Stocks Rally on Plan for Government Equity Infusions, Continued Pursuit of Evil Shorts

Reader eh pointed out in comments today that we could see “a monster snapback rally” should the tone of news improve, and one may be in progress.

Bloomberg reports that Senator Charles Schumer proposed creating a new agency to provide equity to distressed financial firms. The stock market, and financials in particular, applauded.

But in this skeletal form, this seems like a world class bad idea. The only successful example of dealing with a financial crisis is Sweden, which did not try to prop up troubled banks, but instead nationalized them, wiping out equity, brought in new top executives, and recapitalized them. The cost of failure was high to the incumbents and the solution was comprehensive, not piecemeal.

There seems to be a surprising willingness to accept its positioning as a “permanent solution” at face of the fact that this is a more like blood transfusion into a very sick patient: it will keep them alive without in many cases restoring them to health. Without other measures, such as the son of Resolution Trust Corporation proposed by Nicolas Brady, Paul Volcker and Eugene Ludwig in yesterdays Wall Street Journal, this runs the risk of being a page out of the failed Japanese playbook, where losses were not recognized and zombie banks were not permitted to fail. This US variant may keep them in a slightly more vital state, but that’s a long way away from a solution.

However, a potential shortcoming of the RTC version 2.0 idea is that we now live in a world of mark-to-market accounting. One imagines that sales out of this entity would be deemed to be fire sale prices (even though the Brady/Volcker/Ludwig piece used the formula “fair market prices”) and financial firms holding similar assets would not be required to mark them to those levels. But will anyone trust any non-market-price-based valuation approach? As much as the purge needs to (and inevitably will) happen, the RTC was not formed until a lot of thrifts had already fallen over. Implementing a similar vehicle at this juncture could have nasty unintended consequences.

Reader Dwight e-mailed us pointing that Pimco via CNBC said something we have mentioned in passing in earlier posts: with the RTC, the FDIC was disposing of assets that had already fallen in its lap via thrift failures. But this entity instead proposes to buy assets. How will the price be determined for assets where there is no market, or where transaction volumes are very small? Note that small sales do not represent where larger trades should be priced. A tremendous number of players have set up distressed asset funds, yet perilous few have done any buying. Will this son-of-RTC really set market-clearing prices? It could instead, via a combination of lack of savvy or having compromised, conflicting objectives, instead validate above-true-market prices, which is a bad outcome on many fronts (throwing scare fiscal firepower away on a failed mission, preventing rather than facilitating price discovery).

One also wonders if this high concept is, like the Frannie/Freddie conservatorship and the AIG rescue, intended again to keep the US at less than 80% ownership to avoid consolidating the debt (and presumably the assets) onto the Federal balance sheet. Even though the difference between 80% and 100% may not make much difference in practice, it’s troubling to think that accounting considerations might be constraining policy options for such a high-stakes operation. And does anyone think the rating agencies and our foreign creditors aren’t acutely aware of the size and scope of the obligations the US government is taking on?

Perhaps the biggest shortcoming of this idea is it assumes the US has the wherewithal to pull this off without the tacit support of our friendly foreign funding sources. Unlike Japan in the 1990s, which had a high enough savings rate to deal with its crisis internally, we are at the mercy of our overseas creditors.

Brad Setser has pointed out that the reason the US economy is not doing as badly as its financial firms is that we have been the beneficiaries of a “quiet bailout” of about $1000 per person via continued purchases of US Treasuries and Agencies during the market upheaval. But the Freddie/Fannie rescue, the Lehman failure and the AIG rescue have brought the US financial woes to the attention of the man in the street in Asia, and he is not taking it well. It may become increasingly controversial for foreign central banks to keep buying US paper, particularly since the amount on offer is sure to be going up.

From Bloomberg:

U.S. stocks rose on prospects the government is formulating a “permanent” plan to shore up financial markets and regulators and pension funds took steps aimed at curbing bets against banks and brokerages.

Bank of America Corp., American Express Co. and General Motors Corp. climbed more than 10 percent after Senator Charles Schumer proposed a new agency to pump capital into troubled financial companies. Wachovia Corp. rallied 48 percent, while Morgan Stanley and Goldman Sachs Group Inc. erased most of their earlier plunges, as regulators in the U.S. and U.K. stiffened rules against so-called short sales and the nation’s three largest public pensions stopped lending shares of Goldman and Morgan Stanley to short sellers.

On the pursuit-of-shorts front, the Wall Street Journal tells us:

New York Attorney General Andrew Cuomo said he has started a “wide-ranging investigation” into short selling, or bearish bets, in the financial sector. The UK Financial Services Authority imposed a temporary ban on short-selling financial stocks Thursday. And The California Public Employees’ Retirement System, the nation’s largest pension fund, said that starting Thursday it is no longer lending out shares of Goldman Sachs Group and Morgan Stanley, joining a growing list of public funds that are trying to limit short-selling of those two stocks.

Another bit of cheer is that Morgan Stanley is in talks with its investor, China Investment Corp, about another equity purchase, as well as engaged in merger talks with Wachovia.

Perhaps the real reason for the reaction was indirectly revealed in an e-mail message from hedge fund manager Scott, who was mystified at the rally of two days ago and is no doubt even more perplexed today, and saw this anecdote as providing a partial answer:

{An independent analyst} was asked to speak to a slew of {big firm you’ve all heard of] financial advisor types, more or less retail guys. I have no clue about the kinds of assets they control, but they certainly work out of a nice building in the financial district, and I imagine they all have nice suits and well-heeled clients.

And {the analyst] (who speaks on a daily basis with 4 or 5 of the most talented, sophisticated investors in the country, and somehow got thrown into that mix) said he basically just started asking these guys questions about, for example, what Lehman and AIG meant to the world’s financial system, and what their failures might portend. And they were clueless about the ramifications of all of this.

I‘ve been operating on the assumption that it was just laziness or complacency about risk that kept markets elevated. And now I’m wondering if I need to rethink that, and ask if there’s actually a total lack of awareness of what’s going on, which would obviously change the way you’d think about market pricing and how the market reacts to events.

In any event, my thoughts on today revolved around the fact that AIG was really a binary event—rescue or bankruptcy. The odds in favor of rescue far outweighed those of bankruptcy—I didn’t see how the Fed could let it fail. So call that 80-20, or 90-10, somewhere in that range. But against those odds, it seemed to me that the upside-downside weighed heavily on the side of caution. AIG rescued, 3-5% upside. AIG BK, 10% downside, before the real world ramifications started to seep into the picture. So the fact that the market did so well, with that big unknown hanging over its head, said to me that we are very far from a bottom here. But I thought it was merely complacency about risk that had to be overcome, and now I’m beginning to think that recognition of risk has not even really reared its head to date, astonishing as that thought seems.

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  1. sev

    It’s simple. The Treasury prints a ton of cash and the FED puts it back in to save equities and try to scare people out of gold.Really it’s not that hard. I heard a to of people say today that that’s exactly what will happen and it did. Now all we need to do is find out who got the injection and PUT them into oblivion. If anyone has any evidence or suggestions please put them up. The moves were coordinated and heavy although tomorrow might bring out sellers riding the top down… unless the treasury decides to print even more which wouldn’t suprise me at all seein the FDIC needs 500 billion alone.

  2. Anonymous

    “Scott” is amusing. It apparently never crosses his mind that somehow the loss of LEH and AIG might not be the end of the world. No, it’s just that the world is filled with dummies who don’t understand anything, and if only they did, then Scott’s hedge fund would be doing better than it is.

  3. dd

    Used to joke that in the electronic age all that was needed was a number and the Fed could provide the zeroes. Maybe not a joke afterall.

  4. Anonymous

    Sentiment is so bad, a snap back rally is not at all surprising. Scott and the rest of the gang betting on the end of the world will have to wait patiently.

  5. S

    What is the appropriate penalty rate for capital infusion?

    The banks are already subsidized by the low rates. Exactly how do your determine what sort of pain the equity holders of the major banks should take? That will be the ultimate tell.

    The sure trade since July-15 has been the moral hazard trade into the major money center banks.

    Righting the balamnce sheet does not mean rewarding the equity, and the market continues to be confuised on this point. Note the 52 week high on WFC.

    Any equity infusion should result in painful dilution to shareholders. JPM and BAC have already been given massive bailouts into the 10s of billions. JPM got the BSC backstop. BAC washed the FHLB debt of coutnrywide through and you can bet that it will magically diminish.

    Rest assured there will be no dilution for the favored children. Disgraceful. Even more disgraceful is the consequences of failure are worse crowd. Scoundrels.

  6. bg

    The snap back rally is due to the ignorance on the part of the masters of the universe? That seems too naive to me.

    Once upon a time ‘moral hazard’ did not mean ‘tax-payer backstop’. It used to mean gambling with other peoples money. If the financial system is, in fact, negative value, and if low stock price automatically triggers a run on its liquidity, then you can be sure that it will use whatever liquidity it has (from other peoples money) to fund a snap back rally.

    Very cynical by my standards, but far more likely than Kenneth Lay saying “I didn’t know anything about any of that”.

    We should count on extreme volatility to scare the pants off of the light hearted, but we all know where the ship is going.

  7. Swedish Trader

    Thank you for a fantastic blog!

    However, I am from Sweden and worked as a trader during the banking crises there. They did NOT force any major wipe outs of bank shareholders. Instead, the large banks (SEB, SHB etc.) were given a 100% state guarantee WITHOUT giving anything to the state.

    There is no questions that the banks would have gone out of business without this. Also, the Central bank (riksbanken) did a lot to make sure that the banks made money when the Krona was allowed to flot.

    In the end, the general population paid a MASSIVE price in lower standard of living but the shareholders of the banks did OK……….

  8. doc holiday

    In addition to my earlier comments about how the evil shorts were not in the compensation loop or accounting fraud loop, it is perhaps wise to return to the panic theories spun out by Treasury almost one year ago, e.g, MLEC and various on-the-fly creative solutions to help window dress bailouts to Friends Of Angelo, et al, and etc:

    Re: SUNDAY, OCTOBER 21, 2007
    The SIV Bailout Plan: Does the Math Work Even for Citi? (Revised)

    A reader question got me to work through a back of the envelope calculation of what the SIV rescue plan, the so-called Master Enhanced Liquidity Conduit, would buy for its chief beneficiary, Citigroup. What I came up with gives cause for pause.

    These capital strucutres put the size of the MLEC in the same order of magnitude as Cit's likely commercial paper funding needs. If you instead assumed their SIVs were funded roghly 95% with commercial paper, the MLEC would be a band-aid on a gunshot wound. So let's play with the reader-submitted information.

    The size of the market for SIVs has been pegged at $400 billion. The Citi funds in aggregate have (had) $100 billion in assets. They sold $20 billion, so now they have a $80 billion liability structure to worry about (note some sources have acknowledged the sales but still put the total size of the Citi program now at $100 billion, but we'll stick with the more widely reported $80 billion.

    The most recent reports say that Citi will take only half of the MLEC, so we'll say $40 billion. Commercial paper goes out to 270 days. But asset-backed commercial paper, in particular SIVs, was frozen out as of the first week of August, so let's say we have only 210 days of outstanding CP maturities (rounding up), and they are roughly evenly staggered.

    **>> I just hope this time, this year, those evil bastard shorts really get wasted, because they seem so elusive, like cockroaches that somehow got inside The Board Rooms of corporations … sweet jesus, what next, Washington?? S N A R K!!

  9. jkiss

    Overall, a great post. However,
    “Perhaps the biggest shortcoming of this idea is it assumes the US has the wherewithal to pull this off without the tacit support of our friendly foreign funding sources. Unlike Japan in the 1990s, which had a high enough savings rate to deal with its crisis internally, we are at the mercy of our overseas creditors.”

    It is worth remembering that foreigners hold no dollars, they hold US paper; to continue purchasing treasuries they must continually acquire more dollars. Asians and others, whether gov or ‘man in the street’, are helpless, the amount of US paper they buy is always exactly equal to our trade deficit, no more and no less.

    It used to be the fiscal and trade deficits were in approximate balance, i.e. stable. But now the trade deficit is falling fast, soon to be surplus, both on account of our consumers being bankrupt and because of cheaper oil. Meanwhile our fiscal deficit is exploding; foreigners with fewer dollars are losing the ability to fund our fiscal deficit – they are quickly losing their access to dollars just when they need more.

    US citizens will themselves have to fund our gov, meaning treasury interest rates will rise* until gov sucks up all US consumers paltry (but growing) savings. We will soon find that there are no savings available to fund endless bailouts, fixing aging infrastructure or some imaginary green revolution.

    * After the ‘link’ between rising gov expenditures and rising interest rates was broken decades ago gov expenditures have gone through the roof, no matter whether dem or gop congressmen were in power. The trade deficit, and foreigners flush with dollars, broke the link a long time ago, but the link will soon reassert itself and consumers spending less themselves will, for the first time in a generation, begin electing those promising that gov will spend less.

  10. Chris

    Thank you for your thoughts on these proposals such as Schumer’s and son of RTC.

    I think there are at least two differences between now and the RTC thing. First this is a global crisis, and under Greenspan the dollar has been globalized massively. Second the derivatives, and the inter-relation between currency trading, interest rate swaps, so-called insurance “fees” etc, these were only incipient issues then.

    A domestic solution like son of RTC might work on the mortgage side of things, maybe even on some of these securitised deals, but what about the global issues which rule here now, follow the sun from market to market round the globe with non-stop bets.

    This issue is a concentrated one given where the financial clout is located and where the predominance of the currency, interest rate and “commodity” trades are located.

    Concentration defines who needs to be involved, and also where chain reaction effects would reverberate.

    Perhaps the key to it all would be in currency reform and in re-regulating commodity markets especially oil and gas.

    The international side needs to be taken into account, for there is nothing to stop anyone dumping their toxic stuff here so Bernanke and Paulsen will pick up the tab for it.

  11. Abbott_Of_Iona

    If a new resolution trust is established and succeeds the citzen will again rejoice in its ignorance.

    Assuming it is established it appears to me to be no different that the brutal measures the (former) USSR just took.

    If you don’t like the message (efficient market, where the latest information pushes the price to an illusive equilibrium) close the market.

    Even if this manages to forstall price discovery, prices will be discovered at some time in the future. Hopefully without the loss of life.

    In the meantime the USA can look forward to a long slow Japanese type tourture and continuing pilage by insiders.

    Having said that, a resolution trust will do nothing to addresses the fundamental lie that, is, a country can remain independently active in an economic and soverign sense with out industrial and food security.

    Globalisation is failing. But that won’t stop its cheerleaders.

    Lets hope we can return to cooperating nation states without loosing our tempers.

  12. Anonymous

    The market rallied today because the SPX hit support @1133 in a time slot,should bounce to 1290 by sept 24,dont forget option expiration friday,I can assure you the banks havent.PB

  13. Hank

    Dear Earl,

    Hank here.

    I know it’s been a rough few days, and you probably thought I wouldn’t get back to you, but I’ve been busy working on the solution to this whole problem.

    It’s real simple:

    1) You lose your house, your car and your job. Sorry about that, but I applaud your willingness to take one for the Team.

    2) Friends of mine help out by buying your house and car for ten cents on the dollar.

    3) Patriotic, God-fearing Americans like you help out by buying the house and car loan at face value from some other friends of mine, and then selling it to yet more friends of mine at five cents on the dollar. How, you may ask? Don’t worry, I’ve already taken care of it.

    4) When Joe Wong gets tired of buying Treasuries instead of a Mars mission or Africa or something, I raise taxes so high you don’t ever have to worry about having to worry about having another car, house or job.

    Now, that’s what I call a win-win-win situation. Except for you, but we’re in a war, remember? And we will be for the next hundred years or so, so get used to it or go to Canada before we have FEMA lock you up somewhere.

    Remember, Earl: I’m from the Government. I’m here to help you.


  14. vachon

    I haven’t heard how they would handle the trillions(?) in derivatives that are built on the backs of these bonds.

  15. Martin

    To the information about the Swedish solution, it is worth adding that the bank(s) the government took over eventually was put back on the stock market. A government takeover does not have to be permanent, but it may cost. The long term effects of the rescue must also be taken into account. Take a look at the Swedish banks and Swedish economies reaction to the current crisis. What I’ve heard is that the Swedish central bank haven’t needed to supply Swedish money market with liquidity yet. This might change, but I think the true price of acting/not acting in the Swedish case shouldn’t be judged until we see the long term effects throughout this crisis.

  16. Richard Kline

    I’ve been slow to use the phrase ‘socialism for the rich,’ but the proposals to _buy_ bad securitized debt on the open market to prop up the present holders of same merits no other label. We’ll know if we’ve left our tattered democracy behind for tacit oligarchy when and if that kind of intervention is approved. I could not be more opposed to this scheme, the need to restructure the financial system nothwithstanding. And re: Paul Volcker, the fact that his name appears under the title for such a plan is exactly why I have NOT been and am not a Volcker man. In his last re-do on financial system crisis in the US, he showed himself entirely ready to hose the poor and soak the middle class, and unlike most he has the nerve to push the steamroller of such an approach right over the face of the public (bless their little unwashed ears). In a pinch, insiders will always vote for the rest to take the hit, and here we see this nakedly.

    Swedish Trader, thanks for the background. I felt in my gut that what you say _had_ to be true, but simply didn’t have the factual background. Soooo . . . it sounds like the Semi-powers That Be _are_ attempting their version of the Swedish Solution here.

    Regarding the equities bounce today, in the final hour, we have practically speaking yet another short cover. Each wave is bigger than the last: This is the salient fact, to me, not the nominal ‘reason.’ These kinds of increasingly severe swings have an historical profile, and they end one way. And I’m more on the side of those Universal Traders not really ‘getting it,’ since they have spend the bulk of their careers in conditions where equities are severely inflated and markets aren’t ‘allowed’ to crash. Gaming the system works until it doesn’t—because you’ve killed the system. If the authorities and the players feel that they cannot tolerate an orderly price decline they will get themselves a catastrophic one. Friday? Monday? A week from now? The Ides of October?? I wouldn’t believe anyone if they said they knew, and least of all claim to know myself. But the boojum is in the grass, and we will meet it face to face, soon. The larger and larger swings in the bush say that it approaches. And the CBs setting fire to the grass won’t prevent that outcome.

  17. Anonymous

    Even “electing those promising that gov will spend less” does not ensure that those elected will accomplish what they promise.

    Regardless, I doubt we will ever see the U.S. electorate choosing anything but a small handful of candidates who promise that gov will spend less. I find the suggestion well outside any U.S. experience in the last 100 years. Surely, no such tide was seen in the electorate even in the 30s, and despite certain meaningless protestations of some recent candidates, very few politicians elected to the federal government have come anywhere close to actually trying to reduce government expenditures. It does not help the re-election effort. Then again, who knows? The baby boomers (who have the largest voting bloc) may just go contrary to their lifelong bullying and selfishness and voluntarily decrease social security. Of course, I’m not sure I would bet on that.

  18. Matthew Dubuque

    Matthew Dubuque

    I’m a real fan of Paul Volcker; the world is unaware of half of the good he did during his tenure at the Fed.

    However, I am skeptical of this RTC II plan. What I don’t understand is HOW these hundreds of billions in toxic waste assets, viewed as highly radioactive and untouchable by financial participants from all sectors of the market, i.e. hedge funds, central banks, pension funds, accounting firms, ratings agencies, takeover specialists, private equity, vulture capital, distressed capital, value investors, speculators and the like will suddenly become “investment grade” with “potential” profit down the road.

    Nobody, but nobody wants this shirt on their books, yet somehow it is supposed to be a grand legacy for us to bestow upon our children?

    Wait a minute.

    Matthew Dubuque

  19. Anonymous

    I want to thank all the posters on this blog for your thoughtful, concise and knowledgeable insights. I have visited and read many a financial blog site and without a doubt you guys are the best.

  20. Abbott_Of_Iona

    Does "Swedish Trader" have any information for Martin & Richard Kline about the insane amount of money that the Swedish banks are exposed to in Latvia & Estonia or the collapsing property bubble there?,1518,577603,00.html

    “Until recently, Scandinavian banks had good reason to be smug. Unlike other European financial institutions such as UBS and Royal Bank of Scotland, which have suffered multibillion-dollar writedowns tied to risky subprime U.S. investments, the more conservative northern banks mostly steered clear of securitized assets and other new instruments.
    Instead, they made money the old-fashioned way, investing extensively in the booming economies of Eastern and Central Europe — especially their closest neighbors, the Baltics”

    No amount of STATE intervention will work in a "FREE MARKET" until the STATE takes over the "FREE MARKET"

    The question is what is the STATE?

    It is not the Taxpayer.

    It is not the citizen.

    It is not the voter.

    It is not a child born today that will become a debt slave.

    What is it?

    Who are they?

    Why do they do it?


  21. Cash Mundy

    Anyone been reading F. W. Engdahl’s
    Financial Tsunami papers? He’s been at it for a while:

    Part I: Sub-Prime Mortgage Debt is but the Tip of the Iceberg
    F William Engdahl, November 23, 2007

    and seems to be up there with Nouriel Roubini and George Soros for being early, right and consistent. The three of them have helped me really take care of some business…


    While free market purists and dogmatic followers of Greenspan’s late friend, Ayn Rand, accuse the Fed Chairman of hands-on interventionism, in reality there is a common thread running through each major financial crisis of his 18 plus years as Fed chairman. He managed to use each successive financial crisis in his eighteen years as head of the world’s most powerful financial institution to advance and consolidate the influence of US-centered finance over the global economy, almost always to the severe detriment of the economy and broad general welfare of the population.

    I don’t think he means that in a nice way.

  22. Anonymous

    Fund manager Scott has it right. Retail brokers have no idea of what’s happening macro or micro. All they know is candlesticks and sell-side calls on the squawk box. They’re salesmen.

  23. S

    Markets rallied on the back of the FSA annoucement on banks. Note the differential across the bank universe in those stocks that were heavily shorted (WB, COF, etc) and those money centers that taunt from behind the veil of the government. Quadruple witching tomorrow as well adds to the volitility. And then BB and HP have anothe rplan to save the complex.

    The greatest irony of all this is how people actually think another government plan marks a buying opportunity. WFC at 4x book loaded to the gills with CA real estate and home equity. So the gov to speand 1 trillion, equities rally.

    It is all the more pitiful that GS is complaining to the government after its prop desk has exploited competitors and markets for a living. I say let it go to zero if that is what the market deems it worth. Contrary to popular opinion the sun would come up if GS went bye bye forever. It most surely would be a more efficient reallocation of human capital.

    The State of the Union is well in its last throes

  24. Anonymous

    The RTC idea has a large drawback: huge inventory and getting bigger everyday! Most of the forclosure sales today are investor driven, very similiar to the bubble period but all based on speculation that RE always goes up. We are running through the lower end blocks now but soon the Alt A and Prime high end will be hitting the inventory and these are priced well north of 500K.
    My guess is that some type of RTC will be created if nothing else to try and place the Fannie/Freddie foreclosures which itself will require years to unload not to mention the number of FHA Saver foreclosures that will be occuring. Yes the Gov’t will have to be in the business of unloading the excess housing inventory but this is a national problem not a few overbuilt subdivisions out in the Southwest.

  25. dd

    RTCI had known assets and liabilities courtesy of FSLIC. RTCII has a derivatives issue but the Fed is now the proud owner of a good quarter if not closer to a half of that market. Geithner and Corrigan have a plan; but the hopes of a “private” market are dead. So it will be a “public” market underwritten by the US and supported by worldwide CBs. Think of it as the earth’s first truly global market. JMHO

  26. Matthew Dubuque

    Matthew Dubuque

    The compliant and illiterate corporate media has clearly put out the BEST case here, where hundreds of billions of HIGHLY radioactive toxic waste that no capitalist of ANY ilk would DARE go near will MAGICALLY turn to investment grade securities and “may” turn a profit if it is foisted on the non-feasting classes.

    What we have now is the BEST CASE scenario, reminiscent of David Stockman and his fabricated “rosy scenarios” put out in behalf of Saint Reagan.

    But this is much bigger.

    We now have the BEST case scenario.

    Let’s have Professor Roubini or Mr. Buiter put out the WORST case scenario and see if they bring anything worth discussing to the mix.

    Matthew Dubuque

  27. Abbott_Of_Iona

    The USA

    A Republic?

    Res Publica (A Public Thing) ~ "For the People"

    Can the USA call itself a Republic any longer.

    If it cannot ~ Then can it call itself a democracy ~ Demos ~ A population of the common people & Cracy ~ Rule.

    The USA is no longer a Republic or a Democracy.

    The question is ~ what has it become?

    If it is possible for an insignificant number of the population to control the vast majority of the population by greed (lets all buy a house it is the creation of all of wealth,we will be rich beyond our (American) dreams) or fear (some creep from a culture we know nothing about kills 3000 people on 9/11).

    If it is based on either of these two things then the Italians had a word for it.


  28. Anonymous

    Have you seen that Cox is proposing a “temporary” ban on all short selling? They are desperate to prevent price discovery and prop up their buddies. This is unbelievable.

  29. masaccio

    The toxic waste to be bought by the new entity has to be valued pool by pool and mortgage by mortgage. The cost of evaluating each mortgage is apparently pretty high. I read somewhere it costs about $350 per file to do initial due diligence.

    Maybe it can be done more cheaply as we look at pools that are operating, but the price will be high. Who is going to pay for that? How is it going to get done?

  30. Dean

    I saw the “America’s brightest” TV interview and I found little encouraging. The politicos basically said “we agree” to cooperate. Everyone knows that an agreement to agree at a future date is not an agreement.

    This is going to turn into political football very soon. A quick resolution favors McCain and the other party will not allow such. There is going to be a huge outcry from the public about sources and uses of funds.

    That’s all for now.

  31. Stuart

    Unlike RTC 1 that was disposing of assets of failed S&Ls, this proposed RTC 2 would have to acquire these assets, such as all the crap on Washington Mutual's books as an example. In aggregate, hundreds upon hundreds of billions if not more. So, my question is…. where does the RTC the capital in the 1st place in order to acquire these assets. 2nd, given that most of these are marked down very little, what does the RTC pay for them. Somebody has to take the hit. If they pay pennies, the originating bank takes the writedown and we're back to square one. If paid at face value as on the books, then the RTC will take the hit. Also, I cannot see how taking these over and selling at a much lower mark would not trigger derivative events…. Nevertheless, the main question, given that the Treasury had to issue paper to fund the Fed's balance sheet, a clear sign that except for longer dated paper (10s, 30s) the Fed is out of ammo, where does the RTC get its money from to do the purchasing.

  32. Anonymous

    This may be slightly off topic here and probably better suits the previous post, but I was struck by clarity of the following July 4th comment by Richard Kline (which I found while searching around for something else):

    Richard Kline said…
    So Yves, I couldn’t agree more that a functional plan to recapitalize the US banking system is the key mechanism needed for the US to move forward in a global macrofinancial realignment. I don’t think that the present idea of foreign major capital—read the Gulfies and China and its cubs—is a go. They stand to lose money by direct investment, and there are twisty political ramifications from such stakes. In any event, those foreign sovereign moneybags haven’t moved en masse, and they would be crazy to do so before US financial institution prices bottomed which as I know that you know is something very far from present valuations.

    What likely needs to happen is for a US public body to be capitalized out of the Fed or Treasury, which then sells bonds guaranteed by the US and in turn places capital stakes in the salvagable portion of the major US financials. Guaranteed ‘financial agency bonds’ out of the intermediary institution can quite possibly be sold to that sovereign foreign capital because not only will they not have to invest in US banks directly but also there stands to be a secondary market for the paper in time.

    This sounds complicated but then the situation _is_ complicated. I suspect that the ultimate resolution to the US financial system crisis will look much like this. But we need it in the next six months whereas we are more likely to get it twenty-four months and more down the road after wasting a lot of time and an enormous amount of money trying to defend indefensible market-top valuations in the big financials, equities, and US mortgages. If the US had any real leadership, economic or political, we would be hearing the first discussions of such an approach. We don’t have leaders in this country, though . . . only players.

  33. Anonymous

    Sy Krass said…

    Arent we going parabolic or about to go parabolic on M3 now? If you look at the charts of M3 (or the ghost of M3), I starts to go parabolic this October or November. This feels “icky” it seems that we are going to have trading swings of 2000 – 3000 pts a day soon to swing back form deflation to hyperinflation to stave off the both of them. Just look at the history, the cycles are getting shorter and shorter, the last two have provided half day rallies, we’ll see how long this one is…

  34. Cassius Mundus

    Abbott_Of_Iona said…

    The USA

    A Republic?


    I will join you in briefly wandering afield.

    Rather than make my usual polemical rejoinder by way of agreement, I would like to note one of the fundamental determinants of current social, political and financial structures, which may receive too little consideration: that they are fundamentally industrial and technical in nature, and could not exist without our present state of industry and techne.

    This was noted by John Keegan, I think in his book on War One, in which he referred to the industrialisation of warfare: how the machine gun was essentially industrial killing, mass destruction instead of mass production. I’m sure it has been much discussed elsewhere.

    I state no conclusions or proposals here other than to suggest that industrialisation and computerisation are profoundly fundamental to things ranging from this blog as a means of communication to current political systems, including but not limited to Marxism, Capitalism and Fascism. Any plan, platform or project for the future will instantiate within this context, which can be expected to continually alter towards greater technical capacity, with unpredictable effects.

  35. Cash Mundy

    Asia’s buying it, so I guess Europe will too. Man, now that is impressive: stopping the Great Crash of 2008 by banning shorts. Who knew?

    Well, I guess everything we knew was false. Either that, or they just commanded the tide not to rise.

  36. Jojo

    Maybe a representative form of government isn't such a good idea after all? Seems they do what is best for THEM & THEIRS, not what is good for the American people.

    Welcome to Amerika.

  37. Anonymous

    Stuart’s right. Bill Seidman (former Chairman of the RTC) said the same thing on Kudlow yesterday (9-16): you have to buy the assets and then sell them. In RTC-I they were given the assets and then sold them. I think he said Japan tried the RTC-II idea and they never agreed on prices after ten years of trying.
    It all smacks of Son of Super-SIV with the taxpayer taking the hit rather than the reckless financial wizards who created the stuff in the first place.

  38. Stuart

    Surprise, Surprise…. As soon as Goldman Sachs gets hit with short selling attacks, the SEC is out there front and center to ban short selling. Resource companies, tech companies can be short sold into the friggin’ ground and nary a god damn word. But, oh boy, touch one of the inner boy’s club and that’s a no no, Cox is out there. By the way, the Chinese market bans short selling, take a look at it and get used to that graph. Do you think the SEC will still allow Goldman Sachs though to short sell. You’re god damn right they will. Nah, no manipulation in this market whatsoever. The SEC is supposed to be neutral to any all industries, not playing favorites. McCain is right. Cox, you need your ass fired ASAP!

  39. HRP

    OK, now, stay with me here, and I’ll try to explain it, with the help of Earl over here. Fortunately, Earl is insured by Mutual of Ohama XXXXXXXX AIG XXXXXXX the full faith and credit of the Bureau of Engraving and Printing, or this could be dangerous.

    OK, now, Earl represents civilisation. Now, notice the alien schistosome that has leapt onto Earl’s face and knocked him down, making him appear to be stone-dead. Now the schistosome is Too Big to Fail, and that’s all you need to know about that.

    OK, now here comes Hank, and he says, we must cut this alien pod-thing from Earl’s face, and he nicks it a bit (now, that represents Lehman) and it bleeds a weird molecular acid and generally via alien sign language makes it known that if anyone tries to cut it off, it will turn into a Black Hole, kill Jim, me, and Hank, and then drop straight thru the center of the Earth and kill a bunch of Chinese people and then come back here and so on.

    Not Good.

    OK, so Hank says, clearly we cannot remove this Alien Fruiting Body from Jim’s face without killing everyone, and so we must

    Alien Giant Schistosome
    3 KG
    0.7 meter
    has a posse

  40. Richard Kline

    So Anon or 10:18, awwww did I really say that? I comment on so many things and sundry that I don’t recall ’em all. Though as I do recollect, there was a pretty good reply to _that_ concept from Yves at the time which you might dredge up an paste here in tandem to give full context.

    I’ve been for overt nationalization since last Autuman (and well before); this comment was an attempt at a partial go to that effect since the real thing isn’t in the offing. I don’t even know if I’m still behind that idea at this time, frankly, but I’m surely opposed to buying radioactive ASBs on the open market as an indirect and most odious bailout of busted out speculators. There HAS to be a better way.

    And Abbott_of_Iona, (can we just call you Colmkill for short?), Swedish exposure in the Baltics has been well-covered by Yves and commentors at NC in the past and elsewhere, so speaking for myself I’m reasonably current on the risks and their vectors there, yes. Since you asked.

  41. Anonymous

    As Swedish trader points out above, Sweden didn’t nationalize the troubled banks in the early nineties. But Norway did. I once read somewhere that they ended up making money in the whole bailout once the banks were privatized again – can’t verify if this is true or not. Myself, I’m from Finland, and our own banking crisis ended up costing a fortune.

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