The Market Ticker

That didn't take long.

"The plan is for the government to lend some $25 billion to the automakers in the first year at an interest rate of 4.5 percent, or about one-third what the companies are currently paying to borrow, the report said.

Under the proposal, the government would have the option of deferring any payment at all for up to five years, the article said."

Never a mention about the automakers bringing this on themselves.

How? Oh, let's see.  We'll make a lot of trucks and SUVs, and set up our pricing structure so that we can't make money off cars, but do off the gas-guzzlers.  We refuse to solve our problems with managing retirement health care costs for thirty years, putting it off until we finally toss it to the government as we get backed into a corner.

Cerberus buys Chrysler after Daimler bought it earlier, and now has its hand out, and that's not even a publicly-traded company.  Its a private hedge fund, basically, which appears to have made a bad bet and now wants the government to back it.

(Oh, and by the way, Chrysler already got its bailout.  It was stuck in the housing bill.  You didn't know that?  Well its in there - go read it.  That's right, a private company got bailed out at your expense - in the housing bill - to make cars!)

"Too big to fail"?  Gee, that net keeps getting wider and wider doesn't it?

It would be one thing if this was the first time.  But if you remember, it wasn't.  Chrysler was saved from going under once, and before you say "but the government didn't lose money" you must also add that the automakers learned exactly nothing from this adventure, in that they utterly failed to get their labor and production costs under control.

Build cars in Detroit?  That's nice.  How come Toyota and Honda have plants in the United States and manage to build them for less?  Probably because they don't have the UAW problems and legacy issues.

Well, the automakers had their chance to solve this over the preceding 30 years, and instead of doing so they "levered up" into cheap gasoline by building a production structure that required sales of huge gas-guzzling vehicles to soccer moms in order to turn a profit.

When the inevitable "last sucker" was found and the business dried up so did they.

People complain about CAFE standards but the truth is that business failure is the only medicine that works.

GM, Ford and Chrysler had 30 years to tool up to be able to profitably produce both small and large vehicles so they wouldn't get nailed by the inevitable shift in fuel costs, a shift that, by the way, they were all aware was coming.

Why did they act as they did? 

Because Chrysler was bailed out instead of being allowed to fail the first time.

Time to cut the cord.

PS: Oops.  Turns out its $25 billion EACH.

You would have thought that PIMCO's McCulley was a 2-year old yesterday.

He was running his mouth all day long, along with Cramer and everyone else on CNBC, and the message was along the lines of:

• Paulson has to "show the color of his money" in bailing out Fannie and Freddie (why McCulley?  Are you getting nervous?)
• "Its only going to get worse" (if Paulson doesn't act now)
• "Agencies (Fannie/Freddie) need to be privatized" (I thought your problem with them is that they already are, they did unsound things, and now you're screaming for a bailout?)
• "The situation is worse than a year ago" (no kidding?  Who'd a thunk?  You don't read The Ticker, do you?)

Now let's digest all of this, in light of the facts.

See, just a few months ago, PIMCO disclosed that it had gone on an incredible Fannie and Freddie paper buying spree over the previous few months! 

That's right, into the eye of the hurricane PIMCO went out and intentionally bought debt they knew was distressed, issued by a company that might fail.

This was not done "blind".  It was done by a couple of very intelligent men who have been investing in the debt markets for a very long time and are experts.

So what's all this really about?

Simple - its about twisting the arm of the government and robbing the taxpayer.

Not because they were bamboozled, not because an unexpected calamity struck these firms, not because of an error.

No, this was a calculated act from the top down - buy a boatload of this debt at distressed prices after the threat has been identified by THEM, then WHINE at the United States Treasury and demand a bailout "or the end of the world will happen while Paulson sits and watches Rome burn."

In truth if Paulson doesn't do what PIMCO wants PIMCO will be the one who burns and PIMCO directly bought into a known distress situation!

See, this is where we've come to.  We are now beyond "moral hazard" and "too big to fail"; we've now transmorphed the entire financial system into a mechanism to literally rob the people as institutions intentionally place themselves in harms way and then demand that the government cover a bet they knew was bad when they placed it.

It is one thing to argue that someone is "too big to fail" and that they pose "systemic risk."  We've heard that countless times over the last year, and it seems to be the justification for every bailout and proposal that is put on the table - and has been since LTCM collapsed.

But now we've seen institutions take it one step further, and intentionally purchase securities issued by firms that they allege are "too big to fail" yet in dire trouble, then scream for the government to come in and bail them out!

Do you understand what's going on here? 

Fannie and Freddie have been running one gigantic hedge fund for the last couple of years.  They bought about $500 billion worth of trash ALT-A paper in the 2005-2007 time frame between them, with a goodly amount of "Option ARM" and "Interest Only" loans included.  In addition they took in over a hundred billion dollars more from Countrywide and Indymac, most of which was done using "automated approvals" and are in fact stated income loans, although they're called prime paper.

Institutions like PIMCO, The Chinese and Japanese Central Banks, and others all knew this.  This is NOT a surprise to any of them.

They all invested knowing full well that these firms were running with leverage ratios far in excess of anything that could be reasonably called safe.  In addition they knew these purchases of garbage mortgages had nothing to do with "sustainable housing" or any such claptrap.  Fannie and Freddie were "levering up" and "chasing yield" just like the rest of these market participants and the buyers of their paper knew it.

But the award for "truly outrageous" is reserved for those firms like PIMCO that have bought increasing amounts of this debt since the beginning of the year, knowing full well that it is impaired and that the firms behind it are at risk of failure, purchasing it on the back of being able to FORCE the government to do that which the black print on the front cover of EVERY prospectus says won't happen.

Why do we put up with this nonsense?

As for Paulson, were I him I would do what I recommended over the weekend - order up full audits, document that there is no possible way they can survive with the losses that are both being hidden and the projected future path for credit quality, place the firms in conservatorship, and run down the portfolios.

Guarantee nothing of the present debt.

But - provide a funding path going forward that is guaranteed for new security issue, with the strict stipulation that, as noted, only true prime paper can be underwritten, and no "hedge-fund" like activities are permissible.  And again, that's 20% cash down payments, 36% DTI, and 15 or 30 year fixed terms.  I suggest using Ginnie Mae, which already exists, but if the government wants to re-jigger Fannie and Freddie, once they've run down their portfolios, the equity has been wiped out, and can be sold back off to the public, that's fine too.

This does all of the following:

• Those who intentionally bought securities "in distress" thinking they were going to be able to blackmail or jawbone the Treasury into making them a profit will get it in both holes, as they should.  Let their shareholders come after those clowns for their obvious and transparently bankrupt strategy.  We must not let "moral hazard" morph into intentional acts of placing one's self in harms way so you can whine for a bailout!
• Similarly, idiots like Bill Miller who have been buying GSE common stock of late on the very same premise - that they'd be "saved" by the government - will also take it in both holes.  Again, we cannot allow firms to intentionally place themselves in harm's way and then scream for help.
• It places the responsibility for the bad debt where it belongs - in the GSEs and those who knowingly and willingly bought it.  Note that most of this debt is perfectly sound and as run down both coupon and principal payments will be made.  For some of the more risky paper, there will be losses.  This is as it should be.
• It insures that going forward we will have mortgage liquidity for those loans that are made under sustainable guidelines, with an explicit guarantee, but only for soundly-underwritten paper.

The "new" paper will be marketable folks.  It will have an explicit guarantee and be underwritten to sound standards.  That is, indeed, the "gold standard" when it comes to debt sold into the market - that it represents loans made to qualified borrowers with collateral valued at or above the amount of the loan written.

Those who are screaming for bailouts of the existing paper and firms are not interested in mortgage liquidity or a healthy housing market. 

Oh, and one of the screamers?  China.  Again:

"``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''"

You lying sack of dogsqueeze. 

You bought these securities knowing full well that they were not guaranteed, and like everyone else who did so, you were simply "reaching for yield."  You, along with the rest of your cronies over in China, Japan and elsewhere, were fully aware that the GSEs were buying ALT-A paper stuffed full of liar loans made to hairdressers on $500,000 houses in California and Florida.  YOU DESERVE WHAT YOU GET from such a purchase and, if this "is the end of the current international financial system", then IT NEEDS TO END RIGHT NOW, because that "current international financial system" has turned into one gigantic SCAM and YOU ARE THE WORST OF THE SCAMMERS!

These folks are ALL simply trying to force the government to cover a bet they knew was bad at the time they made it, in a raw act of arm-twisting.

Henry Paulson MUST SAY NO.

There is a fly in this ointment however - its that a tremendous number of banks have bought GSE Preferred and are holding it as part of their risk-based capital!

What?  You mean to tell me that banks are holding stock as part of risk-based assets?!  How the hell did that happen?

Oh, it happened because once again:

"Banks bought Freddie and Fannie preferred stock because they can be used as capital that regulators require to cushion against losses on loans. Banks also get a tax break on 70 percent of the securities, making them attractive to own, said Midwest's Wiest."

And guess what - those are the only two firms' preferred that this applies to. 

What sort of criminally stupid "regulators" do we have in this nation when banks are allowed to hold risk-based capital in the preferred stock of firms that are levered up at 60:1 or more?

This whole mess is one gigantic scam from the top down.

We the people need to run all of these people - every last one of them, from Bernanke to OTS to OCC to Treasury - out of town on a rail.  They have intentionally allowed banks and institutions to not only lever up to insane levels but also then allowed banks to buy and hold preferred stock, which is THIRD IN PRIORITY in liquidation, as part of their risk-based capital!

Oh, one more thing.  Has Henry Paulson shot off his Bazooka pointed at Fannie and Freddie themselves?  One has to wonder, given this:

"In July, Congress gave the Treasury authority to lend money to or acquire equity in the companies if needed to prop them up. That helped reassure buyers of Fannie and Freddie debt that the government would stand behind them in a crisis.

But the Treasury's authority may make it harder for them to sell equity because of uncertainty over how the Treasury would treat private shareholders if a bailout is needed."

You have to love unintended consequences.

Wouldn't it be ironic if Paulson's "Bazooka" turns out to be what kills the GSEs? 

The next obvious question is was that Paulson's intended outcome all along?

Things that make you go "hmmmmm..."

Paulson should have known better.

This is what he said when arguing for the Housing Bailout bill, and specifically, authorization to spend up to $800 billion of taxpayer funds on Fannie and Freddie just one month ago:

"Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac," Paulson said. "At the same time, recent developments convinced policymakers and the [firms] that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary."

"If you've got a squirt gun in your pocket, you probably will have to take it out," Paulson said. "If you have a bazooka in your pocket and people know it, you probably won't have to take it out."

Wall Street and The Debt Markets see it differently.

Notice that the stock price hasn't gone back up.  In fact, it has gone down.

We get to add this as yet one more piece of stupidity from our government, and one more lie.  It is now clear that Paulson's claim that he has this authority is being called - the "PUT", if you will, has just been exercised by Wall Street and the Debt Markets.

So Hank, what's it gonna be?  Is the counter-party good or not?

Remember, you argued that if you were given unlimited authority you would not have to use it, but if your authority was limited, you would. 

You were dead wrong - again.

This joins the list of other "dead wrong" statements you've made, of which I am keeping a running copy and sent them around on the 19th of July. 

How many times do you get to be wrong as Treasury Secretary Hank before you resign in shame?

And now I must ask again - is that really a Bazooka in your pocket, or an empty launcher?  I'm not the only one that's curious you know; the bond market seems to think it smells like BS, and so does the stock market.

Here is the mathematical reality of the situation folks.

The GSEs took on many hundred billion in "ALT-A" paper, representing about 10% of their total.  That's $300 billion roughly, for Fannie.

This paper is garbage.  It was not purchased due to any "affordable housing mandate", but rather to "lever up" as the GSEs have been doing for the last few years.  When times were good this was a great deal - gearing up at 60:1 sounds great when times are booming, and you make lots of money.

The ugly stick in this is that some of this "core capital" - in fact, fairly close to half of it - is in fact not money, but deferred tax assets.  That is, it is a tax deduction you can take against future earnings - if you have any.  Yes, counting this as "capital" is allowed by accounting rules.... but this doesn't change the fact that its not money and you can't spend it.

But that $300 billion of paper is in fact trash.  It is "ALT-A" loans made to people who may have overstated their incomes or otherwise performed some sort of trickery, or maybe the paper is Option ARMs which are even more toxic.  The point is that a large percentage of that paper is going to default; fully $100 billion of it is in two states alone - California and Florida, and sliced a different way, about $100 billion of it are interest-only loans - loans that are essentially all taken out by real estate speculators.

How much of this paper will go bad?  Maybe half, or $150 billion worth.

How bad will the losses be?  On average, about 50%.

So we have a real no-BS $75 billion loss. 

How much actual money did you say Fannie had again? 

Hmmmm... that's a problem isn't it?

Then we have to start counting the "streamline refinances" that Countrywide shovelled at the GSEs to the tune of $100 billion, all of which were done via automated underwriting and are, for all intents and purposes, stated-income loans - although they weren't sold to the GSEs that way!  While both Fannie and Freddie are making noises about "putbacks" of fraudulent originations, exactly who are you going to put them back upon?  Indymac and Countrywide were the two largest "shovellers" in this regard, and guess what - neither exists in a form that they can be "put" upon today with any degree of success.

This is why "bailing out" these firms was a bad idea in the first place.  They did wildly imprudent and outrageous things that NEVER should have been allowed to happen.  Our government IGNORED these risks through intentional blindness, fueled in no small part by the over $200 million dollars spent on lobbying.

Worse, the buyers of the debt knew these firms had done this sort of nonsense as all of these guys know how to read a balance sheet!  They're not stupid - they willingly and knowingly took the risk by buying that debt.

Additionally we now know from the GSE's latest reports that they are gaming their losses by making the interest payments on loans that have defaulted - on purpose - so as to avoid having to recognize those as defaulted loans.  This is an outrageous act of pure book-cooking and must not be allowed to stand.

PAULSON SAID the government wasn't going to bail out speculators.

YOU LIED TO CONGRESS AND TO THE AMERICAN PEOPLE PAULSON; the biggest speculators of all are in the corner offices of Fannie Mae and Freddie Mac, along with the bondholders who purchased their debt, and now you want to bail both of them out!

Nor does it end there.  An article in The Economist points out that a large percentage of the debt allegedly "sold" in recent auctions wasn't sold at all - it was part of an elaborate scheme known as a "switch":

"The banks that manage the agencies’ debt issues are pulling out all the stops to ensure their success—even to the point of artificially boosting demand through deals known as “switches”. In such an arrangement, an investor agrees to buy into a new issue in return for being able to sell back to the banks an equal amount of an old one, thus ensuring its net exposure does not rise. If enough of these deals are struck, large amounts of debt can be shifted even when demand is thin. A recent $3.5 billion issue by Fannie was helped along by “very significant” amounts of switching, says one banker involved in it. With a quarter of the agencies’ debt due to mature in less than a year, those charged with peddling it will have their work cut out—especially if the Asian investors continue to be put off by unkind headlines."

This sort of thing is kinda like check kiting or other forms of "not-true sales", including the kind of "carryback" deals that we've seen recently for other debt (E.g. "I'll sell you $100 billion of debt, claim it was $100 billion, but I'll finance $80 billion of it no-recourse"; the net result is that I only received an actual $20 billion and if the debt goes back, the seller eats the other $80, not the buyer!)  Yet another transparent scam perpetrated upon the market to make things seem better than they really are.

It is time to stop the game Henry.

Your bluff has been called.

The snakes must be decapitated and their writhing, bleeding bodies disposed of.

Fannie and Freddie MUST be forced into receivership.

Their portfolio MUST be placed into rundown.

Those people who bought specific debt products must get only the coupon and principal that can actually be generated by the performance, such as it were, from those loans, and not one penny more.

We have a means to provide true prime mortgage liquidity in the United States.  It is called Ginnie Mae, and they, unlike Fannie and Freddie, did not take imprudent actions, did not "lever up" and are performing just fine.

Extend Ginnie's charter to provide mortgage guarantees to any American Citizen subject to a 20% cash down payment, 36% DTI and a 15 or 30 year fixed, fully-amortizing loan schedule.

GOING FORWARD THE PROBLEM IS SOLVED.

You have no business bailing out the debt-market speculators who work in the executive offices of Fannie and Freddie with our tax money.

NONE WHATSOEVER.

If you are foolish enough to try to "draw" your Bazooka Mr. Paulson you will find quite quickly that instead of reacting "positively" and with "stability" to your actions the credit and equity markets will instead react as they did after Bear Stearns - with a short "pop" followed by yet another resumption of the collapse in process. 

ALL YOU ARE GOING TO DO IS WASTE TAXPAYER MONEY!

You cannot stop what is happening Henry, and you know it.  Stop lying to The American People.  This is not just Fannie and Freddie, it is ALL structured debt that is under stress because ALL of it was done with too-lax underwriting and intentional blindness as to the credit condition of the borrower.  It is ALL toxic, in ALL classes, as is evident in the CMBX and elsewhere. 

CMBX spreads are MUCH HIGHER than they were in February.  Why? 

BECAUSE THE MARKET KNOWS YOU CANNOT, AND HAVE NOT, PROVIDED STABILITY - JUST BS.

Repudiate your so-called "Bazooka" now Paulson, before the market forces you to draw an empty tube, and level with The American People.

We're tired of being lied to.

Sorry folks, you get politics today, not markets.

The markets are simple - we're screwed.  I've been doing a lot of detail-level writing on that account of late.

But why are we screwed, and why can't we stop it?

Actually, we can stop it.  We just (collectively) refuse to stop it, because stopping it means we must take responsibility for not only our own actions but those of our nation.

Let me share with you a quote off the thread from yesterday's Ticker:

Allclear Wrote:

There is no forum whatsoever to ask the hard questions, and demand factual truthful answers. In the past, we relied upon the media to ask the hard questions and uncover the coverups. Not any more...it is now part of the government, and you will never see any such thing again.

In response I said:

Yes there is.

Get off your ass.

Which elicited the following as a reply:

yeah yeah yeah. What do you suggest that might change things in the short term to benefit the nation as a whole?

If you told me we were going to have a major protest to disrupt normal activity in Washington DC with hundreds of thousands of people...I would be there in an instant. Because these scumbags might begin to think twice when they have to face an angry mob

Translation: "You do the work and take the risk of sticking your neck out and I'll show up to eat the popcorn and drink the beer as long as I can be part of an anomymous, amorphous angry mob."

Is this any different from any of the other popcorn-eating contests over the last 30 years?

Well, in fact, no.

Let me put out some inconvenient facts that you may or may not know about, but which happen to tie into the upcoming theatrical release of I.O.U.S.A, a movie featuring Warren Buffett, and former Comptroller General Dave Walker (who resigned in disgust).

America's GDP, or the total of all goods and services produced in this nation in a given year, is about $14 trillion dollars.

America the nation currently has an outstanding debt of about $10 trillion dollars, and has more than doubled in the last ten years.  But this number is not the real total, because it does not count all the "promises" (read: entitlements) that people have been told they will have.  Those "promises" are Social Security, Medicare and Medicaid, in the main.  They total, approximately $90 trillion dollars in current liability.

What's worse, about 1/3rd of that was added with the "Medicare Part D" drug benefit, even though Congress was at the time fully aware that there was already $60 trillion or so sitting out there in unfunded liabilities.  They did not care because the AARP, and you, screamed and demanded that Congress "do something."

Oh they did something all right.  They did the very same thing that you think you have a right to do - that is, spend more than you make.

That's right.  You have a right as an American to have a 4,000 square foot house on an acre, even if you only cut hair for a living.  If you can't get that loan honestly, you simply will make up an income and use some sort of "exotic" mortgage product to get it.

Your car broke down?  Its beneath you to buy a used one, right?  Just hit the home equity line and buy a new Suburban.  $40,000.  Cool.  Oh, and charge the gas too.

Your kid comes home from school complaining that one of his friends has an iPOD.  To shut him up, you go buy him one - even though you don't have the $200 it costs.  You just pull out the plastic and charge it.  It will all be ok.

Your grandmother is taken deathly ill and whisked to the hospital.  She's 85, and has cancer.  She has had a good life, but now it is drawing to a close.  When you get there, the doctors ask what you, as her closest kin want, as she's unconscious at the time.  You tell them that they should preserve her life at all costs.  Of course you don't have any money to pay for the $500,000 in medical bills.  Its ok; she was in a nursing home and didn't have anything anyway, so there's no estate for the bill to eat into; Medicare will pick it up.  After all, she's entitled to the best medical care money can buy as an American.

You love the $3/quart strawberries at the local WalMart.  You won't pay $3.50.  As a consequence, the grower has fired all of his United States citizens as pickers and is employing illegal Mexicans.  You don't care, as you've got a good job - you answer the phones for Joe's PCs and help people with their computer problems.  Unfortunately Joe's customers want to pay $50 less for that PC, so he fires you and outsources your job to India for $2/day.  Oops.

Folks, what is going on in this country is exactly like what happened yesterday on the forum.  Each and every day.

You drive around your neighborhood and see the "For Sale" and "Foreclosure" signs and the boarded-up businesses.  You whine about $4 gasoline, $5 cheese and Ice Cream that is both more expensive and now is in a 1.5 quart instead of a 1/2 gallon container.

Your employer cuts medical benefits or expects you to pay more.  You grumble or, if you're unionized, you might actually strike.  You end up capitulating anyway, then your job gets shipped to China.

We all feel the squeeze, but will we accept that we are part of the problem?  That we have a spending deficit (that is, we spend more than we make), we have a savings deficit (we don't save anything, on balance), we have a balance-of-trade deficit (we demand $30 DVD players from China, therefore, all the people who made them here are fired and they are manufactured there where workers are paid 25 cents/hour) and we have a common sense deficit (that is, we think we can continue to do this until the cows come home and there will be no consequence.)

Well, now we've got the beginning of the consequences, and what America is doing, for the most part, is sticking its fingers in its ears and going "LA LA LA LA LA LA LA LA" - because actually removing the fingers from your ears requires that you admit that you are likely part of the problem as you're in debt up to your eyeballs and are unwilling to live within your earnings capacity!

Would you like to know the rest of the consequences that are coming for you, your children and grandchildren if you don't remove the fingers and stop chanting?  Do you even know what they are?  Let me lay a few out for you:

• As noted in previous Tickers, I believe China threatened Paulson and thus our government if they didn't insert the Fannie and Freddie "rescue" provisions into the Housing Bill - $800 billion, potentially, worth of liability out of your pocket.  Do you like the idea of foreign governments dictating to our government what we must do as a nation and how high our taxes must be?
• China and Japan could get upset with our profligate spending, discerning that we can't possibly pay back what we owe them (see, they buy a lot of our debt.)  They could express this opinion either by refusing to buy more, or actively dumping what they own.  The alternative?  They tell us what we can and can't spend - and how much Granny can have in her last year of life.  Again - are you willing to have foreign governments dictate your standard of living and what the government can and can't spend on?
• What happens when you can't get a loan?  Of any sort.  Oh, and you kinda need one.  Guess you'll have to do without that (whatever it is), right?  What if its gasoline or food?  Could you survive six months without any of your credit cards?
• Think your job is safe?  How sure are you?  Can it be shipped to China?  If not, will what it pays if your job is NOT outsourced to China keep food on your table?  Are you sure?  What if you're wrong?
• How do you unwind close to $3 trillion in bad debt, and who eats the loss?  If its "the taxpayer", are you willing to pay 30-50% more for everything - forever?  Oh, your wages won't go up either.  If your purchasing power deteriorates by another 30-50%, will you be able to feed, clothe and keep your family and yourself warm this winter?

You think this is all about finances?  No.  How many of you voted Democrat last Congressional election?  Did you do so based on a promise to bring "the boys" home from Iraq?  Did it happen?  Did Ms. Pelosi and Mr. Reid introduce a bill to de-fund the war or refuse to approve the spending, as they said they would?

No.

Did you sit behind your computer or TV, or did you show up in Washington DC and shut the city down along with 10 million of your fellow Americans?  I don't recall any mass protests, and 20 "Code Pink" ladies don't count folks.

Who's fault is it, if you really believe we should not be in Iraq, that we still are?  

Yours.

Folks, we have choices in this country.  One of them is to sit on our butt and whine and complain or stick our fingers in our ears.  Another is to demand that someone - anyone - bail us out.

The third, and the most appropriate choice, is for us to take responsibility for ourselves and for our nation.  We simply must recognize that:

• We cannot spend more than we make.
• We cannot send trillions of dollars overseas to buy cheap imported goods while denying our citizens good jobs at the same time, then expect to have a high standard of living.  If we do that our standard of living goes down and theirs (China's) goes up.  The poor farmer going from living in a stick hut to a bunkhouse in a factory gets quite a (relative) boost in his standard of living.  How far down does your standard of living have to go to meet parity with him?
• We cannot demand that the government provide "things", whether that be retirement, medical care, or anything else, that cannot be fully funded from today's tax revenues.  This, unfortunately, means that in their present form Social Security and Medicare cannot be allowed to continue to exist.  This is a fact whether you wish to admit it or not.  Playing partisan politics and calling names will not fix this.  The original design of these programs was defective - intentionally so.  Use your heads and face the math.
• We cannot own a house if we are unable to put 20% down, finance it for 30 years on a fixed mortgage, and pay no more than 36% of our pretax income for all debt, including our mortgage payment.  This is a mathematical fact; those who are levered beyond this are at high risk of default and should default so prices can correct to sustainable levels.  Do you want to be able to afford a home, or claim to own one that you'll never actually have clear title to?  We must stop lying to both ourselves and our neighbors.
• A home is a place to live.  The laws of common business balance prohibit it from rising in value faster than prevailing wages over extended periods of time.  Unfortunately, prices in the general economy tend to rise at the same rate as wages, and houses come with costs (maintenance, property taxes and utilities) which means that on average, they make poor investments - but are great places to live.  If you want to invest in housing and not go broke, you must buy it when cheap and sell it when expensive, just like a stock - whether you like living in the place or not.
• We cannot buy a car if we do not have a 20% down payment or need to finance it for more than the duration of the warranty if new, two years if used.  If that makes the car too expensive, we need to buy a cheaper (or used) one.
• We cannot use credit on an ever-expanding basis, nor can we tap phantom "equity" to pay it off.  Revolving credit used for true emergency purposes is reasonable.  Carrying ever-expanding balances and then taking out a HELOC to pay it off is not.  Down this road you will lose your house - eventually.  Just ask those people who have or are. And oh by the way, its not credit - its DEBT.  Don't forget that.
• $30,000 a year to attend a university is unconscionable.  A person graduating with a Bachelors carrying $100,000 or more in debt is outrageous and that we allow the university system to exploit our children like this is even more so.  Never mind the debt merchants at the student registration table handing out credit card applications to young people with no income, no job, and no assets!  Bankrupting our children starting at 18 must end now, and it will only happen when we as adults say no f*ing way is my kid going to spend that kind of money he or she doesn't have to go to your school.  Cut that crap out or go out of business.  Why are you permitting your children to be violated by these clowns?
• Our retirement security is our problem.  It is not our children's bill nor is the government's issue to solve. If you are not saving and investing 10% of your gross income you are going to be in trouble when you retire.  As an example, if you make $100,000 and save 10% of it in a retirement account that earns 9% in yield (entirely possible using a simple timing signal I have discussed in The Ticker before), start at 21 and retire at 65, in a 401k with a predicted inflation rate of 4% you will have $88,000 annually to live on.  The bad news is that if you wait until you're 30 to start you'll only have $53,000 a year (!), and if inflation is 6% instead of 4% as well you will have just $30,000 in today's purchasing power.  That's a hell of a haircut from your $100,000 salary! Still think you can get by saving less?  If you don't act prudently now, you'll be working well into your 70s, and it won't be by choice.  So much for those MaiTais on the cruise ship.

We MUST frame the political debate in this nation around these principles.  We MUST teach these facts to our children.  We MUST stop demanding that the government give us that which as a nation we cannot afford, and WE MUST shout down those in the public space who continue to insist on unsupportable, unsustainable spending both by individuals and by the government.

It is no accident that the bankers, Universities, Realtors and credit merchants want you to spend more than you make.  They love the money you give them and they do not care if you go broke or wind up eating dogfood in your retirement.

That's a fact.

Now what are you going to do with the information above, and if you have sons or daughters, does it change your answer?

This was my answer as recently as July 31st.  You don't have to show me 100,000 people in a park before I'll travel 900 miles to wave a sign, hand out flyers and press palms.  I'll do it whether the other 99,999 people show up or not, because its the right thing to do.

 What choice are you going to make America?

(Photo by Brian Reisinger)

"Here I sit all broken hearted....."

Oh I cannot tell a lie - NOT.

The sell-off yesterday was predicated by not only the Barrons' article I cited in the weekend Ticker, but also by a Reuters follow-up and, when queried, Treasury confirmed that it had no intention of immediately bailing out Fannie and Freddie.

Now of course that wasn't Paulson who said that, and we know the game by now, right?

That is, you let the market get frothed up good on the short side, all the Bears come out and sell the beJeezus out of anything Financial, and then, out of the blue, after you call certain "friends" to tell them in advance you suddenly "JamJob" the market with some sort of "news" that you're going to fix it.

Of course you can't fix it, but the goal is really to just kick off a furious short-covering rally and give a knee in the nuts to the shorts.

How many times have we seen this?  And how many times do I believe that certain "favored people" were told in advance?

Oh, on the latter, all of them?

So what, precisely, was that nasty little rally late this afternoon, on heavy volume too?  Do you really expect me to believe it was all organic?  That there was no "whisper in the breeze"?

Uh huh.  I've gotten wise to you Paulson, you snake.

I don't trust these guys as far as I can throw them.

With that said, the credit market says that Fannie and Freddie are toast.  Nothing that the crooners have done can (or will) change that.

Let's get something straight here.  This isn't just liar loans.  Its everything securitized.  That's why nothing Paulson can do will fix it, and if he has an ounce of common sense he will not throw the taxpayer to the wolves trying to do that which is futile.

Again, our friend the CMBX, with the glorious deterioration of just the last few days:

What planet are you on if you don't think this is a big deal?  The AA and A spreads have blown out by 150 basis points over the weekend!

Something is blowing up.

Actually, that's a lie.  A lot of things are blowing up in the credit world.  In fact, its easier to list the things that aren't blowing up instead of the ones that are.

The ones that aren't blowing up (thus far) are:

• Treasuries

That's it.  A list with one item in it.

Most everything else is either at historical wides or is very close to it.

That's bad.

Paulson, of course, can remove Treasuries from that "safe" bullet list if he's stupid enough to actually try to bail out Fannie and Freddie.  That is, if instead of doing what I recommended over the weekend, throwing them into receivership and then running down the portfolio, forcing people to take whatever medicine they have coming, he could try to "buy out" $800 billion in bad paper, or worse, decide that he's going to paper over the problem (with your tax money) and hide it.  Either of those attempts has a high probability of drawing a big black line through "Treasuries" on the list above.

I hope he's smart enough not to do it, because Lord knows, we haven't got enough people in this country who "get it" and will raise hell in our streets, towns and in protest in DC to make clear that we the people will not tolerate such nonsense being offloaded onto the 80% of America who were prudent and did not make one dime in profit from this fanciful fraudulent credit binge from which all these "wonderful" Wall Street institutions - and their executives - extracted billions for themselves.

You want to know what's worse?  Inflation expectations are totally "off the reservation."  Forget about them being reasonable; there is nothing reasonable at all about what consumers expect.

After all, why should they?  Gasoline poking around $4, egg, dairy and cereal prices doubling over the last couple of years, $5/gallon heating oil "locked" pricing for the upcoming winter.  But as Bernanke says, "inflation expectations remain well-anchored."

Bullcrap.

Now we have a cute little problem.  See, Bernanke has spent the last year throwing literally half his $800 billion balance sheet into the system to intentionally drive short-term interest rates below where they should trade on a "fair value" basis, into one of the largest commodity bull markets of all time.

But just like his predecessor Greenspan, who whined repeatedly that long term rates aren't coming down as I think they should, Bernanke is seeing the same thing.

What's worse, as spreads blow out for anything but Treasuries the cost of credit over longer periods of time is ramping to insane levels.  To put this in perspective, the cost of "AA" Commercial Real Estate Credit is implied at 900 basis points (by the chart above) over the 10 year swap rate, which is currently around 5%.  This means that the actual cost of that credit is close to 14%!

How much has lowering the Fed Funds target to 2% done for those people?  NOTHING!  If anything the excess liquidity and allowing people to continue to lie about their exposure and credit risk has caused spreads to blow wider and as a consequence the real cost of money, which is all that matters to people like you and I, has gone up, not down.

The market controls the real cost of money, not The Fed, and the market says "nuts" to Bernanke!

Want a mortgage? It costs, according to Bloomberg, 6.37% right now.  A year ago?  6.24%.  But what was the Fed Funds Target a year ago?  5.25%.  So The Fed throws $400 billion into the pot to drive down short-term interest rates, and you see mortgage costs go upward, not down.

Who gets the extra?  Bernanke's buddies, who are trying furiously to get you to take out that mortgage so they can steal that extra "vig" from you and not go bust. 

But you, for your part, still can't afford the house.  Why not?  Because its too damn expensive, that's why.  It costs more than 3x your annual income, and all the "liar loans" and "exotics" that used to be available are gone, as the Ponzi schemes that were being run that made them possible have imploded and buried their proprietors.

You want to fix housing?  Drive prices down to no more than 3x incomes on average in a given area.  Period.  The quickest and easiest way to do that is to provide federal support for only 30 year fixed mortgages with 20% in cold, hard cash (no games) down and a maximum 36% DTI.  Intentionally cut off ALL other mortgages from ANY SORT of Federal support, implicit or explicit.  Poof.  House prices come back to affordable levels because nobody will pay more and people can afford houses again with SUSTAINABLE and AFFORDABLE mortgages.

On to our next point, are you enjoying getting it in both holes as a consumer, while our government and The Fed continue to lie about the state of the economy and what's being served up next for you behind Door #1?  There's something back there making noises suspiciously like a credit collapse monster and his name begins with a "D".  While there are plenty of people who say you "can't" get either of those "D" things with price inflation screaming higher like this, they are wrong.

The way it happens is really quite simple.  First you overlever the consumer with hopeless levels of debt, telling him that his balance sheet is "strong" and his house is the center of his "wealth", when in fact you're lying to him relentlessly for your own personal profit (as a "money man" or "broker", whether of stocks or mortgages.)  You run media campaigns trying to get people to "live Richly".

Then reality strikes - the Ponzi scheme runs out of suckers.  A Ponzi scheme the bankers and government intentionally constructed and let build to knowing unsustainable levels.  At the same time, the intentional "loose money" policies of the government and banking system, from The Fed to the "fog a mirror" mortgages, create tremendous froth in commodity prices.

When it all comes apart the consumer gets it in both holes, as his purchasing power is utterly destroyed at the same time his so-called "wealth" is proven to be a phantom - but the debt he was encouraged to take on is still there!

And see, The Consumer is 70% of the economy; as a consequence when the consumer's balance sheet gets lit on both ends of the page and burns towards the center the entire economy goes in the toilet all at once.  Suddenly, credit cards (which of course the consumer was encouraged to "lever up" with too!) and car loans (125% of sticker price anyone?) implode. 

The only company left that makes money is the guy selling plywood to board up the once-busy storefronts.

Why do we, as Americans, tolerate this sort of crap? 

This was not an accident - it was an engineered scheme devised for the explicit purpose of goading you into spending money you didn't have on things you didn't actually need so the bankers and lobbyists could make BILLIONS while literally BANKRUPTING YOU, and you fell for it!

Oh, and they passed "bankruptcy reform" at the same time so if you have an "above-average income" you can't get out from under the debt either; you're stuck with wage garnishment, preventing those who gave you credit they knew you couldn't repay on the original terms from being forced to take the loss that resulted from their intentional scheme.

Now let's think about our fine Presidential candidates for a moment.

Are you enjoying Obama and McCain spar in a Church over matters religious and snipe back and forth about "tax cuts for the rich" .vs. "tax cuts for the middle class", when in fact The Federal Government is currently turning the largest budget deficits in history, and doesn't have the money to provide a tax cut to anyone!

Are you enjoying McCain claim that Obama "tried to legislate Iraqi failure", while at the same time John McCain has ignored the fact that he was in Congress during the time Glass-Steagall was repealed, he was involved in the genesis of the credit bubble and willful regulatory blindness and even today he refuses to call for the fraudsters to be indicted, tried and jailed?  How about focusing your "legislative" complaints on things like fraud throughout our financial system and Congressfolk who got $70,000 in benefit from "friends of important people" mortgages, while that same firm screwed millions of Americans out of their house?  Mr. Jefferson of Lousiana was caught with an alleged $90,000 in cold hard cash (literally - in his freezer) and is under indictment - isn't $70,000 worthy of the same treatment?

Are you enjoying Obama spending his time attacking McCain for "pandering to the rich" while he himself is ignoring the fact that States attempted to stop the subprime mess in the early part of the decade (before it got out of control) and both Congress and the Administration sat back while regulators over which BOTH have control intentionally overrode state regulators and prevented them from putting a boot on the neck of those who were preying on low-income families?

You want to talk about religion?  How about having a discussion on what the candidate's faith - or for that matter any faith - says about honest and fair dealing?  You know, what we haven't gotten from Washington DC over the last 20+ years, irrespective of whether it was a Democrat or Republican sitting in a particular chair?  Do we now have a pair of snakes from The Garden of Eden running for the White House, where all we're really choosing between is which head is on the snake and whether that head has hair or is bald?

You want to talk about national security?  Good.  So do I.  How do we accomplish it when our economy and thus our source of government funds (remember, government in the end only exists fiscally because it has taxing power, and that requires a strong economy) is impaired by reckless overextension of credit, lying, fraud and rampant thievery up and down both wall and main streets, none of which either candidate is willing to take on?

Maybe we as Americans are asking the wrong questions this election season.