T & A and the GS-20 Summit

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 Wednesday Treasury Secretary Paulson announced the T&A would be taken out of TARP (the Wall Street bailout bill passed in early October). The raison d'etre given by the Bush administration to congress for passing TARP was that only by purchasing troubled assets on bank balance sheets could banks be freed up to lend again and get the economy going. After the legislation was passed, congressional leadership from both parties announced with great fanfare how they were saving the American economy with this program. The ink was barely dry on the bill however, before Paulson announced that preferred stock was going to be purchased in troubled financial institutions instead. While the first $250 billion will still be earmarked for that purpose, Paulson has now decided that the remaining funds should be used to support financial markets that supply credit for credit card debt, auto loans and student loans. Of course next week, there might be a better way to save the American economy and the six week old program could be changed even again. If all this looks like no one in Washington has the slightest idea what they are doing, it's because they don't.

This is not to say that the new ideas for TARP are not an improvement on the original provisions of the bill which were essentially a form of welfare for Wall Street. Unlike welfare for the poor though, welfare for the rich comes with fewer limitations. While TARP has a provision for 'restriction' of bonuses, it doesn't eliminate them, nor does it force companies that can't continue to exist without government support to pay their executives salaries that top government officials would get. Nevertheless, over the weekend seven top Goldman Sachs (Paulson's old firm) managers graciously renounced their bonuses for 2008. Why they would have been getting bonuses when the company's stock has fallen 70% in the last twelve months is not exactly clear. CEO Lloyd Blankfein received a Wall Street record $68 million bonus last year when he was making the decisions that lead to this year's disastrous performance.

Like everything else in the contemporary economy, lack of effective ideas for handling the credit crisis is global as well. The GS-20 meeting of world leaders this weekend in Washington produced mostly a commitment to free trade and further monetary and fiscal stimulus (in other words governments throughout the world are going to print more paper money which will be backed by nothing other than their leaders hot air). British PM Gordon Brown, who decided to sell half of Britain's gold at the bottom of the market in 1999 and has presided over a worse subprime crisis than in the U.S., led the charge for increased stimulus measures. Other ideas bandied about included multinational supervision for global banks, more oversight for credit rating agencies and regulation for hedge funds. These useful suggestions didn't get much beyond the bandying stage however. Essentially anything concrete was put off until the next meeting in April. The do-nothing summit was immediately declared a success by President Bush.

Shortly thereafter, Japan announced a second quarter of negative GDP confirming it was in recession as the euro zone did last Friday. Since this was not exactly surprising news, Asian markets were little changed overnight, even despite the drop in the U.S. on Friday. The out of the blue rally in American markets last Thursday faded almost as quickly as it arriveed with the Dow down 3.8% and the Nasdaq down 5.0%. Technically speaking this was another crash day on the Nasdaq, but as I have said many times, no one pays attention anymore to just a 5% or 6% drop - and that includes world leaders.

NEXT: Trojan Horse of Earnings Surprises

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.

Our Video Related to this Blog:

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.

The House Caves in, but it's the Market that Collapses

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

On Friday, the House of Representatives took up the Wall Street bailout bill in a second time do-over and passed it by a comfortable margin of 263 to 171 (the party breakdown was 172 Democrats and 91 Republican yes votes). What made the difference wasn't that any of the horrendous provisions that looted the U.S. treasury on behalf of Wall Street were removed, but more costly measures, at least $110 more billion, were added! These pork runneth over items were for programs that had particular appeal in a number of districts where Congressman had previously voted no. The penny for your district, a dollar for Wall Street game worked like a charm. So did the lobbying efforts of those who benefited from the bill. One representative who switched his vote, said he never talked to so many bank presidents in his life (calls coming into the capital from just regular people were up to 100 to 1 against the bill). The U.S. congress proved once again that like every other regime in history that had created hyperinflation, it deems restraints on government spending to be unnecessary. Both presidential candidates showed their 'lemming to the sea' leadership abilities by not only supporting this legislation, but by helping to round up votes in their respective parties. It was reported that Obama alone helped switch 22 votes.

The passage of this bailout bill represents the third key policy blunder of the financial and monetary authorities in handling the credit crisis. The first was the rate lowering campaign by the Fed that started in August 2007, which flooded the financial system with a tsunami of liquidity. The second was the Bear Stearns bailout, which established a policy that would inevitably lead to bailouts for almost any failing financial institution. Now with this Wall Street rescue bill , the bailouts have gone from individual companies to the entire financial industry. Just as Bear Stearns was not the only bank/broker bailout, nor will this bill be the only industry bailout for the financials (Warren Buffet promptly stated that this bailout isn't big enough to work). The fourth key decision that will lead us down the road toward hyperinflation will be to expand the bailouts outside the financial system. The auto industry has already received its second government loan, expect more to come. This new phase for bailouts though will not be limited just to industry. The Federal government will also have to turn on its money spigot to save state and local governments from going under. Governor Schwarzenegger has already requested $7 billion in assistance for California.

In a little more than two months, the national debt ceiling has been raised $1.5 trillion because of the Fannie Mae and Freddie Mac bailouts (add another $5.3 trillion for their government takeover) and the Wall Street rescue legislation. A national debt of a little over $9 trillion will soon be exceeding $16 trillion, around $2 trillion more than the official overstated GDP figures. It looks like the U.S. government intends on borrowing from foreign governments to pay for this (both the Fannie Mae/Freddie Mac and Wall Street bailouts are sending a lot of money overseas). However, it is more realistic to think the printing presses will have to be scheduled for 24/7 operation.

The stock market spoke very clearly in its reaction to the the bailout bill. It started tanking immediately. The Nasdaq, S&P 500 and the small cap Russell 2000 all closed at new lows for the year - below the crash bottom on Monday. Only the Dow held above this level. Key support around 2000 was broken on the Nasdaq on Monday and this break was confirmed on Friday. The next major support level for Nasdaq is around 1800 and for the S&P around 1000. Expect a visit to these levels some time in the future. Although I suspect the government will try to interrupt this journey - perhaps instead of banning just short-selling, they'll try to ban all selling of stocks.

NEXT: Today's Global Stock Market Meltdown

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.

Short Selling Democracy - Senate Ressurects Bailout Bill

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

Late on Wednesday evening the Senate passed their own version of the Wall Street rescue package by a margin of 74 to 25 . Unlike the House the Representatives where all of the members are up for election this year, only a third of U.S. senators have to face the voters next month. It was therefore easier for them to ignore an irate populace opposed to this legislation and instead follow the lead of their major campaign donors who have paid them the big bucks for their assistance in looting the U.S. treasury.

In order to make the bill more sellable, a small bone or two was thrown to the little guy. A number of tax breaks amounting to a few cents for the populace for every dollar for Wall Street were thrown in to the mix to help buy off some key congressional votes in the house. The provisions have nothing to do with fixing the financial system of course. They include disaster aid for Texas, Louisiana and the Midwest (as if congress wouldn't vote for this otherwise), aid for rural school programs, and tax breaks for people who live in states without state income taxes. Some fixing of the AMT (alternative minium tax), keeping it from affecting several million middle income earners, was also thrown into the bill. Many of the House members that voted against the bailout bill the first time would like these provisions. Only a little over a dozen or so need to change their votes. If they are willing to do so for a few cents on the dollar, their votes obviously come pretty cheap.

Also added to the Senate bill was a provision to raise FDIC insurance on bank deposits to $250,000 per person (already the limit for IRAs in banks). While this may be a good idea, this provision could wind up to be extremely costly to the government. Bank failures will eventually drain the FDIC insurance fund (this would have happened already because of the failures of Washington Mutual and Wachovia, but the banks taking them over are paying off the funds the FDIC would have had to pay, then writing off an equivalent amount of bad loans, and will be reimbursed by that amount through the bailout plan). The government is going to wind up paying $250,000 per account for a large number of depositors of failed banks one way or the other in the future (instead of $100,000). Needless to say, the senate bill doesn't assume these future costs will exist.

The Senate bill is just another confirmation that our representatives in Washington see no limits whatsoever are needed on government spending. They take a break-the-bank expenditure bill and try to pass it be adding more expenditures (the likely amount not adequately reflected in the proposed costs). While the U.S. is not the first government in history to engage in such profligate behavior, the powers that be seem to think it can be the first in history to avoid destructive inflation or even hyperinflation as a consequence of doing so. Just in case reality rears its ugly head at some point, you just might want to pick up some gold and silver.

NEXT: No Assurance in Insurance; Wachovia's Deal is Not a Deal

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.