FDIC-Treasury Squabble

In an interesting display of interdeparmental politics, Sheila Blair who heads the FDIC has pushed forward with a proposal to use $24B of the $700B TARP bailout money to assist with mortgage loan modifications. This is 3% of money that was earmarked for Wall Street, and even that amount Paulson and the Bush administration is raising objections to.

It's becoming more obtrusively clear that the money was only intended to be a taxpayer bailout of the rich and powerful.

UPDATE [11/18/08]: This is almost a new post, but in questioning today by the House Financial Services Committee, Paulson reiterated that it was not his intention to use the $700B TARP bailout money to assist specifically with mortgages, and he does not plan to bail out the auto industry either. Interestingly, he added that he only intends to use $350B of it; the rest would be for the Obama administration. (Recall that $250B was allocated for the immediate use by the Treasury Department, then another $100B additional merely required approval from the President, then the last $350B require approval from Congress.) He added that it is his belief that the government would recoup the expenditure (having been used to purchase preferred stock in banks). If history bears this out then my opinion of him and the bailout would improve somewhat.

UPDATE [2/7/09]: ...but I guess not. This preferred stock has recently been valued at 60 cents on the dollar at purchase time, which adds up to $78B of tax money given to support failed businesses with excessive executive compensation. No surprises there—to my mind this has always been $700B down the drain regardless.

"Shifty" Paulson

The news today is reporting that Treasury Secretary Paulson is changing the way that the $700B bailout money is going to be spent. He has already done this once in a big way when he used his first $250B to buy preferred shares in banks rather than to accumulate troubled mortgages. In fact, I can't recall the man ever saying the same thing twice, so today's change of plans is hardly news and should have been anticipated. Today he is shifting away from mortgages entirely and hopes to direct the rest of the bailout money to credit cards, student loans, and other areas where the financial industry has been taking loses.

To my knowledge, the Treasury Department has not acquired a single troubled mortgage, which was the original intent of the bill. Banks are now starting to modify mortgages as they would under a free market without any government assistance, on the principle that getting less money from a loan modification is better than getting even lesser money from a foreclosure, in the setting of declining house values.

Actually, recalling my review of the legislation there was hardly a mention of mortgages, so the program is going as written, if perhaps not as advertised.

ADDENDUM [2/7/09]: For a nice review of bailout history and a blistering commentary on Paulson check this out.

China Stimulus

China has announced a $586B stimulus package. Though the number is quite high, since we are considering a communist nation, it doesn't particularly strike me as news, to the degree that the economy is funded by the public sector to begin with. Hopeless optimists see this as reason for a possible turnaround of a general downtrend in their manufacturing that had been explosive over the past few years, but was driven by credit and dependent on extreme global consumerism also driven by credit. Actually, it is an admission they have the same serious financial woes that are affecting other nations

Bailout Money at Work

American International Group (AIG), America's largest insurance company, has taken a prominent role in the bailout saga. First, it was taken under Federal conservatorship September 17th with an $85B advance for capital—with the intention that the profitable parts of the company would be sold off for as much and repaid to the Fed. Once the bailout money was received, the execs partied with expensive spas and hunting trips. Now AIG is back in the news needing even more bailout money, to the tune of $150B all told.

AIGs role in this was to sell Credit Default Obligations (CDOs), which allowed banks to sell off subprime mortgage backed securities to private investors, giving them more money to lend out, allowing for the ridiculous explosion of credit in the early half of this decade. When pools of mortgages are chopped up in to tranches and sold as securities, banks have to keep the riskiest "unrated" tranches for themselves—the ones that will go belly up first. They can avoid risk by getting CDOs (or bond insurance) on those tranches in case they default. This all is fine and dandy, until the insurance company is teetering on the verge of bankruptcy. Apparently, AIG was a major provider of CDOs.

CDOs are key. So long as banks can insure their unrated tranches as they sell off loans as securitized debt, they are no longer limited by fractional reserves as to the amount of credit they can create. Without CDOs, this credit explosion either could not have happened, or would not have happened to the degree that it did. Bailing out AIG is a more civil way of handing money to banks straight up.

Coordinated European Cuts

I guess I'm back on, after a few days where financial events had slowed down I figure due to the election. Today the ECB dropped prime interest rates by 50 basis points to 3.25%; the Bank of England dropped their by a whopping 150 basis points to 3.00%; and the Swiss National Bank dropped rates by 50 basis points to 2.00%.

The European liquidity crisis is in full swing, and this is good news for the value of the dollar relative to these respective currencies (euro, pound, swiss franc). The euro appears to be having a particularly strong correction over the last couple months.

Congrats Obama!

Congratulations to our next President Barack Obama. Either candidate would have been a welcome replacement over the current administration—I believe the most fiscally self-defeating in our history. Unfortunately, both candidates supported handing a $700B blank check to the Treasury Department to bailout Wall Street. But Obama won over McCain with an attitude of hope, change, unity, and without the mudslinging campaigning that has come to dominate politics over the last few years.

Red October

In October we see a chaotic whirlwind of financial news; though all of it though, we also see a fairly clear signal of the strength of the dollar, despite economic turmoil domestic and abroad.

We see the passage of the $700B bailout bill—followed almost immediately with a sudden plunge of the DJIA to the low 8000 range, with a struggling recovery in to the 9000s at month’s close. (Even in the low 9000s it is about 1000 points below the prior trend line dropping at 3000 points per year.) We see reason to wonder if those $700B are really going to trickle down to main street, as promised, since bad mortgages were not off-loaded from banks as planned, but rather big banks were forced to sell preferred stock to the Treasury Department, and plan to use the money mainly to acquire smaller, struggling banks. In other words, we see a huge move toward centralization of U.S. banks around the Fed and the Treasury Department.

I’ve also caught wind that the “Hope for Homeowners Act,” passed in August, is struggling if not failing. I’m not going to repeat the low numbers I’ve heard for revised mortgages under the legislation because they must be inaccurate.

In October we see a massive printing campaign of U.S. dollars, where since mid-September the base money supply has increased by half. This would be bad news to anybody with a savings account, were it not for much stronger deflationary forces in play. Even this huge injection of cash is small compared to the magnitude of credit loses. There seems to be a general demand for hard cash world-wide that the printing is a response to.

We see no end to liquidity measures from the Fed such that I’ve stopped adding it up. There is practically unlimited capacity for borrowing in the system, sponsored by the Fed, and the taxpayer. Such measures are having no effect other than possibly to be preventing total collapse. Just because one has a credit line doesn’t mean anyone is using it. We’ve reached a point where we cannot manage our credit problems anymore with more credit.

In October, we see significant declines of all investment classes against the U.S. dollar: stocks, commodities, real estate, foreign currency, metals, have all fallen in price. This is all far from over but the strength of the dollar at this point supports the underlying premise of this blog: that the value of cash is inversely proportional to credit in the system; in other words, as credit collapses, cash will strengthen.

A common sentiment when I started this blog—that the U.S. dollar is about to tank because our general economy is in trouble—has proven inaccurate.