Hardly surprising to retrench after a collasal day yesterday. We seem to be in a bit of a range, which I suspect we will be in for a while until we all find our way. Unlikely to be any awe inspiring good news in the near term. Yes, bits and pieces, but nothing to change the overall mood. The fact that we did not give up all of yesterday's gains on a record drop in retail sales (at least since records started in 1992) is probably a good thing. Retail down 2.8%. Have I mentioned that consumers are tapped out?
And they have a perfect storm to add to the fact that debt is near record levels on a consumer basis. Their piggy banks, also known as homes, are now under water. Their credit availability has dried up, thanks to new tighter lending standards (which Paulson is foolishly trying to loosen now). They are losing jobs, which, last I checked, tends to cut into spending habits. They are losing money in the stock market, be it a brokerage account, college account or retirement account. And consumer sentiment numbers continue to be near lows, which means consumers are depressed. Now my wife likes to spend money when she is depressed, but not so much when she is depressed about finances. Any how, did I mention that consumer spending is hitting a wall? Well, it is and I have been pounding that drum for a while.
Over two thirds of our GDP is tied to consumer spending (which is a somewhat unhealthy percentage from what I read), but that means a 2.8% drop in spending correlates roughly to almost a 2% drop in GDP. Add to that likely export drops due to global recessionary pressures, and we should easily get a 2% annualized drop, probably more like 3% annualized, this quarter. For the one economist still on the wall on whether we are starting a recession, you can now join the recession crowd. I know technically it takes two quarters of GDP drop (the official definition is a bit more amorphous, but most think the definition is two quarters of GDP drop, so I will work with that) and we have to get another quarter of drop to qualify. So raise your hand if you think the GDP will go up next quarter. Anyone? I see no hands, so it is unanimous - we are in a recession. You can quote me on that. Or you can quote Buffet who said something to the effect that it sure feels like it, and that was a couple of months ago when things seemed darn right rosy compared to today. Let me move on, because there is a lot of juice out there today.
You Likely Own a Car and You Likely Will Own a Car Company
It is no secret that the American car companies are on the ropes. I heard a report tonight that they each have roughly three months of cash at the current burn rate, which may or may not get to the new administration. But we all know that this President or the next will likely save them one way or another. It's the jobs stupid.
The current Pres may be more concerned with the corporations but the next cares about the jobs, and there are tens of thousands of jobs on the line here. While I care about the jobs I wonder whether Chapter 11 might not be the better path to long range health. Still, bankruptcy financing, which is needed to get through Chapter 11, is reportedly non-existent, so that may not be a present option, absent government financing in Chapter 11 (gee, there is an idea). Yet, it is unlikely that the government will let this get worked out in the bankruptcy courts. Why? Well one forecaster has about 200 billion reasons:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNv90nwWR0Wg&refer=home
They predict letting just GM fail will cost the U.S. $200 billion in aid to states, unemployment and the like. I have not done a critical analysis of this forecast (not that I am capable of that but it sounds good to say) but it sounds plausible that it is cheaper to keep the tens of thousands of jobs around for better days than to let the companies fail. I know Obama is going to tie support to a speed up in greener and more efficient cars being brought on line faster. I suspect these companies already have that message and are converting as fast as they can, though gas prices are down 50% in the past few months, so maybe they still need prodding. Either way, I don't see the government allowing these companies to fail. Perhaps one?? Who knows. By the way, I am not saying to buy stock, as this could be an AIG type of deal where the we get 79.9% of the stock (at 80% the government brings the company onto the government balance sheet, and we don't want that (because the government balance sheet looks so great right now)). If we are putting in big bucks, it should be that way. Isn't Communism great!!
Surprise!! Surprise!! Surprise!!
99% of the top selling brokers of Merrill Lynch are staying on to work for Bank of America. THAT IS UNBELIEVABLE!!! OH MY GOD - 99%!! This seems like an incredible percentage - until a single thought crawls into your brain. Which is . . . . . . . where the hell else are they going to get a job in this environment? These people are lucky to have a job. Beggars cannot be choosers and this is proof of that pudding.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZj2MHOlnlCI&refer=home
"Strong and Stable"
Gee, where have I heard words like these. Perhaps from executives of Lehman, Bear Stearns, Wachovia, WaMu, Merrill, Morgan Stanley (and as Yule Brenner said in "The King and I" "ectetera, ectetera, ectetera!") If you believe this from Citibank, you are on the wrong blog, respectfully.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYOr08Ji4N98&refer=home
For more on the financial strength of Citibank, this may interest you.
http://brontecapital.blogspot.com/2008/11/citigroup-whachovia-sheila-bair-and.html
This is Bad (I am pretty sure)
All this derivative stuff still makes my head spin (and hurt), and when you get to CDOs and CDOs squared and CDOs cubed and so on, my brain really begins to hurt. You have to consider tranches and the like, but overall, CDO is now a bit of code for "run away, run fast, run hard, and don't look back. Run for your life!!") Yves, who does NakedCapitalism.com, probably my favorite blog, has a nice piece on CDOs you would be wise to read. She knows her stuff, though pretty much all of this article is from Financial Times, and they also know their stuff:
http://www.nakedcapitalism.com/2008/11/more-cdo-defaults-in-offing.html
The Big Red Country
My five year old daughter, who is adopted from China, likes to look for China on globes by looking for the red country. A fair number of globe manufacturers depict it in red. So much so that when on a new globe we ask her to look for China she says she is looking for a red country.
The events in the past few years, or months, reflect that China has been privatizing businesses at a tremendous rate (which is making the government's task there in addressing their downturn more challenging), but as of late U.S. seems to be essentially nationalizing businesses at a similar rate. Go figure.
Nonetheless, China is having big problems. I have noted this repeatedly and I have said repeatedly that this is a major problem globally, especially for us. They are a major trading partner and they have been buying our Treasuries to support our spending and deficits. Soon, they may not be able to fund our foolish debt laden ways. And then what? Seriously, there are other countries that are enablers for us, but they are all having their own issues. What happens when the U.S. tries to sell bonds to support the alpahbet soup of facilities and the TARP and everything else and no one buys? What happens when the spigot is turned off? I suspect Bernanke starts up his printing press and climbs in his helicopter and inflation be damned. Just food for thought. For now China is still our (financial) ally. They do it for their own economic well being, but they may wake up to a different tune soon.
Later!
Friday, November 14, 2008
Thursday, November 13, 2008
Bounce?!?!?!
Okay, I did not see that coming and apparently those that drove the market down to new lows early on did not either. Here I was feeling all smug and superior in anticipating the market had worse things ahead and then the turn. Not just any turn mind you, but a massive one. I have not done the math but I believe the market swayed close to 10% today, from low to high. The odd part is that the volatility index was down nearly 10% today despite the fact that the pricing on the volatility index (VIX) itself ranged over 15% today. So how can the volatility index end down for the day, significantly, when the volatility index itself had one of its most volatile days? Go figure.
Green Pastures Ahead . . .
If you think that is what I am going to say, you have not read this blog long enough. Yes, the extreme "dead cat bounce" today was reassuring. It perhaps might signal that there is some support at the bottoms we reached again today -or it might not. I agree that the market has some great bargains right now, which is why I am back in a bit. Heck, I even have one call option (I won't say what it is but the stock was up over 16% today and my option did not change, arrgghh!). Still, the prospect for medium to long term pain remains.
So let's talk a bit about the TARP. Few hundred billion in and Paulson apparently decides all his previous brilliant ideas are dumb and now he needs to focus on consumer debt. I question how one man can cause so much economic disaster to one country with one bad idea after another. He is obviously bending over forwards (not backwards) for some political folk in doing this or an alien has overtaken his brain and permanently programmed it for stupid ideas.
Okay, reducing consumer debt by transferring it to the federal government is not stupid, though that is not what Paulson has in mind. It is, however, what the last "stimulus" package did in part and will undoubtedly be what happens to the next stimulus package. Right now that helps the man and woman on the street and the federal government has an easier time now getting credit at good rates. But the plan is ostensibly designed to get people to start spending again. I know this is the mantra from both parties - revive the economy by reviving consumer spending, which is what got us out of the last couple of bubbles, I mean recessions. But we are, as a consumer, in heavy debt and can not, should not and will not start spending above our means despite how much money they give us. Wake up politicians!!! Debt needs to be paid down, not added to. Yes, doing so will prolong the recession, but in the long run restoring balance to individual balance sheets is much more important. So yes give money to consumers in debt but ask them to use this to pay off debt. The sooner it is paid off the sooner the consumer can help the economy - but not until then.
Da Plan
Paulson's new plan is not to pay the average Joe (the plumber) on the street a dime of what is left of the $700 billion, but rather to back those companies providing credit to consumers so the over-their-heads-in-debt consumers can borrow more. Brilliant!! NOT!! Somebody pleeease give Paulson a chart showing the consumer debt load and its ratio to the GDP and explain to him very slowly "This is bad, very bad. Debt going down is good. Debt going up is bad."
Did I mention that Paulson is doing some stupid things with our money. It is a bunch of bull to give J.P. Morgan $25 billion (on top of the $29 billion Bear Stearns guarantee) to get it lending only for it to say it will use the money, likely, for an acquisition. J.P Morgan, lest you haven't already noticed, has already gobbled up more than its fair share in this downturn and it is quickly transitioning from the "too big to fail" to "too big to save" status. We do not need to go there, yet the federal government is giving them more than enough rope to hang themselves. Bottom line, if you want to give them $25 billion to lend and get credit markets working, you require them to do this with the money or at least get board positions where you have a say. Paulson is an idiot. (That is an opinion, not advice!!)
So, what should we be doing with the money? Well everyone else is telling the government what to do, so I might as well add my two cents worth (since they are certainly spending much more of my money than that on these plans).
Money going to support the commercial paper market was a great idea. Commercial paper is critical to our businesses operating properly. We need more of this. Right now the shipping industry is at a standstill because traders cannot get letters of credit or, for those that do get letters of credit, financial institutions do not honor them. We need government support here right away- as in yesterday. International trade is critical and we should use our dollars to get it moving again. Seriously, this includes food getting to countries that desperately need it. We need to break this log jam.
In a word, infrastructure. We need a lot of spending in this country to improve roads, bridges, dams, levies and everything else. So let's think about this, hmmm. We have a lot of blue collar construction industry workers out of work and collecting unemployment or living off government benefits. We have thousands of desperately needed infrastucture projects. Seems like a good fit to me. Perhaps the TARP has a few billion that it has not yet spent on companies that deserve to go bankrupt that it can spend on companies that actually make things and are the backbone of our society.
I am sorry to say, but I think the best plan is for the government to quickly decide which companies should fail and take them down quickly. The survivors should get "some" assistance, but not much. If they need a lot, they should be on the fail list. We need to clean out the bad pieces of our ecnonomy fast, not slowly. The faster we do it the faster we recover.
Just some thoughts to consider.
Green Pastures Ahead . . .
If you think that is what I am going to say, you have not read this blog long enough. Yes, the extreme "dead cat bounce" today was reassuring. It perhaps might signal that there is some support at the bottoms we reached again today -or it might not. I agree that the market has some great bargains right now, which is why I am back in a bit. Heck, I even have one call option (I won't say what it is but the stock was up over 16% today and my option did not change, arrgghh!). Still, the prospect for medium to long term pain remains.
So let's talk a bit about the TARP. Few hundred billion in and Paulson apparently decides all his previous brilliant ideas are dumb and now he needs to focus on consumer debt. I question how one man can cause so much economic disaster to one country with one bad idea after another. He is obviously bending over forwards (not backwards) for some political folk in doing this or an alien has overtaken his brain and permanently programmed it for stupid ideas.
Okay, reducing consumer debt by transferring it to the federal government is not stupid, though that is not what Paulson has in mind. It is, however, what the last "stimulus" package did in part and will undoubtedly be what happens to the next stimulus package. Right now that helps the man and woman on the street and the federal government has an easier time now getting credit at good rates. But the plan is ostensibly designed to get people to start spending again. I know this is the mantra from both parties - revive the economy by reviving consumer spending, which is what got us out of the last couple of bubbles, I mean recessions. But we are, as a consumer, in heavy debt and can not, should not and will not start spending above our means despite how much money they give us. Wake up politicians!!! Debt needs to be paid down, not added to. Yes, doing so will prolong the recession, but in the long run restoring balance to individual balance sheets is much more important. So yes give money to consumers in debt but ask them to use this to pay off debt. The sooner it is paid off the sooner the consumer can help the economy - but not until then.
Da Plan
Paulson's new plan is not to pay the average Joe (the plumber) on the street a dime of what is left of the $700 billion, but rather to back those companies providing credit to consumers so the over-their-heads-in-debt consumers can borrow more. Brilliant!! NOT!! Somebody pleeease give Paulson a chart showing the consumer debt load and its ratio to the GDP and explain to him very slowly "This is bad, very bad. Debt going down is good. Debt going up is bad."
Did I mention that Paulson is doing some stupid things with our money. It is a bunch of bull to give J.P. Morgan $25 billion (on top of the $29 billion Bear Stearns guarantee) to get it lending only for it to say it will use the money, likely, for an acquisition. J.P Morgan, lest you haven't already noticed, has already gobbled up more than its fair share in this downturn and it is quickly transitioning from the "too big to fail" to "too big to save" status. We do not need to go there, yet the federal government is giving them more than enough rope to hang themselves. Bottom line, if you want to give them $25 billion to lend and get credit markets working, you require them to do this with the money or at least get board positions where you have a say. Paulson is an idiot. (That is an opinion, not advice!!)
So, what should we be doing with the money? Well everyone else is telling the government what to do, so I might as well add my two cents worth (since they are certainly spending much more of my money than that on these plans).
Money going to support the commercial paper market was a great idea. Commercial paper is critical to our businesses operating properly. We need more of this. Right now the shipping industry is at a standstill because traders cannot get letters of credit or, for those that do get letters of credit, financial institutions do not honor them. We need government support here right away- as in yesterday. International trade is critical and we should use our dollars to get it moving again. Seriously, this includes food getting to countries that desperately need it. We need to break this log jam.
In a word, infrastructure. We need a lot of spending in this country to improve roads, bridges, dams, levies and everything else. So let's think about this, hmmm. We have a lot of blue collar construction industry workers out of work and collecting unemployment or living off government benefits. We have thousands of desperately needed infrastucture projects. Seems like a good fit to me. Perhaps the TARP has a few billion that it has not yet spent on companies that deserve to go bankrupt that it can spend on companies that actually make things and are the backbone of our society.
I am sorry to say, but I think the best plan is for the government to quickly decide which companies should fail and take them down quickly. The survivors should get "some" assistance, but not much. If they need a lot, they should be on the fail list. We need to clean out the bad pieces of our ecnonomy fast, not slowly. The faster we do it the faster we recover.
Just some thoughts to consider.
Wednesday, November 12, 2008
The Slow Drum Beat South Continues
I have perhaps been a bit Chicken Little and the sky-is-falling kinda guy lately, so you might think I take solace in the fact that the market is down big time. Indeed, approaching the lows of October 10th. Truth be told, I put a third of my retirement back into equities a few weeks ago, so this down market makes me lose money (though admittedly it opens opportunities for the two thirds still in Treasuries). Mind you, my thought (not advice) is that the bottom is a bit lower, and perhaps 15-30% lower, but guessing (predicting) a bottom is fool’s gold. Don’t ask me, ask a financial advisor.
Again, the Bloomberg headlines tell the story. Mind y0u, these change throughout the day, but right now they say the following:
•China's Industrial-Output Growth Slumps, Adding to Risk of Deeper Slowdown
•Asian Stocks Extend Global Rout on U.S. Treasury Plan, Intel Forecast Cut
•Mizuho May Sell $3.2 Billion of Preferred Shares in Japan to Boost Capital
•Citic Pacific Cedes Control to Parent, Hands Over Foreign Exchange Losses
•Hedge Funds Lost $100 Billion in October on Withdrawals, Eurekahedge Says
•Paulson Scraps Plan to Buy Troubled Assets, Shifts Focus to Consumer Loans
•GE Says U.S. Will Guarantee Up to $139 Billion in Debt for Lending Unit
•House's Boehner Demands Fed Name Recipients of $2 Trillion in U.S. Loans
•North Korean Nuclear Samples Bar Undermines Verification, South Korea Says
You can try to find the silver lining here, but truth be told this is a bad slate of news. I am still caught up with Asia. China is in for a world of hurt and when China sneezes, the U.S. has a stroke (or at least a nasty infection). For those in college in economics or finance following this, ask your professor about this. Today Best Buy publicly said that they have never seen a consumer environment like what they are now facing. All the rules are down the tubes. If your professors have lost less than 10% in their retirement from peak or gained in their investments otherwise this year, I would not mind listening to what they have to say. I suspect they cannot meet this rather minimal criteria.
Again, the Bloomberg headlines tell the story. Mind y0u, these change throughout the day, but right now they say the following:
•China's Industrial-Output Growth Slumps, Adding to Risk of Deeper Slowdown
•Asian Stocks Extend Global Rout on U.S. Treasury Plan, Intel Forecast Cut
•Mizuho May Sell $3.2 Billion of Preferred Shares in Japan to Boost Capital
•Citic Pacific Cedes Control to Parent, Hands Over Foreign Exchange Losses
•Hedge Funds Lost $100 Billion in October on Withdrawals, Eurekahedge Says
•Paulson Scraps Plan to Buy Troubled Assets, Shifts Focus to Consumer Loans
•GE Says U.S. Will Guarantee Up to $139 Billion in Debt for Lending Unit
•House's Boehner Demands Fed Name Recipients of $2 Trillion in U.S. Loans
•North Korean Nuclear Samples Bar Undermines Verification, South Korea Says
You can try to find the silver lining here, but truth be told this is a bad slate of news. I am still caught up with Asia. China is in for a world of hurt and when China sneezes, the U.S. has a stroke (or at least a nasty infection). For those in college in economics or finance following this, ask your professor about this. Today Best Buy publicly said that they have never seen a consumer environment like what they are now facing. All the rules are down the tubes. If your professors have lost less than 10% in their retirement from peak or gained in their investments otherwise this year, I would not mind listening to what they have to say. I suspect they cannot meet this rather minimal criteria.
Tuesday, November 11, 2008
WE HAVE COMMENT!!!!!!!!!!!!
Okay, the WE above is just "I" but after two weeks of this blog up and running I finally shamed someone into posting a comment. Nothing too substantive, mind you, and anonymous, but a comment nonetheless. And it may be anonymous, but I have my suspicions on who it is. In any event, this is a momentous event for my blog and so I am inspired to continue this fodder. As I said yesterday, it helps me to clarify my own thoughts. If it perhaps is of entertainment value for someone else, that adds incentive for me. Mind you - entertainment value, not investment advice value. I hope to educate a bit but moreso hope to give everything financial a bit of a lighter side, as much as today's markets allow. I have no intention of providing advice.
Billboard News
I have said before and will again that I find the Bloomberg headlines a decent head check on the general economy and where things stand. Once again, little good news and increased issues in Asia (though one glimmer of light on China retail sales).
•Asian Stocks Fall on Concern Economy is Worsening; Inpex, Fortescue Slide
•China's Retail Sales Rise 22% as Financial Crisis Fails to Damp Spending
•Pelosi Calls for `Emergency' Aid to Automakers as GM Falls to 65-Year Low
•DoCoMo May Pay $1.5 Billion for Stake in Tata Teleservices, Sankei Reports
•Crude Oil Trades Near 20-Month Low Below $59 a Barrel on Demand Outlook
•Global Financial Markets Have Yet to `Bottom' After Rout, Jim Rogers Says
•Gendell's Tontine Capital to Liquidate Two Stock Hedge Funds After Losses
I truly think that China is an important ally and that we need to work with them. They have been loyaly supporting us in our time of need, buying our Treasuries, but it may be time soon where we and others need to support them. It will be difficult, depending on the timing, but we need to be there for them - if we can. And therein lies the quandry - if we can.
Sorry folks, done for the night. Work is hectic now, which is a good thing.
Billboard News
I have said before and will again that I find the Bloomberg headlines a decent head check on the general economy and where things stand. Once again, little good news and increased issues in Asia (though one glimmer of light on China retail sales).
•Asian Stocks Fall on Concern Economy is Worsening; Inpex, Fortescue Slide
•China's Retail Sales Rise 22% as Financial Crisis Fails to Damp Spending
•Pelosi Calls for `Emergency' Aid to Automakers as GM Falls to 65-Year Low
•DoCoMo May Pay $1.5 Billion for Stake in Tata Teleservices, Sankei Reports
•Crude Oil Trades Near 20-Month Low Below $59 a Barrel on Demand Outlook
•Global Financial Markets Have Yet to `Bottom' After Rout, Jim Rogers Says
•Gendell's Tontine Capital to Liquidate Two Stock Hedge Funds After Losses
I truly think that China is an important ally and that we need to work with them. They have been loyaly supporting us in our time of need, buying our Treasuries, but it may be time soon where we and others need to support them. It will be difficult, depending on the timing, but we need to be there for them - if we can. And therein lies the quandry - if we can.
Sorry folks, done for the night. Work is hectic now, which is a good thing.
Monday, November 10, 2008
Headline "Bad" News
Honestly folks, I am looking for some great news to circulate. Something that says all is well and the world will wake up to a new dawn. Right now we are just not quite around that corner. No matter, knowledge is power and, well, I seek to empower you. Right now, the place to watch is Asia and China in particular. I know, that was yesterday's news (and what I harped on yesterday), but guess what, it is today's news and tomorrow's news too. The U.S. sneezes and China gets a cold. China gets a cold and the U.S. gets pneumonia. The U.S. gets pneumonia and . . . you get the picture. Anyhoot, here are the latest headlines from Bloomberg:
•American Express Gets Federal Reserve Approval to Be Bank Holding Company
•Asian Stocks Drop as Earnings Outlook Worsens, Business Confidence Slumps
•Las Vegas Sands Halts Macau Construction, Seeks $2.14 Billion of Capital
•Australian Business Confidence Plunges to Record Low on Recession Concern
•China Stocks May Need More Than Stimulus to Lure Investors After 64% Drop
•KKR Financial Suspends Dividend, Borrows $400 Million From Banks, Parent
•Alumina Suspends Wagerup Refinery Expansion, Cites Global Financial Crisis
•Obama Tours White House as Transition Team Weighs Reversing Bush Policies
•Fed Refuses to Identify Recipients of $2 Trillion Emergency Loans to Banks
Not real pretty and the Asia related headlines are picking up speed.
Anti-AIGing Cream
We really need something to stop the constant AIGing of the U.S. taxpayer. Squarely in the good-money-after-bad category is the U.S. upping the AIG ante to $150 billion. Mind you, AIG had already given us a lien on everything up to pencils and staples, so we get no new security from what I have heard. All we really get is a sliver of hope that the enorous amount we already are risking on them will actually get paid. Don't hold your breath.
Those in the insurance business are somewhat giddy at the AIG demise. Not because a competitor is gone but because it did not have the best of reputations among its brethern, you might say. Let's just say they didn't play well with others. So, you ask, why are we saving a company that folks here don't care that much about. That is a much better question when you consider that we are really just saving the holding company, not the insurance subs. The insurance companies are (were) fine (they were regulated by state insurance departments that for the most part did their regulatory jobs). But now the holding company has put them at risk. More a reputational risk than anything else as most seem to share the AIG name. Customers seem to be fleeing a bit, not really caring that the insurance companies are financially sound. All this is making the whole payment of the U.S. loan issue a bit more problematic. Hard to sell those insurance companies when they are losing clients or slashing premiums to save clients. Which is why, of course, we add to the scare more by adding more loans to the pile. This, I think, will work out dandy. But perhaps only for the Berkshire Hathaways of the world who will pick up the pieces. No tears here for AIG.
Back to the question, why save AIG? Well, it turns out that AIG issued hundreds of billions of dollars of credit default swaps ("CDSs") to EU banks. That sounds big, but it is a small part of what was at one time an estimated $62 trillion market. Nonetheless, these CDSs seem a tad more important than most because of the companies that bought them. You see, EU banks can use the CDSs to support their required capital ratios and they bought hundreds of billions of CDSs from AIG. Some of these banks are highly leveraged, suffering from mortgage security woes and many are already on the brink. When AIG had its rating cut, some of their CDS contracts required the posting of collateral, which is what got this train rolling on government loans. AIG needed cash to post as collateral. Yet the government was not really interested in saving a holding company like AIG. So, again, why?
Given that AIG was propping up the capital ratios of dozens of Eupropean banks, its demise would have sent major ripples through Europe and beyond. Moreover, Mr. Ben was reportedly getting calls from EU officials warning of doom and gloom. Something like, Der Bernanke, ze time hast cum fur de Fed to giv ze loans to ze AIG azzs undt avoiden de vorldvide catostrofe. Erstvile ve vill be forced to be makin ze calls to ze big W. Okay, my fake German is a bit off, but you get the picture. Europe sneezes and Bernanke bends over. (One of my better lines I believe)
The National Bank of Craig
I have decided to become a bank and try to get some support from the TARP or any of the other alphabet soup of facilities. Hey, Goldman Sachs did it (with bad consequences to hedge funds) and now American Express is seeking to do it. It seems to be a Constitutional right these days to become a bank. I don't pretend to know what the (unintended) consequences of this will be. When Goldman did it there were new capital ratios it had to meet so lending to hedge funds was curtailed, resulting in hedge funds liqudating assets to meet new margin requirements, which was all on top of sales to meet redemptions (no wonder the markets have not done well). Still, who knows what knock on effect Amex becoming a bank will have to other companies or even Amex card holders. Only time will tell. Yves has more take on this here:
http://www.nakedcapitalism.com/2008/11/does-everybody-get-to-be-bank-now-amex.html
I Sneezed and No One Said Gesundheit
Not asking a lot here, but if you actually read my post today I would appreciate a comment. Perhaps just a shout out. Can you hear me now? All I need to know is that someone is out there. Anyone?
Someone? Bueller? I don't mind writing this as it helps me to clarify my own thinking, but if I have anyone who cares about what I am writing it may inspire me to be a bit more religious about it. I read hours of this stuff every day either way, so you just impact how much I pass on. Your choice.
•American Express Gets Federal Reserve Approval to Be Bank Holding Company
•Asian Stocks Drop as Earnings Outlook Worsens, Business Confidence Slumps
•Las Vegas Sands Halts Macau Construction, Seeks $2.14 Billion of Capital
•Australian Business Confidence Plunges to Record Low on Recession Concern
•China Stocks May Need More Than Stimulus to Lure Investors After 64% Drop
•KKR Financial Suspends Dividend, Borrows $400 Million From Banks, Parent
•Alumina Suspends Wagerup Refinery Expansion, Cites Global Financial Crisis
•Obama Tours White House as Transition Team Weighs Reversing Bush Policies
•Fed Refuses to Identify Recipients of $2 Trillion Emergency Loans to Banks
Not real pretty and the Asia related headlines are picking up speed.
Anti-AIGing Cream
We really need something to stop the constant AIGing of the U.S. taxpayer. Squarely in the good-money-after-bad category is the U.S. upping the AIG ante to $150 billion. Mind you, AIG had already given us a lien on everything up to pencils and staples, so we get no new security from what I have heard. All we really get is a sliver of hope that the enorous amount we already are risking on them will actually get paid. Don't hold your breath.
Those in the insurance business are somewhat giddy at the AIG demise. Not because a competitor is gone but because it did not have the best of reputations among its brethern, you might say. Let's just say they didn't play well with others. So, you ask, why are we saving a company that folks here don't care that much about. That is a much better question when you consider that we are really just saving the holding company, not the insurance subs. The insurance companies are (were) fine (they were regulated by state insurance departments that for the most part did their regulatory jobs). But now the holding company has put them at risk. More a reputational risk than anything else as most seem to share the AIG name. Customers seem to be fleeing a bit, not really caring that the insurance companies are financially sound. All this is making the whole payment of the U.S. loan issue a bit more problematic. Hard to sell those insurance companies when they are losing clients or slashing premiums to save clients. Which is why, of course, we add to the scare more by adding more loans to the pile. This, I think, will work out dandy. But perhaps only for the Berkshire Hathaways of the world who will pick up the pieces. No tears here for AIG.
Back to the question, why save AIG? Well, it turns out that AIG issued hundreds of billions of dollars of credit default swaps ("CDSs") to EU banks. That sounds big, but it is a small part of what was at one time an estimated $62 trillion market. Nonetheless, these CDSs seem a tad more important than most because of the companies that bought them. You see, EU banks can use the CDSs to support their required capital ratios and they bought hundreds of billions of CDSs from AIG. Some of these banks are highly leveraged, suffering from mortgage security woes and many are already on the brink. When AIG had its rating cut, some of their CDS contracts required the posting of collateral, which is what got this train rolling on government loans. AIG needed cash to post as collateral. Yet the government was not really interested in saving a holding company like AIG. So, again, why?
Given that AIG was propping up the capital ratios of dozens of Eupropean banks, its demise would have sent major ripples through Europe and beyond. Moreover, Mr. Ben was reportedly getting calls from EU officials warning of doom and gloom. Something like, Der Bernanke, ze time hast cum fur de Fed to giv ze loans to ze AIG azzs undt avoiden de vorldvide catostrofe. Erstvile ve vill be forced to be makin ze calls to ze big W. Okay, my fake German is a bit off, but you get the picture. Europe sneezes and Bernanke bends over. (One of my better lines I believe)
The National Bank of Craig
I have decided to become a bank and try to get some support from the TARP or any of the other alphabet soup of facilities. Hey, Goldman Sachs did it (with bad consequences to hedge funds) and now American Express is seeking to do it. It seems to be a Constitutional right these days to become a bank. I don't pretend to know what the (unintended) consequences of this will be. When Goldman did it there were new capital ratios it had to meet so lending to hedge funds was curtailed, resulting in hedge funds liqudating assets to meet new margin requirements, which was all on top of sales to meet redemptions (no wonder the markets have not done well). Still, who knows what knock on effect Amex becoming a bank will have to other companies or even Amex card holders. Only time will tell. Yves has more take on this here:
http://www.nakedcapitalism.com/2008/11/does-everybody-get-to-be-bank-now-amex.html
I Sneezed and No One Said Gesundheit
Not asking a lot here, but if you actually read my post today I would appreciate a comment. Perhaps just a shout out. Can you hear me now? All I need to know is that someone is out there. Anyone?
Someone? Bueller? I don't mind writing this as it helps me to clarify my own thinking, but if I have anyone who cares about what I am writing it may inspire me to be a bit more religious about it. I read hours of this stuff every day either way, so you just impact how much I pass on. Your choice.
Sunday, November 9, 2008
Alms for the U.S.! Alms for the U.S. !
So you ever wonder where all this money is coming from to pay for the TARP and the rest of the alphabet soup of facilities we have set up to save our economy?? Well, a lot of the money comes from our good friends in China. Yes, some joke about how our programs allow us to borrow from China to buy things from China, but from China's perspective, that is a big reason to supply the money we need. So what happens when we buy less from China because we are buying less overall or when China needs its money to support its own economy? We will soon see what happens, but I suspect it is not going to be pretty...
China sucking wind
I have read several stories over the past couple of days that seem to be ringing the alarm bells about China. Now, admittedly, ringing alarm bells about China is nothing new - it happens all the time - but these bells seem to ringing a bit more true and a bit more often. For one, China called back one of its leading economic leaders from a couple of international summits on an emergency basis (rarely a good sign) and the country is pouring a rather heavy amount of money into its economy to prop it up. Did I mention 67,000 bankruptcies in the country and lots of factory closings. This country (yes Palin it is a country not a continent) has been paying our tab for a while and may soon not be able to do so. Then what?
http://www.nakedcapitalism.com/2008/11/china-announced-586-billion-stimulus.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=augL9_cumtA4&refer=home
http://online.wsj.com/article/SB122623724868611327.html
Long day, long week, little to say.
China sucking wind
I have read several stories over the past couple of days that seem to be ringing the alarm bells about China. Now, admittedly, ringing alarm bells about China is nothing new - it happens all the time - but these bells seem to ringing a bit more true and a bit more often. For one, China called back one of its leading economic leaders from a couple of international summits on an emergency basis (rarely a good sign) and the country is pouring a rather heavy amount of money into its economy to prop it up. Did I mention 67,000 bankruptcies in the country and lots of factory closings. This country (yes Palin it is a country not a continent) has been paying our tab for a while and may soon not be able to do so. Then what?
http://www.nakedcapitalism.com/2008/11/china-announced-586-billion-stimulus.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=augL9_cumtA4&refer=home
http://online.wsj.com/article/SB122623724868611327.html
Long day, long week, little to say.
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