The newcomers imitate old fogeys...

Privatize gains and socialize losses - Bush or Obama, does not matter - the rigmarole continues...

From here: The first assumption is that those battered assets will recover handsomely, thus allowing the government loans to be repaid with interest. There has, however, been no independent assessment of the assets or their underlying collateral, so there’s no way to know that they will recover by much, if at all from their beaten-down state. ...
Even if we assume that the assets do increase in value, allowing the government to be repaid, there are still unsolved problems. Successful sales will rid banks of some of their toxic assets, but not necessarily all or even most of them. To restore the banks to health, the sums expended would have to be enough to balance the banks’ assets and liabilities, and provide a reasonable cushion to resume lending and absorb future losses. No one knows with any certainty how much that is, though some estimates put it north of $2 trillion, much more than what the administration is contemplating. And even if you assume that the sums put up by the government are enough to cleanse the banks entirely, restoring the banks to health by throwing money at them — even with a sheen of private capital — would not be fair. It would be one big transfer of wealth from the government to bank investors. That would be better than an apocalyptic crash, but it is a near complete socialization of losses, with little value flowing to taxpayers.

AIG - a cover play?

Is it AIG that's playing us for fools or is it really Goldman Sachs?

From here: The roots of the linkage between Goldman Sachs and AIG go back to the closing months of the Bush administration, as the financial meltdown reached crisis proportions and key decisions were made that are now reaping the whirlwind. Remember who played a key role in deciding to bail out AIG? Henry Paulson, the Goldman CEO-turned George W. Bush Treasury Secretary. Paulson, according to a September 27, 2008 New York Times piece by Gretchen Morgenson, led a team of regulators and bankers in early September to determine what to do with the most severely wounded financial institutions. One of the participants in those meetings was Lloyd C. Blankfein, Paulson's successor at Goldman Sachs. Out of those meetings came the controversial and heavily criticized decision to allow Lehman Brothers, a Goldman competitor, to go belly up, and to bail out AIG. Starting with $85 billion from the Fed, taxpayers have pumped a total of $170 billion into the giant insurance company. The bailout was crucial to Goldman in that it permitted AIG to pay off its $12.6 billion debt to the firm, $8.1 billion of which was to cover AIG-backed credit derivatives. At a hearing of the House Financial Services Committee on February 11, 2009, Goldman Sachs CEO Lloyd Blankfein denied that his firm had a major stake in bailing out AIG. Blankfein told the panel that "with respect to our dealings with AIG, we were always fully collateralized and had de minimis or no credit risk at any given moment because we exchanged collateral....We had transactions with them. And if they had gone the wrong way, they would have owed us money. We assumed they'd pay it, but if they defaulted, they wouldn't pay us. We insured against that default. We didn't win money from it. We wouldn't have made money. But it would have protected our down side."

Throughout the past six months of economic crisis, Goldman has taken full advantage of what the government has to offer. On October 28, 2008, Goldman and eight other banks were the first to receive federal bailout money under the Treasury Department's Troubled Assets Relief Program (TARP). which was initiated by Paulson. On November 25, 2008, Goldman became the first bank in the nation to benefit from the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP), issuing $5 billion in government-secured debt at 3.367%, substantially less than the market rate facing banks which issued unsecured debt. All told, Goldman has issued a total of $20 billion in government-guaranteed debt under TLGP. In their dealings with banks, both Treasury and the Fed have been subject to relatively minimal disclosure, in order to protect the proprietary interests of financial institutions, especially to prevent rumors of illiquidity or excessive debt from threatening a bank's viability.

Isn’t money fungible?

I thought it was, but when couched in legalese and banking jargon, what was intended to be a fungible commodity can be 'unfunged'.

From here: When news broke that Wells Fargo, recipient of $25 billion in bailout money, was planning a lavish Las Vegas retreat for its top employees, lawmakers howled. The bank canceled the trip but took out full-page newspaper advertisements defending such trips. ''The funds to pay for recognition events such as these do not come from the government,'' the ad read. ''They come from our profits.''Does that mean the bank tracks government money and profits separately? No.

Company spokeswoman Julia Tunis Bernard said Wells Fargo doesn't distinguish between bailout money and other revenue. What the newspaper ad meant, she said, is that the bank didn't need the bailout money to pay its routine operating expenses -- including employee trips like the one to Las Vegas.

Another example of 'unfungible' aspects of money here: Ruth Madoff said she owns a Manhattan apartment, $45 million in bonds and $17 million in cash that are “unrelated” to an alleged Ponzi scheme by her husband, Bernard Madoff. ... Madoff’s lawyers claim “only Ruth Madoff has a beneficial ownership” to a Manhattan apartment, about $45 million in municipal bonds on deposit at Cohmad Securities Corp., and approximately $17 million in cash in another account. Ruth Madoff says these assets are “unrelated” to the alleged fraud, citing her husband’s lawyer.

On my mind

Not too sure if one can find another place on earth where the public is taxed, part of the proceeds of public taxation is used to bailout large banks that were on the verge of bankruptcy and then the large banks decide to promptly reward their underperforming bankers with large bonuses. Ah, the joys of capitalism...

Read here and weep...

A plea (on the auto industry bailout)

The Republican senators in the Senate last night blocked the auto bailout under the following pretext: the demands for steep cuts in pay and benefits for the automobile workers were not met. Yes, following textbook style Republican governing, they have again asked the workers to make sacrifices whilst making no attempt to hold the management responsible. They have managed to turn this into a ‘the result of workers getting undue benefits is killing the US auto industry’.
At this point the auto bailout looks like a non starter in the Senate. The White House should act now and act decisively. The government must use the funds from the TARP bill to bailout the auto companies. No, I do not think the management at Ford, GM and Chrysler deserve the bailout, but I think the workers deserve it. There are a million or more that will be affected if this does not happen. Three months back Sec. Paulson managed to convince a doubting Congress to fork over $700 billion to save companies on Wall Street. Companies that make money off other peoples money. Companies that have no real infrastructure save people sitting at terminals and betting on outcomes that they scarcely understand. Companies that do not produce or manufacture tangible products save for pieces of paper whose values depend on other pieces of paper… ad infinitum. Detroit made decisions, pursued bad choices and was led by bad managers. As part of the bailout, the government should go ahead and change the management, restructure management benefits and legislate the closure of brands that make no sense. The government should not punish workers that have done nothing other than follow the bidding of managers who were short sighted. Moreover, from a pragmatic viewpoint, the fallout from a million people losing their jobs as a result of these companies going under could have severe repercussions not just for the economy, but socially and morally as well.


Another major argument laid out by the Republicans in fighting the bailout is a story claiming that an average autoworker rakes in $73 dollars an hour. That is a pile of garbage. A breakdown of how the $73 is divvied up here: (The representative image above has been ripped from the article).

The calculations show, accurately enough, that for every hour a unionized worker puts in, one of the Big Three really does spend about $73 on compensation. So the number isn’t made up. But it is the combination of three very different categories.

• The first category is simply cash payments, which is what many people imagine when they hear the word “compensation.” It includes wages, overtime and vacation pay, and comes to about $40 an hour.
• The second category is fringe benefits, like health insurance and pensions. These benefits have real value, even if they don’t show up on a weekly paycheck. At the Big Three, the benefits amount to $15 an hour or so

Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour.

• The third category is the cost of benefits for retirees. These are essentially fixed costs that have no relation to how many vehicles the companies make. But they are a real cost, so the companies add them into the mix — dividing those costs by the total hours of the current work force, to get a figure of $15 or so...

Please do not fall for the $73/hr number!! It is actually closer to $50.

Advice to Sec. Paulson (IMHO)

Out the 700 billion dollars authorized by Congress last month to rescue the economy (read: bailout financial institutions), 290 billion dollars has now been spent by Sec Paulson in doling out taxpayer cash to companies of his choice. Rightly or wrongly, Sec. Paulson made a little publicized comment that he is reluctant in approaching Congress for approval on spending the rest knowing full well that it might be an uphill battle with the public suffering from an extended bout of 'fat cat only' bailout fatigue. He has rightly called that the next President-elect have the reins on the money to do what is best fit to get us out of this hole.

Meanwhile, what does the market do - it holds us hostage. Every day we see the DOW slipping by about 400 points. Yesterday evening it closed at 7552. We see prominent banks calling for the rest of the $410 billion to be disbursed as soon as possible. Many are warning of dire forecasts if the stated plan is to wait until the next administration takes office. Yesterday, Citigroup’s stock fell by historic amounts to less than 5 dollars a share. Some people are hinting at a Citigroup based bailout, others are mentioning Citi's merger with another firm. From a macro view of events, large financial institutions know that now might be the best time to wring the rest of the bailout funds - kind of like looting banks as the banks premises are engulfed in flames.

At this point in time, it might be prudent for Sec. Paulson to just sit back - take a deep breath and let the markets settle down. Let the much talked about 'bottoming of the markets' run through its course. It is clear that all of the policies (however loftily planned) introduced by Sec. Paulson have failed miserably - whether it be buying troubled assets or investing in banks directly or shoring up credit card and loan companies - nothing seems to have affected the downward slide. With a lame duck (looks more crippled than lame) administration and a Congress awaiting a change of hands, now might be a good time to relax and tell the market "Just shut the **** up - do what you have to do – we are not moved by your daily swings".

Yes, this is a classic case of the tail wildly wagging the dog. Instead of prudent policies guiding investments and market conditions, we live in an age where fiscal and monetary policies are determined by the direction of the DOW or the spiraling stock values of ‘select’ companies. Yes and remember, it only ‘select’ companies like prominent Wall Street firms that get the preferential treatment. Sec. Paulson: Now, more than ever, is time for a much needed respite, some introspection and enact of policy of 'wait patiently'. People will respect this policy of yours more than the failed policies associated with the TARP bailout. I suspect the moment Sec. Paulson starts to project an image of this nature, the market which has been behaving more like a spoilt brat on painkillers will also settle down. Of course, before the ‘settling down’ can actually happen, the spoilt brat might throw just one more hissy fit taking the DOW to maybe 5000 and swallow a couple of companies with it, but what the hell, we have endured so much so far and used up billions of dollars of taxpayer money and nothing much has happened, let the hissy fit run its course. As soon as the market and (by translation the big financial institutions) understand that they cannot wag the dog any longer, they will also resort to prudent methods of buying and selling.

Irrationally exuberant behavior started this whole thing. Inflated housing prices, unbelievably cheap credit and overleveraged companies all acted in collusion to hype the markets to soaring levels. Rational approaches like the one outlined above will help end it.

Talking about irrational behavior, it is indeed interesting to end with the cover of a book published some years back that predicted a DOW of 36,000. The book said that it will offer the reader “Rock solid investment advice. Long term investors can place it next to the works of Benjamin Graham and Peter Lynch, as well as Warren Buffett’s annual homilies to his Berkshire Hathaway’s investors”.

The great monthly flip flopping ritual

Former Goldman Sachs CEO and current Treasury Secretary Henry 'FlipFlop' Paulson is caught in a curious case of shape shifting. We are now able to soundly predict with a large degree of confidence the frequency with which the Treasury Secretary performs the flips and flops on the bailout package. Yes, the predictable recurrence pattern on plans to use bailout funds now happens monthly. See below.

In September: The $700,000,000,000.00 bailout bill was called TARP (or Troubled Assets Relief Program). It was sold to lawmakers as a mechanism to buy off troubled and toxic securitized assets off banks and lending institutions and thus ease the credit crisis sparked by the mortgage meltdown.

In October: Buying troubled assets was cast by the wayside and the Treasury decided to flip and put out a plan to buy equity stakes in American banks of their choice. Hank's alma mater Goldman Sachs saw a cash injection of $10 billion. Morgan Stanley got another $10 billion. Is it a matter of coincidence that both of them announced bonus pools of 7 billion dollars. No, I would not dare suggest that they used taxpayer money to pay their bonuses.

In November: Treasury flopped and now announces that they have decided that buying up equity stakes in banks are not working (or maybe worked just well enough for those banks to declare bonuses). The wizards yesterday announced that they are planning on using the remaining bailout funds to help companies that issue credit cards, make student loans and finance car purchases.

In December: Plans to unveil disbursement of as yet unknown cash injections to as yet unknown set of companies as Christmas gifts. Consumer retail stores, bodegas and kiosks might need to behave properly in line as they queue up to get a part of the largesse.

Curiously missing from the whole bailout equation was help for troubled and distressed homeowners.

United States Senator from the state of NJ Robert Menendez summed it up best:

In the month of August, over 9,800 homes entered foreclosure every day, if this statistic was that there were over 9,800 Wall Street executives that lost their jobs every day in August, we would have ended this a long time ago.

Sad but true...

More bailout lament

Looks like the bailout czar Mr. Kashkari and the uber bailout czar Mr. Paulson have given very little thought on the way they have planned to use the 700 billion 'bailout' dollars allocated to them by the congress. Initially they told us that they would use the money to buy troubled assets from banks at market or below market prices. In fact the name of the bill was TARP – Troubled Asset Relief Program. Suddenly, that did not seem like a good idea and just as Europe (and England in particular) was planning on loaning money to banks directly in the hopes of thawing the credit freeze that was enveloping us, our bailout czars decided to follow the same path. The only difference with the approach they took here was that they decided to dole out the money on an arbitrary basis to banks of their choice with little pre-conditions attached. 'Friends of Hank' got about 125 billion from the largesse that was announced without fanfare a couple of weeks back. This week they also announced that they have started doling out the remaining 125 billion (of the 250 billion first tranche that they had powers over) to smaller banks of their choosing. Apparently what these banks have been doing with the money is pretty egregious.

From here: In his column on Saturday, The Times's Joe Nocera told about a conference call that he had listened in on recently between employees and executives of JPMorgan Chase. Asked how an infusion of $25 billion of bailout funds would change the bank's lending policy, an executive said the money would be used to buy other banks.

Buying and acquiring other banks with private money is capitalistically 'noble' - it increases shareholder wealth and all is fine with the money making machinery. It is frightening when the big banks openly tell us that they are planning to channel taxpayer money (ostensibly given to spur lending and ease the credit crunch) into private acquisitions and takeovers of other banks. This not only makes the public and the Congress look like jackasses, it also begins to smack of a socialist mindset - government giving large amounts of money to large oligarchic institutions in order that they go ahead and use public monies to gobble up smaller ones.

And Sen. John McCain accuses Sen. Obama of spreading the wealth!!