Bank(rupt) of America Gets Government Bailout

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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This morning, only hours after getting another major infusion of bailout cash from the U.S. government, Bank of America reported its first quarterly loss in 17 years. The latest bailout became necessary because Bank of America's government arranged takeover of money- hemorrhaging Merrill Lynch (this took place after Bank of America's takeover of money- hemorrhaging Countrywide Financial). This time, it is at least being admitted that taxpayers are getting stuck with the loss. Things were so bad, that the government didn't even try to lie about. The Fed and Treasury weren't just busy with Bank of America last night either, but put the final touches on the latest scheme to keep Citigroup afloat.

While Citigroup has been struggling for survival for some time now, Bank of America was one of the few big banks and brokers that seemed t0 be getting along well enough despite the Credit Crisis. The loss of $1.79 billion, or 48 cents per share it reported today is small compared to the fourth-quarter net loss of $8.29 billion, or $1.72 per share, for Citigroup (its fifth quarterly loss in a row, but better than the $1.99 loss in the fourth quarter of 2007). However, Bank America's proposed acquisition Merrill Lynch lost a whopping $15.31 billion, or $9.62 per share, last quarter and things looked bad enough to potentially drag both companies into oblivion. Bank of America management claimed it didn't realize that Merrill's loses would be so high (makes you wonder just how accurate their loan analysis is - no wonder they thought sub-prime borrowers were good credit risks) threatened to KO the deal if the government didn't pay up.

The Treasury coughed up another $20 billion of TARP funds immediately. To this, they added a rescue package with the government agreeing to share in losses on $118 billion in residential and commercial mortgages, derivatives and corporate debt. Bank America will absorb the first $10 billion of losses, the government the next $10 billion, and the government 90 percent of the rest. Why taxpayers should get stuck paying off this debt is beyond me. Even worse, there will probably be more to pay down the road.

The Treasury was also busy coming up with a new idea for saving the beyond insolvent Citigroup. After more than a half-dozen bailouts since late 2007, the bank is still at risk of crumbling . The latest scheme is to split it into two businesses, Citicorp and Citi Holdings. Citicorp, will focus on traditional banking, while Citi Holdings will be the dumping ground for the company's riskier assets. CitiHoldings will account for $850 billion of Citigroup's $1.95 trillion in assets including CitiMortgage and CitiFinancial. It will also be in charge of Citi's 49 percent stake in the joint brokerage with Morgan Stanley, and the pool of about $300 billion in mortgages and other risky assets that the U.S. government agreed to backstop late last year. Citi's new structure is an almost complete reversal of the financial supermarket approach it adopted in the late 1990s and which everyone on Wall Street thought was one of the best ideas ever (so much for that). The company isn't out of the woods yet either. The fourth quarter earnings report showed that credit deterioration was severe from North America to Europe to Latin America to Asia.

NEXT: Inaguaration Day 2009 - Looking for a New Beginning

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Real Deflation is Taking Place in Bank Stocks

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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PPI came out this morning and the U.S. government is now claiming that there has been wholesale price deflation in 2008. At least this is what the headline number indicates. Core inflation wasn't as benign, rising the most since 1988. The media is of course now hyping the headline number, which it downplays when it indicates inflation and ignoring the core number which gets a lot of attention when it's the better number (the advantage of having two numbers, one is likely to look better). The prices that are really dropping are assets, not those that are consumer related, with bank stocks yesterday taking a real hit.

According to the BLS wholesale prices in the U.S. fell by 1.9 percent in December. The yearly drop of 0.9% compares with a rise of 6.2% in 2007. As has been pointed out repeatedly in this blog, recent drops in the PPI are due almost exclusively to declining energy prices. These led the price declines last month, with energy prices overall going down 9.3% and gasoline dropping by a record 25.7%. For a change, food prices also fell, or at least the reports indicates a 1. 5% drop for the month (there was no drop for 2008, nor have U.S. food prices fallen year over year in the last four decades). Core inflation told a very different story however. It was up 0.2% in December and 4.3% in 2008. The last time it was higher was 20 years ago.

Mainstream media reporting on the PPI, as has been the case recently, has indicated the risks of consumer price deflation because of the headline numbers. The media usually reassures the public that economists (almost all of whom missed the Credit Crisis, the recession and are usually wrong in almost all of their predictions) have "confidence that the Federal Reserve (which has totally and completely mishandled the Credit Crisis since its inception) has the tools needed to keep deflation from becoming a problem". The media usually follows this up with 'isn't it great that the Fed had the foresight to cut interest rates to zero'. Certainly, you can not argue that what the Fed is doing will keep the threat of deflation away. Central Bank monetary policies that have given rise to hyperinflation in the past are usually very effective in preventing prices from falling.

While there is no actual deflation going on in consumer prices as the mass media would have you believe, assets prices are indeed deflating (the two are not interchangeable) because of the collapsing financial system. That collapse is by no means done. Bank America actually hit a new yearly low in aftermarket trading yesterday. Citigroup fell over 20% into the 4's (its yearly low is just above 3, a price that large cap financial stocks trade at only if they are on the verge of oblivion). Wells Fargo was also down quite a bit. The charts for JP Morgan, Goldman Sachs and Morgan Stanley are not looking particularly healthy either. Even after the U.S. government has pumped almost an unlimited amount of money into these companies, they are faltering again. As we have said in the New York Investing meetup over and over, "there is no such thing as a single bailout for an insolvent financial institution". We'll just have to see what the government does next.

NEXT: Bank(rupt) of America Gets Government Bailout

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Economic Predictions for 2009

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Last night in its December 4th meeting, the New York Investing meetup released its economic predictions for 2009. The talk began with a review of the 2008 predictions made at the Dec 12, 2007 meeting and published on the website that day (can be found in the file section in the file, "Japan 1992, U.S. 2007", see: http://investing.meetup.com/21/files). All the predictions made for 2008 were accurate at least to some degree, with the prediction of recession and and government bailouts for financial institutions being particularly spot on. If the 2009 predictions are equally accurate, it's going to be a very rough year.

It is our belief that the economy next year will descend from recession to depression (this is no official declaration for depressions as there is for recessions). As part of that scenario, unemployment is likely to rise toward and possibly into the double digits (depends on how much the government fudges the figures). Bankruptcies will increase dramatically, particularly for retailers, auto related companies (suppliers, dealers, etc.), home builders, and small businesses and individuals. Shrinking consumer credit and rising defaults on credits cards will continue to damage the economy. The real estate sector will not recover and the commercial component will suffer more than the residential. The bailout for banks and brokers will continue and additional money will be have to pumped into the failing institutions that have already received government money. Bailouts are likely to be needed for big players, like Morgan Stanley, Goldman Sachs, Bank America, and General Electric. Failures of small and medium banks will rise.

The U.S. government will react to this economic deterioration in 2009 by lowering interest rates even further, essentially instituting ZIRP (zero interest rate policy), and by ballooning the deficit and the national debt. Bailouts will expand beyond companies to states and municipalities. Some municipal bonds are likely to default if not propped up as well. The feds are going to have to support money market funds again next year, just as they have done twice so far in 2008. They may have to bail out the market system itself with the possibility of an exchange failing (there have been rumors of trouble at COMEX for some time now). In general, there will be some shift toward bailouts being focused on programs that help individuals rather than corporations, which received over 95% of bailout money in 2008.

Things don't look any better on the International front either. 2009 will be the year of global recession, with simultaneous recessions in the U.S., the Eurozone, Great Britain, Japan, Australia and a number of emerging economies. China will be in danger of political instability because of contraction in its manufacturing sector. Countries that export a lot to China, such as Japan and Korea and commodity producers such as Brazil will see damage to their own economics because of China's problems. In Europe, it looks like Great Britain will be the hardest hit of the major countries. Some smaller countries, such as the Ukraine, Hungary, Romania, Latvia and Estonia could see their economies implode just as happened in Iceland this fall. Overall, the rest of the world will react to the economic crisis by lowering interest rates and 'printing' large amounts of money just as we will be doing in the U.S.

While things look dire on a number of fronts, that doesn't mean there aren't many ways to make money in the current environment. People tend to focus too much on the risks in such scenarios, instead of the opportunities. The bigger the crisis, the bigger the opportunity should always be kept in mind. Winners always keep both in balance and keep an eye out for profitable investments when others are too worried or too fearful to do so.

The notes for the talk can be found at: http://investing.newyork.com/21/files in the file, "Economic Predictions for 2009".

NEXT: Brother, Can You Spare a Job?

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dr. Evil and Mini Me Loot the U.S. Treasury

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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On Monday, U.S Treasury Secretary Henry Paulson and his look-alike Interim Assistant Secretary for Financial Stability, Neel Kashkari (both originally from Goldman Sachs and participants in helping to create the credit crisis) came up with a plan to stabilize U.S banks without nationalizing them. The U.S. will be saved from socialism by pilfering its treasury and giving the money to the U.S. banks and brokers that are considered 'too big to fail' the many teetering regional banks will have to wait and if still in business, might get a share of the government's succor sometime in the future). Pilfering was their intent, along with helping out their other well-placed friends from the beginning (Kashkari drafted the Treasury department's three-page constitutionally questionable, unworkable, and politically inept power grab that was the original Wall Street bailout bill). Interestingly, every major American news outlet seems to have missed the real story about what is taking place.

The story universally reported by the U.S. media, frequently in blaring headlines, was that the government was going to distribute funds to banks in exchange for ownership stakes. No such thing is occurring. In reality, the Treasury is injecting liquidity by buying preferred stock. Preferred stock is loan in perpetuity, it does not represent any ownership rights in a company. Preferred stock is supposed to pay interest (if it doesn't, like all other permanent loans it's a gift). No interest rate was cited in the Treasury announcements, although anything less than the 10% that Warren Buffett got on his recently purchased preferred from Goldman Sachs (along with warrants) or Mitsubishi got on its purchase of Morgan Stanley preferred (backed by a U.S. guarantee), is a government subsidy. No major media source seems to have pointed this out. Instead, they all reported that if rescue plan works, the U.S. taxpayer will benefit because these preferred shares will be sold for a profit. Since preferred share prices fluctuate with interest rates and not the fortunes of a company (as long as it's a viable enterprise), they would go down, not up, if higher interest rates result from the government's inflationary policies. No common share price increases, as happens when a company does better, will benefit preferred share holders. It is of course almost 100% certain the government also overpaid substantially for this preferred stock as well (in the case of AIG, the U.S. government paid ten times the market price for the equity it purchased). The U.S. taxpayer is going to lose somewhere between a little and everything on this deal. There is no chance is will be profitable.

This looting of the treasury is also not going to be terribly effective either. With it, the government has officially established a 'too big to fail' policy. Only big banks intitally get any money. These include J.P. Morgan Chase, Bank of America, Citigroup., Wells Fargo, Bank of New York, State Street, Merrill Lynch, Morgan Stanley and Goldman Sachs Group Inc. Citigroup, Wells Fargo, and JP Morgan will get $25 billion each (even though it doesn't appear that JP Morgan, nor Wells Fargo are in trouble and need the money). Another $25 billion will be split between Bank of America, and Merrill Lynch, which are merging. Goldman Sachs and Morgan Stanley will each get $10 billion, while State Street Bank and Bank of New York (which also doesn't appear to need the money) will get roughly $3 billion each.

This latest move by the Treasury will not only help to continue to put another major dent in the U.S. government's stretched finances, but is helping to create a dangerous concentration of banking power. For 200 years, U.S. policy has promoted a large number of small banks, but now we will be getting a small number of large banks. The thinking behind America's historical approach to banking was to prevent the concentration of too much economic power in too few hands, which could threaten the capitalist and democratic systems. Based on what is happening now, these fears were obviously well justified.

NEXT:

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Bridge Loan to Nowhere - the Wall Street Bailout Plan

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs

http://www.youtube.com/watch?v=UQieE8Ryvk0

As I write this the U.S. House of Representatives has just defeated the Wall Street bailout plan.

On Sunday, the final details of the bill emerged from the fetid backrooms of the nations capital. After intense negotiations congress and the administration managed to put together the costliest and least effective piece of legislation ever to emerge from Washington D.C. The Emergency Economic Stabilization Act of 2008 was supposed to free up the credit markets and get banks lending again. Yet there were no provisions, no mechanism, and no requirements in the bill that would have made this happen. In exchange for their $700 billion dollars, American taxpayers were guaranteed nothing - and they were likely to have received it in abundance.

Even if the bill had had some means in it to revitalize the U.S. banking system, this still would not have happened. The simple reason for this is that the bailout was much too small to have had any significant impact. At no point in the verbose discussions and pontifications in the congressional hearings did anyone specify approximately how large the problem was that this bill was trying to address. I personally had no problem of finding an estimate of $13 trillion of bad loans (which I think is much too low). The Treasury, the Fed and the congressional research staff either couldn't determine this number or didn't want to discuss it publicly. If they had, the absurdity of this latest government endeavor to deal with the credit crisis and its real intent as just a give away to big Wall Street banks would have become immediately obvious.

To make the bailout more palatable, the cost tag was divided into three parts: $250 billion immediately, $100 billion additional at the discretion of the president, and another $350 billion unless congress decided to rescind it (fat chance of that ever happening). The Treasury secretary, not exactly someone known for his good judgment and lack of corruption, still would have had wide leeway in deciding who got the money. Inexplicably, loans up to March 14, 2008 were eligible for government purchase, even though the credit crisis was front page news starting in late July 2007. Why wasn't that the cut off date set for eligible funding?

According to government press releases, the plan was supposed to prevent the big money from profiting big time from the bailout. In reality, the bill insured that this would happen. The bill specifically made banks that acquired assets in a merger or takeover (this includes JP Morgan, Bank America, and Citibank so far) eligible to dump the bad assets they acquired on the taxpayer. This provision was also a de facto bailout for the FDIC, which would itself be bankrupt as of today because of the failure of Wachovia, if it didn't exist.

The taxpayers were supposedly protected in the bill because the government would get some ownership rights in companies that had their bad debts purchased. Rights in a company that fails - and most if not all of these companies will fail - are of course worthless. If after five years the government is facing a loss in the program, the president was required to 'submit a plan'. How submitting a plan would magically restore lost money from out of business companies was not detailed in the bill description.

What about caps on the $50 million dollar paydays for Wall Street executives? The bill created some 'tax restriction' on earnings above $500,000 and imposed some 'limits' on golden parachutes. What those 'tax restrictions' or 'limits' were, seemed somewhat vague. Executives that received huge bonuses in the past were not required to return any of the money before a company received bailout funds from the taxpayer, even if those bonuses had been obtained under false premises.

What direct benefits and new protections would the people paying for the bailout get? The average investor, pension holders, homeowners, people on Main Street in general, those who suffered because of the bad decisions of Wall Street companies weren't to benefit from the government's largess at all - they were only supposed to pay for it.

NEXT: The First Stock Market Crash of 2008

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.