Category Archives: Bailout

From turmoil to manipulation to control

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TURMOIL, FEAR, CRISIS, PANIC, COLLAPSE, SAVING THE ECONOMY, BAILOUT, CONTROL… Notice the progression from left to right.  A few bumps in the road lead to an eventual bailout with control obtained due to matters rushed in a state of panic.  Do people act rationally when they are paniced?  NO  Generally, they look for a solution.  Someone to come along and say “follow me”  I know the way!  This is exactly what is happening with the proposed bailout plan that is thankfully hitting a few speed bumps.  However, Bernake, Paulson, and the Bush administration want to see it passed immediately.

Bloomberg article:    (Emphasis in bold mine)

“I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover,” Bernanke told the Senate Banking Committee today. “My interest is solely for the strength and recovery of the U.S. economy.”

Lawmakers have balked at rubber-stamping the Treasury plan to remove illiquid assets from the banking system, with Democrats demanding it support homeowners and limit executive pay, and Republicans resisting the plan’s reach and size.

Bernanke, putting aside his prepared remarks released earlier today, said the Treasury should buy illiquid assets at “hold-to-maturity” values rather than at discounted “fire- sale” prices. The suspension of “mark-to-market” accounting for assets, a change backed by “many banks,” would instead hurt investor confidence.

Let’s get this straight… Markets in turmoil, unknown amount of worthless assets, the banks don’t want to write them off because it will show up on their books, they will need more cash on hand once the bad debt is written off, which they don’t have, Bernake and Paulson want to push this though ASAP, Bernake and Paulson want to pay the HTM (Held to Maturity cost), and not a discounted price.  That is essentially paying for a salvaged car at the price it cost when new and in the showroom.  THIS IS NOT GOOD

HTM securities are those the investor intends to hold to maturity and is able to hold to maturity. Designation of a security as HTM allows the investor to report the security value at historical cost plus accretion or minus amortization. Unrealized gains or losses are not shown on the balance sheet, reflected in reported income, or reflected in reported net worth. 

What I want to know is what we aren’t seeing.  We have a bill trying to be pushed though Congress at a very rapid pace.  Lawmakers are being asked to assume at a minimum $700 billion worth of debt obligations that nobody knows the value of.  No bank in the world or private institution would consider doing such a thing.  However, the rules change when you say that it is in the taxpayer’s best interest in “saving” the economy, but behind the taxpayer’s back you are reaching into their pocket and pulling out hard earned cash.

Potential outcomes at current juncture…

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I’m attempting to grapple everything going on apart from my disgust… and come up with a couple scenarios. Any help will be appreciated.

Overall economic trend:

  • - Economy is sliding deeper into a recession
  • - Housing prices continue to fall
  • - The dollar’s short-term value is undecided, and long term looking weak
  • - Unemployment rising
  • - Prices falling
  • - Interest rates falling

Present Situation:

If a bailout is passed we might be able to presume that:

  • - The dollar will lose value potentially very much if large reserves are sold off
  • - Interest rates will have to rise as that is the only way foreigners will want to hold dollars
  • - Imports will become very expensive
  • - Prices will skyrocket
  • - Recession will deepen – Depression?
  • - Stock market will rally — for how long?

If the bailout isn’t passed:

  • - Dollar might stabilize a bit
  • - Uncertainty will continue
  • - Markets will gyrate while overall trending down
  • - Financial markets will tighten
  • - Stock markets will plummet

Finally: A potential indicator of a dollar collapse

If interest rates rise and the dollar falls people are selling off their dollars and treasuries, which means nothing but bad for the dollar.

—–
How am I doing so far?

Copperfield & Houdini for Presidency!

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I’ve attended a few performances by David Copperfield and he has performed the unbelievable.  Before my very own eyes a group of thirty people vanished into thin air.  Where did they go?  I watched the unbelievable made real right in front of me.  How could this be an illusion created to fool me into belief?  I ask you… HOW?

David Copperfield and Harry Houdini would probably be a better pair to run the government at this point.  At least they would give us a good show.  The current officials in office make my gut wrench.  We have migrated from the land of the free to nationalization of private property in the name of free markets.  Whoa… okay let’s get something straight.  WE DO NOT HAVE FREE MARKETS… NOT EVEN CLOSE  

If we actually had a system that represented free markets the Federal Reserve (a PRIVATE bank made up of member banks that are also PRIVATE) would not exist, we would still be on the gold standard, and the government wouldn’t even consider a bailout of the taxpayer’s funding, and the United States Treasury would not be proposing this amazing relief package for those who are mainly responsible for getting us into this mess.  

So, I mentioned two masters of illusion… Why?  What is being pulled off at the moment is happening in front of our eyes and for some like me is atrocious.  However, for others they think it is essential to the integrity of financial markets, financial institutions, and YOUR house.  The entire bailout is being purported as a bailout for the helpless homeowner, the saver, the middle class.  

The problem is that nobody knows how much any of this debt is actually worth.  Say the government buys $700,000,000,000,000.00 worth of debt at $0.20 on the dollar, which is great discount.  If that debt is in reality worth less than that we have a problem.  When will these notes be paid back, and in what form are the notes?  

Chris Martenson managed to grab part of an article that later disappeared from Bloomberg that said:

“The Treasury’s thinking is to make it as big and wide as possible so they have the flexibility to act if need be,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. “There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.” 

Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

This effectively means any type of debt.  Let’s take a moment to see what forms of debt exist:

  • Credit Card DEBT
  • Mortgage DEBT
  • Automobile DEBT
  • Bond DEBT

………. and the list goes on ………….

So, we have the United States government wanting to take on all this debt in the name of saving the financial markets.  Let’s just take the debt from the banks to clear up their balance sheets so they don’t have to write it off, which would cause them to have to increase their reserves because their assets are now below the minimum.  We could lower that further, but it has already been lowered to 3% of total assets.  That means they most likely loaned out the other 97%.  

As the Fed creates money our dollar is worth less and less.  Where is the Federal Government going to come up with $700 Billion dollars?  They will create it from nothing, which the Federal Reserve is great at doing.  Inflation will not solve the problem, only exacerbate it.  Newt Gingrich opposes it, and admits that if he is wrong in not supporting it that it is the lesser of two evils.  

If this bill passes please say goodbye to the dollar as we know it.  Foreigners might finally reach the breaking point to where they are afraid to purchase dollars and realize that buying them to keep their currency less expensive is futile.

Bernake admits financials out of control…

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In an article from the Chicago Tribune

“We have lost control,” said Hale, quoting Bernanke. “We cannot stabilize the dollar. We cannot control commodity prices.”

Hale is an economist who had a private meeting with Ben Bernanke several months ago. Now, we are finally feeling the full effect of the loss of control.

I really hope that many of you have hedged your portfolios already or gotten out of the markets. The dollar is next unless perhaps interest rates are raised as an emergency measure to prevent the fallout. Expect housing prices to continue their descent as liquidity evaporates.

The banking system is insolvent.

Lehman and the dollar sacrificed to save AIG!

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Taxpayers are bailing out AIG!

So, it looks like government officials are deciding to take a 80% interest in AIG, the nation’s largest insurer valued at about $85,000,000,000,000.00. Looking at these numbers it makes sense why the Fed or Treasury were unwilling to lend a helping hand to Lehman. They had to make a decision… if we can’t save em both who will rock the world’s financial markets more, AIG or LEH? The verdict is out and the 85 billion dollar answer is AIG. Do I have a problem that the taxpayer is now on the hook for another unknown sum of liabilities? Heck, at this point it is Monopoly money right?

AIG will pledge their $1.1 trillion in assets in collateral for the “loan”. What happens if their liabilities are greater than their assets? Doesn’t that mean they are bankrupt. Oh wait they are being supported… with money created out of thin air because last I checked we don’t have any surplus cash sitting around, quite the contrary.

Downgraded
After many talks to have private industry help AIG with their problems it came down to the USG. Once AIG’s rating was downgraded their ability to raise capital was further hampered. I sure wouldn’t want to lend them money. There are way too many unknowns with their sales of CDS – Credit Default Swaps and sub prime mortgage-backed securities holdings.

Lender of last resort
Had the government not stepped in tomorrow would be extraordinary in comparison to last Monday. I actually had a dream the other night about the Dow dropping over 1000 points. Perhaps this latest intervention will prevent that in the short-term. However, for the longer-term all this does is prolong the continued de-leveraging in the credit markets. Is there a possibility of a soft-landing as people like to say? Perhaps, but if so it is going to mean a serious about of liquidity introduced into the markets. We know what that means… the devaluation of the greenback.

The market will prevail, the dollar will fall
At the end of the day the Fed will probably resume its monetary inflation as prices continue to fall due to a recession. Unless I have been hard of hearing there is much fear in the air and it is growing. Excesses will need to be cleaned out, and it is going to be a matter of when. The how is fairly obvious as the tornado of destruction is just getting going. Paulson pushed the matter of Freddie and Fannie to the next Presidency, while the present administration tries to ride off into the sunset with their ego’s left in tact.

Let the carnage continue… Who’s next? Washington Mutual (WaMu)? Wachovia (WB)? THE US DOLLAR!