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)

It's a done deal...

The $700B bailout made it through the House by a wider margin than expected, 263-171. The really sad part is that the government is going to lose their shirt on these purchases sticking us with the tax bill PLUS it isn't goint to do anything and we're going to slide into a deep recession anyway. Leave it to the government to get it wrong.

Each one of us just invested thousands in a huge money-losing mutual fund. The only consolation is that MAYBE (although I doubt it) this bill will help out the economy enough that our net worth will drop less than it otherwise would have, enough to offset the expense of this bill. Of course, how on Earth would one measure such a thing. No accountability.

At least I'm happy to report that my representative Phil Gingrey voted against this steaming pile of cow dung. He has my full support - vote, volunteer time and campaign contribution.

Lining up...

Once the federal spigot is open, everybody is going to line up to get theirs...

California may need a $7 billion emergency loan from the federal government to pay for "teachers' salaries, nursing homes, law enforcement and every other state-funded service" this month, Gov. Arnold Schwarzenegger warns. California is running short on cash, he warns in a letter sent to Treasury Secretary Henry Paulson. State Treasurer Bill Lockyer issued a statement a day earlier saying because of the national financial crisis, California "has been locked out of credit markets for the past 10 days." "Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal Treasury for short-term financing," Schwarzenegger wrote. The governor warned that a number of states are facing the same cash flow crunch this month, but that his state is "so large that our short-term cash flow needs exceed the entire budget of some states." Schwarzenegger said his state would attempt to sell "$7 billion in Revenue Anticipation Notes for short-term cash flow purposes in a matter of days." Lockyer said that unless the national economic crisis subsides and California can secure private short-term loans "the state's cash reserves would be exhausted near the end of October. Payments for teachers' salaries, nursing homes, law enforcement and every other state-funded service would stop or be significantly delayed," Lockyer said. "And California's 5,000 cities, counties, school districts and special districts would face the same fate."

Crooks - all of them

Critics of Paulson's effort to put together a financial bailout worry that the he is getting too much of his advice from aides who were his colleagues at Goldman Sachs, where he was the CEO before joining the Bush administration in 2006. Paulson has recruited three former Goldman execs—Ken Wilson, Ed Forst and Dan Jester—in recent weeks to help him create and execute a bailout plan. A fourth, retiree Steven Shafran, is one of Paulson's "senior advisers." Treasury spokeswoman Michele Davis said Wilson and Jester joined Treasury as advisers in August; Forst, who left Goldman this summer to become a senior administrator at Harvard, joined Paulson's crisis squad in September. "This is a time when the American people need all the experts at Treasury that they can get," Davis said, adding that the ex-Goldmen are getting paid "de minimis" as "contractors." A senior commercial banker, who asked for anonymity discussing bailout politics, said that the relationship between the investment business, which will be a major beneficiary of any bailout, and the Treasury team is "very incestuous." A GOP congressional adviser, who also asked for anonymity, said Paulson's Goldman-heavy kitchen cabinet "narrow[s] their window of input."

Nobody mentioned conflicts of interest, so I will. This is a crock of shit and it stinks.

Crooks - all of them

The Center for Responsive Politics, a Washington nonprofit group that studies money and politics, reports that on average, lawmakers who voted in favor of the bailout bill have received 51% more in campaign contributions from sources in the finance, insurance and real estate industries (FIRE, for short) — over their congressional careers than those who opposed the emergency legislation.

In this election cycle, the 140 House Democrats who voted for the bailout bill collected 78% more from the FIRE industries than the Democrats who opposed it. Over their careers, they collected 88% more, the data show.

On the Republican side, the gap was smaller. Republicans in the House that voted yes on the bailout bill got an average of 23% more in contributions from the FIRE industries in this election cycle than House Republicans who voted against it. In the long run, they got 53% more.

Of the 37 Democrats that sit on the House Financial Services Committee, 25 voted for the bill, including the committee chairman, Barney Frank of Massachusetts. He received nearly $800,000 this election cycle from sources in the FIRE industries. Of the 33 Republicans on the committee, 8 voted for the bill. The ranking Republican member of the committee, Spencer Bachus from Alabama, was among those who voted in favor. He has received $822,000 from the FIRE industries this election cycle and $3.7 million since 1989.

Response from Senator Chambliss

Thank you for contacting me regarding the turmoil in our financial markets and the actions taken by the United States Treasury as they pertain to several leading financial institutions. It is good to hear from you.

This is the most serious and critical domestic issue I have dealt with in my 14 years in Congress. We have been betrayed by many people and by abuse of the system. Now we have two significant choices to make - do nothing or take action.

I strongly believe that doing nothing will destroy the financial security of millions of Americans and possibly lead us into a depression. [BOOGA BOOGA] I just as strongly believe the bill as now negotiated will arrest the crisis and begin to turn our economy around.

The bill that I voted for is not a bailout. H.R. 1424, "The Emergency Economic Stabilization Act," is crafted to address the crisis; restore security for the American taxpayer; and return our nation to the strongest economic power in the world. And in the process this bill enables us to root out and punish those who cheated us all.

Call it anything you want; the bill you voted for IS a bailout. I am so sick of this "politics of meaning" bullshit.

I know that my vote in favor of this package was not the politically popular thing to do, but this is not a popularity contest. This is about the future of our country and the future that my children and grandchildren will inherit. I have absolutely no doubt in my mind or my heart that my vote in support of this measure was the right thing for our economy, for Georgians, and for our country.

My first reaction was one of anger and frustration. How could this happen in the strongest economy in the world? How could the best financial system in the world fail? After calming down, I realized the seriousness of the situation and the consequences of Congress failing to act.

The Treasury Department submitted a proposal to Congress requesting authority to purchase troubled assets from financial institutions. This program was intended to address the root cause of the market stresses by removing these assets from the financial system.

I did not support the original proposal submitted by the Administration because it did not address the critical needs of the American taxpayer, community banks, retirees, and small businesses and it concentrated too much power in a small group to administer the plan.

As the conversations in Washington and across the nation continued over how to address the challenge before us and as the details of the problems in our financial sector were revealed daily, I became convinced that something had to be done and done soon.

Moreover, when the House rejected the plan, the economy suffered a $1.2 trillion dollar blow in the stock market, which only made more apparent the impact this credit crunch is having on Main Street . Specifically, in some cases, Georgia community banks are unable to make auto loans.

Who cares? That's what the market does, especially recently. It gyrates for no apparent reason, disconnected from economic fundamentals. It has since recovered most of that loss.

Below are details of the legislation:

TAXPAYERS ARE PROTECTED. In its current form, the legislation before the Senate protects taxpayers in many ways. Accountability, safeguards, and oversight measures are numerous. There will be transparency, public reports, and triggers to end the program if, for some reason, it is not effective or end the program early if it is more successful. Moreover, I worked to negotiate a mechanism to stop all transfers of taxpayer funds if necessary. That said , I believe this legislation will be effective.

ALL of this is meaningless if Treasury overpays for these securities, which is almost a mathematical certainty. Everything about this bill makes it almost IMPOSSIBLE for Treasury to pay a fair market price.

NOT A BLANK CHECK. I opposed the President's initial request to simply give a blank check to Secretary Paulson. I also opposed the second version submitted by the President and Congressional Democrats that would have given taxpayer money to liberal groups such as ACORN. Let me be clear - this current bill, the bill in the Senate, is not a blank check for anyone. First, it allows the release of $250 billion to purchase these toxic loans. Then, Congress can release another $100 billion but only with Presidential involvement and certification that it is necessary. And only if absolutely necessary and again with Presidential certification and Congressional approval, the remaining $350 billion could be released. However, I do not believe the entire $700 billion authorized will be necessary or used.

[It absolutely IS a blank check, just a smaller blank check than in the original proposal.]

NO GOLDEN PARACHUTES. CEOs and other executive officers who drove their companies into the ground will not be able to walk away with millions leaving taxpayers holding the bill. Those companies that choose to participate in the program will be subject to strict compensation limits.

NO NEW GOVERNMENT SPENDING. The language is clear - all revenue generated through the repayment of any assets purchased and any sold must be used to pay down the national debt. No money will go to pork projects, new government spending, or liberal groups such as ACORN.

HELP FOR MAIN STREET . As this crisis continues, community banks are being affected more and more. Car loans and home loans, even to those with good credit, are drying up. People are losing their retirement savings. Small businesses are now having difficulty getting loans to make payroll or grow their business to create new jobs. If we allow this to continue, jobs will be lost, more retirement accounts will be impacted, and credit will get even tighter.

PUNISH CRIMINALS. The Federal Government is actively investigating cases of fraud and abuse. Where wrongdoing is found, the perpetrators, including, if implicated, members of Congress will be brought to justice. We have already seen subpoenas issued for records at Fannie Mae and Freddie Mac. This bill demands cooperation with the Federal Bureau of Investigation (FBI) and I expect we will see more subpoenas and criminal prosecution.

ADDRESS THE UNDERLYING CAUSE WHILE WE TREAT THE SYMPTOMS. We are seeing the symptoms now - lack of trust in the banking industry, daily tightening of the credit markets, losses in personal retirement accounts - and while this legislation addresses those issues, it also goes further to treat the cancer that got us here. This legislation authorizes the Securities and Exchange Commission (SEC) to modify the 'mark to market' accounting procedures that magnified this crisis by forcing banks to mark down the value of assets they had no intention of selling in the near future. This mark down of value caused a corresponding loss of value to the institutions. The SEC has already begun the process to modify this procedure.

RETURN TRUST IN THE BANKS. By increasing the FDIC protection on bank accounts from the current $100,000 to $250,000, taxpayers and bank customers can once again trust that their money is safe in the bank of their choice.

DEBT REPAYMENT. Toxic loans will be purchased at a discount and 100% of the monies repaid to the government will go to reduce the debt we incur in this process. While we shouldn't expect full repayment, it is possible that all of the money expended will be repaid.

PROTECT OUR NATIONAL SECURITY. If we do not act and this crisis spreads like a cancer to every segment of our economy, it will destroy not only taxpayer savings but it will erode our ability to fund our military, supply our troops with the resources they need, and protect our homeland.

NO TIME FOR POLITICAL FINGER POINTING. There is plenty of blame to go around but now is not the time to throw stones, now is the time to address this crisis and get our economy moving again.

FOR THE COUNTRY; NOT POLITICAL POPULARITY. This is not a popularity contest, this is a crisis. And since this crisis began, I have had numerous conversations with economists, community bankers, small business owners, and taxpayers. I have weighed the costs of inaction versus the costs of unpopular action. I support this bill because it is good for the country, it is the right thing to do today for taxpayers and tomorrow for my children and grandchildren, and it is necessary to get our economy moving again.

Strong capital markets are vital to a prosperous U.S. economy and given the renewed focus of our regulators and market participants, I remain confident in our financial markets and our overall economy.

However, history warns us against inaction by hard lessons learned. Delaying to act would be a repeat of the mistakes of the 1920s, when thousands of banks failed before significant confidence was restored to our financial markets. [BOOGA BOOGA]

Meaningless double-speak. I expected better.

Blindfold? Cigarette?

I'm starting to think pink slips are too good for Paulson and Bernanke. Read this; these guys make a lot of sense...

The $700 billion rescue that the House considers today reflects the unintended consequences of decisions made by Paulson and Bernanke since March. Beginning with the orchestrated purchase of Bear Stearns by JPMorgan Chase, each step was a bold effort to forestall a collapse of the financial system. The economy grew in the first two quarters of this year, and financial distress eased for a while after the Bear Stearns rescue. Still, each decision to bail out or not created more instability, leading to further runs on securities firms, banks and insurers. "Every time you tinker with this delicate system even small changes can create big ripples,'' said Dino Kos, former head of the New York Fed's open-market operations and now a managing director at Portales Partners LLC in New York. "This is the impossible situation they are in. The risks are that the government's $700 billion purchase of assets disturbs markets even more.'' Paulson and Bernanke insist that the program to buy troubled mortgages and other securities is needed to revive lending and restore stability to markets. What they haven't discussed is the risk that they inadvertently make matters worse. By creating a government pool of distressed real-estate and bad debt, they could depress the housing market further. Risk may become even more concentrated through a wave of bank mergers that, if unsuccessful, would stick taxpayers with an even higher bill.

WTF?

Wells Fargo and Wachovia agreed to a $15 billion merger that highlights the buyer's strong balance sheet and aspirations to expand its presence in the eastern US. The bold move casts doubt on the status of a transaction between Wachovia and Citigroup involving the former's banking and mortgage businesses announced last Monday. Citi, however, issued a strongly worded statement contesting the new deal. The Wachovia-Citi deal, engineered with the help of the FDIC, carries a price tag of $2.1 billion. Wells Fargo would pay 0.1991 of a share of common stock in exchange for each common share of Wachovia, a ratio that values Wachovia at $7 a share based on Wells Fargo's Thursday closing price. "This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," said Wachovia CEO Robert Steel in a press release.

Wells Fargo expects to face about $74 billion in losses and write-downs when it acquires Wachovia and its troubled portfolios loans of loans. Wells Fargo's top executives made the comments during a conference call with investors, and said the deal will close in this year's fourth quarter. Wells Fargo CFO Howard Atkins said his company doesn't know yet how many of those losses and write-downs it will take up front when the deal closes, and how many it will tack on to earnings reports over the coming quarters. Atkins said the combined Tier 1 capital ratio of the combined companies will be about 7.5% - or lower than Wells Fargo's current Tier 1 ration of 8.2%.

Citigroup said that a proposed bid for Wachovia by Wells Fargo violates an exclusivity agreement that Citi had with Wachovia. "Wells Fargo's conduct constitutes tortious interference with the Exclusivity Agreement," Citi said in a statement. Citigroup demanded that Wachovia and Wells Fargo abandon a $15 billion stock swap deal that was announced earlier in the day. Citi said it "has substantial legal rights regarding Wachovia and this transaction."

Wachovia is a carcass; Wells Fargo and Citi are just picking it over. Of course the Wells Fargo deal is much better for WB stockholders and better for shareholders. But mark my words: If this deal does not go through for Citi, Citi is a walking dead man.

25 Senators who make me proud

Allard (R-CO)
Barrasso (R-WY)
Brownback (R-KS)
Bunning (R-KY)
Cantwell (D-WA)
Cochran (R-MS)
Crapo (R-ID)
DeMint (R-SC)
Dole (R-NC)
Dorgan (D-ND)
Enzi (R-WY)
Feingold (D-WI)
Inhofe (R-OK)
Johnson (D-SD)
Landrieu (D-LA)
Nelson (D-FL)
Roberts (R-KS)
Sanders (I-VT)
Sessions (R-AL)
Shelby (R-AL)
Stabenow (D-MI)
Tester (D-MT)
Vitter (R-LA)
Wicker (R-MS)
Wyden (D-OR)

This turkey of a bill passed in the Senate 74-25 (Kennedy was ill and unable to vote) and is now headed back to the House. And to add insult to injury, they appended it to a POS mental health parity bill (since the Senate cannot initiate revenue or spending bills). I despise all 74 of the senators (40 democrats, 34 republicans) who voted for this crap. I guess I'm voting Libertarian in November since both McCain and Obama voted for it. And although I am not prone to vote Democratic, I will be voting for Chambliss's opponent Martin (D).

ETA (10/3):
I sent two emails to Sen. Chambliss; the first was the original letter that I posted here and the second was to chastise him for this vote. I received two responses. IT WAS THE SAME DAMN FORM LETTER.

Another reason to oppose Paulson plan

As if another was needed.

Credit-card debt is on the brink of imploding and will be the next storm to hit the fragile finance industry, an investment research firm predicted this week. According to Innovest StrategicValue Advisors, banks will charge off $18.6 billion in delinquent credit-card accounts in the first quarter of 2009 and $96 billion in all of 2009, more than double the research firm's forecast for all of this year. Innovest projects that amount would be high enough to damage some of the biggest card issuers. Credit-card charge-offs are "defying gravity" when compared with the problems in the mortgage market, according to Gregory Larkin, senior banking analyst for Innovest. But that will change as they catch up with mortgage charge-offs, which have spiked eightfold since the third quarter of 2007.

After they're done buying up $700B of mortgage backed securities, they are going to come back and rape your wallet again in order to buy credit card debt, student loan debt, and whatever the hell else strikes their fancy.

Who is to blame?

Answers adapted from posts by some really smart people at the Actuarial Outpost.

Asset Backed Securities take future cash flows (lease payments, mortgage payments, etc) and accelerate them. You get money today for cash flow in the future. This is borrowing from the future. And all that liquidity came rushing into the global markets today. It needed a place to be invested. Boom - huge investment bubbles formed as the money chases yield. Risk blossomed, but the money had to be invested someplace.

Companies working on very small margins but using leverage to increase profits on those small margins (This is the ONLY spot where I'll accept government regulation being lax, but it was the rating agencies and counterparties fault more than anyone.)

Congress created the GSEs and then assiduously failed to regulate them. No private entity could have behaved the way Fannie Mae & Freddie Mac behaved (not producing financials for THREE YEARS, cooking the books with little or no repercussions, amassing mind-boggling levels of debt).

Crooked mortgage brokers.

Freddie Mac and Fannie Mae forcing the 'market' for lower rates and underwriting guidelines. The market won that battle.

Government wanting EVERYONE to be able to afford homes they could not afford.

People who (a) took out a loan with low initial payments in the beginning because they believed they could refinance in a few years right before the payments blew up... but, oops, now they can't get a refi because the house isn't worth as much as they owe or (b) were making their mortgage payments and living off credit cards, and then refinancing to pay off the credit cards, repeat. Now that they can't refinance the house to pay the credit cards anymore, they've got credit card bills and mortgage bills together that they can't pay.

Rating agencies that gave AAA and AA ratings to paper that should have been rated B or CCC at the most.

S&P500

On March 24, 1998, the S&P500 closed at a then-record value of 1106. Today, 10.5 years later, the S&P500 closed at 1106. That doesn't take into account dividends, but it also doesn't take into account inflation, whose eroding value far exceeds the positive value of dividends. So it's been truly a lost decade, just like Japan's a while back. With no sign of the end in sight.

Blood on the Street

Dow down 778 points (6.98%) after House kills the very very bad bill, its 12th 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. 5, 1932	-7.15
Sept. 24, 1931	-7.07
July 20, 1933	-7.07
Sept. 29, 2008	-6.98

In news unrelated to the bailout bill...

GOOG down $50 (11.6%) to $381, almost 50% down from its all time high last November of $747 and below $400 for the first time in two years.

AAPL down $23 (17.9%) to $105, almost 50% down from its all time high of $203 last December, a 16-month low. This one, I called back in December. It was just too high; it's at a much more reasonable valuation now.

It's mark-to-market's fault

A provision in the bill, whose adoption is in doubt after the House of Representatives rejected it Monday, gives the SEC the right to suspend mark-to-market accounting under Statement Number 157 of FASB. The SEC would be allowed to step in front of mark-to-market accounting standards if it was in the public interest and consistent with the protection of investors, the House bill said. Mark-to-market accounting, or "fair-value" accounting, is cited as one of the major reasons for the meltdown in the U.S. banking system. The rule, which went into effect Nov. 15, 2007, forces financial institutions to put a fair value on their assets or liabilities each quarter.

Isn't blaming mark-to-market accounting just a fancy form of shooting the messenger? It's not FASB's fault that banks are carrying assets that ain't worth diddly. That doesn't mean they should be allowed to carry them at cost, or face, or mark-to-fantasy like they did prior to FAS157.

Update on Alitalia

Alitalia has been struggling in negotiations with CAI, a business consortium designed to take over. CAI secured the endorsement of the pilot union Saturday. Rocco Sabelli, CAI's CEO, said the endorsement will help the consortium find an international counterpart, naming Air France - KLM and Lufthansa. It is looking to get the endorsement of the flight-attendant union this week.

Source: The Times (London)

Wendy's and Arby's merge

The merger between Triarc Companies (Arby's parent company) and Wendy's International was completed today. In connection with the merger, Wendy's became a wholly owned subsidiary of Triarc and Triarc changed its name to Wendy's/Arby's Group.

USA Today Poll

33% of respondents to a USA Today poll think we're already in a depression.

Conclusion: 33% of respondents to USA Today polls are too stupid to have their opinions taken seriously.

Unemployment is 6%. In the Great Depression it was 25%. In the Carter and Bush Sr recessions it was aroun 8%.

GDP is still growing, albeit modestly. During the Great Depression it fell 29%.In 1990 GDP fell 3%. In 1980 it fell 8%.

Not to mention that during a depression prices fall; in 1929-1933 prices fell 30%. We still have inflation.

Good thing the government is looking out for me

Georgia did not allow "price gouging" in the wake of the refinery crisis. The effect was predictable (by anybody with a brain, but apparently not by our politicians). There was a run on gas, and no nobody can buy gas AT ANY PRICE. Thanks a lot.

Between this and the federal bailout BS, I'm not sure I'll survive any more government "assistance". The road to hell certainly is paved with good intentions.

Bill fails first vote

Normally I'd say bill dies, but I am positive they are going to bring it to another vote. There were 205 in favor of the legislation and 228 against. Among Democrats, 140 voted in favor and 95 against. Among Republicans, 65 voted in favor and 133 against.

Two things that would make the bill more likely to pass (even I'd support it) -
1) Provide specifics about what kinds of securities can be bought and at what price (market price and not a penny more) and from whom (no major investment banks and no foreign banks)
2) Accompany it with Paulson and Bernanke resignations

It's happening all over

The UK government said that mortgage bank Bradford & Bingley is being nationalized after investors and lenders lost confidence in the group, leaving it unable to continue funding its operations. The bank's retail deposit business and branch network is being sold to Banco Santander's Abbey division for 612 million pounds ($1.12 billion), while the remaining assets and liabilities, including its roughly 42 billion pound mortgage book, will be taken into public ownership.

The governments of Belgium, the Netherlands and Luxembourg launched an 11.2 billion euro ($16.4 billion) rescue for Fortis, acting after confidence in the banking and insurance group evaporated and potential bidders reportedly walked away from a deal. The three governments agreed to inject capital to buy 49% interests in Fortis-owned banking subsidiaries operating in each of their jurisdictions.

A consortium of lenders offered a lifeline to Germany's Hypo Real Estate.

The Icelandic government came to the rescue of Glitnir, buying a 75% stake in the country's third-largest lender for 600 million euros.

Citi to acquire Wachovia Banking Operations

Citigroup will acquire the banking operations of Wachovia according to a press release from the FDIC this morning. Citi will acquire "the bulk of Wachovia's assets and liabilities." Under the agreement, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, while the FDIC will take losses beyond that.

Citi will pay $1 per share for the bank.

According to a Wachovia press release, "Wachovia Corporation will remain a public company with two main operating subsidiaries: Wachovia Securities, the nation's third largest brokerage firm, and Evergreen Asset Management, a leading provider of asset management services." So they will be like Fidelity or Vanguard.

WB stock is not trading this morning. Not sure what that means.

In related news, Standard & Poor's Ratings Services on Monday placed Citigroup's AA rating on review for a possible downgrade.

Bend Over, America!

Here it comes.

http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml

In all honesty, though, this bill is a lot better than the crap Paulson first put forward. He should have been fired for even sending such a bill to Congress.

From TownHall

Response from Senator Isakson

My comments are indicated by brackets in the body of the letter and footnoted at the bottom so as not to break the flow of Sen. Isakson's letter.

Thank you for your letter regarding the economy, the financial markets and the proposal from the Treasury Secretary to the Congress.

We are in difficult financial times, and I am committed to protecting the savings and jobs of the people of Georgia by making sound decisions on both immediate actions as well as long-term actions.

First, our economic stress is rooted in the decline of the housing market. The cause of the decline was the funding of marginal credit mortgages (subprime) through the creation of mortgage-backed securities that were sold around the world. As the default and foreclosure rate on these mortgages increased, the value of the securities declined. As the values declined, the balance sheet of the financial institutions that bought them deteriorated. The market for these securities declined and ultimately evaporated, thus causing a liquidity problem for the financial institutions and a credit crisis for American consumers and small businesses.

In the immediate term, we must address the credit and liquidity crisis. In the long term, we must put in place the oversight and safeguards to ensure the transparency and accountability necessary to prevent this from happening again. The Treasury has proposed using up to $700 billion dollars to purchase, at a discount, these mortgage-backed securities. This would provide liquidity to the financial institutions and improve their balance sheets. The important question is this: "Is the taxpayer of Georgia protected?" If the Treasury properly discounts the securities to, say, 50 or 60 cents on the dollar, and holds the securities to maturity there should be little or no cost to the Treasury.[1] More importantly, investors will return to the market and will compete with the Treasury to by [sic] these discounted securities and the market will be reestablished.[2] I am working to ensure the safeguards necessary for maximum security for the taxpayer.

In the long term, we must bring transparency and accountability to Wall Street. While I am not a big government regulator, if the investment bankers on Wall Street were held to the same standards of transparency and accountability as our national banking system, this would not have happened. The security rating agencies such as Moody's and Standard and Poor also share some of the blame for the way they rated the subprime mortgage-backed securities, and they should be held accountable. I will work hard for the right reform of Wall Street.

The term bailout has been used a lot in this debate. Not a dollar of the $700 billion will go to the brokers who created the securities. Instead, they will go to the investors who bought them[3], and then only after they take a significant discount or loss. Properly executed, the Secretary of the Treasury and the Chairman of the Federal Reserve believe this proposal will restore liquidity to the credit markets and return confidence in the financial system. [4]

I will continue to work for the best interest of our economy and the safety of the savings of the citizens of Georgia.

Thank you again for contacting me.

[1] This is incorrect. Secretary Paulson has already said that he wants to buy these securities at their "hold to maturity" value. That means that even if the Treasury pays 50c or 60c on the dollar it is still paying the theoretically maximum value that the security will ever be worth. Under a best case scenario taxpayers break even. Bad experience would mean that the taxpayer takes a bath.

[2] This claim is absurd in the extreme. I cannot believe he even said this. Why would these folks come forward to compete AFTER a competing buyer appears and drives prices up? Wouldn't those buyers if they existed have come forward now BEFORE a competing buyer appears when they can make whatever lowball offer they want? This is ridiculous on the face of it.

[3] This is not relevant. The banks all bought and sold these securities to each other. The investors who bought MBSs on deal A are the same companies who served as brokers on deal B. And why do I need to bail them out anyway? These investors employ Harvard mathematicians and MIT rocket scientists to figure out what price to pay for these things. If they made a mistake, too bad. As I've said before, boo freakin' hoo.

[4] Who really cares what Paulson and Bernanke think? Just a month ago they were telling us that FNM and FRE would not need to be taken over. A couple of months before they were telling us that the economy was sound and the subprime crisis was contained. Before that they were telling us there was no housing crisis at all. They are either fools or liars. Either way I am not inclined to trust them with $700 billion of taxpayer money.

Don't short us, we'll short you

Hedge funds executives have told CNBC that several Wall Street firms are marketing a new hedging product that would allow them to "short" stocks—even those on the banned short sale list. The new "product" is being pitched to major hedge funds today to gauge their interest—it's unclear if any funds have agreed to implement it. But the move is controversial: Wall Street firms were behind the SEC's latest move to ban short-selling. Citigroup officials have been among those pitching the new shorting technique—which involves the use of derivatives. An official there who spoke on condition on anonymity said the technique is still in the discussion stages, adding that if it is rolled out, it will be used purely for hedging purposes. Hedge funds will not be able to use the technique to create a "net short" position.

Hypocritical SOBs.

Wachovia is Next

Their stock plummetted 30% to $9.26 today. Now Marketwatch is reporting that they are in early merger talks with Citigroup. Put a fork in them; they're done too.

It's pretty difficult to get 192 economists to agree on anything...

Yet here you are...

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

WaMu seized, sold to J.P. Morgan Chase

In the largest bank failure in US history, Washington Mutual, with about $310 billion in assets, succumbed Thursday to the fallout from the subprime mortgage crisis, was seized by federal regulators and rapidly acquired by J.P. Morgan Chase for $1.9 billion. The federal Office of Thrift Supervision said it closed WaMu on Thursday and appointed the FDIC as receiver. The FDIC in turn conducted the bidding process that led to the purchase by J.P. Morgan.

God Help Me - I agree with Robert Reich

Talk about the Bailouts of All Bailouts eased market fears and generated a rally on the Street, but how realistic is it? On Capitol Hill, Senator Charles Schumer suggested that government inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. At the other end of Pennsylvania Avenue, Hank Paulson is considering an agency like the Resolution Trust Corporation to take bad debts off the balance sheets of financial institutions. Problems are:

(1) It's not likely to do all that much good because no one knows how much bad debt there is out there. Even if the government bought a lot of it, investors and lenders still couldn't be sure how much remained. After all, big banks have already written down hundreds of billions of bad debts, and that hasn't restored confidence in the Street. As the economy slows, bad debts will grow. Again, the problem isn't a liquidity or solvency crisis; it's a crisis of trust.

(2) However much bad debt there may be, that amount is surely far greater than the $394 billion of real estate, mortgages, and other assets that the old RTC bought from hundreds of failed savings-and-loans -- thereafter selling them off form whatever it could get for them. The Bailout of All Bailouts would therefore put taxpayers at far greater risk than they are even today, and require an unprecedented role for government in reselling assets. Another major step toward socialized capitalism.

A better idea would be for the Fed and Treasury to organize a giant workout of Wall Street -- essentially, a reorganization under bankruptcy, for whatever firms wanted to join in. Equity would be eliminated, along with most preferred stock, creditors would be paid off to the extent possible. And then the participants would start over with clean balance sheets that reflected new, agreed-upon rules for full disclosure, along with minimum capitalization. Everyone would know where they stood. Bad debts would be eliminated. Taxpayers wouldn't get left holding the bag. And there would be no "moral hazard" incentive for future financial wizards to take giant risks with other taxpayers' money.

Congress, the Fed, and the Administration shouldn't be giving more help to Wall Street. Policymakers should focus instead on people who really need a safety net right now -- workers who have lost or are about to lose their jobs, who need extended unemployment insurance and health insurance for themselves and their families; homeowners who have lost or are likely to lose their homes, who need additional help meeting mortgage payments and reorganizing their debts; and people who have lost or are in danger of losing their savings or pensions, who need better insurance against possible loss. The only way Wall Street's meltdown doesn't spill over to Main Street is if policymakers begin to pay adequate attention to the people whose wallets really keep the economy going, and who merit more help than the Wall Street tycoons whose carelessness and negligence have put it in such jeopardy.

http://robertreich.blogspot.com/2008/09/bailout-of-all-bailouts-is-bad-idea.html

More on Paulson

On January 18, speaking about the proposed “short term growth package” - neither the White House or any members of the Administration called it a “stimulus” until it was signed into law - Paulson asserted “the long-term fundamentals of the economy are strong, and I believe our economy will continue to grow.”
At the end of July, the Bureau of Economic Analysis reported the U.S. economy did not grow, but actually shrank during the first quarter of this year.

At the end of January, Paulson was pushing the “growth” package, which included tax rebates and told the Real Estate Roundtable it “is expected to help create more than half a million jobs by the end of 2008. We know from experience that both immediate tax relief for income tax payers and incentives for businesses to invest and hire are effective in creating growth and jobs in the short-term.”
The bill was passed in February, and the first rebates were distributed at the end of April. But, in the seven months since Paulson’s forecast, instead of creating “more than half a million jobs,” the U.S. economy shed 529,000 jobs.

On January 7, Paulson spoke about housing and capital markets in remarks to the New York Society of Securities Analysts about the growing problems confronting homeowners. “To meet this challenge,” he said “this Administration - without committing any taxpayer money - helped foster an industry-wide effort to prevent this market failure. By preventing avoidable foreclosures, we will safeguard neighborhoods and communities, and fulfill our primary responsibility of protecting the broader U.S. economy.”
When Paulson offered these remarks, the national foreclosure rate, according to RealtyTrac was one for every 534 homes; in August the foreclosure rate was one per 416 homes.

But, he said, “fortunately, credit-worthy borrowers looking for a conforming mortgage will find that Fannie Mae and Freddie Mac have remained active, and traditional conforming mortgage products are readily available. Fannie and Freddie's securitization volumes have risen dramatically since June of 2007, even as other mortgage markets slowed. However, they are also experiencing stress due to the housing downturn and both companies reported substantial third quarter losses. I am pleased that Fannie and Freddie have moved quickly to raise capital and, through their securitization activities, remain a positive force for home finance.”
In September the Treasury (and the Federal Reserve) used legislative authority granted in July to nationalize Freddie Mac and Fannie Mae.

Paulson told the National Association of Business Economists in March “many in Washington and many financial institutions have been floating proposals for a major government intervention in the housing market, with U.S. taxpayers assuming the costs of the riskiest mortgages. Today, 93% of American homeowners -- 51 million households -- pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2% are in foreclosure. Most of the proposals I've seen would do more harm than good - bailing out investors, lenders or speculators who, instead of getting a free pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout.” The problem, he said, was limited to subprime ARM borrowers.
According to the Mortgage Bankers Association National Delinquency Survey, the percentage of all prime loans past due increased.

Paulson in March said adjustable rate mortgage borrowers benefited from “the recent decline in short-term interest rates, which are very significantly mitigating the effects of mortgage resets.”
On March 3, when Paulson spoke, the interest rate for the 10-year Treasury - the benchmark rate for the 30-year fixed rate mortgage - was 3.54%; on Sept. 22 it was 3.81%.

Bottom line - this bozo hasn't been right about anything since he became SecTreas. Why should we trust him with $700 billion of our money that he said he didn't even need just a month ago. Screw him and the horse he rode in on, and screw President Bush for not firing him already.

Source: http://www.foxbusiness.com/story/markets/economy/paulsons-track-record-strong-facts/

Letter from Rep. Ron Paul

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,
Ron Paul

From the London Times

I cannot believe that I am widely in agreement with the leftists on this one. The Bush administration will go down in history as an abysmal failure on economic policy. His name will be ushered in the same breath as Herbert Hoover.

Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid these achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do.

How did things come to such a pass? When Mr Paulson announced his $700 billion “plan” last Friday, it seemed the US Government was finally going to do whatever it takes to stabilise the world financial system. The universal assumption was that Mr Paulson would present a detailed plan of action over the weekend. Yet all that appeared by Saturday evening was a three-page legislative outline, with no hint of the mechanisms to be used. The only substantive clause in the draft was a swaggering demand for untrammelled power: “Decisions by the Secretary pursuant to this Act are non-reviewable and may not be reviewed by any court of law or any administrative agency.”

When further details of the Paulson plan failed to appear on Sunday it was assumed that the details were being untangled in late-night political negotiations. When there was still no plan on Monday, the view was that Mr Paulson must be holding back the details for his testimony to the Senate Banking Committee the following day. But then, to everyone's astonishment, Mr Paulson turned up to the committee on Tuesday morning with only the briefest opening statement, which simply repeated what he had already said the week before: the sky was falling and the only way to stop it was to give him authority over $700 billion in public money, to be spent in unspecified ways.

And suddenly the sky did fall down - not on the world economy, but on Mr Paulson. Consider the reactions from American politicians, including Republicans: “Stunning and unprecedented in its lack of detail”... “a $700 billion blank cheque to Wall Street”... “neither workable nor comprehensive”... “foolish waste of massive taxpayer funds”... “eerily similar to the rush to war in Iraq”. Best of all was John McCain's comment: “When we're talking about a trillion dollars of taxpayer money, ‘trust me' just isn't good enough.”

At first, nobody could quite believe Mr Paulson was incompetent. Was it really possible that the Treasury Secretary had no idea of what to do with this unprecedented financial firepower? Perhaps his silence on crucial issues such as what he would pay for the banks' “troubled assets” was just a tactical ruse. But as the cross-examination rolled on, and Mr Paulson just waffled - “we will ask experts to advise us”, “we will get the best and brightest financiers to suggest ideas” - the terrible truth dawned. There was no such thing as a Paulson plan. Not only did Mr Paulson not know what he was doing. He did not know what he was talking about. When pressed to offer at least some basic principles for his rescue, Mr Paulson had no answers. When challenged about limits to executive remuneration and taxpayer stakes in future profits of participating banks, he brusquely rejected all such proposals - on the amazing ground that they might discourage some of the stronger banks from taking advantage of government support!

Well said!

I have a few questions: What does this say about the private sector? Why can't all of the private equity funds, sovereign wealth funds, and enormous pools of capital do this themselves? There are trillions of dollars sitting around in cash, yet none of it that sees any value here? I guess that Hank Paulson, George Bush and Ben Bernanke -- all of whom have been been unequivocally, expensively, tyrannically wrong about the entire crisis from the beginning -- are smarter than both the markets and all of the private equity pools about this paper? Does that sound right to you? The guys who missed this from day one -- despite many many admonitions from many people -- only they see the value in this paper, whereas the smart guys who saw the shitstorm coming in advance, and bet against it, don't?

Why Henry Paulson Must Be Contained (Michelle Malkin)

http://michellemalkin.com/2008/09/22/why-henry-paulson-must-be-contained/



MUST READ!

KILL the BILL

Paulson Has To Go!

March 13, 2007
Treasury Secretary Henry Paulson said late Tuesday the turmoil in the subprime mortgage market is no surprise given the correction in U.S housing market. Paulson also said the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

Apr 20, 2007
Treasury Secretary Henry Paulson said on Friday the housing market correction appears to be at or near its bottom and that troubles in the subprime mortgage market will not likely spread throughout the economy. "We've clearly had a big correction in the housing market. Retail housing was growing for some time at a level that was not sustainable," Paulson said in a speech to The Committee of 100. "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.

Aug 1, 2007 (Yahoo News)
U.S. Treasury Secretary Henry Paulson said on Wednesday that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades."

May 7, 2008
'The worst is likely to be behind us,' Paulson told the paper, in one of the most optimistic comments by a top U.S. finance official since sub-prime mortgage losses set a domino effect in motion in mid 2007.

Aug 10, 2008
"We have no plans to insert money into either of those two institutions [FNM and FRE]," Paulson said in an interview with NBC's "Meet the Press" broadcast today from Beijing. He added that their earnings results were "not a surprise."

ENOUGH IS ENOUGH. Paulson is either the world's biggest liar or the world's biggest idiot. I was calling the end of the real estate bubble in February 2005, and it took the former head of Goldman Sachs by surprise? He is either the world's biggest liar or the world's biggest idiot. Why exactly would we trust this SOB with $700B of taxpayer money?

Not only should his plan be defeated in Congress; President Bush should fire his sorry worthless ass. Enough, I say!

Letter to my senators and representative

I am writing you to voice my strong opposition to the $700 billion bailout proposed by the Bush administration. The beneficiaries of this plan are multiple, yet I am not among them. Nevertheless, it is my pocket that is being picked to pay for this.

Americans who bought more house than they could afford are now at risk of losing their houses. That is not my problem. While I was living in a house that was well within my means without the need to take out a subprime or liar loan, they were not sharing their home appreciation with me.

Other Americans used their houses as an ATM and undertook refinancing after refinancing to take out their equity. That is not my problem. While I was spending the last 5 years building equity in my house, they were not inviting me on vacation with them.

Investment bankers who in past years have made bonuses in the $2-$3 million range are in danger of losing their jobs. That is not my problem. While I was bringing home much more modest (or no) bonuses, they were not sharing their bounty with me.

Investors in FNM, FRE, AIG, LEH, ML, MS and GS who reaped huge profits in recent years are now at risk of losing their investments. That is not my problem. When I was investing my money in less profitable but less risky investments, they were not sharing their capital gains with me.

I keep hearing that without this bill, there could be a deep recession or even another Great Depression. Quite frankly, that sounds like scare tactics to me. But even if it were true, then too bad. That's how capitalism is supposed to work. Perhaps the next batch of homebuyers, investment bankers and stock investors will be more careful.

All of these folks enjoyed their private gains for a long time. Now this bill is attempting to socialize their losses. I cannot find words strong enough to match my revulsion to this bill. As Rep. Bunning recently said, this bill is socialist and un-American. If you make this my problem by spending $700 billion of my and my fellow taxpayers' money to bail out those who made bad (almost criminally so) decisions, I will further make it my problem to do everything in my power to get you out of office.

Thank you for your attention to this matter. I trust you will do the right thing.

Paulson's Got it Wrong!

Why Paulson is Wrong - University of Chicago

The $700B Question - Anil Kashyap & Jeremy Stein (NYT)

Paulson’s plan was not a true solution - Martin Wolf

Some thoughts of my own to follow as time permits.

Morgan Stanley sells 20%

Morgan Stanley said it signed a letter of intent to sell up to 20% of the company to Mitsubishi UFJ Financial Group Inc. Financial terms of the deal were not disclosed. If the deal is completed, the price would be based on Morgan Stanley's book value after Japan's largest bank completes a due diligence review. The letter of intent signed by both banks is nonbinding.

Follow-up (9/29) ... deal reached

Mitsubishi UFJ is buying 9.9% of Morgan Stanley's common shares at $25.25 apiece, for an estimated total of $3 billion. It also purchased $6 billion of perpetual non-cumulative convertible preferred stock with a 10% dividend and a conversion price of $31.25 a share.

End of Investment Banking

The Federal Reserve said in a statement Sunday night that Goldman Sachs' and Morgan Stanley's applications to become bank-holding companies were approved. The move effectively put an end to the industry of independent investment banking, although boutique security firms remain. The Fed will have oversight of and lend to Morgan Stanley and Goldman. The firms also will be subject to bank-capital requirements.

Paulson's Toxic Toxic Debt Plan

So, Treasury and the Fed (i.e., you and I) are going to buy toxic mortgage securities.

1) If these were priced fairly relative to their intrinsic value, an actual investor would have bought them. So we are forced to conclude that the government is going to overpay for them, regardless of the price they actually end up paying for them.

2) What is the immediate benefit? That investment bankers who make $2 or $3 million a year don't lose their jobs? Boo freakin' hoo.

3) If the government ends up owning all these mortgages, are they going to foreclose? No. They'll let folks keep their houses for pennies on the dollar. "American dream" and all that bull----, you know. Houses worth 2x or 3x what mine is, which I paid for all on my own.

4) How are they going to deal with all this debt? They'll monetize it, of course. Severely depleting my savings, to the benefit of those who didn't save squat.

Thanks again, Washington. I hate you all.

Edited to add:

One particularly appalling paragraph in the Paulson proposal: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Not only is this a truly scary power grab, but it demonstrates a ridiculous lack of understanding of our system of government. Who decides whether a law is constitutional? The courts! Therefore, the paragraph in question is completely unenforceable. All a court has to do to review a decision is state that the paragraph in question is unconstitutional, and there's nothing the executive or legislative branch can do about it. We've already determined Paulson doesn't know anything about the economy; I guess now he's letting us know he doesn't understand anything about politics either.

Alitalia

Alitalia, Italy's flagship airline, is bankrupt and will be liquidated, said Augusto Fantozzi, the airline's administrator. A purchase offer from a group of Italian industrialists was withdrawn, and there are no other bids. The airline was hobbled for years by labor disputes and poor management and more recently was hit by the rising cost of fuel.

Reserve Primary Fund

The Reserve Primary Fund money market fund -- the oldest money market fund -- broke the buck. That's really bad news. Could cause a panic.

Stock Market Volatility

Even after today's very good showing, the general market trend is down AND volatility is increasing substantially (notice both the substantially broader trading ranges and the much greater volume of this week compared to the recent past). This is not a good sign.

Interesting day on Wall Street yesterday

The authorities, which will retain veto power over major decisions at the company, will receive equity giving them a 79.9% stake in AIG. In return, the insurer would receive a bridge loan of $85B to keep it afloat until it could dispose of billions of dollars in assets. The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business. The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.

The CEO was out on his fanny. That at least is a positive first step.

Barclays will buy Lehman’s high-profile New York headquarters at the north end of Times Square, along with two data centers in nearby New Jersey, for a price it said was close to their current estimated market value of $1.5B. Barclays will buy Lehman’s operations, along with trading assets valued at $72B and trading liabilities worth $68B, for $250m in cash.

On paper that's 6.25 cents on the dollar, although I understand that the assets and liabilities have not been marked to market, so it's probably not quite as good a deal as that.

In other news...

Federal Reserve policymakers held the target lending rate at 2% on Tuesday. Analysts said it demonstrates that the Fed is being conscientious not to use basic monetary policy to address specific problems in the financial industry.

Financial Armageddon?

Lehman files for bankruptcy and will almost certainly be liquidated. No big surprise there; I myself predicted as much when the markets closed on Thursday. Shares were trading at $7 then; they are worth 22 cents now (more likely zero, because of the bankruptcy).

But Merrill Lynch selling to Bank of America?! OMGWTF!?
On two fronts:
1) I didn't think Merrill Lynch was in such bad shape as to sell. Guess things must be worse than they look from the outside.
2) Just eight months ago Bank of America said they were scaling back in the commercial and investment banking business. Guess they changed their mind.

Keep in mind that Lehman was founded in 1850 and Merrill was founded in 1914 (and Bear Stearns was founded in 1923). All of these firms survived the Great Depression, and now they're gone in the events of the last year. That's a little scary.

Lehman Soundbites

Lehman down 6.9% to $7.25 in regular trading; then down a further 4.6% to $6.92 in after hours trading.

They took another $7.8 billion in writedowns, resulting in a $3.9 billion loss for the most recent quarter. (At least one highly reputable source on the web had $2.8B which is not the correct figure.) The loss amounts to $5.62 a share.

They didn't release a balance sheet!

They said they are hoping to sell 55% of the investment management business, which includes Neuberger Berman. THE CROWN JEWELS! Say it ain't so!

Business (i.e., non-trading-related) revenues declined 28% for the first 9 months of '08 vs. '07. That's bad, really bad.

Moody's put their credit rating on review, saying it would be lowered from its current A2 level unless they can negotiate "a strategic transaction with a stronger financial partner."

Lehman said it is "formally engaged" in talks to sell $4 billion in British residential real estate to money manager BlackRock, expecting to complete the sale "within the next few weeks."

They cut the annual dividend to 5 cents a share from 68 cents to save $450 million annually.

They plan to spin off more than $25 billion out of its $33 billion commercial real-estate portfolio to its shareholders early next year. The new company, Real Estate Investments Global, will include money-losing stakes in apartment-building owner Archstone-Smith and California land developer SunCal.

Not a single bright point in any of that news. I won't be posting in this blog until next Wednesday. I am almost positive that something big (REALLY big) will happen before then.

Harry Potter and the Missing Revenue

Scholastic stock down 25% since a year ago, when the last Harry Potter book was published. The company has been unsuccessful in finding the next big thing to replace that revenue.

Not particularly exciting but...

Hi Alberto,

We just posted an article, "6 Safe Places to Invest Your Money" (http://www.bankaholic.com/606/low-risk-places-invest-mone/). I thought I'd bring it to your attention in case you think your readers would find it interesting.

Either way, thanks for your time!

Helen Anderson

WaMu down 25%

WaMu is down $1.02 (24.8%) to $3.10

Stick a fork in them; they're done too.

Lehman down 40%

And I thought it was bad when I reported Lehman was down 40% for a week back in July. The stock has been flat since then. However, today Lehman plummeted 40% to $8.55 (actually, the stock is pretty much in free fall; I'm having trouble keeping this post up-to-date even as I am still writing it).

South Korean regulators said talks between government-owned Korea Development Bank and Lehman have ended. Stick a fork in Lehman; they're done!

WaMu CEO Ousted

Washington Mutual replaced its chief executive on Monday as the nation's largest thrift tries to find a new leader to guide it through the housing crisis. The lender also said it signed an agreement with its main regulator, the Office of Thrift Supervision, which requires it to provide an updated business plan and forecasts for results, asset quality, capital and the performance of business segments. WaMu noted that the OTS agreement doesn't require the company to raise more capital, increase liquidity or change any of its products or services. Kerry Killinger, who was CEO of WaMu from 1990, will be replaced by Alan Fishman. Fishman was chief operating officer of Sovereign Bancorp, the nation's second-largest thrift, and CEO of New York-based Independence Community Bank, which Sovereign parent acquired for $3.6 billion in June 2006. He has joined WaMu's board.

Ron Paul is a prescient genius!

I may have found my candidate in November.

Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related Government Sponsored Enterprises. These entities are the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the National Home Loan Bank Board. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.

One of the major government privileges granted these GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out these GSEs in times of economic difficulty helps them attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac. Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.

GOOG

At $422 it's down 43% from its all-time high 10 months ago. I'm guessing this is mostly a result of the flak about the Chrome browser with its highly unethical EULA.