The Market Ticker

What a load of crap we were treated to yesterday.

Paulson's speech capped off what had been just one piece of BS after another.

It was also reported that Dimon said that "short sellers who start rumors should be jailed", although I didn't hear that particular quote in his speech.

Really?  Does "intentionally destroying value" include yanking the rug on a supposedly-committed 28-day funding line three days after it was issued?  That happened, you know.  And who was on the board that made this decision?  Or how about when people appear before Congress and say, right after The Fed claims that the system would have imploded had Bear not been bailed out, that they would have been "just fine"? Hmmmm.

Never mind Dimon's outrageous comment here:

"In the second part of a wide-ranging interview, Dimon said the regulatory systems covering the financial world need tightening in the wake of billions of dollars in losses at financial institutions in recent quarters.

"We need to do some serious work to try to avoid getting into this serious problem again," Dimon told Rose."

Of course he was part of the problem in putting all this crap together in the first place.  Off-exchange credit-default swaps, securitized paper, you name it, Dimon's company was ass-deep in all of it.  Now he has the gall to say that "regulatory systems need tightening"? 

You mean to tell me that sound, ethical business practices aren't enough for you Jamie?  That given the opportunity you'll take it, even if its unsound, unless prevented by law or regulation?

Paulson continued to dissemble on housing and calls the price declines a "necessary correction."  Note that what he hasn't said, and won't, is that he and his buddies created this housing bubble and looted hundreds of billions of dollars from Americans, transferring that money to private hands which then went into vacation homes in The Hamptons.

Nowhere has Paulson, nor will he, talk about the fact that "normal homebuying activity" (which he kept saying) consists of people purchasing with 20% down and a 36% DTI ("back end") ratio - maximum.

But no!  Instead he wants to create more financial alchemy - more BS and lies, instead of true evaluation of credit risk and appropriate setting of rates and terms to balance it.

This is not a surprise.  The more "sophisticated" the products the more fees can be siphoned off by these institutions and, of course, the more vacation homes can be purchased in The Hamptons.

How about this Hank?  Everyone who securitized a fraudulent loan - that is, one where there was the ability to discover a falsely inflated appraisal or income claim but it was not done goes to jail and forfeits all of their homes in those very same Hamptons.

Would that make a difference?

How about this one Hank?  How about every financial institution which booked "negative amortization" interest income and which has reason to believe that they'll never collect it, yet has not written it off, be prosecuted under Sarbox for making intentionally false statements on their financial statements and the executives jailed?

Would that make a difference?

Why do we keep talking about "voluntary reform" when in fact what has happened here is systemic, intentional and massive fraud?  We want to have "voluntary reform" by the very people who committed these fraudulent acts in the first place? 

You're kidding, right?

Of course he's not.  And neither is Congress.

"The Jawbone" continues to be the primary financial weapon of mass destruction - just divert people's attention and get them to buy stocks even though there has been absolutely nothing done about the huge credit bubble that exists across our entire economy, in housing, in commercial real estate and in other forms of debt, so that Hank's buddies on Wall Street can unload their shares into your hands and insure that you lose twice - first when you can't make your debt payments, and then again when your 401k and IRA accounts are destroyed.

Remember, this is the same guy, along with Bernanke, who said last spring that "Subprime won't have an effect on the greater economy" and "the economy is fundamentally strong."

This is the same guy who has said "a strong dollar is in our nation's interest" while pursuing and ratifying (instead of criticizing) the injection of over two hundred billion dollars in excess liquidity that resulted in energy producers pushing back via higher oil prices.  That is, he's sat back while the dollar was trashed and ratified that policy while claiming to believe in the opposite.  In fact, Paulson just said up front that he approves of the lower interest rates - even though those are a huge part of why the dollar is in the tank. 

If you want a "strong dollar" then you have to make dollars scarce.  And how do you do that?  REMOVE LIQUIDITY.  This causes market interest rates to RISE.  Oh, and Hank knows this - but he is in favor of and said he liked the exact opposite of what would produce a strong dollar.

In fact I'll go so far as to state that I don't think that Paulson gives a good damn what the broader economy does - just so long as the "humongous bank and brokerage" industry (hattip to Bill Cara for the term) profit from it.

Had Paulson (or anyone in Congress) actually given a good damn about the housing market and these issues just a couple of years ago, they could have stepped in to stop the fraudulent lending and perhaps - just perhaps, IndyMac Bank would not have lost forty percent of its value in the market in one day, trading now (Tuesday) at a stately FORTY THREE CENTS a share.

If you listened to Hank Paulson and Ben Bernanke last summer and fall and bought stocks at SPX 1576, you are out twenty percent of your money.  The sad reality is that you need to make 25% to get back to even - not 20%.  Oh, and did I mention that so far, analyst earnings estimates have not been ratcheted down to anything approaching reasonable off the peaks?  Shall I note that for three quarters in a row the analyst estimates for the SPX have been too high?  Or shall I mention that the next two quarters - including the one we're about to get reports on - are two of the toughest comparisons in the history of the market?

I understand that Hank Paulson's job is, to some extent, to cheerlead for America.  I can deal with that - its part of the job description.

But does that job description include intentional covering for and apologizing on behalf of those who ripped people off?

Here's the truth folks:

• You can't run a credit book with well under 1% of its total value held in capital base.  The reason should be obvious - even in "good times" you're likely to see 1% default rates, and in bad ones, history says you could see ten times that much.  You WILL go bankrupt doing this if you HONESTLY report what's on your books.
• The banks and other financial institutions are NOT adequately capitalized when you pull all the off-balance-sheet crap back on their books and force an honest accounting of the payment capacity of the "protection" they hold via the unregulated swap market.  Are there safe, well-capitalized banks?  Yes.  Now tell me which ones they are; to do so you must be able to take a market value for every security on their book, no "Level 3" games, and then compute their Tier Cap ratios.  If you can come up with a list of these banks, I'd like it, because want to put my money there!
• Bernanke and Paulson know the above is the case.
• They are desperate to hold the ball of string together without forcing the banks to take their medicine, which would sink a significant number of them and force many of the rest to divest themselves of assets at whatever price they can get and thus become smaller and less powerful.
• Its not working nor can it, because the underlying problem is the valuation of the "assets" behind the debt is deficient by up to half of the outstanding loan balance. 
• Nobody in their right mind who is upside down to a significant degree (10% or more) and cannot be attached for the deficiency (either because they don't have it to take or are in a "no-recourse" situation) should sit still for this.  Contract law recognizes a thing called "efficient breach" for a reason!  Businesses do this all the time and you should too if it makes sense in your particular set of circumstances.  Under absolutely NO circumstance should you EVER touch 401k, IRA or other tax-sheltered retirement money in an attempt to keep your house as in virtually all cases such assets are one of the few things that creditors cannot attach and seize in a bankruptcy!
• This problem is NOT limited to a few "small banks" as you may have been told or led to believe.  Have a look at the stock prices of any of the regionals with exposure in California and Florida - the big regionals.  WaMu, Wells, Wachovia, Downey, First Federal and of course IndyMac.  These firms did not get in trouble writing subprime loans, they got in trouble by writing negative-amortization "pay option" ALT-A paper that nobody in their right mind with a hint of common sense would have EVER written.  Absolutely NOBODY outside of the blogosphere such as myself, Mish, Roubini and a few others is talking about this.  We, on the other hand, have been talking about it for more than a year and in fact, I documented WaMu's horsecrap during their first quarter earnings report last year when a quick look at their 10Q showed that they were paying their dividend from capitalized interest which, of course, is not real money that has actually been received.  The regulators have not done jack about this.  Still.  A year later.
• You want the really bad news?  The FDIC only has $50 billion in actual assets.  Now most of the time they don't eat much on a bank closure, as they get another solvent bank to "eat" the dead one's deposits and thus their actual "pay out" is quite small.  BUT, in a real "oh crap!" scenario the government would either have to disavow them or backstop them.  In the former case you lose your money.  In the latter the yield curve ramps higher and borrowing costs go to the moon.  Assuming that The Government calculates that telling "insured" depositors to piss off would result in an immediate deployment of torches and pitchforks, you must therefore expect that if you're in debt or NEED access to credit to function and the failures start to get ugly that you will be absolutely screwed even if you're so-called "insured", as your borrowing costs will skyrocket.

The bottom line: The bad debt must be "ringfenced" and the losses forced to be taken.  Government must not contaminate itself with this trash, as it is entirely possible for an expanding default bubble to engender even more defaults and down this road lies the potential destabilization of our currency and government. 

We must have some adults show up at this drunken creditfest and remove the tap from the damn keg!  This situation will not get better on its own accord nor can it be fixed through "bailouts" or "handouts."

If you've been playing the short side here for the last six weeks is it time to step back and watch the fun?  Absolutely.  We can certainly scream higher here on the lies and dissembling, and that might even go on for a while.  After all, the liars have lots of practice - just look at all the claims that "the bottom is in" in January - and then again after Bear Stearns.

Were either "the bottom"?  No, and if you bought into Citibank, you've either made nothing or worse, lost your ass.  Shall we go down the list of banks?  Wachovia?  Wells?  Washington Mutual?  Downey?  First Federal? Oh Hell, Lehman, Merrill, Morgan?  Freddie and Fannie?  The latter, by the way, are almost certain to wind up nationalized - which means if you're a common shareholder, they are an effective if not actual zero.  Remember folks, that just a couple of months ago you were told that all these stocks were generational buys.

Pay attention folks, or get fleeced, just like you did in 2000-2003.

Again.