Turning Japanese?

Fed cuts rates to 0%

That's it, all done, close up and go home, there's nothing left to do.

The Federal Open Market Committee today agreed unanimously to cut the Fed Funds rate to a target range of 0% to 0.25%.

Read the FOMC statement.

CPI falls by largest amount since 1932

US consumer prices fell in November at the fastest rate since 1932. The CPI fell by a seasonally adjusted 1.7% and by 1.9% on a non-seasonally adjusted basis, the biggest decline since January 1932, at the nadir of the Great Depression.

Full-on deflation is here. All the bullshit you've heard all your life about how another Great Depression can't happen because of circuit breakers in the system is just that ... bullshit.

Bernard Madoff arrested over alleged $50 billion fraud

Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion "Ponzi scheme" in what may rank among the biggest fraud cases ever. The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses. Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him.

Dilbert

Trump Organization in Bankruptcy

AGAIN!

Trump Hotels & Casino Resorts and related operations sought a Chapter 11 restructuring after reaching agreement with most of its creditors on a new financial structure for the business. Trump's stake would be slashed to 27% from 47%, even after he plows $72 million into the new operation. Other common shareholders would be mostly wiped out, and bondholders would control about two-thirds of the equity in the reorganized company under the proposed restructuring plan, which is subject to court approval.

Their last bankruptcy (in which Trump also made out like a bandit) was reported in this blog just 3.5 years ago.

Tribune Files for Bankruptcy, Stock Falls 94%

Tribune, the owner of several of the nation’s largest newspapers, has filed for Chapter 11 bankruptcy protection. The company cited a $13 billion "heavy debt load" as the reason to seek protection. The media giant, which owns The Chicago Tribune, The Los Angeles Times, the Orlando Sentinel, 23 television stations and the Chicago Cubs, was battered in the past year. Their stock is now trading at $1, down 94% from yesterday's $18 closing price.

0% Interest Rates are Here!

Worldwide!

In the US, the Fed funds rate may be 1%, but 3-month Treasuries are currently yielding 0.01%.

The Bank of England dropped its rate from 3% to 2%, the lowest rate since the central bank's founding in 1694.

Japan-style near-zero interest rates are here and may be here for a while. I predict a lost decade, for the entire world this time rather than just Japan.

Jobs, Jobs, Jobs

This is bad, and getting worse very very quickly

AT&T cutting 12,000 jobs
Credit Suisse cutting 5,300 jobs (mostly in the US)
Dow Chemical cutting 5,000 jobs (and 6000 contractors)
UBS cutting 4,500 jobs
DuPont cutting 2,500 jobs (and 4000 contractors)
Belden cutting 1,800 jobs
3M cutting 1800 (more) jobs
Anheuser-Busch InBev cutting 1,400 US jobs
Nomura cutting 1,000 jobs
Viacom cutting 800 jobs
Adobe cutting 600 jobs

Retail sinking ... fast

Abercrombie Same-store Sales Down 28%
Kohl's same-store sales fell 17%
Nordstrom's same-store sales fell 16%
Macy's Same-store Sales Down 13%
Limited Brands same-store sales fell 12%
J C Penney same-store sales fell 12%
American Eagle Outfitters Same-store Sales Down 11%
Saks Fifth Avenue same-store sales fell 11%
Target same-store sales fell 10%
Dillard's Nov. Same-store Sales Down 9%
Children's Place same-store sales fell 7%
Costco's same-store sales fell 5%
Aeropostale same-store sales fell 5%

(all this news was reported today)

4% Mortgage Delinquency Rate

For the quarter ended September 30, 3.96% of people holding a mortgage were at least 60 days behind in payments, compared with 2.56% in the 2007 third quarter. "It's nothing short of staggering," said Ezra Becker, principal consultant in TransUnion's financial services group. Becker noted the rate had hovered at about 2% for years, until the second quarter 2007, when it started climbing. Moreover, the climb is not likely going to slow, he said. "Our projections are that it's not only going to be increasing but it's increasing at a faster pace," he said. The fourth quarter of 2008 could see the percentage of mortgages past due jump as high as 4.6 to 4.7%, he said, an estimate that reflects the recession and rising unemployment rates. "This is more pessimistic than what we would have forecast a quarter ago," he acknowledged. The highest delinquency rates continue to be in Florida, at 7.8%, Nevada, at 7.7%, California, at 5.8% and Arizona, at 5.5%.

Goldman To Post Loss

Goldman Sachs Group is likely to report a fiscal fourth-quarter loss of as much as $2 billion, or $5 a share, five times the current analyst consensus, The Wall Street Journal reported. The expected loss for the quarter ended Nov. 28 would be the firm's first quarterly deficit since it went public in 1999. The company will write down the value of assets in private equity, commercial real estate and more.

Sears Holding Posts Loss

Sears Holdings Corp reported a wider-than-expected quarterly loss Tuesday as sales fell at its US Kmart and Sears Roebuck divisions and said it would close additional stores. The loss was $146 million, or $1.16 a share, for the third quarter ended Nov. 1, compared with profit of $4 million, or 3 cents a share, a year earlier.

US sales at stores open at least a year declined 11% at Sears and 7% at Kmart.

Sears Holdings is now trading at 33.00; it was trading above $100 as recently as two months ago. Merging Kmart and Sears Roebuck was a marriage made in hell from the beginning.

Dow down 7.7%

Dow down 678 points (7.7%) to 8149, its 10th worst day in history, bumping 10/9/2008 from the top 10 list.

Oct. 19, 1987	-22.60
Oct. 28, 1929	-12.80
Oct. 29, 1929	-11.70
Nov. 6. 1929	-9.90
Dec. 18, 1899	-8.72
Aug. 12, 1932	-8.40
Mar. 14, 1907	-8.29
Oct. 26, 1987	-8.00
Oct. 15, 2008	-7.87
July 21, 1933	-7.84
Oct. 18, 1937	-7.75
Dec. 1, 2008	-7.70
Oct. 9, 2008	-7.33

From the Department of the Bleeding Obvious

The US economy entered a recession in December 2007, a committee of economists at the private National Bureau of Economic Research said Monday.

Don't Blame The Quants

by Steven Shreve, PhD (founder of the computational finance program at Carnegie Mellon)

The investment banks created mortgage-backed securities with payoffs that depend on the performance of hundreds or even thousands of mortgages. Many of these securities received investment-grade ratings, and their returns were significantly greater than investing in a comparably rated bond. The law that higher expected return means higher risk seemed to have been repealed. The practice of "ratings arbitrage," getting a better-than-merited rating and selling securities based on that rating, was born.

It is easy under these circumstances to point an accusing finger at the "quants" on Wall Street, that cadre of mathematics and physics Ph.D.s who crunch numbers in esoteric models. Without the quants, the complicated mortgage-backed securities that fueled the housing bubble and led to the freezing of credit might not have been created. The models used by the quants determine the prices of those securities and steer the traders who make markets in them. Without this guidance, the banks might not have touched them in the first place. To prevent a recurrence of financial crises, some call for a return to a simpler time, before derivative securities and the quants who analyze them--a time when investors bought stocks and bonds and little else.

Such complaints miss the point. When a bridge collapses, no one demands the abolition of civil engineering. One first determines if faulty engineering or shoddy construction caused the collapse. If engineering is to blame, the solution is better--not less--engineering. Furthermore, it would be preposterous to replace the bridge with a slower, less efficient ferry rather than to rebuild the bridge and overcome the obstacle.

Before the collapse, Carnegie Mellon's alumni in the industry were telling me that the level of complexity in the mortgage-backed securities market had exceeded the limitations of their models. The bridge was cantilevered out way too far, and the quants knew it. But in most banks, the quants are not the decision-makers. When they issue warnings that stand in the way of profits, they are quickly brushed aside. Furthermore, in addition to better engineering, the bridge must not be built this time with the shoddy construction material of no-documentation mortgage applications and a network of unscrupulous mortgage originators.

The quants did not create derivative securities. The quants help us understand them, price them, trade them and manage the risk associated with them. The quants know better than anyone how their models can fail. For banks, the only way to avoid a repetition of the current crisis is to measure and control all their risks, including the risk that their models give incorrect results. On the other hand, the surest way to repeat this disaster is to trust the models blindly while taking large-scale advantage of situations where they seem to provide trading strategies that would yield results too good to be true. Because this bridge will be rebuilt, the way out of our present dilemma is not to blame the quants. We must instead hire good ones--and listen to them.

Source: Forbes [Thanks to DL for the link]

Blame the Quants

(Scientific American editorial)

If Hollywood makes a movie about the worst financial crisis since the Great De­­pres­­sion, a basement room in a government building in Washington will serve as the setting for a key scene. There investment bankers from the largest institutions pleaded successfully with Securities and Ex­­change Commission (SEC) officials during a short meeting in 2004 to lift a rule specifying debt limits and capital reserves needed for a rainy day. This decision, a real event described in the New York Times, freed billions to invest in complex mortgage-backed securities and derivatives that helped to bring about the financial meltdown in September.

In the script, the next scene will be the one in which number-savvy specialists that Wall Street has come to know as quants consult with their superiors about implementing the regulatory change. These lapsed physicists and mathematical virtuosos were the ones who both invented these oblique securities and created software models that supposedly measured the risk a firm would incur by holding them in its portfolio. Without the formal requirement to maintain debt ceilings and capital reserves, the commission had freed these firms to police themselves using risk tools crafted by cadres of quants.

[more]

Existing home prices hit 40-year low

No, not really.

Not at all, actually. But that's how the press keep reporting it. Even the Financial Times, which usually is very good about accuracy.

What they really mean is that the price of previously owned homes in the US fell in October by the biggest amount in 40 years, which although alarming news is completely different.

Borders trading under $1

Shares of Borders Group headed south, losing more than 40% after the bookseller reported massive losses and dwindling sales, said it was no longer contemplating a sale of the company, and learned it would soon be booted out of the S&P MidCap 400. Borders said that its third-quarter loss ballooned to $172.2 million, or $2.85 a share, from a loss of $40 million, or 68 cents a share, in the same period of last year. The loss includes non-cash, non-operating charges totaling $133.2 million in the quarter, consisting primarily of deferred tax and fixed asset impairments.

Citi is dead too

The federal government was nearing an agreement to rescue Citigroup by helping to remove billions of dollars in toxic assets from its balance sheet. The agreement, which was still under discussion and could fall apart, would mark a new phase in government efforts to stabilize U.S. banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to absorb bad assets, on a targeted basis, from specific institutions. The talks centered on the creation of what is sometimes called a "bad bank" - an outside entity designed to hold some of a financial firm's worst assets. That structure would help Citigroup cleanse itself of billions of dollars in potentially toxic assets. Under the terms being discussed with top Treasury Department and Federal Reserve officials, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The U.S. government would then absorb any additional losses. One person said the new entity is expected to hold about $50 billion of assets. That would mean taxpayers could be on the hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour. It was unclear Sunday night whether the government would take an equity stake in Citigroup in return for the support. Also uncertain was whether Citigroup would get a government loan to finance the facility. [...] It wasn't known if Citigroup will have to make changes to its executive ranks, board or elsewhere inside the company in return for government assistance. After weekend discussions, the parties were hoping to unveil an agreement Sunday evening.

Citi's fate

As I first mentioned when Citi lost out on the Wachovia acquisition and accompanying sweetheart deal from the government, Citi is TOAST!


This time last year, Citigroup (C: 3.77 -0.95 -20.13%) was valued at about $180 billion. As of market close today, its market capitalization stood at $16 billion. Its once-proud share price has shriveled to $3.77 (a 16-year low) after dropping more than 60% this week, and analysts are starting to wonder just what the future holds. There are several options facing Citigroup as it tries to stem the decline. It could sell some of its business units or even sell itself whole - both are under consideration, according to a WSJ report - or it could try to buy itself time and gain market confidence by firing Pandit. In a worst-case scenario, a government bailout along the lines of that handed to AIG could be used to rescue Citigroup. In a call with senior managers Pandit reportedly said he intends to keep the bank whole and independent, but events appear quickly to be overtaking the former Morgan Stanley executive and hedge-fund manager who took over as CEO last year. Citigroup's board was meeting to discuss its options and may decide to overrule Pandit and sanction sell-offs.

Citi's fate?

As Citigroup's share price sinks, investors are wondering if the US government will have to help the bank. Some ideas thrown out in a recent Fox Business article.

• More preferred shares - rinse and repeat until the federal government owns all of Citi
  
• A loan with ownership stake as was done with AIG - Would wipe out most of the earlier $25 billion investment in preferred shares, plus it would hurt investors in Citigroup's bonds as well as bank bonds in general which would make it harder for some banks to fund themselves
  
• Guarantee all of Citigroup's debt and derivative obligations
  
• Buy Citigroup's worst assets perhaps at a discount and allow an asset manager such as BlackRock to manage them for taxpayers - isn't that what TARP was supposed to do in the first place?
  
• Instituting a new short-selling ban, loosening mark-to-market accounting rules for bank assets, or halting trading in credit default swaps - too brilliant for words
  
• FDIC liquidation - This is a little like saving the patient from cancer by shooting him in the head with a bazooka, but may be the best option at this point. Too big too fail, my butt.

Can someone please educate the financial media

...to quit saying "inflation is down 1%." That would mean that inflation went from 4% to 3%. What actually happened is that we had deflation, PRICES are down 1%.

Yahoo CEO Yang is out!

Good riddance. Moron. Refusing a $45 billion offer because it was "too little." Company is worth less than 1/3 of that now.

Citigroup Laying Off 50,000+ Employees

Over 1/7th of their remaining workforce, above and beyond all previously announced layoffs. So many different thoughts:

1) Last week some Citi bigwigs made a big deal about buying large chunks of Citi stock for their personal accounts, presumably to shore up confidence in the stock. They must have known this layoff was in the works. How is this not insider trading?

2) These 50,000 (52? 53? I keep seeing different numbers in the press) people were doing some sort of work yesterday. Apparently that work does not need to be done tomorrow? Why not? It's not like Citi's revenues have gone down by 1/7th. Did it not need to be done yesterday? Then why were these folks warming a desk? It doesn't make any sense.

3) The bottom line, as I've said before, is that it appears fairly certain that Citi is not going to make it. I guess that will prompt the MOAB (mother of all bailouts).

Market News

Teasury may have to pump more than the planned $200 billion into Fannie Mae and Freddie Mac to keep the mortgage giants afloat. Deterioration of the housing market and the broader economy have put the corporations into deeper trouble than they were in when Treasury announced their takeovers. (Source: The Washington Post)
Follow-up: Freddie Mac has a net worth of NEGATIVE $13.7 billion; FNMA still has a positive net worth but said it may be negative by year-end.

Delinquency on subprime mortgages set an all-time record in October as unemployment soared and interest rates reset, driving monthly payments higher. The increase is spreading to the entire mortgage market, as well as auto loans and credit cards. (Source: CNBC)

A further $103 billion of synthetic CDOs are vulnerable to catastrophic losses based on defaults involving underlying derivatives. Defaults by Lehman Brothers and other institutions have already touched off $24 billion in synthetic CDO losses. There is about $750 billion of synthetic CDOs outstanding that are tied solely to corporate-debt derivatives. (Source: Financial Times)

Amex becomes bank

American Express is the latest US firm granted approval to become a bank holding company, which allows it access to the Federal Reserve’s discount window as well as the opportunity to apply for Treasury assistance if needed. Citing the “unusual and exigent circumstances” weighing on the financial markets, the Federal Reserve Board waived the standard 30-day waiting period.

Circuit City Files for Bankruptcy

Not much to add to that, other than it's about time.

LTCM II in BIG trouble

No, not Meriwether's hedge fund, although it's still in trouble too. I'm talking about Scholes' hedge fund. When will these guys learn that having a Nobel Prize does NOT exempt you from the basic economic fact that greater returns are ONLY possible with greater risk. Highly leveraged bets are great when the market is up, but they will trash you on the way down.

Platinum Grove Asset Management, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29% in the first half of October. The decline left Platinum Grove Contingent Master fund with a 38% loss this year through October 15. Funds employing a similar approach of exploiting differences in the value of related securities fell 14% last month and 30% this year, according to data compiled by Chicago-based Hedge Fund Research. Scholes, winner of the 1997 Nobel Prize in economics, was a founding partner in Long-Term Capital Management. He started Platinum Grove in 1999 with Chi-fu Huang, Ayman Hindy, Tong-sheng Sun, and Lawrence Ng, who had all worked at LTCM.

Jobs Data

The US labor market has shed 651,000 jobs and driven the unemployment rate to 6.5%, its highest point in more than 14 years. Nonfarm payrolls fell by 240,000 in October, worse than expected. Payrolls losses in September were revised down sharply to 284,000, the largest job loss in seven years. Unemployment surged by 603,000 in October to 10.1 million, the highest level in 25 years. In the past six months, unemployment has leaped by 2.45 million, the largest increase since 1975. So far in 2008, a total of 1.18 million jobs have been lost, according to the survey of work sites. Payrolls have fallen for 10 straight months.

More Bad News at Blackstone

Shares of Blackstone Group fell sharply (-9.88% as of the time of this post) after the large private equity fund reported heavy third-quarter losses as the value of its holdings were battered by the ongoing financial crisis. The company said its quarterly loss jumped to $340.3 million from $113.2 million during the same three-month period in 2007. Blackstone is now trading at $7.75.

Source: FoxBusiness

Credit Card Backed ABSs are next

Faced with rising consumer credit-card delinquencies, buyers are not interested in bonds backed by credit-card payments. Top-rated card-backed securities maturing in three years traded at a spread of 475 basis points more than Libor during the week ending October 30, compared with 50 basis points higher in January. Sales of credit-card bonds hit zero in October, the first time since 1993.

Source: Bloomberg

HA HA

Blackstone is trading at $8.55, down an amazing 72% from its IPO price. It's underperformed the DJIA, the S&P500, the Wilshire5000 and pretty much every other stock out there.

Another one for the DUH files!

A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant AIG may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.

"From each according to his abilities..."

The Treasury and the FDIC are considering a program that may offer about $500 billion in guarantees for troubled mortgages to stem record foreclosures, people familiar with the matter said. The plan, which might put as many as 3 million homeowners into affordable loans, would require lenders to restructure mortgages based on a borrower's ability to repay.

So these folks get to own a house WORTH MUCH MORE THAN MINE (I know this because if their mortgage were the size of mine, they could pay it with an unemployment insurance check) and PAY LESS for it. George Bush - member of the US Communist Party? Who knew?

GDP Contracts

GDP fell 0.5% in the third quarter, in line with expectations.

Delta acquires Northwest

It's called a merger, but really it's an acquisition. Delta closed the deal today and became the world's largest airline.

Big Surprise

Fed lowers fed funds rate 50 bp to 1%. Who didn't see that coming?

Another form letter from my senator

Thank you for contacting me regarding H.R.1424, the Emergency Economic Stabilization Act. I appreciate your thoughts and the opportunity to respond.

The House and Senate approved this bipartisan financial package designed to stabilize credit and restore confidence in U.S. financial markets. This legislation is critical to allowing us to unclog the financial markets, free up credit to the average American and over time restore the American economy to what it has been and always will be - the best entrepreneurial capitalistic system in the world.

This is like the converse of a statement that Fidel Castro made a few years ago: "We are going to use capitalism to destroy capitalism." Now our idiot senators and representatives are telling us that they are going to destroy capitalism in order to save capitalism. Government owning 20% of the largest banks in the country is not "entrepreneurial" or "capitalistic."

While this legislation will not be a quick fix, it does address the core problem of mortgage-backed securities. As it is implemented, it will begin to stabilize the market and free up capital for the credit markets. The legislation authorizes the Treasury Secretary to immediately use up to $250 billion to purchase distressed assets from institutional investors.

Except we've already spent hundreds of billions, and not ONE MBS has been purchased yet.

If needed, the Secretary may then access an additional $100 billion to purchase these distressed assets but only with presidential approval. An additional $350 billion may be accessed if the president first wins approval from Congress.

The legislation includes a number of provisions to ensure oversight by Congress and accountability to the taxpayers, including prohibitions on executive compensation to ensure bad actors are not rewarded. Specifically, companies that receive more than $300 million from this plan will have limits placed on their top five executives. These limits include a ban from receiving a "golden parachute" as well as limits in the tax deductions executives may take on compensation over $500,000.

Who cares about the top five executives when everybody downstream of them is getting billions. At Goldman Sachs the average bonus is $216K, at Morgan Stanley it's $138K. You are taking MY money (I don't make $138K in total compensation, let alone bonus) and giving it to GS and MS employees. How dare you, you socialist? If I wanted a socialist to represent me, I would have voted for a socialist.

The legislation also continues the suspension of "mark-to-market" accounting rules that is already in place today. The bill does not allow bankruptcy judges to restructure the terms of existing mortgage loans. Additionally, it does not provide funds for affordable housing community organizers such as ACORN.

This bill does precisely the one thing that we can do to help unlock the credit markets and help the average working Georgian, the average Georgia retiree, and the average Georgia child who is looking to the future to benefit from what right now is a very difficult situation. This financial crisis has cost people their jobs and put small businesses at risk. It has ransacked individual retirement accounts and frozen the credit available for businesses, home purchases and car purchases. The people affected by the legislation sent us to Washington to make these kinds of tough decisions. I am glad the majority of the members of Congress did not simply turn a blind eye and hope for the best.

Sincerely, Johnny Isakson

Truly The End of Days

Barclays is seeking investments from two state-backed Russian banks in an effort to boost its capital. The British bank has spoken to OAO VTB and OAO Sberbank about potential capital injections, but it wasn't clear Monday if Barclays' efforts had been successful. Barclays said it would raise £6.5 billion ($10 billion) from private sources to meet government capital benchmarks.

Didn't know state-backed Russian banks were considered private sources these days.

Dow up 889 points

Dow up 889 points, its sixth (NOT its second like the press are reporting, points don't matter, only percents matter) largest increase in history...

March 15, 1933: 8.26 points, or 15.34%, to 62.10
Oct. 6, 1931: 12.86, or 14.87%, to 99.34
Oct. 30, 1928: 28.40, or 12.34%, to 258.47
Sept. 21, 1932: 7.67, or 11.36%, to 75.16
Oct. 13, 2008: 936.42, or 11.08%, to 8,387.61
Oct. 28, 2008: 889.35 or 10.88%, to 9,065.12
Oct. 21, 1987: 186.84, or 10.15%, to 2,027.85
Aug. 3, 1932: 5.06, or 9.52%, to 57.22
Feb. 11, 1932: 6.80, or 9.47%, to 78.60
Nov. 14, 1929: 18.59, or 9.36%, to 217.28

Today's News

Foreign ministers, finance ministers, and central bank presidents from Argentina, Chile and Venezuela and others attended the meeting to discuss a crisis which is threatening to severely hurt regional and global economic growth. Foreign Minister Celso Amorim of Brazil said at a press conference that there was a general consensus for the need for reform in "the architecture and the procedures of the international financial system." He did not elaborate on what kind of changes the officials were in favor of or exactly what they had discussed. But he stressed the importance of the region's states pulling together to better weather global financial storms that may lie ahead.

The IMF may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money. IMF's work in countries such as Turkey is only just beginning. The Fund is already close to committing a quarter of its $200bn reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia.

Five straight quarters of losses and a 70% slide in its stock this year haven't stopped Merrill Lynch & Co. from allocating about $6.7 billion to pay bonuses. Goldman Sachs and Morgan Stanley, both still on track for profitable years, have set aside about $13 billion for bonuses after three quarters, down only 28% from a year ago. Even some employees at Lehman Brothers, which declared the biggest bankruptcy in US history last month, will get the same bonus they received a year ago. The worst financial crisis since the Great Depression, a $700 billion taxpayer bailout, public outcry over excessive pay and the demise of three of the biggest securities firms won't deter Wall Street from offering year-end rewards. Goldman, the biggest and most profitable Wall Street firm, has set aside about $6.85 billion for bonuses, or an average of $210,000 for each employee, down 32% from $339,000 a year ago. Morgan Stanley, the second-biggest securities firm, has $6.44 billion for bonuses, or $139,000 per person, down 20% from last year. The money Merrill has set aside for bonuses equates to an average $110,000 for each of its 60,900 people, up from $108,000 a year ago because more than 3,000 jobs have been cut.

Iceland's central bank on Tuesday unexpectedly hiked its key lending rate by six percentage points to 18% in a massive reversal of policy. 15%? Down to 12%? Up to 18%? We don't have a freaking clue what we're doing.

Boeing-IAM Deal

Boeing, on the heels of a tentative agreement to settle a strike with its machinists, immediately faces contract negotiations with its engineer and technical workers union, an effort promising to be just as heated and contentious as the one that prompted the machinists to walk out for seven weeks. Boeing and the IAM tentatively agreed to settle the strike by 27,000 employees in Washington, Oregon and Kansas.

The union said it endorsed the deal that includes no additional cost-shifting to workers for healthcare benefits[*], preserves the company's pension plan, and guarantees a 15% pay increase for each member over the life of the four-year agreement. They will also receive yearly lump-sum payments that could total up to $8,000. Further, the union was able to extract an agreement from Boeing to protect nearly 2,200 facility jobs and an additional 2,920 jobs related to materials delivery and inventory process, as well as expand the scope of its subcontracting review.

For Boeing's part, the manufacturer said it was able to retain flexibility to manage its business, a hint to its increased reliance on outsourcing. It was also able to secure a longer-term contract than in prior years, crucial for a company with a poor record of suffering production halts during labor-contract negotiations.

[*] Sweet deal. I just did open enrollment and my HMO premium went up 16%!

Laffer

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

[...]

Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932.

http://online.wsj.com/article/SB122506830024970697.html

Wow, good insights. I wish somebody had said that before now.

The parade continues...

On Friday unveiled a $7.7 billion investment in PNC. Over the weekend, Capital One and Regions unveiled investments of $3.55 billion each. The new members inducted into the club Monday include the #10 bank in the country SunTrust who will get $3.5 billion, as well as KeyCorp ($2.5 billion), Comerica ($2.25 billion), Northern Trust ($1.5 billion), and Huntington Bancshares ($1.4 billion).

European countries with two quarters of negative growth

Denmark showed a contraction of 0.6% following a 0.2% contraction. Estonia showed a contraction of 0.9% following a 0.5% contraction. Latvia showed a contraction of 0.2% following a 0.3% contraction.

Who knew GWB was a communist?

The Treasury Department is considering buying equity stakes in insurance companies, a sign of how the government's $700 billion rescue program could turn into a piggy bank for a range of beleaguered industries. The availability of US government cash in the middle of a global credit squeeze is drawing requests from insurance firms, auto makers, state governments and transit agencies. While Treasury intended for the program to apply broadly, the growing requests could put a strain on the $700 billion, a sum that only last month stunned lawmakers. MetLife, Prudential and New York Life are interested in exploring a sale of equity stakes to the government, according to people familiar with the matter.

Aside from the socialist aspects, it's clear that Paulson has no clue what he's doing. First the money is to buy mortgage backed securities, then it's to capitalize banks, now it's to capitalize insurers. Does he have the first idea what to do? Why did Bush give him a blank check?

Here's Michelle Malkin's take on this: http://michellemalkin.com/2008/10/25/bailout-creep-what-the-hell-is-hank-paulson-up-to-now/

Argentina trying to seize pension assets

Argentina wants to seize private pension assets to prop up their disastrous government finances, which have been devastated by socialist policies. Just what you need to solve the problems of a socialist economy - more socialism.

http://online.wsj.com/article/SB122567336191591913.html

Mrs. Kirchner defended her decision to seize the pension assets by asserting that the market is too risky for retirement savings, and that the returns earned by private-sector fund managers are not adequate. That's quite a claim considering that the average annual return of Argentina's private-sector pension managers over the past 14 years is 13.9%. But it is even more absurd if one compares the private-sector returns to those of the government's pay-as-you-go social security system over four decades.

If we're not careful, that could happen here.

Are they kidding?

A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans.

Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans. This was suggested by the chairman of the House Committee on Education and Labor. “With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said. “We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings. With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said.

Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.

When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan. “The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said. That simply results in transferring money from taxed savings accounts to untaxed accounts, she said. “If we implement automatic [individual retirement accounts] or if we expand the 401(k) system, all we’re doing is adding to this inefficiency,” Ms. Ghilarducci said.

Today's News

PNC is buying National City. At least another FDIC intervention was averted.

UK's economy posted a third quarter 0.5% GDP decrease. US releases its figures next Thursday October 30. Economist consensus is -0.3%, but I think it will be much worse, between -0.5% and -1%.



Europe still hasn't figured out what it's doing about this mess. The central bank of Sweden cut its interest rate to 3.75%, a drop of a half percentage point. The Riksbank demonstrated that it is focusing on boosting the economy rather than inflationary problems. The cut was the second policy easing of the month, and the bank expects to decrease the rate by another half point during the next six months. Meanwhile, Denmark's central bank raised its benchmark lending rate from 5% to 5.5% to boost the krone. It seems like they are damned if they do (raise rates and the risk of recession skyrockets) and damned if they don't (and their currencies get clobberred). No wonder the US$ and the yen are looking like safe havens.


The yen rose to 94.77 per US dollar, the highest in 13 years. Of course, that means their trade surplus is getting hammered. I mean, really REALLY hammered. It was down 94% for September. That is not good for their export-driven economy. It seems they are also in a damned if you do, damned if you don't scenario.

As of last night's close Japan's Nikkei 225 index stands at 7649, a level not seen since 1981. So the conventional wisdom expedient of claiming that "stocks always outperform bonds over X years" is false, at least for X < 28.

Today's News

Credit rating agencies put the global financial system at risk because they had to be lapdogs, not watchdogs, to survive, Moody's CEO Raymond McDaniel testified on Capitol Hill yesterday. The three major agencies were caught in a race to bottom, forced to lower their standards in an attempt to maintain their market share. That race to the bottom was very lucrative in the short-run for the companies, but disastrous for the global economy in the long haul.

So exactly why isn't Mr. McDaniel in jail for fraud? Or at the very least forced out of his company in disgrace? Why is he still the CEO of anything? Disgraceful! Disgusting!

Desperate to preserve its currency peg to the euro, Hungary raised its interest rate by 3 percentage points to 11.5%, raising the possibility that other Eastern European states will have to follow to head off collapse of their currencies.

Of course, they may save their currencies at the cost of very deep recessions. Now is not the time to be raising rates.

Greenspan testified today before Congress. I see a lot of finger-pointing in an attempt to preserve his legacy. Well, sorry, Mr. Greenspan, but the jury is in. You are an idiot. To think that once upon a time I admired the job he was doing. I -- unlike him -- am not afraid to admit that I made a mistake. Have a Coke and a smile and STFU and let the rest of us figure out how to clean up the mess you left us.

Wachovia had a $23.9 billion third-quarter loss, essentially eviscerating four years of earnings. They took took an $18.8 billion goodwill impairment. Together with last quarter's goodwill impairment, they have essentially written down their 2005 Golden West acquisition to zero. What a bonehead move! The bank also added $6.6 billion in provisions for credit losses. This combined with last quarters credit loss provision increase is approximately equal to the "profits" for all of 2006 and 2007 proving that those year's profits were almost completely illusory accounting artifacts.

Merrill Lynch CEO John Thain said he expects "thousands'' of job losses from the bank's takeover by Bank of America. Most of the cuts will fall in information technology, operations , and finance, Thain said in a Bloomberg Television interview. "We haven't mapped it out in terms of actual number of people, but we are committed to saving $7 billion across the combined platforms, and that will be a challenge,'' Thain said. "Between our two companies it will be clearly thousands of jobs.''

Goldman Sachs is preparing to cut about 10% of its 32,500 employees.

Commercial Real Estate is Next

Think about it...

Hotels? Who is going to be travelling in this recession?

Office space? Companies are going to be cutting back personnel and needing less space?

Malls? Fuggedaboutit!

Wacky Sarkozy idea

French President Nicolas Sarkozy called on European nations to create sovereign wealth funds as part of a "United European response" to the broadening economic crisis. In a speech to the European Parliament, Sarkozy said member states should use the funds to snap up stakes in cheap domestic industries to ensure "European companies are not bought up by non-European capital while their stock exchange values are low."

Um ... excuse me, but don't you need actual wealth to create a sovereign wealth fund? How is Sarkozy proposing to create this fund ... by increasing his already large deficit or by taxing folks who could otherwise make these investments themselves? Stupid idea of the month, in a month that has seen more than its share of stupid ideas.

Some Beat Down Stocks

Percentages reflect drops from their respective 52 week highs.

GM -88%
Sun (JAVA) -79%
CBS -66%
News Corp (NWS) -62%
Yahoo (YHOO) -62%
Starbucks (SBUX) -59%
GE -54%

Linens N Things

In chapter 7 liquidation.

Goodbye Letter

No, not mine.

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866% betting against the subprime collapse. Last month, he shut things down, claiming dealing with his bank counterparties had become too risky. Today, Lahde passed along his "goodbye" letter.

One paragraph in particular resonated with me and will resonate with anybody who over the last couple of years has - like me - asked WHO ARE THESE MORONS running Wall Street?

The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades.

The hits just keep on coming

U.S. banks expected to use rescue money for all but loans
U.S. banks will probably use their money from the government to buy weaker competitors, avoid painful cost-cutting measures or simply as a cushion to help them through the downturn, experts said. Some of the money may eventually get into the economy through lending, but that is not likely before the end of the next quarter. Even with capital from the government, analysts said, the American banking industry still needs to raise about $275 billion to cope with anticipated losses.
[International Herald Tribune by way of the CFA Newsletter]

Fiscal Conservatism

http://firesaxby.com/

9th worst market drop since 1929

Dow down 733 points (7.87%), its 9th worst day in history (and 7th worst since 1929). I wish the stupid press would stop reporting the meaningless "fact" that it's the 2nd worst point drop in history.

Oct. 19, 1987	-22.60
Oct. 28, 1929	-12.80
Oct. 29, 1929	-11.70
Nov. 6. 1929	-9.90
Aug. 12, 1932	-8.40
Oct. 26, 1987	-8.00
Oct. 15, 2008	-7.87
July 21, 1933	-7.84
Oct. 18, 1937	-7.75
Oct. 9, 2008	-7.33

The Dow is now at 8578, exactly where it was last Thursday. My TV had told me that the bulls were in charge. Stupid TV.

ETA: A lot of sources give the above list as worst drops ever, but that is incorrect. There were drops of 8.7% in 1899 and 8.3% in 1907 that are not represented above.

Markets Down

Of course, yesterday's rally in the US turned out to be short lived. This has been followed up by drops in Asia.

The Nikkei 225 Average fell 0.8% to 9372
The broader Topix index fell 1.5% to 942

Australia's S&P/ASX 200 fell 0.8% to 4300
New Zealand's NZX 50 index fell 1.2% to 2914
South Korea's Kospi fell 1.5% to 1347

How is this any different from what Chavez is doing?

According to the WSJ, some of the big banks were unhappy about the government taking equity stakes but acquiesced under pressure from Paulson in a meeting yesterday.

The Plan... (work in progress)

Here's how Paulson is investing your money ... with absolutely no accountability. I cannot believe that a non-elected official has this much power.

Citigroup J.P. Morgan B of A Wells Fargo $25 bn $25bn $25bn $25bn

Goldman MS State Street B of NY $10bn $10bn $2bn $3bn

Edited to add:
The numbers are downright scary; the numbers above didn't look too big at first, but here's how they stack up as a percentage of the outstanding common equity of those companies:
Citigroup = 25/86 = 29%
JP Morgan = 25/164 = 15%
BofA = 25/141 = 18%
WF = 25/111 = 23%
GS = 10/44 = 23%
MS = 10/35 = 29%
BNY = 2/35 = 6%
SSB = 3/21 = 14%

Edited a second time to add the percentages in terms of book shareholder equity (as of 9/30):
GS = 22% (WSJ)
JP Morgan = 19% (WSJ)
Citigroup = 18% (WSJ)
BofA = 25/186 = 13%
WF = 25/73 = 34%
MS = 10/46 = 22%
BNY = 2/32 = 6%
SSB = 3/16 = 19%

Iceland Down 77%

Iceland's benchmark stock index plunged 77% as trading resumed after a three-day suspension and the nationalization of the country's largest banks. Kaupthing, Glitnir and Landsbanki Islands collapsed this month with debts equivalent to as much as 12 times the size of Iceland's economy. The three banks accounted for about 76% of the ICEX 15 Index's value prior to the nationalization. The OMX Iceland 15 Index fell 2324 to 680 as of 2:07 pm local time. Four of the 13 other stocks in the index didn't trade. Trading was halted since October 9 after the gauge lost 30% in nine days as the country's financial system collapsed. Iceland started talks in Moscow today to secure an emergency loan of as much as 4 billion euros ($5.47 billion) from Russia.

Just goes to show that halting trading to prevent bad results just brings on ever worse results alter on.

Asia up again

Nikkei 13.0%
Topix 12.7%
Singapore 6.6%
Taiwan 5.5%
Seoul 5.3%
Sydney 5.1%
Hong Kong 4.1%

Sovereign Bank acquired by Spain's Santander

Sovereign Bancorp is being acquired by Spain's Banco Santander after losing almost $1 billion mostly from mortgage-related investments.

Morgan Stanley saved?

Investors are relieved that Morgan Stanley's investment from Mitsubishi Financial did not turn sour in the end, even if it means the Japanese bank managed to extract a slightly sweeter deal. Morgan Stanley shares surged 87% after it received a $9B investment from Mitsubishi UFJ Financial Group in exchange for a 21% stake in the firm. The deal, which came a day earlier than expected, was modified a little to provide more downside protection to Mitsubishi by switching to an investment of preferred shares only, instead of a mix of common and dividend-yielding shares.

I'm not sure this is a "sweet" deal for Mitsubishi. Sure it's better than originally negotiated, but at Friday's share price Mitsubishi could have bought more than half of Morgan Stanley.

Governments buying stock directly in banks

The administration will use perhaps as much as $250bn US of the $700bn US bailout program recently passed by Congress to purchase stock in U.S. banks, providing the banks with desperately needed capital, the official said.

The UK government unveiled an injection of £37bn ($63bn) into Britain's biggest high street banks.

German Chancellor Angela Merkel outlined a rescue package up to 80 billion euros ($109bn) to be used to recapitalize the German banking sector.

I'm amazed that anybody (other than socialists) thinks this is a good idea.

The Bulls Are In Charge?

That was the headline today after the Dow's 936 point increase. It is the fifth largest increase in history...

March 15, 1933: 8.26 points, or 15.34%, to 62.10
Oct. 6, 1931: 12.86, or 14.87%, to 99.34
Oct. 30, 1928: 28.40, or 12.34%, to 258.47
Sept. 21, 1932: 7.67, or 11.36%, to 75.16
Oct. 13, 2008: 936.42, or 11.08%, to 8,387.61
Oct. 21, 1987: 186.84, or 10.15%, to 2,027.85
August 3, 1932: 5.06, or 9.52%, to 57.22
Feb. 11, 1932: 6.80, or 9.47%, to 78.60
Nov. 14, 1929: 18.59, or 9.36%, to 217.28
Dec. 18, 1931: 6.90, or 9.35%, to 80.69

Notice that 6 of the top ten increases occurred in the 1929-1932 period during which the DJIA plummeted from 381 to 41 (89%!).

Here's a graph of that period, suggesting it is at least possible that the latest "bull" is nothing of the sort.



And lest anybody think stock markets always recover in a reasonable amount of time, here's a picture of the Japan stock market over the last 25 years, which has been in a definite secular bear market, the absurd bounce up to 40,000 in the late 1980s notwithstanding.

The Subprime Primer

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true

Europe and Asia up

Hang Seng up 10.2%
Shanghai up 3.7% at 2074 after dropping as low as 1931
Sensex up 7.4%
Sydney up 5.6%
South Korea's Kospi up 3.8%
Singapore's Straits Times up 6.7%

London 4,256.90 +324.84

Paris 3,531.50 +355.01

Frankfurt 5,062.45 +518.14

DJ Stoxx 225.37 +20.42

Here's an idea...

Isn't it possible that the problem lies not with the plunge over the last few weeks (painful as it's been) as with the unreasonable increase over the last four years. Not unlike housing pricing, although obviously to a much lesser extent.

Stupidest Poll Ever

When will stock markets hit a bottom?

Within a few days	13%
Within a week	18%
Within a month	53%
They already have	16%

Total responses to this question: 97266

http://money.cnn.com/POLLSERVER/results/42446.html

GM

No, not another story about how GM is trading at the same price it had back in 1950.

GM reportedly has held preliminary talks to acquire Chrysler, against the backdrop of an increasingly bleak decline for the auto industry. Reports on Friday night by The Wall Street Journal and the New York Times both cited unnamed people familiar with discussions between the two automakers. GM has been in talks with Cerberus Capital Management, which owns 80.1% of Chrysler and 51% of GMAC. Cerberus proposed a swap in which GM would acquire Chrysler's automotive operations, and in turn give Cerberus its remaining 49% stake in GMAC, the Journal reported.

Apparently the rumor from February 2007 wasn't wrong, just ahead of its time. But I don't understand the logic of this deal. Two weak players merging never solves anything.

Further Socializing

Paulson gave some new details of the emerging plans by the U.S. federal government to inject capital directly into a "broad array" of financial firms. He said that officials are working on a "standardized program that is open to a broad array of financial institutions" and the Treasury is working as quickly as possible to nail down the details and get the recapitalization plan running. The government wants to "do it right. The plan is to attract private capital to complement the government's funds, he said. Paulson went out of his way to say existing shareholders would be protected, and that the government would only make the purchases through a "broadly available equity program" without any voting power, "except with the market standard terms to protect our rights as investors."

Another Wild Ride

After trading in a 1000-point range that had it down nearly 700 points after the opening bell, the Dow Jones Industrial Average closed down 128 points (1.5%) at 8451, down nearly 1900 points (18.2%) for the week. That's eight consecutive losing sessions (down 2400 points), and seven consecutive triple-digit losses. The broader S&P 500 declined 10.6 points (1.2%) to finish at 899.3, giving it a weekly loss of 18.2%.

But you know who is doing WAY worse than the overall market? Blackstone. They closed today at $8 a share, down an amazing 74% from their offering price of $31 just over one year ago.

Wells Fargo emerges victorious

Citi walked away from its fight to buy Wachovia, clearing the way for Wells Fargo to acquire Wachovia, transforming Wells Fargo from a regional player focused on the West Coast to a national retail-banking powerhouse. Citi said it will no longer seek injunctive relief to block Wells Fargo but will pursue a $60 billion claim against Wells Fargo and Wachovia for breaching an agreement that gave it the exclusive right to negotiate with Wachovia. With Citi bowing out, Wells Fargo looks set to acquire Wachovia in a $11.7 billion all-share deal.

I like this deal; not only is it better for Wells Fargo and better for Wachovia shareholders and better for the taxpayer because of the lack of a FDIC backstop, I think it's also good for consumers to keep Wachovia banking operations integrated with the brokerage business.

About the only group this is not good for is Citi shareholders.

More on Iceland

Iceland seized the nation's last major independent bank, shutting down currency trading and effectively rendering the krona worthless on world markets, as the collapse of Iceland's financial system accelerated. Prime Minister Geir Haarde, who warned this week of "national bankruptcy," said Iceland's finance minister, Arni Mathiesen, will be in Washington this weekend for International Monetary Fund / World Bank meetings, but he would not say whether an IMF bailout is in the works.

Dow down 700 this morning

Although it has recovered somewhat and is "only" down 269 points right now.

Is Morgan Stanley going to make it?

Financial stocks have generally risen modestly today. The sole exception seems to be Morgan Stanley. Shares traded as low as $8.70 this morning, but recovered somewhat and are down about 25% at last check. Shares fell 26% yesterday. The stock hasn't been under $9 since April 26, 1995.

Updated at 11:58:
MS is trading at $7.48, down 4.97 (-40%). It's possible that Goldman Sachs will be the last man standing. GS never loses, especially with their man Paulson calling the shots.

Decoupling? What decoupling?

The hell is everywhere...

Europe:
The pan-European Dow Jones Stoxx index fell 7.5% to 205
French CAC index fell 6.8% to 3208
German DAX index fell 7% to 4544
UK FTSE index fell 8.5% to 3948

Asia:
Nikkei fell 9.6% to 8276, its lowest close since May 2003
Japan's broader Topix index fell 7.1% to 841
Hang Seng Index fell 7.2% to 14,797
China's Shanghai Composite fell 3.6% to 2001
Australia's S&P/ASX fell 8.3% to 3961
New Zealand's NZX index fell 4.7% to 2805
South Korea's Kospi fell 4.1% to 1241
Thailand's SET Index fell 8.7% to 457
India's Sensex fell 5% to 10,766

Yahoo at $13

That Microsoft offer doesn't look so bad now, does it? They were idiots for not ripping that $31 a share out of Ballmer's hands before he came to his senses.

Who are these morons?

And why do they have jobs?

Ladenburg Thalmann analyst Richard Bove cut his price target for Morgan Stanley shares to $19 from $44. But, wait a second - Morgan Stanley is trading at $12.

1) Is Bove saying he expects MS to climb from $12 to $19 (over 50%)? Doubtful!
2) How low did the stock have to drop before he cut his ridiculous $44 target?

Why does any company have these bozos on staff? Do they think ANYbody listens to them? What is the point?

Nikkei 225 Plunges

On 1/1/1984, the Nikkei 225 stood at 9927. Today -- almost 25 years later -- it stands at 8262. So before accounting for dividends, the Nikkei has lost almost 1% a year for 25 years. That is the fate that awaits the US, thanks to our misguided credit policies of the last couple of decades.

Dow Down 679 points

Dow down 679 points (7.33%), its 9th worst day in history.

Oct. 19, 1987	-22.60
Oct. 28, 1929	-12.80
Oct. 29, 1929	-11.70
Nov. 6. 1929	-9.90
Aug. 12, 1932	-8.40
Oct. 26, 1987	-8.00
July 21, 1933	-7.84
Oct. 18, 1937	-7.75
Oct. 9, 2008	-7.33
Oct. 5, 1932	-7.15

The Dow is now at 8579, down 2272 points in just the last seven sessions. It is down 5700 points (40%) from its high, just 1 year ago.

Anniversary

Today is the five-year anniversary of the low point of the 2000-2002 bear market on 10/9/2002.

Coincidentally, it is also the one-year anniversary of the high point of the 2002-7 bear market on 10/9/2007.

C'est la vie!

One Year Anniversary of Peak

The Socializing of the Economy Continues

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones. [Source: International Herald Tribune]

1) An interesting (and self-serving) interpretation of the Act. Nobody in Congress envisioned buying direct stakes in banks. The bill was supposed to be about buying securities from their portfolios.

2) When in history has socializing an economy ever made anything better?

Government

Corruption

Another $38B for AIG

Pretty soon, we'll be talking real money here. Evoking its emergency powers to combat financial market stress, the Federal Reserve said it was lending $37.8 billion in additional cash to troubled AIG.

Hey look! It's a roller coaster!

Dow has sixth losing session in a row, down 190 points to 9258.

Emergency Rate Cut

Fed lowers fed funds rate and dicount rate 0.5% each in an emergency meeting. This was coordinated with rate cuts by the UK, Sweden, China and the European Central Bank.

Really bad PR

The committee on Oversight and Government Reform held a hearing on Tuesday to address and examine downfall of AIG, the world’s largest insurance company. The committee planned to discuss the financial excesses and regulatory mistakes that led to AIG’s government bailout. One of the items discussed was AIG’s expenditure of $440,000 for a corporate retreat at the St. Regis Monarch Beach resort in LA. These funds were spent on Sept. 22, a week after the Federal Reserve extended an $85 billion emergency loan to AIG to keep it from going bankrupt due to insurance liabilities. According to the receipt from the St. Regis, the eight-day company retreat was a lavish one -- $139,000 was spent on hotel rooms, while even more money -- $147,301 -- was spent on banquets. Another $23,380 was spent on undisclosed spa treatments and another $6,939 was spent on golf. A full $9,980 was spent on room service and food and cocktails at the hotel lounge.

This is exactly why government bailouts are unethical thefts of my tax money. It's bad enough when they do it with their own shareholder's money, but with taxpayers funds at risk?

Response from Representative Gingrey

Thank you for contacting me regarding your opposition to H.R. 1424, the Emergency Economic Stabilization Act of 2008. As your Congressman, I appreciate hearing your thoughts and welcome every opportunity to be of service.

As you may be aware, Congress first began consideration of the proposal offered by Treasury Secretary Hank Paulson the week of September 22. The House of Representatives defeated a modified version of the proposal on September 29 by a vote of 228 to 205, while the Senate passed its version of the proposal on October 1 by a vote of 74 to 25. On Friday, October 3, the House of Representatives agreed to the Senate version of the bill by a vote of 263 to 171, and the President signed it into law shortly thereafter.

While I do believe that we need to ensure the economic security of our nation and its people, I voted against both the initial House version and the later Senate version which ultimately was enacted. I do not believe they were the right approaches to address this crisis, and I could not support a bill that aimed to save our free-market economy by sacrificing the very free-market principles that sustain it.

Without question, our country is facing very difficult economic challenges. Though inaction was not an option, I firmly believe that in this instance, Congress had an obligation to not only act quickly, but also correctly. I believed that Congress could have created a premium-based insurance program for mortgage-backed securities where the businesses participating-and not the taxpayer-would pay the premiums. I also support suspending the capital gains tax for two years to spur economic growth and investment here in America.

Additionally, I was very troubled that this legislation did more to treat the symptoms rather than cure the underlying disease that caused this economic crisis. While there is a lot of blame to go around, there is no question that Freddie Mac and Fannie Mae are in desperate need of reform and should be transitioned back into private sector organizations. Congress must address the root problem of this crisis to ensure that it never happens again; the legislation twice presented to the House failed to do this.

Dow down another 500 points

Dow at 9447, down almost 1400 points and an incredible 12.8% in 4 sessions.
1-Oct-08 10,831.07
2-Oct-08 10,482.85 (-3.2%)
3-Oct-08 10,325.38 (-1.5%)
6-Oct-08 9,955.50 (-3.6%)
7-Oct-08 9,447.11 (-5.1%)

S&P500 below 1000 for first time in five years; Nasdaq at five year low too.

Trying to outdo the Carter era

These guys are trying their damnest to give us runaway inflation at the same time we have a deep recession. Bless their hearts.

The Federal Reserve announced it is going to buy commercial paper in an effort to restart a market that has virtually shut down in recent weeks. In another unprecedented move to combat the credit crunch, the Fed said it would set up a special purpose vehicle to purchase three-month unsecured and asset-backed commercial paper. Lending in the commercial paper market has shrunk in recent weeks given the turmoil in financial markets. The Fed said that the Bush Administration believed the move was necessary and will make a special deposit with the central bank to support the facility. The Fed did not give an estimate of how much commercial paper it would purchase.

Iceland

Icelandic government acts to avert economic collapse. The Icelandic parliament approved legislation that gives the government broad authority over the country's banks, including the ability to force them to merge or sell off subsidiaries as well as the ability to seize assets. The government is expected to fully nationalize Landsbanki and Glitnir soon, while a third bank, Kaupthing, was forced to accept state loans. Iceland's currency, the krona, lost 30% of its value against the US dollar in the past 30 days and 80% against the euro over the last year. Inflation has exploded to 14%. Interest rates are at 15%+.

MarketWatch has this to say...

It's hard to imagine a less politically popular move, but the way things are headed the first recipient of the $700 billion bailout money that Treasury Secretary Hank Paulson has to spend could very well be Iceland, which is in a financial meltdown.

Best Places to Launch a Career

1 Ernst & Young 3300 hires, $50-$55K
2 Deloitte & Touche 2000 hires, $55-$60K
3 PricewaterhouseCoopers 3600 hires, $50-$55K
4 Goldman Sachs 900 hires, $60-$65K
5 KPMG 3200 hires, $50-$55K

Stupid is as stupid writes

Oh, the sweet irony of these two items appearing side by side in the AJC today...

Now that the crisis is easing, who is to blame for the great gasoline shortage of 2008? Well, let’s think about that from the economic perspective of basic supply and demand. Gov. Perdue signed an executive order on Sept. 12 enacting Georgia’s gas-gouging statute. What happened then?

There was not as much gasoline to go around as before the hurricane, but there was still plenty of gasoline. There was no shortage in Oregon, in Wisconsin, in Ohio. Let’s say that you owned a company that delivered gasoline. Say you owned 5,000 trucks. Now let’s say that you could have gotten $6, $7 or $8 per gallon in Atlanta, but only $4 or $5 in Oregon, Wisconsin or Ohio. In other words, you could have made big profits in Atlanta. Don’t you think you might have diverted some of your trucks to Atlanta? But what if you could have gotten only $4 per gallon in Atlanta, about the same as in Oregon, Wisconsin or Ohio? Was it worth it to divert some of your trucks from their regular routes? Of course not! No big profits meant no gasoline trucks driving to Atlanta. Is this all becoming clearer? Perdue and his consumer affairs office decided to play God with the price of gasoline so Atlanta didn’t receive needed gasoline supplies. That’s the supply side.

Now let’s think about the demand side. There was not enough gasoline around town to match the amount the buyers would like to buy at $4 a gallon, but there was enough to match the amount people would buy at $6, $7 or $8 dollars a gallon. People were exactly right to line up and top off their tanks. There was not enough gasoline to go around because the price was stuck at $4 a gallon! At $4 a gallon, I was still taking my usual Sunday drive to the mountains and all of you were still taking your football trips or whatever you do, if you could find gasoline. But some of you could not get to work. At $8 a gallon, however, I would not take my Sunday drive and others would cut back, too. The gasoline that we did not use would have been there for the rest of you to get to work. There would have been no need to top off our tanks because there would have been no shortage. Would it have been terrible to pay $8 for a gallon of gasoline in the short term? Well, two weeks ago, if I were to have offered you $8 to sit in a car line for two hours you probably would have told me your time was worth more than that. So you decide: would you rather let the price go up to its natural level and not have to spend five or six hours per week searching and waiting for gasoline, or do you like the Perdue way of controlling how gasoline is distributed in Atlanta?

And right next to it this letter to the editor...

In a letter “Prices too low to limit demand,” a reader opines the reason we have a gas shortage in Atlanta is because our gas is too cheap. At first I thought, “that’s crazy, we are paying 40 to 50 cents more per gallon than anyone else in the U.S.” But then I thought, how brilliant the reader must be.

Using this same line of thinking, we can end homelessness and world hunger simply by raising the prices on food and homes! If we make bread $10 per loaf, surely more people will have access to it —- and if homes were to rise in price, say to California levels, our streets in downtown Atlanta would be empty!

Back to reality: The shortage was caused because a panic was created by a combination of no information by our leaders and no preconceived plan to deal with such a situation. People will continue to hoard until they see gas stations without plastic bags over their pumps as a daily occurrence.

Now, I'm all for diversity of opinion in the letters page. But when a letter's premise is so absurd that reading it makes my brain hurt, I have to wonder who is the editor who let this letter see the light of day?

Nikkei below 10,000

The Nikkei 225 Average dropped below the 10,000-point level for the first time since December 2003, dropping as low as 9,916 during the session. It currently is trading at 10,148 (-324.63).

35-year old to head TARP

Paulson announced Neel Kashkari, a close advisor, has been tapped to lead the $700 billion mortgage rescue effort. A former banker at Goldman Sachs, Kashkari has been assistant secretary for international economics. He came to Treasury along with Paulson in July 2006. Kashkari's new title is interim assistant secretary for financial stability. Kashkari, 35, holds two master's degrees. The first is an MS in engineering and the second was an MBA in finance.

You have to be kidding me! Leaving aside for now the continuing invasion of our economy by Paulson's Goldman Sachs associates, they are putting a 35 year old in charge of $700B!!?? I have more experience in finance than this guy!

Dow down 795 points

What happened? I thought this effin' bill was supposed to solve everything. My senator specifically told me that the stock market dropped 778 points because we didn't pass this turkey of a bill. Well, the market has now dropped 1200+ since its high mid-Friday when the House took up its second vote on the bill.

Every senator and representative who voted for this appalling communist takeover of a huge sector of our economy should resign now. Of course they won't. I can hear it already ... "it would have been much worse if we hadn't passed the bill." It must be nice to live in la-la land where you can make non-provable statements unchallenged and there are no consequences for your actions.

Since they won't resign, I hope the voters take advantage of their opportunity in just a few weeks to at least assign blame where it belongs. Regardless of your party, I urge you to vote anti-incumbent. Maybe the next batch of bozos we vote in will be more careful.

Bank of America Settlement

Bank of America and 11 US states reached an $8.4 billion accord under which BofA will modify troubled mortgages and enable nearly 400,000 Countrywide clients to keep their homes. The program is designed to resolve claims that several state attorneys general had filed against Countrywide. The program's goal, BofA said in a statement, is to enable borrowers who financed their homes with subprime loans or pay-option adjustable-rate mortgages to hang on to those homes. For BofA, "the cost of restructuring these loans is within the range of losses we estimated when we acquired Countrywide," CFO Joe Price said in a statement. The plan will reduce interest and principal on the mortgages by $8.4 billion. The program applies to mortgages serviced by Countrywide and originated before Dec. 31, 2007. The target borrowers are those who occupy their homes as their principal residences and "who are seriously delinquent or are likely to become seriously delinquent as a result of loan features, such as rate resets or payment recasts," BofA said. How will BofA ensure that the mortgage workouts will keep people in their homes? One method is to ensure that first-year payments of principal, interest, taxes and insurance will equal 34% of the borrower's income. The modified loans' interest rates will adjust with "minimal risk of payment shock and redefault," BofA said.

Bank of America's settlement is another solution that leaves some people feeling like injured parties, namely borrowers making good on their debt. BofA said it would modify $8.4 billion in subprime, adjustable rate or pay-option mortgages originated by Countrywide to let borrowers stay in their homes. The deal is obviously a win for buyers facing foreclosure. It's also a manageable loss for BofA which built the cost of this deal into its purchase price of Countrywide earlier this year. But this plan, despite its virtues, carries the same flaws as the Troubled Asset Relief Plan just enacted by Congress and really any sweeping plan designed to limit mortgage losses. It leaves responsible people holding the bag. While responsible homeowners who have cut the family budget and made good on payments despite the declining value of their homes, troubled borrowers will be able to refinance through the FHA, get lower interest rates or get a reduction in principal for pay-option mortgages.

ETA (4:14pm)

Bank Of America to sell $10 bln in common stock - MarketWatch

Market can't possibly have a good reaction to that, can it? They are essentially issuing new equity to settle a lawsuit?

ETA (10/27)

Some details of how specific mortgages may be reset:

Interest rates may be reset as low as 2.5%

Prepayment penalties and late fees will be waived

Upside-down borrowers may have principal reduced

Things bad in Europe

Hypo Real Estate got a second rescue package valued at €50 billion from the German government. A first rescue package failed, prompting Chancellor Angela Merkel to vow not to let the property lender fail. Hypo has a €400 billion balance sheet.

The pan-European Stoxx 600 index closed down 7.6% at 242.

The German DAX 30 index closed down 7.1% to 5387, the French CAC-40 index dropped 9% to 3712, the UK FTSE 100 index closed down 7.9% to 4589, and the Russian RTS index slumped 19.1% to 866 before trading was suspended.

Nine Fortune 200 Companies

Have imploded in this financial crisis. Global 500 rankings indicated in parenthesis.

#13 (# 35) AIG $110B
#31 (#100) Merrill Lynch $64B
#38 (#113) Lehman Brothers $59B
#39 (#120) Wachovia $56B
#55 (#161) Fannie Mae $43B
#56 (#162) Freddie Mac $43B
#100 (#318) Washington Mutual $26B
#108 (#352) Countrywide Financial $23B
#156 (N/A) Bear Stearns $16B

This is going to get interesting

A New York judge issued an emergency injunction that extended Citi's exclusivity agreement with Wachovia over Wachovia's objection. The markets don't need this kind of confusion right now. Just get 'er done - Citi or Wells Fargo doesn't much matter at this point.

Follow-up (10/6):
Wells Fargo appeared to have the upper hand in its battle with Citigroup for the chance to take over Wachovia thanks to two court rulings in its favor. A New York appellate court overturned an earlier decision to block Wells Fargo's acquisition of Wachovia. In a separate ruling a North Carolina court issued a temporary restraining order preventing Citi from enforcing the claimed exclusivity agreement.

Baby Boomers

The early Baby Boomer generation (1946-1955) has taken it all.

• Their parents had meager (or no) employer provided retirement benefits; Boomers had generous defined benefit pensions PLUS retiree medical benefits; their kids will have 401(k)s with pathetic returns as the effects of the "age wave" kick in.
• Their parents had the Great Depression; Boomers had the greatest economic expansion in history; their kids will have a decades-long recession like Japan's "lost decade" only longer.
• Their parents had ditch digging jobs under Roosevelt's jobs program; the Boomers had great jobs; their kids will have the jobs that are not outsourced to India
• Their parents' government ran a balanced budget; the Boomers' government ran a deficit almost every year of their adult lives; their kids will be saddled with tens of trillions of dollars of debt
  

However the Boomers need to remember that the next generation needs to keep paying taxes for Social Security and Medicare to maintain them in the style to which they have become accustomed. However, these programs (particulary Medicare) will be bankrupt before that next generation can use them, so Boomers should tread lightly. In the next 10 years, this country is going to have generational warfare that will make the "class warfare" that our politicans often mention seem like high tea at the Ritz.

Dow dropped 436 points

I thought this bill was supposed to be great for the stock market. When the vote started in the House the DJIA stood at +279. It closed the day at -157. What happened?

171 Representatives who make me proud

Aderholt
Akin
Altmire
Bachmann
Barrow
Bartlett (MD)
Barton (TX)
Becerra
Bilbray
Bilirakis
Bishop (UT)
Blackburn
Blumenauer
Boyda (KS)
Broun (GA)
Brown-Waite, Ginny
Burgess
Burton (IN)
Butterfield
Buyer
Capito
Carney
Carter
Castor
Cazayoux
Chabot
Chandler
Childers
Clay
Conyers
Costello
Courtney
Culberson
Davis (KY)
Davis, David
Davis, Lincoln
Deal (GA)
DeFazio
Delahunt
Diaz-Balart, L.
Diaz-Balart, M.
Doggett
Doolittle
Drake
Duncan
English (PA)
Feeney
Filner
Flake
Forbes
Fortenberry
Foxx
Franks (AZ)
Gallegly
Garrett (NJ)
Gillibrand
Gingrey
Gohmert
Goode
Goodlatte
Graves
Green, Gene
Grijalva
Hall (TX)
Hastings (WA)
Hayes
Heller
Hensarling
Herseth Sandlin
Hill
Hinchey
Hodes
Holden
Hulshof
Hunter
Inslee
Issa
Jefferson
Johnson (GA)
Johnson (IL)
Johnson, Sam
Jones (NC)
Jordan
Kagen
Kaptur
Keller
King (IA)
Kingston
Kucinich
Lamborn
Lampson
Latham
LaTourette
Latta
Linder
Lipinski
LoBiondo
Lucas
Lynch
Mack
Manzullo
Marchant
Matheson
McCarthy (CA)
McCaul (TX)
McCotter
McDermott
McHenry
McIntyre
McMorris Rodgers
Mica
Michaud
Miller (FL)
Miller (MI)
Moran (KS)
Murphy, Tim
Musgrave
Napolitano
Neugebauer
Nunes
Paul
Payne
Pearce
Pence
Peterson (MN)
Petri
Pitts
Platts
Poe
Price (GA)
Rehberg
Reichert
Renzi
Rodriguez
Rogers (MI)
Rohrabacher
Roskam
Rothman
Roybal-Allard
Royce
Salazar
Sali
Sánchez, Linda
Sánchez, Loretta
Scalise
Scott (VA)
Sensenbrenner
Serrano
Shea-Porter
Sherman
Shimkus
Shuler
Smith (NE)
Smith (NJ)
Stark
Stearns
Stupak
Taylor
Thompson (MS)
Tiahrt
Turner
Udall (CO)
Udall (NM)
Visclosky
Walberg
Walz (MN)
Westmoreland
Whitfield (KY)
Wittman (VA)
Young (AK)
Young (FL)