Sunday, November 9, 2008

Pillaging - NeoCon Style

From Bloomberg;

"Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

Bush, Paulson and Bernanke have free reign to print new Treasuries, yes, dilute the money supply, and hand them out as they see fit. With no oversight. Some think the Federal deficit will at least double in the next few quarters, others believe it will go higher.

``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

"The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress. "

The worst part is this - everything Bernanke, Paulson and the White House has said about this matter has been untrue. Lending has not increased, it has gotten significantly tighter. Homeowners are being saddled with Federally authorized new debt, not realizing relief as they were promised. The banks are using the money to pay off losses on derivatives, and if, and I emphasize if, they have any left over, they are using it to buy crippled banks.

To give the banks money, they are printing new Treasury notes. Each new note dilutes all those that came before. Sooner or later, the global markets will begin to price in the flood of new dollars.

It is far from over. There are hundreds of trillions of dollars worth of derivatives that have lost 80-90% of their original value. Right now, the Fed is accepting those for exchange with US Treasury notes. You can trust this - they aren't buying the bad derivatives for 90% off. It would do the banks no good to only get 10% of a CDO's original value, the bank would still be insolvent. So, the Fed is setting the value far higher than the market would, and giving banks hundreds of times the real value on these bad derivatives. That money is lost forever.

"$2 Trillion "

"Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds."

That amount will grow, and keep growing until resets peak in the first quarter of 2011. Every dollar they give out in bailouts and swaps with the Federal Reserve goes into a blackhole to cover losses, never having a chance to be relent into the economy. Any government official in the past 6 months that has said the Fed is attempting to ease lending has outright lied.

Is it a coincidence that Goldman Sachs, where Henry Paulson came from, was AIG's biggest buyer of CDS, and when AIG was about to go bankrupt and swallow billions in Goldman profits, Paulson used taxpayer money to buy AIG? Now Goldman Sachs won't go bankrupt because the American taxpayer will give billions to them through AIG, or should I say the US Treasury.

So for now, the Federal Reserve and the Treasury Department does not want you to know where they are putting your money.

Nationalizing whole industries. With little explanation as to how or why. Past leaders have done the same things, and we ended up at war with them.

Update Nov. 13, 2008 - Forbes Magazine has reported the amount is now $5 trillion the government has sent into the black hole. This amount will keep going up. As long as failed businesses, and their failing CEO's, are allowed to use false accounting rules, and not forced to suffer bankruptcy as a failed business, the taxpayer is on the hook for every dime they lose. This includes losses on transactions as far back as 6 years ago. Keep in mind, these corporations that are at the taxpayer trough use their current stock price when evaluating how much is in their asset base. As their stock price goes lower, the losses increase. So, the taxpayer will cover the difference when the big players decide to sell a stock and it goes down.


Saturday, November 1, 2008

"The Beatings Will Continue Until Morale Improves"

The Financial Times has been one of the best sources for the all things financial. At least for the five or six years I have been reading.

In their latest addition to the blog Alphaville, I recommend you read "Time for the Darwinian Flush."

Written by J. Kyle Bass, Managing Partner of Hayman Advisors, this article, in terms of companies, debt ratios, overall prognostications, and downright clarity concerning what is next, is one of the best I have read in a long time.

Some excerpts (in italics), with my commentary following:

"Standard and Poor’s recently penned a report that they expect up to 23% cumulative corporate defaults by 2010. BB spreads are headed to at least 1500 basis points over their current level of roughly 1000 bps. This suggests that we will see at least $1 TRILLION of corporate debt default over just the next 2 years. In addition, all financing costs for nonfinancial corporate borrowers will be substantially elevated and pose an ongoing severe headwind to corporate earnings."

The keywords are "at least $1 Trillion." Corporate debt defaults may vastly exceed that, as over the last 8 years the US economy was 70% consumer driven, not corporate driven. Without consumer spending, the corporations have no income streams.

"How did Lehman, a firm with a STATED TANGIBLE BOOK VALUE of $15.1 billion, go from this number to ZERO overnight? The CDS auction of their senior unsecured liabilities just ended at 8.625c on the dollar. When Lehman filed, they said they had $650 Billion in assets. It wasn’t even worth $340 billion the very next day. WHERE DID THE $310 BILLION DOLLARS OF ENTERPRISE VALUE GO?!?!?!?!?!?!? BOOK VALUES MEAN NOTHING TODAY."

Herein lies the biggest rub - The firms that were leveraged well above a 10-1 or 12-1 ratio, such as Lehman (30-1), have been given prodigal status. The truth of how Lehman made its profit, which has been proven to be phantom, should have every regulatory entity in the books of all corporations levered over 10-1. Today. Lehman was far from the biggest player with these kinds of ratios. Hint - All companies levered anywhere above 10-1 are getting ready to eat your tax dollars, and your great grandchildren's tax dollars, before they fail anyway.

"......isn’t it easy to understand the shotgun marriages of WaMu with JP Morgan and Wachovia with Wells Fargo? If the FDIC had to take them over, they would have had to estimate losses to the taxpayer/FDIC in doing so. With WaMu alone, it would have cost the FDIC over $80 BILLION. They had $320 billion of some of the worst possible assets you could put together. They were basically Countrywide with a horrible credit card portfolio. Imagine the headline that morning…”FDIC steps in to take over WaMu. They estimate that it will cost the taxpayer $80 billion even though there is only $45 billion left in the FDIC insurance fund.” Imagine the bank run we would see if the public knew that the FDIC doesn’t have the money to cover depositors. So, each deal that has been done recently has a clever scheme behind the scenes for the Government to take the losses without admitting the emperor is already naked."

Yes, the "bailouts" will end with several trillions of dollars being added to the national debt. The companies who made the bad decisions, such as imprudent guidelines for lending, will pass the losses to the government (you) while they keep their jobs, bank accounts, yachts and bonuses.

"Lehman had $150 Billion of senior unsecured bonds and $400 billion of CDS was written against it producing $360 billion in losses to those contracts alone.

'The remaining broker dealers are the bookies for the CDS markets, and in some cases; they are even the participants playing with proprietary capital. The recent almost failure of AIG would have eliminated the counterparty on the insuring side of $441 billion of these contracts. Guess who would have been left holding that bag? The bookies would have to make good on AIG’s bets."

Guess who was the counter-party to a large portion of these CDS - Goldman Sachs - The place where US Secretary of the Treasury Henry Paulson worked before going to Washington. AIG did not have the $85 Billion to cover reserve requirements on the down grades to derivatives it covered - this means they would not be able to pay any losses - and Goldman Sachs would immediately be bankrupt.

Yes, Goldman Sachs now gets your tax dollars, to cover bad bets. Guess who was CEO of GS when they began placing these bets? Ahh, Henry Paulson. GS actually wrote and issued CDO's, then sold them to get rid of the bad risk, then turned around and bought insurance policies (CDS) betting the CDO's, that they sold, would fail. The premium for the CDS was a fraction of what should have been charged, because GS convinced the ratings agencies that CDO's and the like were extremely safe. So, GS, errrr, Henry Paulson, now controls how tax money is to be spent, and he is spending it to maintain GS profits. Actually, it is worse than this, but too lengthy for now.

" Housing busts are generally prolonged experiences with severe economic and banking implications. We believe house prices will drop approx 34% from peak to trough and the economic decline will take at least another 2 ½ years. The average home price decline of the 24 that were studied was 31% and the average duration was a staggering 25 quarters (just over 6 years)! "

We are already down over 20% nationally, and the number of adjustable rate mortgages resetting will reach a peak in the first quarter of 2011. Remember, these loans were originated at the height of the real estate bubble. Either the principle gets severely lowered (huge losses) or the defaults escalate (huge losses). Or both. A 34% decline from the top is an optimistic number.

Keep in mind, the US Treasury is now paying banks for the difference in principle reductions. Where do they get that money?

"We think we will see 10-12% unemployment, a 4-5% decline in GDP, and the equity markets could drop at least 70% from peak to trough. Remember, the capital structures of most of America’s companies have taken on more and more senior debt, subordinated debt, preferred, convertible preferred, trust preferred, and God only knows what else in front of equity. A drop of 70% for the S+P is absolutely possible. Remember, all of the loss estimates we have reviewed have really ignored the coming losses in credit card debt, commercial and industrial loans, commercial real estate loans, CDS contracts, auto loans, and unsecured personal loans. We are experiencing the global deflationary bust of all time."

The stock market is roughly a little more than 35% down from the peak. See you all at the bottom.

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