The Market Ticker

You would think that I had cut off someone's arm this morning with a chainsaw.

As I said I would in the forum, for the trading day today all non-donors (or not-logged-in users) were restricted from access.

The howls began within seconds of the flag being set, with the most common claim being that "you allow free access, why are you blocking me?"

Ahem.

Quite a nice psychological experiment was run here, and I hope, if you're one of those accessing the forum for free (but who have chosen not to donate), or reading it without signing in (which I also permit) you've learned something.

That something is that "freedom ain't free", and if you want to continue to live in a Republic, you need to put down the beer and turn off the Boob Tube long enough to raise some hell. In fact, you have an obligation to raise some hell from time to time, especially when our Constitution is used as toilet paper by unelected public "officials".

The Ticker put up last night, and which was on the front page all day while the market was open, had the numbers for the three big committees in Congress who are grilling Bernanke and Friends over their outrageous bailout of Bear Stearns.

I hope you called at least a few of them today.

I'm not the only one who thinks its outrageous, by the way. Try here:

"'It is sort of lonely out here,' says Rep. Scott Garrett (R-N.J.), one of the very few members of Congress questioning the federal bailout of Bear Stearns. Bear is the investment-banking firm that dramatically overexposed itself to the subprime-mortgage market and is now on its way to investment-bank heaven."

Wow. A voice of reason in the wilderness.

Let me guess - The Honorable Mr. Garrett hasn't taken any money from the clowns on Wall Street, and as a consequence he has actually felt free to uphold his oath to "uphold and defend the Constitution of The United States"

I know, its such a quaint document.

Oh, don't look at those Monoline Insurers. You know, the folks who were "too big to fail" and subject of daily "sticksaves" by Gasbagpurile on CNBC? Yes, those guys. They're now apparently missing coupon payments on debt, well, Security Capital Assurance (SCA) anyway on one issue. That got them a "D" rating (no kidding, an actual default!) yesterday.

Gee, I thought these guys were too big to fail? Now, suddenly, when they really are failing nobody's squawking? Nor is SCA the first - we also have two other firms that have repudiated their swap obligations, claiming that they really didn't have to pay off on insurance contracts they wrote.

What changed?

How about this for a theory - these folks never had a snowball's chance in Hell of being rescued, as they clearly are insolvent - but there was a need to find something the media - with the government's blessing - could lie outright about in an attempt to prop up the markets.

Ben on The Hill today basically said that Armageddon would have ensued if Bear had been allowed to go down.

Armageddon eh? That's very interesting; so now we defend lawlessness by saying that the economy would have been hurt if we hadn't acted lawlessly?

Further, Bernanke admitted in his testimony that indeed the $30 billion guarantee was in effect a bribe - he stated in plain english that absent that guarantee the transaction would not have gone through.

But wait - how did that series of events come into play in the first place?

Hmmm..... was The Fed asleep at the switch or was there malfeasance instead of misfeasance?

Did The Fed refuse to regulate and in fact egg on the creation of this derivatives bubble in the first place, generating the very problem that they then claim they had to step in to solve?

In fact that is exactly what Bernanke is stating today on The Hill - The Fed has intentionally allowed, over the space of several years, the creation and promulgation of these "financial instruments" THAT CAUSED THIS MESS IN THE FIRST PLACE.

This sounds somewhat like a rapist claiming that he did it because he has a penis and, you know, if he hadn't been born with one, the rape wouldn't have happened.

Then the cops chime in and we learn that the rapist sent a letter to the cops three weeks prior with his name, address, social security number, a picture of himself, AND TOLD THE COPS HE INTENDED TO COMMIT THE RAPE, yet the cops DID NOTHING.

In addition, Bernanke admitted that Blackrock was retained on a "fee to be determined later basis" - not only was this a "no bid" circumstance but even worse, we can't be told at the present time how much all of this will cost! Let us not forget that Jamie Dimon is on the board of the Federal Reserve Bank of New York!

How do YOU spell "inside dealing"?

I've worked in private industry, both as an employer and employee, my entire life. I've also done government contract work. If I had pulled any of this in any of those positions I would have been fired at best and prosecuted at worst, especially when it came to government contracts.

How can this be allowed to stand and why is Congress NOT bending Bernanke over the table?

Oh, and this morning Bernanke also admitted we are actually in a recession. Note that this man continues to be dead flat wrong in his economic predictions - in fact, we should start tracking them:

• Subprime will be contained and not impact the broader economy, being limited to tens of billions of dollars in write-offs. (Actual: $150 billion so far, and counting)
• The effects of housing on the broader economy will be limited. (Actual: We are now in a recession)
• We will experience a slowdown in economic growth, but not a recession, and trend growth will resume in the middle of 2008. (Actual: GDP growth was below the rate of inflation in Q4, ergo, an effective recession)
• It is now likely we will have negative growth in the first half of 2008 and trend growth will not resume until 2009. (TBD)

And of course we should give these people more power, after their absolutely stellar record of telling people what is to come, and what they intend to do about it to produce the desirable outcome - that is price and economic stability, while at the same time their actions are laced with inside dealing and conflicts of interest and no-bid, NO PRICE awards of contracts!

Oh, and they should not be expected to, nor will they prevent future dislocations by doing any of the following:

• They will not force derivatives onto a public exchange where we can all see their prices.
• They will not force all the off-balance-sheet crap back onto the balance sheets where we can see how impaired these institutions are.
• They will not force margin and capital supervision on these investment banks or anyone else, which requires (1) and (2) above.

But they will violate The Constitution at any time they feel there is a risk of a "dislocation" once they have created the conditions for that dislocation through their intentional acts of both omission and commission, which incidentally, are necessary for the business models of these "investment banks" to work!

Without the ability to avoid marking to market, without the ability to hide things off the balance sheet, and without the ability to avoid margin supervision the investment banking model is fatally flawed.

Note carefully what Bernanke said today on The Hill - the "proper functioning" of the financial system today requires the maintenance of the above unsustainable model of opacity and deceit!

That's right - we can't have transparency. We can't have mark-to-market. We can't have margin supervision. We can't have swaps and other derivatives traded on a public exchange to force public price knowledge and discovery. We can't have a ban on off-balance-sheet vehicles, even though they were, in large part, why Enron imploded with almost no warning. And finally, The Fed must be empowered to raid the public purse any time it would like, effectively taking unmarketable crap collateral unto the public balance sheet, because it is critical to the functioning of the American Economy that investment bankers be able to conceal valuations and deceive the American Public and Investors.

What's worse, Bernanke appears to have admitted that The Fed is blatantly in violation of The Federal Reserve Act - in front of Congress! See, he stated what we knew already but hadn't been said "publicly" - The Fed stands to profit if those Bear Securities are actually more valuable than their models indicate.

The Federal Reserve Act does not permit The Fed to buy anything other than "full faith and credit" paper, and ownership (as opposed to lending) is defined by the risk of both loss AND PROFIT.

It is the latter that defines equity ownership as opposed to collateral against which a loan is made. (PS: Caroline Baum has it figured out too....)

Yet Congress said NOTHING about that clear violation in the hearing today.

Without the action of citizens to force Congress to act to stop this outrage there is no purpose to supposed "oversight."

The hearing today was a joke.

There was not one question about the underlying issue, which was the usurpation of the power of the purse by The Fed and The Executive and how it is that The Fed sat back and WATCHED this entire mess happen so their buddies could get billion dollar paychecks while middle-class America was literally robbed.

We can debate over whether there was a need to "step in" and bail out Bear Stearns. That's a valid and proper debate, and in a Representative Republic, one we should entertain.

But can we first hear from Ben not that there was a "risk of dominoes falling" but rather why that risk, if it existed, justified an action that is clearly outside of both The Federal Reserve Act and The Constitution, along with the clear conflicts of interest presented by Jamie Dimon being on the Board of the NY Fed yet not disclosing to the "target" of his acquisition that the discount window was about to be opened to Bear AND JP Morgan?

Oh, and to speak to Ben's economic prognostications, you didn't see CNBC report on factory orders, did you? Guess why?

Down 1.3% on the month .vs. expectations of down 0.8% - significantly worse than expectations.

Psst - don't look at mortgage applications - down big. Of course, again, not reported when released by CNBC, but last time when they were up big, that was reported - instantly.

Bubble TV at its finest.

There are probably a few of you wondering what sent me "Off The Reservation" earlier today, and why I locked the forum down to all but Gold members for a day (tomorrow, 4/2.)

No, it wasn't because the DOW went up 391 points. Remember, we had two more of those in the last three weeks.

It is simply this folks: The power of the purse is the first, last and greatest power that any government has. It is effectively the power to TAX, because spending must be paid for in some fashion - either by taxing or issuing debt.

This power is explicitly reserved to Congress - specifically The House of Representatives, set forth in Article 1 Section 9 and formalized in The House over time.

While there is much to say about the abuse of that power over the years and the influence of lobbyists and other bad things, the fact remains that once you lose the power of the purse all else soon follows.

It is one thing for Congress to delegate that power for some period of time, for some specific purpose, or in some other way to some other part of the government.

It is an entirely different matter when a government actor or agency, or worse, a quasi-government organization such as The Fed, arrogates to itself this power.

The latter is the most serious of matters and in fact rises to the level of a Constitutional Crisis.

Why?

Because once you lose this power you NEVER GET IT BACK.

If we allow this as a nation we will never again have the power of the purse held where it belongs under our Constitution, which is SOLELY in the United States Congress, specifically, in the US House.

Let me put this in a different light and ask you how you'd feel about it:

Tomorrow, the TSA decides that there is a "heightened risk" of an imminent terrorist attack. As a consequence they decide they need to spend $100 billion dollars immediately on new equipment and people, and in fact they commit those funds immediately. Of course there is no time for Congress to pass a bill authorizing this.

Next week, The Army Corps of Engineers decides that New Orleans requires new levees, and in addition, that Tampa has a high risk of flooding if they do not have a seawall constructed around Tampa Bay. They decide to commit $200 billion dollars immediately to rectify this. After all, hurricane season is coming and there is no time to get Congress to pass a bill.

The week after that......

Get it yet?

Think this can't happen?

The hell it can't!

The hell it won't!

We live in a Constitutional Republic. The United States is NOT a Democracy. You wouldn't want to live in a true democracy; in one minorities have no rights, as just one example.

That Constitutional Republic has a very specific delineation of powers.

Note that right now we have a RAGING debate over The War In Iraq.

Many in this nation think we made a huge mistake going into Iraq. Others think it was the right thing to do. But both sides, thus far, are respecting The Constitution and, despite the objections of some, every appropriation of funds for that war has in fact gone through Congress as is required.

Let's take just one small piece of the wartime debate - The Homeland Security Act. To some, a damn good thing. To others, over-reaching but acceptable. To still others, an outrageous invasion of privacy and personal freedom.

Where you sit on this particular issue in your political beliefs is not the point.

The point is that the bill was in fact introduced and debated, then passed through Congress, and it made its stop in Appropriations where the money was allocated by The House in order to implement the law.

You may disagree with the outcome, but the black letter of Constitutional Principles were followed. The law as passed was properly constructed and funded.

How would you feel if George Petraeus were to decide that he needed $500 billion more for the War and just spent it without a vote or even consideration by Congress?

What if "Homeland Security" was simply implemented by George Bush as he saw fit, with his "Homeland Security Czar" arrogating to his "new responsibility" $500 billion dollars from the Treasury?

Is that ok?

Well, if you don't do whatever is necessary to reverse what happened with Bear Stearns and mete out punishment for that blatant violation of our Constitution, you WILL wake up one day to find out that some General in Iraq, or some Homeland Security person, or some other agency or arm of government just decided to pick your pocket and spend without the appropriation of those funds by Congress, effectively legislating without ever seeing the chambers of the House or Senate!

It is INEVITABLE that if we do not step up right here and now that this will happen again.

And again.

And again.

The line must be drawn here and now.

If we fail to do so we may as well flush one of the remaining pieces of our Constitutional Republic down the toilet, and cede to a "New World Order" in which you can and WILL be taxed without a vote and without representation of any sort and where laws will be imposed by fiat of the executive whenever they damn well feel like it without the prior approval, debate and consent of Congress.

Remember that 230-odd years ago we went to war over this EXACT issue - taxation without representation. The British King saw fit to spend and tax the colonists as he saw fit without any sort of redress to or vote by the colonists, and to impose laws via unitary decision, with the costs of implementation forcibly extracted from the Colonists' wallets.

The end result was The American Revolution.

We were fortunate in that the brave men who understood that responsibility were honest and not particularly interested in personal self-aggrandizement. History strongly suggests that our Founding Fathers were somewhat of a historical aberration, in that most of the time when a society finds itself under extreme duress it usually ends with someone more akin to Adolph Hitler than Jefferson, Madison or Hamilton figuring out what the government should look like.

It is critical that we the people do not permit this usurpation of power to stand, and insist that the power of the purse be restored to where it belongs - solely and exclusively in the hands of Congress.

Should we fail to do so it is a virtual certainty that three, five or ten years hence you will think back about this very issue and this Ticker and realize in horror what you could have prevented, but didn't.

Let us remember that this power to "raid" the public purse has never been wisely used in the past. From Germany prior to WWII on down to the present day, we have never seen a public official that is anywhere close to accurate on their "estimates" as to the fiscal damage from their programs.

Most of you remember the Medicare Part D debate. It was quoted at one number, then another, then another in terms of cost. After it was passed and signed we found out that those numbers were radically underestimated and the cost would be several times greater than we were told - but it was already law.

Some of you remember Ben Bernanke on The Hill giving what used to be called "Humphry-Hawkins" testimony last spring and summer, in which he said that the subprime problem was going to be a "tens of billions" of dollar problem, all-in. We now have seen over $100 billion in writedowns thus far, and Goldman Sachs has said out loud they think its a one trillion dollar problem, which is somewhere between 10 and 100 times as large as Bernanke originally told Congress. Has Bernanke been held accountable for this radically inaccurate "guess"? Of course not. Nor will he be unless you speak up.

Some of you remember the RTC, which allegedly was a "ten or twenty billion dollar" enterprise when the S&L crisis broke. It ultimately cost between $150 and $200 billion of taxpayer money, depending on who you ask, or ten times the original estimate. Yet none of those lawmakers and "agency wonks" were held to account either.

Social Security and Medicare were originally tiny portions of Federal outlays, and were projected to remain a "tiny" portion of public spending. They now constitute, together, some 30% of The Federal Budget, and are growing at a rapacious pace, and yet nobody in the government has ever been held to account for the incredible damage this not only has done but will do to our federal budget down the road.

All of this, thus far up until Bear Stearns, was done above the table and under the rules proscribed by the Constitution.

How much accountability do you think we will achieve when the appropriation is done BEYOND the reach - and accountability - of Congress?

"What is zero, Alex."

The 900lb Gorilla in the room is home prices. Pimco's Bill Gross, as I noted in The Ticker, is ranting and raving about "the need to stop home price declines", and has been doing so repeatedly both in his letters and on national television.

That is because he knows what is coming and how bad it is going to get.

The problem is that we can't stop home price declines, which is why you haven't heard Gross actually come out with a proposal to do so.

It is mathematically impossible to achieve his goal and he knows it.

Debt-to-income ratios over 36-40% are unaffordable no matter what you do, and this naturally caps home prices in the 2.5-3x income range, with the lower end being present when interest rates are relatively high (8-10%) and the upper end being present when they are low (6-8%.) Long-money rates under 6% are historically an aberration and cannot be sustained with the public debt and deficit spending our government engages in.

The nasty in all of this mess is that any attempt to prop up banks like Bear Stearns or others - and there will be others - inevitably screws the vast majority of Americans.

Let's remember - 30% of homes in America have no mortgage at all. Those homeowners have nothing to be gained by "bailouts" for speculators or homeowners, as they own their homes outright.

Another 50% of the housing stock has a mortgage on it that was underwritten under sound guidelines - 20% down, no piggybacks, owned for a long time. These mortgages are not underwater and won't go underwater. Yes, there will be home price depreciation, but the principal will remain less than the note, top to bottom, even if we have a severe, deep recession.

The last 20% of the homes are the problem.

About half of those were purchased during the "bubble years". They are either underwater now or will be. There is no escape from this reality, and most of these will foreclose if the borrowers/owners are intelligent about it. They will exercise the right of "efficient breach" and jingle mail the keys. Their credit will be destroyed for several years, but that's where it stops for them.

The other half of the remainder, 10% of the total, are worse. These are the homes that were serially flipped or serially refinanced. Many, but not all, are held by speculators who got left "holding the bag." Those who serially refinanced and MEW'd out the money to blow on various toys and spending are the ones with real problems. Essentially all of these homes will eventually foreclose and most of those loans are "recourse", which means the borrowers - your neighbors - will be forced in to bankruptcy. This number may eventually reach 10% of all American households, or fifteen to twenty million filings over the next few years.

Now let's look at the economic damage.

The "best figure" I have on the US housing stock value is right near $36 trillion. 20% of that value, or about $7.2 trillion, is "at risk" in terms of borrowers. Let's further assume that through FHA and other programs, we can save half of these homes from foreclosure.

None of that housing stock subject to foreclosure is a zero. If we assume rather pessimistic recovery on first mortgages of 50%, this is $1.8 trillion in real losses that are going to be realized on the value of the homes.

The bad news is that there are also in the high several hundred billion in HELOCs that are worthless on top of the rest. It is reasonable to assume that of the HELOC money out there, that associated with the foreclosed homes has a zero recovery, as these homes are all underwater on the firsts. Call this $100 billion more of realized losses.

As you can see, we are rapidly approaching the $2 trillion mark and we have not yet accounted for any of the "knock on" effects such as decreases in consumer spending, decreases in construction activity and lost jobs across the economy. All in it is likely that the total bill for this carnage will exceed $5 trillion dollars.

To put this in perspective, and why we must stop any attempt to corrupt the power of the purse here and now, we must keep in mind that the total outstanding public debt in the United States is approximately $9 trillion.

In order to "absorb" this we would have to further devalue our currency to an outrageous degree or, alternatively, suffer monetary and price inflation in the 10% area for several years. Such an act would immediately and permanently impoverish all those who made prudent homebuying decisions, whether they are people who paid cash, who have reasonable mortgages, or who have long since paid off their house.

In addition such an attempt would destroy those on fixed incomes, including all retired Senior Citizens living in whole or part off Social Security. The entirety of the population reliant on Social Security to any significant extent would be reduced to poverty and the middle class of America would lose at least half of its discretionary purchasing power on a permanent basis.

If we do not restore the power of the purse to Congress where it belongs the bankers WILL attempt to prevent these losses from flowing back to them, effectively forcing them down the throats of your retired parents, grandparents, and the working class, all of whom will see severe decreases in their standard of living.

With the bankers having the power of the purse, instead of Congress, you will eat all of the losses and the catastrophe will be served upon you in order to save them!

The Bear Stearns bailout will likely not cost $29 billion, it is very likely to cost $100-300 billion if historical precedent holds. The Fed does not HAVE an extra $300 billion, and will, since it has been given the power of the purse, shove off that cost on the taxpayer by demanding it of Treasury.

Nor will this stop with Bear Stearns, as I have illustrated above.

The amount at risk in housing alone is close to $2 trillion! This does not count any of the "at risk" amounts in auto loans that will go bad, credit card debt that will default, or commercial real estate, nor does it, as I noted, include all the "knock on" effects.

All of these losses are real and WILL be realized.

We can argue over who eats these losses but we cannot prevent them from occurring.

When, not if, this flows through to the public balance sheet we will see immediate and severe cramping of the Federal Budget. Unable to fund itself on reasonable terms the government will find itself forced to drastically slash entitlement spending.

That, in turn, will lead to severe "voter unrest", and from there you can figure it out - what always happens will happen once again, as "someone" will appear on the political stage offering bread and circuses, which of course will require that the citizens give up "just a bit" of their freedom........

Still want to sit around and drink beer?

No?

Good.

Then sign the petition to ask the House and Senate to force the unwind of this transaction and, if Bernanke and Paulson refuse, to Impeach Bush (and by extension Hanky Panky)

While you're at it, Ben has been "invited" to several committee meetings the next few days. Here's the list of the Committees in the House and Senate - I strongly suggest that you give the appropriate Congressfolk a jingle and tell them what you think about all of this....

I made several of these calls today and was told they were very busy.

Perhaps tomorrow could be even busier...... but that, of course, is up to you.

The question, and what should drive you to act (or not) is simple - do you want our flag to look like this in a few short years? If not then pick up the phone.




Senate Banking Committee

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