Tuesday, September 30, 2008

Fear Is A Great Motivator

...as the Senate moves up the timetable on a bailout plan vote from Thursday to Wednesday evening.
The Senate plans to vote on the $700 billion bank rescue plan Wednesday evening - two days after the House failed to pass it.

The bill adds new provisions - including raising the FDIC insurance cap from $100,000 to $250,000 - and will be attached to an existing revenue bill that the House also rejected Monday, according to several Democratic leadership aides.

The vote is scheduled for after sundown, in observance of the Jewish holiday. Republican presidential nominee John McCain and Democratic nominee Barack Obama and his running mate Joe Biden confirmed that they would be present for the vote.

So, I expect another good day on Wall Street tomorrow as CEOs dream of all the phat lewt they'll get from this, not to mention being able to lie about how much the toxic trash they have is worth. Asian markets are up 1.5% or so in anticipation of the screwing to come.

McSame, Obama, Biden all expected to be there to vote yes, I would assume.

We'll see how this affects the LIBOR and the credit spreads in about 8 hours or so.

Marketing "Mark To Market"

One of the most important accounrting regulations the SEC imposed late last year was a return to companies having to value their assets at an actual price, not what companies thought the asset should be worth. The accounting practice, known as "mark to market" was imposed last November.

Needless to say, Wall Street hates it. It made banks have to assign a price to arcane assets like securitized mortgage bundles and CDOs and other debt instruments based on what price those instruments were currently trading at.

"Fair value" was defined by the SEC as selling price at the time, not "what the person selling it wanted the value to be." This was done in the wake of the Enron accounting scandals...and in typical Bush administration fashion took nearly five years to be implemented.

Now, since banks wanted to hold on to these instruments and not sell them, those who DID have to sell them sold them as a last resort at low low prices and if you bought them, that was what the arcane little securities product was worth. Banks hated selling them, but they were greedy enough to buy them and hope they went up in value, because they WERE buying low.

Problem is, the housing market went and died. This drove the value of these things down to "near freakin worthless" because, well, they WERE nearly freakin worthless. They kept losing value, too as the housing market continued to crash.

The banking lobby had a brilliant idea. "Change what fair value means so we can lie to the world about what these damn things are worth!" On the eve of the industry bailout, when everyone hates Wall Street. Seems like a losing proposition, right?

You'd be wrong.
In a meeting last week, lobbyists for the American Bankers Association and the Financial Services Roundtable urged the Securities and Exchange Commission to suspend or relax the accounting provision. A similar advocacy effort continues on Capitol Hill, where lawmakers are reconsidering efforts to aid the financial industry after the House yesterday failed to pass a recovery plan. That bill also would have forced a re-evaluation of the "mark to market" accounting rules.

The three-page joint statement today from the SEC and the Financial Accounting Standards Board does not do away with fair value accounting provisions altogether.

But it gives companies more leeway to employ estimates and their own judgment in many cases when they deem the market to be "disorderly" or seized by liquidity problems. It also gives companies room to determine whether the impaired value of their assets is no longer temporary, a conclusion that could trigger massive write-downs.

Regulators reminded companies today that in exchange for using more estimates and judgment, the need to disclose their methods to investors is all the more important. SEC officials sent letters reminding businesses of their obligations twice already this year, in March and September, after expressing concern that many financial institutions were using opaque measurements.

In other words, now financial companies can happily "estimate" how much these things are worth.

Which is how we got into this mess to begin with, because up until last November, banks were happily "estimating" how much these things were worth well in their favor, which is why banks had so many of these damn mortgage products in the first place.

Before the credit markets were locked up because nobody knew what these mortgage things were worth. NOW the credit markets will be locked up because everyone will assume other banks are lying about how strong the assets on their books really are.

That's a great improvement of course because if banks can lie about these assets, they have to keep less cash on hand to meet funding requirements, because more of a bank's assets can be counted as securitized mortgage products (which the bank is estimating).

So, less cash is needed, because everyone's lying about the reasons they can now have less cash on hand, even though the banks know they are lying and know they actually need that liquid cash even more than they did before, because NOW they can get caught with their pants down should they need to really need to buy something with that cash or sell anything vital...like those nifty phantom estimated assets that even LESS people are going to want to buy because NOW not only is the housing market STILL dropping but everyone now knows you're lying about how much the damn things are worth on top of it. After all, the people who you would want to sell these to are also lying about the value of their OWN securitized mortgage products they already have.

Sure, that'll make people want to loan that liquid cash out to people instead of hoarding it!


Morons. We really do deserve this f'ckin crash.


U.S. stocks jumped the most in six years as growing expectations that lawmakers will salvage a $700 billion bank-rescue package helped the Standard & Poor's 500 Index recover more than half of yesterday's 8.8 percent plunge.

JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. climbed more than 13 percent as Senate leaders vowed to resume work on the bailout plan this week after its rejection spurred the market's steepest decline in two decades. Hess Corp. and Schlumberger Ltd. added more than 5.8 percent as optimism about the plan helped oil rebound from a $10-a-barrel drop. All 10 industries in the S&P 500 advanced at least 1.3 percent.

``There is some renewed hope that Congress will come back and try to get the amended plan through,'' Robert Doll, who oversees $1.3 trillion as chief investment officer of global equities at BlackRock Inc. in Plainsboro, New Jersey, said in a Bloomberg Television interview. ``We have to restore confidence, we have to reduce fear, we have to get banks to lend money.''

The S&P 500 rose 58.34 points, or 5.3 percent, to 1,164.73, its biggest advance since July 2002. The Dow Jones Industrial Average jumped 485.21, or 4.7 percent, to 10,850.66 and earlier gained more than 500 points. The Nasdaq Composite Index added 5 percent to 2,082.33. More than four stocks climbed for each that fell on the New York Stock Exchange.

So, we won, right?

It's over?

Still, no.


So you're probably thinking that with the GOP in disarray and the financial crisis pretty much proving that Bush-O-Nomics was the worst idea of all time, the Wingnutopshere would be full of gnashing and wailing.

Oh no, my friends. As Dan Riehl proves, you'd be wrong. (h/t Hilzoy)
More and people borrowed against equity they were, in effect, gambling they would have. Well, lo and behold, it isn't there. So does this cycle, this addiction ever end? Should Americans trust the very same people who first created, then abetted and eventually denied this problem to actually fix it? For heaven's sake, you should know better than that.

That even as they were cobbling together a plan they were looking to protect those same bad credit risks that have been benefiting all along should tell you all you need to know about where the liberal heads in control of Congress are really at. And don't kid yourself that this 700 billion dollars will be enough. As they show no real signs of curbing the types of behaviors that got us here in the first place, there's no reason to believe that problems won't continue to mount. And that just means transferring of wealth through increased taxation, again.

Now, frankly, Dan sounds like me here...so of course there's a catch.
How many generations forward must we mortgage to sustain a standard of living for too many people, one which they don't actually deserve?

Some of the alarmists out there might want to take a moment to consider all the ramifications here. It may sound harsh, but the Great Depression produced many things - one of them was called the Greatest Generation.

The great economic boom of the last few decades propped up by dubious credit has produced a generation or two that thinks enough is never enough and if one can't earn it, than you either borrow it, or the government in the form of hard working taxpayers should make sure you get yours in the end.

Ahh there we go! It's not REALLY government's fault. It's poor people's fault. So, let's burn society in the crucible of a financial meltdown and extract the tempered alloy consisting of the screams of the economically disadvantaged and the romance of America declaring war on the Nazi Islamofascist menace. We'll call it Wingnuttium! We'll build katanas and ninja shuriken and lightsabers out of it and sell them on eBay.

But in all seriousness, the social conservative wing of the GOP has just declared war on the Chamber of Commerce wing on the GOP, and there's going to be blood. As far as the first group is concerned, America is going to burn because God doesn't own all our bodies and minds (and the burning part is cool with them, it'll leave the Faithful behind) and the second group is convinced America's going to burn because the fruitcakes in the first group just don't understand that basic economics is a tool for beating down the poor and gaining political power and God has nothing to do with it.

Well, now that this little rift in the economy has ripped the GOP apart, it just remains to see which wing of the Wingnuts will take over the party and which wing will sit home in five weeks and not vote for anybody.

I forsee pretty much the end of the Republican party as we know it. The Godboys think the Country Clubbers are apostates, and the Country Clubbers think the Godboys are morons. It's always been that way, but that was until the Country Clubbers sided with the Democrats in Operation Make Wall Street Rich Heh Heh Heh. Now the Godboys are pissed, and frankly they want to see the country go down in flames -- they figure it'll take a few million illegals, minorities, Muslims, gays, vegans and Democrats along with it when they get to use their guns on things. This makes them very, very happy...and horrifies the Country Club boys, because they'll be included in the "up against the wall the revolution comes" category.

The bad news is over on this side we'll have to adopt the Boss Tweed types and try to rehabilitate them into Blue Dog Democrats or something. Not looking forward to that, but it more or less worked for Andrew Sullivan and Joe Klein.

Who's In Charge Here, Anyway?

Above: Boehner, McSame and Preznitman direct the GOP caucus to vitctory.

So who's in charge of the Republican Party right now, anyway?

It's not Preznitman. He promised Armageddon if the bailout failed, and we're still here. Besides, the rest of the party hates him, he's at 26% approval, and the Dow closed lower yesterday then it was at when he took office 8 years ago. Bush doesn't exist as far as his own party is concerned. He's poison.

It's not McSame. He threw his weight behind getting the bailout passed as an opportunity to show his "leadership ability." Now he's floundering badly. Right now he looks like a lame duck Senator, not a Presidential candidate. Sarah Palin is a caribou around his neck and Obama is opening a wider and wider lead on him each day.

It's not John Boehner. Ohio's favorite crybaby looks like a complete idiot. He's been unable to fufill the basic House Minority Leader function -- arm-twisting for votes 101 -- and now word is that his total failure may cost him his position in the party leadership. He's seen as weak and ineffective now, and the sharks are already circling for his spot.

It's not Mitch McConnell. The GOP's Senate Minority Leader is in serious danger of losing his seat, much like Tom Daschle did for the Dems. He was locked in a dead tie with Democratic challenger Bruce Lunsford for his own Senate seat right now in Kentucky...and that was before he threw in his lot behind the bailout, unlike his fellow KY Republican Jim Bunning, who came out in strongest possible terms against it. Now McConnell's running scared.

So who is it? AG Mukasey has named a special prosecutor to go after Attorneygate. Condi's got her hands full with India's nuke deal and Pakistan's new President. Hank Paulson looks like a complete scrub right now. Nobody's in charge.

Obama on the other hand is large and in charge with concrete ways to improve the bailout.

dday has more over at Digby's, as does Chuck Todd.

My 17th Level Mutual Fund Manager Stops To Loot The Corpses

US markets have rebounded solidly in the Mother Of All Dead Cat Bounces.
A snapback in stocks wasn't unexpected as carnage on Wall Street often attracts bargain hunters, though questions remain about how investors will proceed. Without a bailout plan in place to absorb soured mortgage debt and other bad loans from banks' balance sheets, investors are wondering what might restore confidence in lending.

While stocks turned higher, moves in the credit markets were more ominous. The benchmark London Interbank Offered Rate, or LIBOR, that banks charge to lend to one another rose sharply Tuesday, making it more expensive and difficult for consumers and businesses to borrow money. In addition, credit card debt and more than half of adjustable-rate mortgages are tied to LIBOR, so an increase isn't welcome for many consumers.

LIBOR for 3-month dollar loans rose to 4.05 percent from 3.88 percent on Monday. LIBOR for 3-month euro loans, meanwhile, rose to 5.27 percent, from 5.22 percent Monday.

Many on Wall Street had expected the government's plan would help sweep away some of the fear and pessimism that has hobbled credit markets, which are where businesses turn to finance their day-to-day operations. The worry is now basic operations like making payroll will be difficult or perhaps impossible for some companies. Critics of the plan said, however, that it was too costly and wouldn't have done enough to jump-start lending.

Credit markets are still locked up and will remin locked up. If something isn't done to lower the LIBOR and soon, everything else will become academic.

Even worse, the source of every single one of these systemic problems can be traced back to the housing depression, which continues to rage on.
House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis.

The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount. Banks will probably stiffen lending rules even more in coming months to limit losses, indicating residential real estate will keep contracting and consumer spending will continue to falter.

And if banks stiffen their lending rules because of more bad mortgage paper writedowns, the credit markets lock up even more.

As important as it is to break up the LIBOR lockup blood clot to prevent an economic heart attack, it's just as important if not more so to realize that the heart itself is the housing market, and that heart is diseased. A very expensive transplant of sorts may be needed, or at least major bypass surgery...and the patient's insurance is held by the Chinese, y'dig?

Obama To The Limit

Come...on...FDIC, now come on FDIC!(h/t AmericaBlog)
Today, Obama announced his support for increasing the FDIC limit to $250,000. This makes a lot of sense and shows that Obama gets it. People of all ages are worried about what is happening with their bank accounts and the old amount is not enough to provide confidence.
This is a good idea if you believe consumer confidence in preventing retail bank runs now is more important than taxpayers being on the hook for the already dwindling FDIC deposit insurance fund later. Retail bank runs are what killed IndyMac and WaMu.

Unfortunately, the real bank runs are already taking place beneath the surface. Foreign banks are taking their funds out of US banks in order to limit exposure. That is a far more fatal blow to the balance sheets of banks than consumers removing deposits.

While this is a good second or third move for Obama to call for, priority #1 is to unlock the credit mess. I'm beginning to think only a massive, coordinated emergency rate cut worldwide will do it. After that, a number of additional actions will have to be taken. But Obama's at least pointing in the right direction on this.

Clearly When Holding 20 You Should Yell "Hit Me"

That's the John Sidney McSame III way, dammit.
John McCain made the morning show rounds today. On Fox they were virtually begging him to "suspend" his campaign again in the wake of the bailout failure yesterday on the Hill. You know, since it worked out so well the first time. McCain's answer: He just might suspend again.

Calling time out because you look like an idiot on the Failout: my friends, that's leadership we can have a good, long, derisive laugh at.

What's The Deal?

Well, the narrative shaping up this morning is this. Asia tanked 4% this morning, but Euro stocks are mixed. US futures are up about 2 percent, shaping up to be a decent day. It's cleaning up after the hurricane, and things will probably be pretty good today after yesterday's hideous losses.

So, like lancing a boil, it's over now, right? Lot of pain but you bandage it up and it heals, right?

Not hardly. Banks are still terrified to lend to each other. The LIBOR vaulted to 6.88 at one point, but still well over 5%. Banks are hoarding cash and reducing or pulling entire lines of business credit just to maintain operating capital. Here's the thing however: the companies they provide credit to also need that money just to provide THEM with operating capital.

Fairly quickly I would wager, the lockup in the credit market must be broken or you're going to see major world businesses say "We have to shut down some operations for a bit." We're talking things like "inability to meet payroll requirements" and whatnot. That's how serious this is. The first major news stories break about that, and panic doesn't begin to describe it.

It'll only get worse should Asia and Europe take their money out of US banks and go home. There's ample evidence they are doing that right now. If this keeps up, US banks will have no choice but to pull credit back to stay open, and the businesses that depend on that credit will have to find it elsewhere at usurious rates.

Bad things will happen after that. We're watching the credit markets die in real time. Pretty soon we're going to get to the "call in your debt" phase of the market lockup, and THEN things get really, really bad for America.

I am still not convinced any sort of bailout is going to help. The Fed threw $600+ billion at the credit markets yesterday, and it did nothing. A $700 billion bailout isn't going to do a damn thing for the credit markets. I expect emergency measures to be taken in the next few days or weeks.

But let's remember what this bailout was: a terrible bill that was designed in secrecy, rushed, and defeated because the House GOP was terrified of the Dems getting a monstrous margin in the next House. The talk radio noise machine killed this bill, folks. Even worse, the bill wouldn't have worked and it was a sweetheart deal for the banks and for Wall Street. Enough sheer voter outrage ended it...for now.

But some action is needed. We're facing anarchy here: not tomorrow, but very soon. Unless the credit market Gordian knot is sliced open, we're talking about mass layoffs and shuttered businesses across the country and the world. By Election Day for example, we'd be looking at the worst periods of stagflation. It's that serious.

I'm hearing noises about a massive Fed rate cut here, for starters. But that'll be it. That's the last bullet in that gun. After that, it's hyper-inflation.


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