblin' down.

The walls will fall. The last month was just a down payment.

*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?

-----

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.