The Market Ticker

The Fed has claimed that this is a "liquidity crisis."

Really Ben?  Then perhaps you can explain this?

Note that this is an intentional drain of "slosh", or liquidity, from the banking system.  $125 billion in the last four days drained?

You wouldn't be trying to intentionally cause a bank failure or two to bolster your call for the $700 billion "bailout" plan, or perhaps intentionally lock the short-term credit markets, would you Ben?

If the market has a liquidity crisis, why would you be intentionally draining reserves from the banking system?  Don't you think you ought to explain that to Congress?

So now we learn about it, in a Senate hearing:

"Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''"

A benefit to the bank that they are bought from, certainly.

But to the taxpayer?  No.

Here's why.

These "hold to maturity" prices are fictions.  Let's take the "average" $700,000 house in California.  The buyer made perhaps $100,000 a year, or $8,333 gross (before taxes.)  Removing FICA and a 25% marginal tax rate from the gross leaves you with about $5,500; the payment is $4,630.11.

Can you survive with less than $900 a month for car payments, food, utilities, homeowners and car insurance and electricity?  Good luck.

So instead nearly all of these people took Option ARM mortgages and in many cases they also took a "piggyback" second mortgage to get around "maximum LTV" restrictions on the Option ARM.

But the house was overvalued by 150%, selling at nine times average incomes instead of three and a half times.  It has now fallen in value from $700,000 to $500,000, but has another 30-40% to go, and will eventually bottom out in the $300,000 range.

The first mortgage is in fact worth about 70 cents now, but will be worth 40-50 cents in a few years.  The second is a zero, because until the first is paid off, its worth nothing, and the first has no chance of ever being paid off.

This is why the market prices are in fact not wrong.

If Paulson does what Bernanke said he will (and should) the taxpayer will suffer hundreds of billions of dollars in losses - guaranteed.

Of course Bernanke said that if the bailout isn't passed the economy will contract.  What he didn't say, but should have, is that it is going to contract anyway (bailout or not), and in fact already is.  We are in a recession now and this is in fact unavoidable as the bad debt must be defaulted.

Throwing cold water on the "bailout now!" mantra, Berkshire announced it is going to invest $5 billion dollars this evening into Goldman Sachs:

"Berkshire is buying $5 billion of perpetual preferred shares, New York-based Goldman said today in a statement. Goldman, which this week transformed itself from the biggest U.S. securities firm to the fourth-largest bank by assets, also plans to raise at least $2.5 billion by selling common stock in a public offering."

But wait! Didn't Bernanke and Paulson just get done saying a few hours prior that private capital would not invest?

Well Comrade Paulson and Comrade Bernanke?  It appears that indeed private capital will invest, if the terms are good and the company sound.

Heh heh heh, a free market solution!  Warren comes in and sticks a big wad of cash into Goldman Sachs - something that you said wouldn't happen without you offloading all of this bad debt onto the back of the taxpayer.

I love it when one of the most-storied investors of our time turns our Treasury Secretary and Chairman of The Fed into a liar just hours after their "Armageddon Story" is run on national television.

Asking for authority to implement one of my three planks to actually solve the problem, Chris Cox stepped up today:

"Sept. 23 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox said Congress should ``immediately'' grant authority to regulate credit-default swaps amid concern the bets are fueling the global financial crisis. "

Now do the other two things Chris:

1. Rescind the 2004 order that permitted leverage to exceed 12:1.  It took only an administrative action to drop the regulation, so you can put it back in force the same way.
2. Implement the requirement to disclose all Level 3 assets in specificity along with their marking model (in total) every quarter in the corporate 10Qs and 10Ks.  This should be able to be done administratively as well, but if it is not, a one-paragraph bill will fix that problem.

Again - do those three and the market clears.

As we have seen, private capital WILL come in if it understands the risks.

Finally, we learned today that The White House was planning this little piece of financial dictatorship for quite some time:

"Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough."

What a tangled web we weave when we practice to deceive.

If this was being prepared for "some time" then the "emergency" status was manufactured.  Instead of bringing this before Congress "months and weeks" ago for consideration where it could be debated and passed, ready if necessary, The White House and Treasury instead back-pocketed their plan and then sprung it on Congress with an outrageous and ill-advised "bump in the night, Freddy Kreuger style" scare campaign at the last possible minute in an attempt to give Treasury dictatorial power over our entire financial system.

Do not pass the $700 billion "No Wall Street Banker Left Behind" bill that will simply further destabilize the markets and impoverish America, never mind the obvious echoes of "The Enabling Act" in March of 1933 - in Germany.

Instead, solve the problem - at no cost to taxpayers.

Don't wind up like this

Yesterday, the market decided that perhaps Congress was going to pass the $700 billion Theft From American Taxpayer Act and hyperinflate the money supply (or, in the alternative, simply plunge us into an abyss of debt from which we would never escape as a nation), and as a consequence oil and gold were bid hard, while the dollar went in the toilet and so did the Dow. 

After all, its somewhat difficult to make money as a corporation when either inflation is running in the double digits (see the 1970s and early 80s) or worse, you're clawing at the edge of the cliff as you sink into the maw of the debt-destruction monster.

Here's a short video on yesterday's market action

This morning, the markets are thinking that perhaps the bailout will not pass, and both oil and gold are down.... along with the market being (relatively) stable.

Former Fed President Mishkin keeps talking about "we must get this done."  Really Mr. Mishkin?  Where the hell were you during the last 10 years when this mess was occurring?  Where was Ben Bernanke?  Alan Greenspan?  Henry Paulson?  (Oh wait - Paulson was busy creating the mess and making himself $500 million in stock and options at Goldman Sachs!)  How convenient of Mr. Mishkin to avoid the hard questions about failed oversight and willful blindness!

There is also apparently a proposal circulating among some banker-types to ladle up accounting games in the middle of this rescue, which may be why Henry Paulson doesn't want any oversight (or even visibility into what he's doing.)

This little piece of nonsense would basically book the loss to the banks as an asset and then amortize it over time, while allowing the appearance that a "distressed" price was being paid by Treasury (!)  Huh?  How's that possible?

Its tricky: the government would "buy" the asset with a contingent liability associated - that is, they guarantee a minimum price plus an upside "kicker"; this allows the bank to not recognize the loss immediately and effectively play games with the accounting rules.  The essence of this - it makes people think they're doing a "mark to market" when they're really not, yet the sales is in fact final.

Nobody in their right mind and in a free market would do something like this, as it leaves a big ticking nuclear device on the balance sheet of the acquirer - but in this case, that "someone" is you, the taxpayer.  Since Paulson is gone in four months, he does not care if he sticks $700 billion worth of crap (or more) onto the taxpayer balance sheet in a format that leaves a bomb sitting there for his successor that cannot be unwound!

If that successor tries to undo this unholy piece of crap he will detonate the entire banking system, which of course we can't let happen, and thus there won't be any way to unwind it.  Further, it won't be able to be challenged in court as the blatant fraud that it is (see "Section 8" of the proposed bailout bill in the previous ticker) as Comrade Paulson has conveniently demanded a "get out of jail free" card in his proposal.

This is why these sorts of things, undertaken in secret and under the claim of "immediate need" must never be allowed to pass Congress.

Further, are you prepared for a more than $1 trillion budget deficit next year on the back of a record for this fiscal year (over $500 billion)?  Are you willing to tolerate that, plus incredible increases in taxes - in the coming years?  Hope so.

Oh, how much of an increase in taxes?  To put this in perspective, in order to balance out the new deficit spending individual income tax rates would have to DOUBLE.

That's right - to bail out the fat cats on Wall Street your taxes will almost certainly double within a year or two.

Are you still gonna let 'em pass this bill?  Remember, Henry Paulson got $500 million personally out of this and Goldman Sachs paid out close to $50 billion in bonuses over the last two years alone.

Well now we have it - since this is a proposed bill (public) and in the interests of fair use, here you have it as reported by Fox:

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY

TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ___________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.—The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.—The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.—The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.—The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.—The term mortgage-related assets means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.—The term Secretary means the Secretary of the Treasury.

(3) United States.—The term United States means the States, territories, and possessions of the United States and the District of Columbia.

I'm speechless.

Let's disassemble this monster piece by piece.

First, this is a de-facto nationalization of the entire banking, insurance, and related financial system.  Specifically:

"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;"

That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act.

This might include things like demanding that a bank or other financial institution sell him its paper, even if it forces that firm to collapse and be assumed by the FDIC!

You didn't buy any bank stocks last week did you?

"(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States."

This, at first blush, would seem to indicate that only American firms would be covered.  Nothing is further from the truth.  If the Chinese wish to unload some of their purchased toxic sludge they merely sell it to, oh, Goldman Sachs for 40 cents on the dollar and then Goldman sells it to the Treasury for 50.  This, under the black letter of the law here, is perfectly legal, which means that one must assume that Paulson will in fact foist off all the bad paper on world markets that was originally based on a mortgage in the United States, while allowing his banker buddies here to loot the taxpayer by acting as an intermediary in the transaction!

"(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;"

Contracts can (and presumably will) be "no bid, no solicitation" and given to whomever Secretary Paulson favors, without regard to the public interest or normal competitive bidding processes.  Must be nice to be a "Friend of Hank."

"In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer."

Notice which comes first.

"(c) Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

Having bought these securities for any price Mr. Paulson would like (and he can compel institutions to sell at his demanded price as noted above!) he can then sell those assets at any price he wishes, to anyone he wishes.  It certainly is nice to be a "Friend of Hank", and it most certainly sucks if you're not.

"The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"

This is clever and nobody in the mainstream media has figured it out.

If you think the cost of this bill is $700 billion, you're wrong.  The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme.

Paulson can (and presumably will) buy up to $700 billion of these "assets", then sell them.  Let's say he decides to buy them at 60 cents on the dollar and sell them for 10.  You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars.

Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.

In fact, he can do this without limit, other than possibly due to the federal debt ceiling, which of course Congress will raise any time we get close to it.  Oh yeah, this bill does that right up front too.  No need to bother with it the first time around.

Folks, $700 billion isn't even close to the total cost of this monster. 

If Paulson and his successor decide to, they could literally cycle all $5.3 trillion of Fannie and Freddie's debt through this scheme, potentially sticking the taxpayer for 20% or more of the total, plus as much private debt on various bank balance sheets as they can manage to nationalize until (and possibly beyond) the point where the bond market tells him to go to hell.

Bottom line: This bill gives Paulson the ability to nationalize an UNLIMITED amount of private debt and force YOU AND YOUR CHILDREN to pay for it.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

If you are a bank, investor, or other entity who is forcibly gang-raped by Secretary Paulson due to his actions as "King" (crowned by Congress) under this law, you are unable to seek redress in the courts or by administrative action.

The claim is that this is intended to "promote confidence and stability" in the financial markets.

It will do no such thing.

It will instead strike terror into the hearts of investors worldwide who hold any sort of paper, whether it be preferred stock, common stock or debt, in any financial entity that happens to be domiciled in the United States, never mind the potential impact on Treasury yields and the United States sovereign credit rating.

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen. 

If they have an IQ larger than their shoe size it will commence at 9:30:01 AM Monday morning, although given history and the lack of intelligence displayed by the crooning media market euphoria may continue until the first couple of firms are dismantled by Paulson's newly-crowned Kingly powers with the scraps handed out to his favored few.

The best part of this outrageous fraud is that those who get bent over the table can't even sue - their only recourse will be the (literal) deployment of pitchforks and torches.

That Paulson and Bernanke circulated this document, irrespective of what actually gets reported out onto the floor of the House and Senate (if anything) tells you everything you need to know about his intentions and the safety of your financial assets in the United States markets.

That this "proposal" hasn't resulted in Congress calling for both Bernanke and Paulson to resign for their blatant attempt to crown Paulson King tells you everything you need to know about Congressional integrity as well.

My advice: Don't be caught with any stock or debt instruments linked to a United States financial firm in your portfolio past 9:30 AM Monday morning.

Oh, and if you want an alternative that will actually work?

Here it is.

Our government is truly unbelievable.

Election + Fear = Stupidity.

The sort of ban that we saw this morning on shorting - 800 stocks - is both foolish and unprecedented.

There are many, many reasons to short a stock that have nothing to do with trying to drive a stock into the ground.

For example, if you're concerned about a preferred stock issue, you might short the underlying while being long the preferred.  This gives you a 100% safe coupon - that is, dividend - while exactly balancing (or close to it) your risk.

This ability to hedge off that risk just disappeared.

Now has there been manipulative conduct and predatory shorting?  Yes. 

But you can't short a company and make money unless the company is overvalued in the first place.  If you try it you will lose your shirt as the actual value, as discovered, will cause the price to rise instead of fall, your short sale notwithstanding.

And make no mistake about it - this crisis is not an accident.  It is in fact a deliberate act - by our government.

Who enabled it?

Everyone.

Alan Greenspan, by flooding the market with money after 9/11 and the technology stock crash, for one.

Barney Frank and the rest of Congress, along with Bill Clinton, who made it public policy that everyone - from a daycare worker to a McDonalds' cook to someone on welfare - could and should own a house.

Both Clinton and Bush Administrations who intentionally looked the other way while rampant fraud ravaged Wall Street and Main Street both, including intentional blindness to outright false accounting in the form of "Level 3" assets and claims of solvency that were not and still are not true.

Now, just yesterday, we find out that The SEC made possible the expansion of leverage in the investment bank and broker/dealer community that made possible the loose lending which helped fuel the housing bubble and mess we are now in:

"The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies."

Yep - the SEC was not only involved but basically caused this mess.

And now that Congress is involved, we are going to get the mother and father of all debt - shoved down your throat:

"The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion dollars and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official. "

This is nothing short of unbelievable, and that actually understates the cost, which is likely to be vastly more than stated.  It always is.

Remember folks, the original estimate on the S&L bailout was that it would cost $20 billion.

The actual cost, when all was said and done, was approximately $160 billion dollars extracted from your wallets all across America.

So let's add it up - thus far:

• Housing "bailout" bill, $300 billion
• "Stimulus checks", $160 billion
• "Back door" bailouts done without Congressional authorization, including "hidden" loans that may never be repaid, such as Bear Stearns and "temporary" clearing loans to Lehman Brothers, about $100 billion (in total)
• Treasury's plan to back money market funds, $50 billion
• This new "bailout", $500 billion

Oh, and don't believe that $500 billion number.  Its a lie.  I have long maintained that we have about $2-3 trillion of bad housing-related debt involved, of which only $200-300 billion has been written off.

So there's still $1.7-2.7 trillion out there to be cleared in this mess and you are going to get charged for all of it unless you literally take to the phones and the streets right now - this weekend - and stop it.

This sort of election-year pandering is beyond outrageous; it is nothing other than government theft (from you) to bail out the pigmen of Wall Street who have robbed you blind for the last decade.

WE THE PEOPLE DO NOT HAVE THE MONEY TO SUPPORT THIS AND THIS SORT OF PANDERING AND OUTRAGEOUS CRAMDOWN OF THE COST OF WALL STREET'S MALFEASANCE UPON THE CHECKBOOK OF THE AMERICAN CONSUMER IS AN ACT OF ECONOMIC TREASON. 

I hope you like INSANE (and real) monetary inflation because the raw monetary printing required to support this program is going to blow your mind (and household budget.)

What you're seeing today is the utter fear in the hearts of people who have made (correct) bets that the financial sector is radically overvalued and these firms are bankrupt; they have now been told that bankrupt or not, you, the taxpayer, are on the hook for their insolvency, despite THEIR bad decisions.

In addition the liquidity that was provided by the floor traders and others in the market who made those correct bets - many of whom will be broke today, literally - will permanent disappear from the market.

Oh, by the way, we don't have the money to do this in America, and not only has LIBOR not unlocked, but spreads haven't come in nearly as much as you would think if the problem was actually solved.

Beware chasing this - yes, we are going to be up huge today - probably 500+, maybe 1000+ on the DOW - think carefully about whether there has actually been a resolution to any of this mess, and whether the root problems identified here have been removed.

If you judge not, then we risk the mother and father of all market crashes at some point in the future - and probably not far in the future either.