The Market Ticker

I told you so Hank, Ben, Congress, and the rest.

The entire credit system is all about confidence.

A year ago I started telling you, and everyone else via Market Ticker, they you had to cut the crap and stop allowing people to lie, or you risked confidence being destroyed.

Today, you're finding out what happens when you don't stop the lies on the balance sheets, don't stop the Level 3 crap, and don't stop lying to The American People.  You can't say "I'm for a strong dollar" and then make $250 billion more of them available, the exact opposite of encouraging scarcity, which is how you get a strong dollar, and expect people to take you seriously.

You can't say "subprime is contained" and never apologize for being 100% wrong.

You can't say "the banking system is sound" and then have the second largest failure ever recorded in FDIC history happen a short while later, when the balance sheets of these firms were available to everyone - with their warts displayed - for more than a year prior.

You can't tell people "the economy is fundamentally strong" when unemployment rises and the price of oil doubles in the space of less than a year as a direct consequence of your monetary and fiscal policy.

Bluntly: You've now got a run on the equity (if not the deposits) of virtually every regional bank in the nation because nobody believes you any more. 

Your attempt to stabilize confidence with Fannie and Freddie has failed because, in short, nobody believes you any more.

WaMu, National City, Wachovia, First Federal, Downey, Colonial.  All down 7% or more, with some down twenty percent today, and with most of them down 90% or more in the last year.

Why?

Because nobody believes you, the FDIC, the OTS or OCC any more.

There is one - and only one - way you can stop this.

You must force every financial institution in America to tell the truth.

NOW.

If you do not stop this NOW it will spread like a cancer from firm to firm, from financial company to financial company, until it consumes all of those who do not voluntarily "come clean" before it gets to be their turn.

You have not lost control; you, along with Congress, have abdicated control.  The Campaign Contributions and shell games have now reached critical mass with The American People, who are no longer willing to take the risk of their investments being destroyed without warning as a result of the lies.  They can and are running for the exits first, following the time-honored principle that "he who panics first gets out with the most of his money intact."

Bernanke, Frank, Dodd, Paulson - we may be literally days - or hours - away from an all-on equity market implosion.

If it happens, it will be because you have consistently refused to listen to those of us who have been telling you that you must force these institutions to to cut this crap out and tell the truth.

You cannot stop this by talking.

You must stop it by doing. 

You must issue a directive today that states quite clearly, here and now:

NO MORE OFF-BALANCE SHEET ANYTHING, NO MORE LEVEL 3 ANYTHING.  YOU MUST DISCLOSE AND MARK TO THE MARKET EVERYTHING YOU HOLD, TODAY AND FOREVER MORE, AND IF THIS LEAVES YOU INADEQUATELY CAPITALIZED, YOU WILL BE FORCIBLY MERGED OR SEIZED HERE AND NOW.

Now.

Today.

Period.

Time's up.

Well, that was no big surprise, really.

Fannie and Freddie got their announcement:

"Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank."

Yeah, ok.

Oh, the futures went higher on this announcement.  By a lot.

Huh?

Anyone look at the bond market?  It didn't like it one bit.  Granted, the reaction in electronic trading of the TNX was muted, but it was not what you want to see - yields up smartly.

Oh, and that's not "rotation away from risk and into stocks."  Not at 6:00 PM on Sunday.  Its more a function of "oh oh, here comes the risk of monetizing $5 trillion worth of bad paper stuck in these companies."

Now let me guess - are you so much of a fool as to believe that this is good for stocks?  If so, you should buy-buy-buy this morning. 

Please let me know what you're buying so I can short it to you.

Why?

Because when the market gets its arms around what's going on here, there is a very good chance that we're going to get an all-on market CRASH.

Not today.  Not tomorrow.  Of course today, with CNBC's cheerleading along with Chris Dodd, we go higher - at least at the open. But as the days wear on, and the facts come to light.......

Why?

Well let's do a little math exercise.

Fannie and Freddie together either hold or guarantee $5 trillion in mortgages.  Nearly all of that was issued in the last 20 years; these firms had tiny balance sheets back in 1990.

Now here's the problem - while Fannie and Freddie are claimed to be all 80/20 full-doc loans this is in fact a lie. 

In fact, a huge percentage of the loans they took on or guaranteed in the last five years were packed with fraud or serious deficiencies in underwriting in some form, whether it be appraisal fraud, claimed income fraud, LTVs as high as 100%, or all three! 

So how bad could this get?

Very bad.

I believe that Fannie and Freddie have as much as half of their paper subject to loss of some form, and that paper which is out in places like California could suffer losses as high as 50%.  Since this is the largest economy in the nation by far, there's no possibility that this is a "small issue."

In reality I believe that Fannie and Freddie could suffer as much as $900 billion in losses as this all plays out.  This assumes that 10% of their portfolio turns out to be essentially worthless and 20% is impaired by at least 10%, with the rest being 100% "money good." 

Frankly, I think that's a bit optimistic, but we'll run with it.

Congress of course has been asked for a "blank check."  If the market comes to the realization that this "blank check" could be as large as $900 billion, do not expect the reaction to be anything like what you have seen this morning.

Chris Dodd must have been reading Tickers, because he asked on the air this morning "Where were the cops?"

Well Chris?  Where were you, and other members of your committee?  After all, you are the cops!  You're the folks who write the bills that form these pesky things called laws that ultimately set the boundaries of regulation.

OpenSecrets.Org says that the cops are in the robber's pockets.  Specifically, Chris Dodd has received the following contributions from PACs linked to the following firms:

Gee, what do you think?  Citigroup, Bear Stearns, Goldman, Morgan Stanley, Credit Suisse, Merrill Lynch, JP Morgan, RBS, Lehman? 

These are a "who's who" list of firms that were involved in blowing the credit bubble and creating the housing mess!

But that's not even the real news here.

The real news is IndyMac, and the fact that the FDIC is a bit, uh, "off the ball".

See, there are reportedly 75 (or more) banks on the "troubled" list.  The FDIC doesn't publish that list. Gee, I wonder why, especially after Friday, when IndyMac went under. 

Not that this should have been a surprise to anyone, given that it was trading at well under a buck for about a week.  Do 'ya think that's a good stock price?

No, the real 900lb Gorilla is that IndyMac was not on the FDIC's "troubled bank list"!

Vigilant? 

Competent? 

How hard is it for these folks to look at a damn 10Q and understand that anyone booking capitalized interest as a significant part of their "earnings" in a declining housing market is in DEEP TROUBLE?

Apparently, its too much trouble for regulators.

Oh, and IndyMac was reported to have a Tier Capital ratio of just one point seven five percent when it went down.

The threshold for "well-capitalized"?  Six percent.

So IndyMac apparently managed to lose two thirds of its required capital before it was noted and seized!

Folks, this is an absolutely disaster.  We have regulators sleeping at the switch, paying zero attention to the issues until they threaten to literally explode in their face.  This has gone on for years, and most notably, became absolutely blatant last spring when WaMu started reporting less cash earnings than were required for them to pay their dividend!

"Now here's the problem: In 1Q 06, 194 million out of $985 is 19.7%. In December, it was 31%. But this last quarter, it was FORTY SIX PERCENT, more than a DOUBLE over the year ago levels.

And what's worse, not one dime of that "income" can be spent! It is entirely phantom.

This is the same sort of crap that sunk Lucent and Enron - booking "income" that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!"

There's that "E" word again - ENRON.

Folks, this sort of crap is exactly what I and others have been talking about.  It is willful and blatant neglect of any sort of rational standard of care among our regulators and lawmakers, and since they are in the government you can't sue them nor is there any criminal indictment that can issue for their blindness!

You want to know what I think?

This whole damn thing is a shell game.  Let's count the ways that you as a taxpayer are being absolutely frapping ROBBED by these clowns in Washington DC:

1. The OTS, OCC and FDIC are ignoring 10Qs like the WaMu one I cited above, which make quite clear that the bank's position is deteriorating rapidly and, absent something that historically-speaking is almost certain not to happen (housing to immediately turn around), they are threatened as a going concern.
2. As these firm's position deteriorates further they start advertising hard for deposits, offering to pay insane (compared to their peers) coupons on CDs and similar.  This of course further narrows their spread between what they pay for money and what they make on loans.
3. Their book continues to deteriorate in credit quality.  Still, nobody cares to mind the store.  Fancy that.
4. Finally, someone notices that the curtains are on fire and everyone (bank)runs. Suddenly regulators are forced to act, and then of course they blame the person who yelled "Fire!" - instead of yelling at either the guy who LIT the fire, or themselves, who had a bucket of water but refused to throw it while it was still smoldering.

The regulators have had more than a full year's worth of warning on this, and have done nothing, and that is working off only the published 10Qs and 10Ks from these firms!  But these regulators have much more - they are in these firms all the time looking at their books and "examining" them, so they have lots of material non-public information to go along with it!

Ok, that's bad.  In fact, its real bad.  IndyMac could consume 10% or more of the FDIC's available cash reserves, from their own claims.  Who knows what the real number will be.

How many more institutions can fail before the FDIC runs out of money?  And more importantly, if they do, then Congress will be compelled to literally issue more Treasury debt to bail out the FDIC, thereby monetizing the losses and permanently damaging your standard of living so the Banker Barons who got their vacation homes in The Hamptons don't have to give any of their loot back.

Still feel safe at your local bank when you're not sure if they're on the list of 75, never mind that the 2nd biggest failure in the history of the FDIC was not?

That's what I thought.

Over the weekend I pointed out that we all, as Americans, had damn well better wake up.

Are you starting to get a sense of urgency about this yet?

The SEC is supposedly all pissed-off about "rumor-mongering" that led to the Fannie and Freddie panic, implying that they're going to try to figure out where those newspaper articles that started the run on their stock originated.

Well, how about this - are we going to see the SEC go after the admitted falsehoods Friday?  Remember, The Fed was rumored to be talking about bailing out Fannie and Freddie as was Treasury, and The Fed explicitly denied having had these conversations after the market closed.

Hmmmm..... let me guess - that rumor made stock prices go higher, so its ok?  Just like the dozens of rumors started last year and early this year related to Buffett buying half the world, all of which caused insane spikes in stock prices? 

Let me point out to the SEC's Chris Cox that market manipulation is defined, under the law, as illegal irrespective of whether it makes prices go up or down, yet I've not seen ONE claim that the SEC is after the people who, over the last year, started blatantly false rumors that spiked prices HIGHER.

One final note.

I have received emails over the last year telling me that I'm "un-American" for suggesting shorting stock, or outright saying that I am short this or that (whether literally or via synthetics such as PUTs.)

Well, let me ask you a few things, if you truly believe that.

Is it "American" to sit still while you are lied to repeatedly by Hank Paulson and Ben Bernanke, along with Congress, when they all tell you that "the economy is fundamentally strong", "subprime will not spread to the broader economy", "we have a strong-dollar policy" and more, and as a direct result of listening to those lies you remain "fully invested" and suffer a twenty-one percent loss from October to now?

Is it "American" to buy stock in a company that has literally made up values for things that it holds on its balance sheet because it does not like the price the market attaches to them, and then claims that it made a profit or suffered a smaller loss than would be the case had it showed you what the market price was for those securities?  That is, do you believe it is "American" to buy stock in a company that is intentionally reporting a made-up number for its "value"?

Is it "American" to buy a bubble house you cannot afford, then go bankrupt trying to pay for it, because some banker told you that you "qualified" for a loan they knew you'd never be able to pay back?

Is it "American" to listen to people tell you to go "buy buy buy" everything you want in the store so long as your credit card is not declined, irrespective of the fact that you can't really afford it and have no savings, literally being one paycheck away from bankruptcy?

I think not.

I believe that an American shorts the stock of companies who lie, and then demands that the SEC force them to tell the truth.

I believe that an American calls for every banker and mortgage broker, along with every appraiser and Realtor, who fostered an unsustainable bubble on purpose so they could have their mansion in The Hamptons, to be jailed for fraud.

I believe that an American refuses to sit still for the sort of social injustice heaped upon the 401k holders in this nation who have no safe place to put their money in a market like this, as nearly none of these plans have an "exclusively short-term treasuries" option (Exception: If you work for the government, you DO have such a choice!  Fancy that.  How come the government doesn't require private 401k plan managers to offer one?)

I believe that an American refuses to sit still while the bankers and brokers demand bailout after bailout, intentionally damaging our nation's currency and driving up the cost of essential commodities, with the impact of that devaluation falling on every American and hurting those of the lower and middle classes disproportionately, simply because they spend more of their income on these very same necessities.

I believe that an American ought to be, right now, on the phone to their Congressmen or woman daily asking these very questions, and refusing to get off the damn phone until they see actual legislation addressing the issues and forcing those who profited unjustly through fraud to pay for their offenses.

And finally, I believe that an American should demand from our Presidential Candidates real answers to these issues, along with real prison sentences for the offenders and, if neither Republican or Democrat will provide it, then all Real Americans have a duty to vote for a candidate who will, irrespective of their party.

Oh, here's the market's reaction to Fannie and Freddie's "Home Loan Savior" action by Paulson last night.....