GNCV: The Return Of Deal Or No Deal - UPDATE

Breaking news at this hour:

CIT Group, the commercial financial lender I discussed this morning after last night's news the company was working a bailout deal with the government, has seen their deal fall apart.

CIT Group, a major lender to small- and mid-sized U.S. businesses, said on Wednesday that talks with the government to bail out the company had ended, a development that could make bankruptcy likely.

"Discussions with government agencies have ceased,'' the New York-based company said in a statement. "There is no appreciable likelihood of additional government support being provided over the near term.''

The announcement came after last-ditch talks in which Treasury Department had been concerned about a worsening liquidity crunch at CIT over the last few days, and that government aid would not put the lender on a path to recovery.

CIT said its management, directors and advisers were evaluating alternatives. It did not elaborate.

A bankruptcy filing would mark one of the largest for a U.S. company since the global credit crisis accelerated last September.

Trading in CIT shares was halted on Wednesday afternoon, with the shares last trading at $1.65, up 4 cents.

Treasury had been considering an aid package that included a temporary loan to give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, a person familiar with the matter had said.

Failure to reach an agreement could result in a bankruptcy, the person said. The person requested anonymity because the talks were private. Other options discussed had been access to the U.S. Federal Reserve's discount window, as well as asset transfers.

Has Obama drawn the line at bailing out any more financial institutions? The rise or ruin of CIT was Obama's first real test of his reaction to Too Big To Fail. Is he finally saying "enough is enough?" Is this some sort of break-neck paced negotiation ploy? Or is CIT Group just too small of a political and financial player for Obama to stick his neck out?

There's no hiding the fact that Obama's numbers are slipping. His approval rating average has dropped from a spread of more than +40% in February (roughly 65% approval - 25% disapproval) to +18.5% now (56% - 37.5%). The political climate has certainly changed. Republicans can't complain too loudly about Obama letting CIT go under, too...not with all the attacks they've made on him spending taxpayer money on private companies.

Still, this is surprising. I honestly figured we'd be seeing another $10 billion or so loan from Treasury. If talks have broken down and CIT is heading for the scrap heap, then I say "good riddance."

We'll see how this shakes out.

[UPDATE 10:05 PM] Financial Times has an interesting article on CIT as well.

The failure of regulators to agree on a last-minute rescue package for the 101-year-old company might starve a large chunk of corporate America of much-needed capital and hit the economy at a time when the recovery appears to be faltering.

In-fighting between the Federal Deposit Insurance Corporation, the Federal Reserve and the Treasury seemed to have killed hopes that CIT would secure a government lifeline.

“They did what everyone else did, but did not get what others got,” said one adviser to CIT, noting that in spite of receiving $2.3bn in bail-out funds and permission to convert into a bank holding company, CIT was denied access to debt guaranteed by the government.

CIT, which has a balance sheet of about $80bn, on Wednesday said it was “evaluating alternatives”, but there is scant hope that any buyers would emerge for the company amid serious concerns over its business model and the quality of its assets.

"In-fighting?" I wonder, who put their foot down and said no to CIT? Could it have been FDIC head Sheila Bair? A couple of weeks ago she came out with a strong statement against the doctrine of Too Big To Fail. I said then that deeds, not words, were what mattered. Could this have been the first deed? Did Bair object enough to kill any deal with CIT?

There's a story here...a potentially huge one. If the government scuttled the CIT deal, specifically Sheila Bair, that could mean that Obama has her back, and that the era of Too Big To Fail might be finally coming to an end.

But I doubt it. Until I hear otherwise, I'm going to chalk this up to "the financial lobby decided to throw CIT under the bus." After all, look how well Goldman Sachs is doing without as much competition as they had just 18 months ago.

GNCV: The Return Of Deal Or No Deal

It's been a while since we've played Deal or No Deal folks, but unfortunately (and completely expected if you've been paying attention at all) it's time for another major bank to step up to see which suitcase full of cash they'll get from you, the American Taxpayer.



Today's contestant, please welcome...CIT Group!

Troubled US business lender CIT Group is nearing a deal in its talks with federal regulators to obtain a government aid package, The Wall Street Journal reported.

The development came as corporate customers began to draw down on their credit lines Monday and Tuesday to the tune of several hundred million dollars, the Journal said, citing people familiar with the matter.

The cash-strapped company's board, it added, had discussed a number as high as 775 million dollars for the drawdowns.

Under the aid plan, regulators would allow CIT, which operates in more than 50 countries and provides financial services to small and middle market businesses, to transfer assets from its holding company to its bank in Utah.

The Federal Reserve would let CIT pledge some of the assets at its discount window, and the company would move to refinance some of its existing debt, the Journal said, noting the aid package had not been finalized and the possibility of a deal remained uncertain.

US government officials are split over the amount of aid that should be given to CIT and, according to some, CIT is seeking to exaggerate the consequences of its potential collapse, the newspaper said.

"There is also the risk that propping up CIT will reinforce the stigma that Washington will bail out companies that aren't even considered too big to fail," it added. The government saved insurance giant AIG from collapse in September, citing concern it was "too big to fail."

Standard & Poor's has lowered CIT credit ratings to CCC+/C, citing "increased near-term liquidity concerns."

S&P said CIT has more than one billion dollars of unsecured notes maturing in the third and fourth quarters, which could result in payments "that could become increasingly difficult to make."

Ahh...but it's not Hank Paulson asking bank CEOs to pick among the many trillions in those shiny suitcases this time, and George W. Bush calling the shots from the booth above as The Banker. The show's gotten a rewrite, kids!

Now it's Timmy Geithner handling the M.C. duties, stepping up from Hank Paulson's gofer last season...and The Banker? None other than Barack Obama himself (The Obanker?)

So here's the question: will Obama stick to the script and allow Timmy to give away billions to "save" CIT Group, or will he call for a last-minute rewrite? Obanker is in quite a spot. He remembers what happened the last time The Banker was talked into saying "No Deal!"... to a little company called Lehman Brothers. The resulting financial crisis nearly wiped out the playing field and did wipe out trillions upon trillions of dollars in global wealth. At this point it's not a question of if the American economy is badly wounded, but how many years...possibly decades...it will take to recover.

If it recovers at all. CIT Group would be the fourth largest bankruptcy in American history if it happened. Obama doesn't have a choice but to save it, right? CIT handles lending for nearly 100,000 retailers, big and small. If they went under, the business lending market would shatter, perhaps becoming a fatal blow the the economy. It's not quite the global systemic risk that Lehman was, but it's still significant...and our economy is in much worse shape than it was when Lehman went under.

Or does he? My argument is that CIT has to die. If it doesn't, it'll just be back several months down the road asking for more money. As a matter of fact, I expect a hell of a lot more contestants for Deal or No Deal to pop up over the next 12-18 months. Obanker's real problem is the rules of the game. At this point, there's no downside towards being a bad faith player. Moral hazard says you'll get bailed out if you only get your tentacles around enough Jenga pieces to bring the entire structure down. Make all the bad deals you want! CIT did, and it represents the third generation of Deal or No Deal players.

Bear Stearns was first (No Deal!), followed by Fannie and Freddie(Deal!). Then came Lehman Bros. opening up the second season of the game, getting a No Deal that spawned the entire industry getting Deals.

Now it's season three. CIT Group is the first contestant. It won't be the last. Will Obanker save it, extending moral hazard, or kill it and send out a warning that a new Banker is in town?

Given the history of the game and this Banker, it's only a matter of how much is in the suitcase.

Be prepared.

Global No Confidence Vote: Revenge Of Subprime

The Thing That Will Not Die has returned from beyond to haunt the housing markets once again. Yes folks, subprime mortgages are back, and all those homes foreclosed upon last year are still clogging up the balance sheets of big banks.

Now we're seeing the Revenge of Subprime: all those homes are being sold back into the market in bulk so that the banks can get whatever money they can for them instead of holding on through falling home prices. Yves Smith at NakedCap runs down the details:

Now we have a new side effect of securitization: trusts dumping foreclosed houses. This looks to be a tragedy of the commons. While it seems rational for owners of foreclosed houses to liquidate inventory and move on (in theory, price discovery and market clearing are a good thing), the servicers are selling in bulk. If you have a lot of sellers dumping inventory at the same time, that is likely to produce an overshoot of housing price declines below historical levels in terms of relationship to rental prices and incomes.

The Wall Street Journal profiles the development in Atlanta, and Georgia has one of the fastest foreclosure timetables in the country, so this trend will be coming to your market soon.

From the Wall Street Journal:

The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.

While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

Yves here. That does not prove conclusively that the servicers are truly getting worse prices. The banks presumably were able to offload the best homes, and what is left will probably sell at deeper discounts. Back to the story:

Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy....

In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 200...

Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.

There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgage with the borrower...

According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount....

Yves here. Read that last sentence again. Stunning. But that also says you could do ridiculously deep principal reductions and still come out ahead.

26% of the original loan amount? Good lord, that's insane!

In other words, mortgage loan servicers are stuck with piles of homes they haven't been able to sell individually. It's gotten to the point where they are now selling all these subprime properties at fire sale rates...and in mass quantities. That is putting tremendous downward pressure on the low end of the housing market once again.

In other words, we're looking at yet another wave of price-crashing in the housing market. There was evidence in Q2 that there was some price stabilization at the low end of the housing market (while prices were still tumbling in high end homes). That evidence however is getting swamped as we speak by mortgage servicers unloading thousands of low-end homes into the markets.

In other words, housing prices may even accelerate their overall fall into Q3 and Q4 if this trend keeps up. Couple that with resetting rates of ARMs in the second half of the year and it's possible in some areas to see housing prices fall as fast or even faster as they did back in 2008. That would be an unmitigated disaster right now, and would seem to indicate that we're increasingly at risk for a double-dip recession.

After all, banks like Morgan Stanley are trying to go right back to selling near-junk bonds as AAA offerings, starting up the Great Game Of Three Card Monte once again. Q3 2009 is beginning to look more and more like Q3 2008, folks.

Be prepared.

Global No-Confidence Vote: Let Them Eat TARP

It's no surprise that the insolvent banks being propped up by taxpayer trillions continue to play games with America's money. After all, we've firmly established that the Obama administration is taking their cues from the financial industry on everything from accounting rules to the so-called "stress tests".

Ahh, but it gets even worse: Now we see the sweetheart deal the banks were given under the Geithner Plan were never acceptable in the first place...and the banks have no intention of participating in the program at all.

The Wall Street Journal reports that the Public-Private Investment Program -- better known as Geithner's Plan -- might never live at all.

The Legacy Loans Program [LLP], being crafted by the Federal Deposit Insurance Corp., [as] part of the $1 trillion Public Private Investment Program [PPIP] ... is stalling and may soon be put on hold, according to people familiar with the matter.[...]

PPIP was to be split between the FDIC program, which would buy whole loans, and one run by the Treasury Department focusing on securities. Treasury is expected to push ahead with its plan -- the larger and more substantial of the two -- and could begin purchases sometime this summer.

Given how much publicity -- and controversy -- Geithner's plan received when it was announced last March, that might seem a bit odd. But the reasons appear to be twofold. First, few investors or banks want to work with the government. And second -- and maybe more importantly -- few investors and banks now think they'll have to. The banks, in particular, are apparently enthused by their ability to raise private capital, and now think they can wait out the market turmoil and sell their toxic assets in a few years, when they'll be worth more money.

And after all, with the back door bailout of the banks through AIG, and the mark-to-market accounting rules, the banks have all the money they need to appear solvent. Why muck around with the government's overt rules and regulations -- including limits on executive pay -- when they have all the money they need to "provide an adequate cushion" from the taxpayer to begin with?

And considering the cushion was negotiated down by billions anyhow, the banks are more than willing to let bygones be bygones. They want the TARP money off the books, but they want to keep the AIG counter-payments, meaning they get free money without any strings attached. Considering they continue to hold trillions in Weapons of Financial Destruction, the banks can continue to extort the under the table cash while looking like heroes denying the need for more overt government monies.

It's a brilliant plan. Confidence restored! All it did was cost us trillions in taxpayer money that will never be repaid.

Ahh, but the last laugh may be on the banks. With the commercial real estate market falling apart and the housing market still in shambles, rapidly rising unemployment will come back to haunt banks very soon. Once again they will be in danger of going under...and then people will ask "Hey wait a minute...didn't you guys just say you were all fine back in April and May?"

Alas, this second phase of the financial collapse may scuttle everyone. So batten down the hatches, folks. The rest of 2009 is going to be a nasty reckoning.

Be prepared.

Global No-Confidence Vote: Price Of Admission

As disturbing as it is, here I am linking to an Obama story actually broken open by...Drudge. But there you are.

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money."

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.

So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it's putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.

So, one option is just to do nothing. We say, well, it's too expensive for us to make some short-term investments in health care. We can't afford it. We've got this big deficit. Let's just keep the health care system that we've got now.

Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything...

So, basically, Obama finally is admitting we're fucked in a three-day weekend news dump.

I've been saying we're insolvent for months now. But to hear the President openly admit such a thing is shocking to say the least. Obama goes on to say that major health care reform in order to reduce health care costs is essential, but it doesn't matter.

What cost will Obama pay for the price of this admission? He has finally decided to be honest about the numbers, thinking that maybe we have enough time to change fate.

But frankly, we're too far gone. We're trillions in debt, with tens of trillions of unfunded liabilities in the hole, with hundreds of trillions in derivative instruments floating around, waiting to explode.

We're not getting out of this one unscathed. Obama, Timmy, and Helicopter Ben are printing money as fast as they can, creating credit at the rate of trillions a month, trying to pump dollars into a deflating economy with massive holes in it, like pumping blood into a man with a hole in his heart.

Obama is doing the only thing he thinks he can do, to create a huge credit bubble in order to prolong the inevitable, the likes of which will destroy our economy when it pops.

It's a Greek tragedy if you think about it. But you were warned. I warn you again: our standard of living is about to plummet. It will in no way be pretty. The results will almost certainly be massive social unrest and upheaval for years.

But it is coming.

Be prepared.

Global No Confidence Vote: Stress Test Shell Game

So, America got the "good" news on Thursday: the banks are fine! Everything is fine! The financial sector passed the stress tests with flying colors! Indeed, Friday was a banner day for bank stocks across the board. Wells Fargo stock was up 14%. PNC was up 19% and change. Regions Financial leapt up bu almost 25%. And Fifth Third Bank stock gained nearly 60% on the news that it only needed $1.1 billion in capital to meet the government's strict requirements for a capital cushion.

Jim Cramer has declared the financial crisis all but over as a result.

Investors can buy almost any bank for the next week, Cramer said, as this group emerges from the black hole into which the credit crisis had pulled it. In fact, he called this a once in a lifetime move in the financials.

What’s happening? The stress tests, that’s what. The Treasury Department released its test results, and this sector is on much more solid footing than anyone had thought. Turns out Armageddon is no longer an option. Banks won’t be nationalized. The worst-case scenario that the most ferocious of bears warned against is off the table. With confidence restored, Wall Street is rushing back into these stocks.

Confidence in the system! Crisis averted! Tim Geithner is a hero! The banks passed the stress tests easily, and credibility has been restored in our financial system! The bears were wrong!

...or were they?

The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.

In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.

The overall reaction to the stress tests, announced Thursday, has been generally positive. But the haggling between the government and the banks shows the sometimes-tense nature of the negotiations that occurred before the final results were made public.

Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests' rigor.

When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed's exaggerated capital holes. A senior executive at one bank fumed that the Fed's initial estimate was "mind-numbingly" large. Bank of America was "shocked" when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations.

At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks' ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.

At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as "asinine," were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed's findings.

What? You mean the results were rigged? The Fed folded its hand? Several banks failed even the far less than stressful tests and negotiated down their capital requirements even further? Well, gosh, that explains why the results were "far better than expected". No wonder the banks made out like bandits Friday in the markets!

Why, no one could have predicted that the stress tests were nothing but a PR scam to buy time, or that the delay from Monday to Thursday would be used to fudge the numbers! Nobody could have foreseen that the tests were designed to lull Americans to sleep while Obama declared the country's largest banks to be Too Big To Fail! Surely nobody foresaw the game plan was to reinflate another stock bubble to cover up the continuing collapse of our economy and to give the banksters every concession they ever wanted as Democrats and Republicans alike caved in to the people really running the country!

And yet, that's exactly what happened. From the get-go, Obama was faced with an enormous problem made worse by the Bush reponse to it. But given the opportunity, Obama showed his true colors, preferring to put his trust in the people who got us into this mess. And surprise, surprise...the stress test was a sham from the beginning.

Total losses from the financial crisis will range around $3 trillion dollars or more, depending on who you talk to. We still have $2 trillion in losses to go.

The Fed says the banks will only need $75 billion more to survive these losses. The banksters were willing to sue if the Fed said they needed more. These lies are staggering, and the stress tests' so called worst-case scenarios have already been broken.

The banks are insolvent. The losses will continue to pile up. It's not a matter if if this will blow up in our faces, but when.

Be prepared.

Global No Confidence Vote: Flunking Out

The banks are fine!

So wonderful in fact that the banks are arguing that the stress test results shouldn't actually be released.

U.S. officials are leaning toward announcing the "stress test" results of individual banks next week instead of just summary results, a source familiar with administration talks said Thursday.

The source, speaking anonymously because talks are ongoing, also said officials will likely release the capital requirements of the 19 firms at their holding company level, not just the needs of their banking units. Some of the banks being tested, such as Bank of America, have large non-bank subsidiaries that were included in the assessments, the source said.

Regulators have stress-tested the 19 largest U.S. banks to determine their capital needs should economic conditions deteriorate further. The source said the announcement of the results has been pushed back, possibly to May 6.

Note the language. "Possibly" we could see stress test results on Wednesday. They are leaning towards "individual" results too, instead of releasing all the results publicly and at the same time.

I'm betting strongly that the banks that are hurting the most, the ones that truly are uncapitalized to the point of being insolvent? You'll never know who they are. The banks will refuse to let the government release the results to us. Forget Wednesday. The banks are angling for "never."

Such a last minute delay in the results the banks knew were coming for weeks now indicates strongly that the banks are in serious trouble. If the results are made known to the public it could cause a run on the banks. I was worried that the tests given the banks were indications that they couldn't fail, they were so easy. But the reality is that the banks have now failed the cream puff tests given to them so badly that they are warning the Fed of systemic collapse brought on by financial panic, and the banks don't want the results to be released at all. The Obama administration is clearly going along with this charade.

Officials said at the time the banks would learn how much extra capital regulators wanted them to have, and then they would have six months to raise that amount in the private market or could tap a new government capital facility.

Since then, the market appetite for the results has reached a fever pitch, forcing the Treasury Department to rethink its plan to keep detailed results of individual banks private.

The source said officials are well aware of the market's sensitivity to the information, evidenced by the punishment some bank stocks have endured from leaked reports of the results and outside analysts' versions of the tests.

"Everyone's being very sensitive," the source said.

Nobody could have predicted! Here's what happened, folks. The Obama administration sold the bank stress tests too well! Now the investing public actually believes these results are "objective and meaningful", and in a way they are. When Timmy and his crew rigged the tests so that any bank could pass, they never counted on a number of banks failing the test anyway.

Even a cursory look at the books shows America's major financial instutuions are zombie banks that should have gone into government recievership months ago. And the banks are now so terrified of the results that they are playing the systemic collapse extortion card yet again.

I have been saying for months now that a receivership plan continues to be the only solution. The banks must be made to give in, because right now any possible efforts to work with the Obama administration results in the banks getting 100% of what they want and the American taxpayer getting no accountability, no stake in the game, and no idea what is really going on. The first real public accounting of the banks is now being all but scuttled before our eyes.

These bad banks must be forced into recievership. They must be Chryslerized: given a firm date and when they fail, taken over and restructured. But that will never, ever happen. The banksters that run the country will never allow it and Obama has no intention of doing it, he has already been given his orders.

Now the last chance of public accountability is being dismantled. We've gone from all stress test results on May 4 to maybe some banks, maybe on May 6th...which of course will become no results whatsoever. Our course towards disaster is now all but locked in. The Fed will simply throw money at the banks extorting taxpayer money, and the creditor nations that own the US will throw money at us...or else.

That is until they run out of money and our economy collapses anyway. There's a reason Obama is trying to frantically implement popular social programs as soon as possible. He knows what's coming.

Now, so do you.

Be prepared.

Global No-Confidence Vote: Eternal Zombie Banks

Back when the bank stress tests were first announced, I figured they would give Obama the political cover to implement Plan N and take over failing banks. Obama could say "Well, we investigated the bank, we did our due diligence work, Banks X, Y, and Z don't have the ability to survive without complete restructuring, so we're going to put them in receivership and do just that. They will emerge as better banks." Nobody could really complain then, and the problem would go a long way towards being solved.

Unfortunately, it's looking like I was not only wrong (happens often) but it looks like the complete opposite has happened.

The Federal Reserve on Friday said the government is prepared to rescue any of the banks that underwent "stress tests" and were deemed vulnerable if the recession worsened sharply. The Fed, in outlining the tests' methodology, said the 19 companies that hold one-half of the loans in the U.S. banking system won't be allowed to fail — even if they fared poorly on the stress tests.

The Fed reinforced its view that major financial firms are "too big to fail," and the government must do whatever is necessary to save them, said former Fed examiner Mark Williams.

"It appears 'too big to fail' is a fundamental philosophy — it's a philosophical principle," said Williams, a finance professor at Boston University.

This here? This is a problem. This is in fact bad enough to make me almost give up in despair. This is proof positive that Obama will in fact continue to throw trillions at the banks until the problem is solved. The banksters know this, so they will continue to take insane risks with money they can't possibly lose, or get in trouble with. If they do lose it, we simply give them more. That is the plan.

Then the banks will want to complain about the nasty rules and strings having this money entails, but we all know that the rules are meant to be broken.

It took nearly 100 days, but the Obama administration has finally enshrined Too Big To Fail as the fundamental heart of the economic crisis. No major bank can be allowed to fail on Obama's watch. The Fed will print money and give it to the banks for zero interest. The banks will then sit on it, pretend they are solvent, and laugh at the rest of the suckers out there losing their jobs. They'll use the money to buy smaller banks that aren't too big to fail, and just get bigger and more powerful.

It'll be that way until somebody notices we don't have the money as a country to pay for our financial system. Then the real fun begins.

I'm honestly terribly disappointed in the President and his financial braintrust. They have decided that preserving the status quo of our banking system is more important than saving the country's economy.

Despite all the honest good this administration has accomplished, it will soon turn to ash. Trillions will continue to be thrown at banks and nobody of course will have to be fired, nor will anyone have to take responsibility. Automakers on the other hand will have to get rid of maybe hundreds of thousands of employees because they simply aren't viable and made such terrible mistakes and took such lousy gambles.

Unlike the banks. They never make mistakes. They just fail their way to trillions in free money. Think about it. There's a reason why GM and Chrysler are on their deathbeds and Ford is whistling past the graveyard. Manufacturing is expendable. Union jobs and pensions are expendable too. Obama can't spare another $30 billion to save the automakers. It gave that $30 billion to AIG this week. Nobody noticed.

If this is the official Obama plan now, Too Big To Fail Now And Forever, then America is now in critical trouble. Nobody will hold the banks accountable for their mistakes, their losses, or their greed. Why should they do anything to improve the situation if they know they can't lose? Moral hazard doesn't begin to describe the situation. Banks are now free and clear to do whatever they want with our trillions. They have unlimited credit from the US Gubment. Undercapitalized? Revenues dropping like a stone while profits are rising? Long-term calamity ahead? No problem!

Ahh, but you and me? We can lose. And we will. Big time. Zombie banks for all eternity. Forever and ever, amen. Zombies eating our jobs, draining our economy, and all the while kept fat and happy by Helicopter Ben's magic printing press. The banks are holding Obama hostage. Obama's not only giving into the bank's every demand, but in fact he is holding the world hostage. "Support our debt or your economy gets it! Don't make me collapse the financial system! Pay up or else!"

Obama will not save the economy. He will save the banksters. The rest of us are now on our own. Don't count on a recovery. Don't count on anything. America's tombstone will read "Too Big To Fail."

Be prepared.

Global No-Confidence Vote: Failing The Test

It's looking more and more like Timmy sold us up the river, folks. You know those bank stress tests everyone keeps talking about as the key for saving the financial system from itself? Turns out there's ample evidence to believe that the tests are at best, a complete ruse that will deliver no useful information about the true state of the banks, and at worst they are completely rigged.

Nobody could have predicted, etc...

The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.

He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program's failings go way beyond such technical issues. “There is no real purpose [of the stress test] other than to fool us. To make us chumps,” Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: “’If we lie and they believe us, all will be well.’ It’s Orwellian."

The former regulator is extremely critical of Geithner, calling him a “failed regulator” now “adding to failed policy” by not allowing “banks that really need desperately to be closed” to fail. (On Saturday, Geithner said on Face the Nation, if banks need "exceptional assistance" in the future "then we'll make sure that assistance comes with conditions," including potentially changing management and the board, but did not say they'd be shut down.)

Black says the stress test must also be viewed in the context of Geithner’s toxic debt plan, which he calls “an enormous taxpayer subsidy for people who caused the problem.” The fact bank stocks have been rising since Geithner unveiled his plan is “bad news for taxpayers,” he says. “It’s the subsidy of all history."

Any scenario for fixing the banks is 100% dependent on the stress tests objectively and accurately determining which banks are solvent and which banks are effectively insolvent. If the tests are rigged as Black says, then there's no way to save the banks or the financial system, in effect, the system will be doomed to collapse.

The stress tests being a way to magically pass all the banks as "A-OK" when they are insolvent is basically the absolute worst case scenario, where banks will be allowed to operate as zombies ad infinitum on the taxpayer dime, funded by Helicopter Ben's Magic Printing Press.

The resulting hyper-inflation as the taxpayer has to continually fund trillions in bad loans and toxic crap basically wipes out the US economy and the world with it. Game, set, match.

If William Black is right, the Obama administration will end up doing more damage to the economy than Bush did, and that kind of admission from myself is downright terrifying.

Do read that Naked Capitalism link. The details of what a true stress test should be, and what Geithner is proposing, should make you ill. I know it does me.

I also asked him about the fact that bank examiners examine banks (duh) and would not have much (any?) experience in the capital markets operations or sophisticated products that the big investment bank, now banks, participated in. Goldman and Morgan Stanley ought to be subject to these exams; Citi, JP Morgan, and Bank of America have large capital markets operations. These firms are where the biggest risks and exposures lie. Do the examiners what to look for in a even the low-risk operations, like repo desks, much the less derivatives and proprietary trading books? He agreed (as presented below) that it was a near certainty that this was beyond their skill level.

Now this begs the question: why has the Treasury Secretary set in motion an obviously bogus process? It suggests the result is pre-ordained.

As AG would say, "The fix is in, folks." And this time, the fix has fixed us but good. A hundred regulators versus the entire financial system when Geithner and Obama have every single reason to lie to us about the results, to pass the banks off as "improving", and hope the Toxic Asset Three-Card Monte game is enough to fool all of the people, all of the time.

Bottom line is there's nothing Timmy can do to save the economy that won't wipe out the standard of living of your average American, but this way Treasury gets to claim due diligence while all hell breaks loose. It's either face the truth and assure a collapse now, or hyper-inflation and collapse later. As a politician, what would you do? Tell the truth?

The lifeboats on the S.S. Titanic are being quietly filled while we're busy below decks listening to the captain's recorded announcements that everything is fine. It's not. Obama can't save us. All he can do is try to control the damage from the collision. Telling us the truth would cause mass panic. Lying to us until the banksters and the bigwigs can get the lifeboats launched is the way to go.

But even the designation of "sick but not ready to be hospitalized" carries with it risk to the Administration. If the banks get sicker than anticipated, how can they explain it? They can't say, "oh, things got worse than we contemplated". The whole point of a stress test is to anticipate worst case scenarios. And it is pretty certain a fair number of the big banks will be on such large-scale life support by year end that it will be hard to make a case not to put them in receivership.

And by the time things get that bad, receivership may not be a viable option anymore...not without Helicopter Ben's Magic Printing Press going at full speed. This is a brutal scenario, one where Obama has determined he has no choice but to prepare America for a collision with an iceberg.

First quarter 2009 was bad. You will refer to them as "the good times" before long.

Be prepared.

Global No Confidence Vote: Banksters Rule!

Two stories today highlight the fact that while Obama is doing a pretty good job running the country, he's still letting the banksters run the damn country and will continue to do so. First, we see the reason the Dow was up 150+ points today: anticipation of tomorrow's announced rules changes in mark-to-market accounting.

It's unclear exactly what changes the FASB plans to make on Thursday, but none is expected to be radical enough to have an immediate impact on stocks. Still, most investment experts say bank stocks should be avoided until the full impact can be weighed.

Advocates of mark-to-market rules say they provide a clearer picture of troubled assets' value because they are priced according to their present worth in the marketplace. The alternative, known as mark-to-model, allows banks to price the assets at a model determined by the institution and at times not easily in view of the investing public.

That's fancy MBA talk for "We're lying and we made this too complex for you peons to figure out on purpose, so take our word for it."

With the rise of derivatives used to package now-distressed mortgages, mark-to-market opponents say the rules need to be changed because there is no fair market value for the bad assets. The current bid offer in the marketplace is at a level that would wipe out some banks if they had to sell at those prices, some analysts say.

So, the banksters want a mulligan. They want their assets to be what their models predict, and not what they are actually selling for right now in the marketplace. If they have to sell at these near worthless prices (and they have to sell at these worthless prices because the toxic assets really are nearly worthless) they they go under.

This is what I mean by America's major banks are insolvent. They are holding pieces of paper that are worth 20 cents on the dollar when the banksters say they are worth 100. But we can't call the banks out on them because they will collapse the entire global financial system if they are forced to go under.

Which means Obama's boys are letting the banksters lie about what these assets are worth. And how are these banks Too Big To Fail? Why, the Gramm-Leach-Bliley Act, which allowed these huge megabanks to form into ravenous cancers on our economy. So what's Obama's response to this regulatory nightmare?

Why, hiring the guys who created it in the first place! Larry Summers, Robert Rubin, Tim Geithner, and now we learn the nominee for Geithner's second-in-command is the guy who did the legwork on the GLB Act:

Tim Geithner’s new nominee for number two at the Treasury Department, Neal Wolin, played a key role in drafting legislation in the late 1990s deregulating the banking system, a former Treasury Department official confirms to us.

The law that Wolin helped draft has been blamed by some critics, many of them Democrats, for easing up regulatory pressure on huge financial institutions, tangentially helping create today’s mess — and his role drafting it could come under questioning at his upcoming confirmation hearings.

Our reporter, Ryan Derousseau, came across Wolin’s role in researching our big profile of Wolin at WhoRunsGov.com. Stuart Eizenstat, a deputy Treasury secretary under Bill Clinton, confirmed that as Treasury’s general counsel at the time, Wolin “provided the technical and legal drafting” for the Gramm-Leach-Bliley Act.

As Ryan writes, the Act hasn’t been directly blamed for today’s meltdown. But it did pave the way for the birth of huge financial companies like Citigroup that were deemed “too big to fail” when their mortgage bets went belly-up and the credit market evaporated. The government, of course, had to bail out these institutions with billions in taxpayer dollars.

Wolin — who was picked after several other candidates passed on the slot — did the legal work under then-Treasury Secretary Larry Summers, who is now Obama’s head of the National Economic Council. The difference here is that Summers’ post, unlike Wolin’s, is a non-confirmable one, so he hasn’t been pressed publicly on Gramm-Leach-Bliley. The question now is whether Wolin will come under sharp questioning over his role in creating it.

Failing upwards is apparently not just a prerequisite to be in the Bush administration, but one for the Obama administration too. We're already seeing the influence of the deregulators on the banksters and in a major way: virtually no accountability and despite all of Obama's tough talk, the reality is the banksters will continue to get free trillions until we inflate our way into a banana republic. These are the same guys that pitched the notions that the Depression-era protections on Too Big To Fail were antiquated nonsense, and that housing values would go up forever. Now they're calling the shots on Obama's economic policy. Why should we expect anything different?

At least the Republicans are somewhat more honest about their plan to eradicate the American middle class. Obama either doesn't realize what's going on, or has been talked into it by the same guys that sold it to Clinton on the way out the door.

Either way, it rewards failure with trillions...our trillions.

The foxes aren't in charge of just the henhouse. The foxes own chicken and egg distribution, production, sales, marketing, and logistics, every step of the way. That money they're giving away to themselves isn't backed up by gold, it's backed up by Helicopter Ben's printing press.

We're in for a hell of a ride down the tracks. One way. Your standard of living will go with it.

Be prepared.

Global No Confidence Vote: The Next Wave

The Dow has come roaring back 20% in the last three weeks and economic data on home sales, durable goods, consumer spending and retail sales have gotten better rather than worse. More than a few prognosticators believe March 2009 now represents the bottom of this recession, and that from here on out it's slow recovery...but recovery nonetheless.

Most analysts now agree, however, that there are some encouraging shafts of light after months of pitch-black news.

"The best news now is that despite the worst . . . daily litany of horrible news, the strongest renewed bank fears, despite all of that, we've got stocks today essentially where they were in October," said James Paulsen, chief investment strategist for Wells Capital Management, owned by the giant bank Wells Fargo.

In October, all three asset classes — stocks, bonds and commodities such as oil and farm products — were in freefall. Today, stocks are up roughly 20 percent in the past two weeks, the biggest such short-term rally since 1938.

"Despite some of the worst news, stocks have stopped deteriorating and have put in what I think is a relatively strong bottom," Paulsen said.

He's not alone in spying a glimmer of hope.

"I think the worst is behind us," said James Dunigan, the managing director of investment for PNC Wealth Management in Pittsburgh.

Dunigan points to recent better-than-expected data on retail sales, which bumped up in January and held in February, as well as an unexpected February increase in sales of existing homes. New data this week showed a 3.4 percent February increase in orders of durable goods — big-ticket expenditures — which added a dose of feel-good.

"You are starting to get some whiffs of that in some of the indicators that are starting to come out. . . . All of the news isn't as consistently bad as we saw," Dunigan said. "I don't think we need to get a lot of good news. We need to get some consistently less-bad news."

If you're willing to go with that theory, then good luck to you. All this month represents is a pause before the next phase of the storm: commercial real estate.

With loan defaults rising, analysts say the struggling commercial real estate industry is poised to fall into the worst crisis since the last great property bust of the early 1990s.

Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or shut their doors.

This is the true heart of the problem. The residential real estate crash has triggered massive unemployment and a commercial real estate crash, giving us another roller coaster to ride downwards over the next two years. Banks and retailers damaged by the current economy most likely will not survive this second phase, especially since the residential market has another 15-20% drop in prices to go. The commercial real estate crash will only be the second tidal wave to hit America just as we've struggled to the surface for oxygen.

Deutsche Bank's Richard Parkus projects delinquency rates will keep soaring to more than 3.5 percent by year-end and as high as 6 percent by late 2010. He says the industry's woes will be "at least of a similar magnitude as those that the commercial real estate faced in the early 1990s."

Drops in property values of 45 percent from a peak in late 2007 are possible, Parkus said, exceeding those of the early 1990s, as demand for office, retail and other commercial space plummets amid a worsening economy.

Adding credence to those gloomy predictions, the government said Thursday that the U.S. economy shrank at a 6.3 percent annual pace at the end of 2008, the worst showing in a quarter-century.

Funding for commercial loans virtually shut down last year as the financial system unraveled.

There was $12.2 billion in commercial mortgage debt issued last year, the lowest figure since 1991 and down 95 percent from 2007, according to a report by Reis.

Making matters worse, about $216 billion in loans are coming due through 2012.

When the companies can't make those payments anymore, they'll get foreclosed on too, driving values down for the rest of the country's offices, factories, hotels and strip malls. More and more companies will go under. This second crash will finish off a great many businesses already on the edge...and truly put us into a depressionary scenario. Seven states are now facing double-digit unemployment, and U-6 "real" unemployment estimates ranging from 18-21%. A great many local and state economies are already so weakened by the current situation that another wave will absolutely capsize them. The banks will take another mortal blow as they lose billions on commercial real estate, throttling any nascent recovery for the financial sector in its crib. That means more bailouts, more spending, more legislation, more pain.

And the real problem is that the local banks that have kept their noses clean on subprimes are the ones that will be rocked the hardest by the global commercial real estate collapse. They're the ones that invested in the strip malls and hotels and business parks because at the time they were safe bets. Now, they'll be cutting back on loans and dealing with foreclosures just like the big boys just when the country needs those loans the most to restart the economy. The disease will be spreading. The results will be devastating. Solid banks now will become weakened. Weakened banks now will become insolvent. Insolvent zombie banks now will become more multi-billion dollar albatrosses around our necks.

The bottom? We're going to wish that March 2009 was the bottom here very, very shortly. Alas, nothing could be further from the truth. Any chance we had at recovery is about to get hit by a tsunami of commercial real estate foreclosures, skyrocketing unemployment, and a long-term depression.

Buckle in kids. As bad as it's been, it will absolutely get worse from here.

Be prepared.

Global No Confidence Vote: New Boss, Same Problem

While the euphoria of Obama's inauguration is still in the air, the cold, hard reality is our financial system is a walking corpse. Even worse, Obama's plan to fix the economy is more of the same bungled policies that failed to get Bush's economy out of the black hole it's trapped in.

President Barack Obama's economic team is pushing to complete a bank-rescue plan that can be twinned with the $825 billion stimulus package being negotiated with Congress to alleviate the rapidly deepening financial crisis.

While full details of the rescue haven't been settled yet, people familiar with the deliberations said the package is likely to include a $50 billion-plus program to stem foreclosures, fresh injections of capital into the banks and steps to deal with toxic assets clogging lenders' balance sheets.

While that's certainly a step in the right direction, the plan itself is much, much too small to effectively deal with the tens of trillions in toxic derivative debt on their books. Roubini explains the crux of the problem in the article:

American banks are reluctant or unable to lend after suffering more than $700 billion in writedowns and credit losses since the collapse of the market for subprime U.S. mortgages 18 months ago. The slump in lending, even after the government has pumped billions into the nation's banks, is exacerbating the worst recession since the 1980s.

U.S. financial losses may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," New York University Professor Nouriel Roubini, told a conference in Dubai on Jan. 20. Obama will have to use as much as $1 trillion of public funds to bolster the capitalization of the industry, he estimates.

In other words, there's a very good chance we have a good $3 trillion in losses in just the financial sector to deal with. Where are the rest of these losses coming from?
Just like the subprime mortgage market, commercial mortgages, credit card debt, auto loans, and other residential and commercial loans were securitized and packaged into toxic waste derivatives. These particular securitized products have yet to fully collapse into losses. Collectively they dwarf the mortgage losses banks have already suffered. $700 billion in writedowns have ravaged the sector. What will more than four times those losses do?
Yesterday the Dow sank under 8,000 again. Banks took a massive hit across the board. Citigroup and Bank of America are not solvent companies. As Paul Krugman explains, they are "zombie banks".

To explain the issue, let me describe the position of a hypothetical bank that I'll call Gothamgroup, or Gotham for short.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets -- say, $400 billion worth -- are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it's still operating, but the reality is that it has already gone bust. Its stock isn't totally worthless -- it still has a market capitalization of $20 billion -- but that value is entirely based on the hope that shareholders will be rescued by a government bailout.

The reality is that an overwhelming majority of the banks in this country, right now, at this moment, are zombie banks. They are insolvent because not only are the toxic derivative assets they have are virtually worthless, but the coming tsunami of losses from the rest of the massive collapse of securitized loan products will assure they are wiped out.
We'll need a trillion dollars more just to begin to fix the problem in the financial sector alone. And that's if they survive at all.
And that brings us to Obama. His plan to fix the problem? The same thing the Bush crew rejected as unworkable, the so called "bad bank" strategy.

Ben Bernanke, Federal Reserve chairman, argues that dealing with toxic assets through purchases of these assets, insurance-style guarantees or one or more bad banks would help banks to lend and raise new capital. Policymakers used the insurance model for Citi and BofA. It directly addresses the so-called "tail risk" of extreme loss, but lacks the finality of taking the assets off balance sheet.

It is not easy for either the Fed or Treasury to provide the insurance - the Fed has problems with credit risk and its balance sheet, Treasury has accounting issues.

There is more enthusiasm for an "aggregator bank" through which, for instance, $100bn of Tarp equity could be geared up five times to provide $600bn of purchasing power. The aggregator bank would issue its own long term debt - probably with a guarantee from the FDIC or Treasury.

The big challenge would be how to value illiquid assets. Officials in the Paulson Treasury say they made real progress on this, but outsiders are sceptical.

In other words, Obama's boys are leaning towards a plan that would dump trillions of dollars of long-term debt on a government bank...a government bank whose debt would then weigh down the country like a stone and transfer the burden of insolvency from the banks to the taxpayers. If they pay too much for these toxic assets, the taxpayer will foot a bill for trillions. If pay too little, the banks will collapse. And even if they pay the right amount, the US taxpayer just bought enough worthless derivative crap to sink the entire country. Who will buy it from America? Do you think China will magically step in and give us trillions for worthless IOUs?

Even better, Team Obama plans to use the "full faith and credit" of our country to back a time bomb of trillions upon trillions of additional debt. Instead of the financial system being insolvent...the United States will be insolvent. Not only will we be dealing with the massive financial sector losses, but the losses in every other sector of the economy as well. A $700 billion loss in banks put us on life support. Another $3 trillion will not only kill us, it'll disintegrate the corpse.

There's a cheery thought. While the country parties hard and is glad to see Bush gone, the reality is we've only faced a small fraction of the economic nuclear blast so far. When the rest of the shock waves reach us, the reality of America as a third-world economic pariah will crush us.

Time is almost up. Yesterday's bank sector hit put many of the remaining banks in our country on knife's edge. Another round of massive financial bailouts will be on the way and much sooner than you think. All the progressive legislation that many of us dream of will not happen. It will get smashed by the tsunami of financial reality.

The reality is America is already insolvent. Bush bankrupted us. The bill is past due already. 2009 is going to be a hideous year, and despite all of Obama's abilities, not even he will be able to fix things. We're too far gone at this point.

Be prepared, for what it's worth.

Global No Confidence Vote: The Naked Citi

Economically we're approaching another fateful moment, another fork in the road...and quite likely another cliff ahead. The Dow tumbled to near 7,500 today, representing a devastating loss in the last week as the auto bailout has stalled out until December.

Far more sinister is the collapse of Citigroup, the number 2 bank in the US. Announcing 53,000 layoffs on Monday, the bank's stock has now imploded under the vital $5 a share point where institutional investors like pension plans and hedge funds aren't allowed to tread. This could trigger a massive selloff that will sink the company, and indeed Citi is now shopping itself around in a last ditch effort to get above the $5 mark.

It's the latest company to play "Deal or No Deal."

Citigroup Inc., which fell 26 percent in New York trading today, is considering selling off pieces of the bank or the whole company, the Wall Street Journal reported online, citing people familiar with the matter.

Talks are preliminary and don’t suggest that New York-based Citigroup is backing away from its insistence that it has sufficient capital and funding, the Journal said.

Buffeted by four straight quarterly losses, Citigroup has raised about $75 billion since December by selling assets and equity stakes, including a $25 billion injection from the U.S. Treasury. The government will do whatever it takes to stabilize Citigroup, including pouring more money into the company, because of the threat its failure would pose to the global economy, said Peter Wallison, a fellow at the Washington-based American Enterprise Institute.

“There is no question that Citigroup will not be allowed to fail,” said Wallison, who was Treasury Department general counsel under former President Ronald Reagan. “I would not think it is a good idea to restore the ban on short selling,” he said.

Citigroup declined $1.69 to a 15-year low of $4.71 on the New York Stock Exchange at 4:15 p.m. It has fallen 84 percent this year.

Like AIG, Citigroup will not be allowed to go under. Hundreds of billions will be poured into it over the next few days by Hank Paulson and friends. Another loaded Weapon of Financial Destruction has been pointed at the global financial system, and as sure as Jack Bauer saves the day in "24" the government will save the floundering company. Bank of America, the number one bank in the US, has slid to $11.25 or so.

The largest banks in the US are failing.

But even more sinister than that, the S&P 500 hit its lowest close since 1997.

"It was pretty brutal," said Phil Orlando, chief equity market strategist at Federated Investors.

He said the market is at a critical point, with the S&P having "tested" or closed below the lows of the previous bear market. Investors will be looking closely at the next few sessions to see if stocks can hold those key levels.

Since peaking at an all-time closing high of 1,565.15 on Oct. 9, 2007, the S&P 500 has lost 52%. The Dow has lost nearly 47% since closing at an all-time high of 14,164.53 on the same day. Since hitting a bull market high of 2,859.12 on Oct. 31, 2007, the Nasdaq has lost 54%.

"The wealth destruction is phenomenal," said Tom Schrader, managing director at Stifel Nicolaus.

Cut in half and still falling. Nobody knows what to do. We're out of rate to cut. We're not running on fumes, we're running on OTHER COUNTRY'S FUMES.

It's rather depressing. What's worse is I don't see a bottom to this yet. The housing crash rolls on, unemployment is rising sharply, and the consumer-driven economy is running out of consumers to consume.

It's a race to see who gets bailed out first, the automakers or Citigroup. I'm betting Citi, and I'm betting a deal will roll around before Monday, stoking another lovely bear market rally that will run smack into the reality of a dismal holiday shopping season come a couple weeks or so.

Citigroup will not be long for this earth in its current form. Bank of America is most likely next. These institutions are testing multi-year lows this week. We're down to a massive decision point here. Too Big To Fail is about to be tested.

Citigroup shares lost more than one-quarter of its market value on Thursday as investors questioned the banks ability to handle potential credit losses and writedowns in 2009.

The bank has been reeling on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits. Citigroup has access to U.S. Federal Reserve funds, is working at insuring some of its debt and is reducing its balance sheet faster than any other company in the banking industry, said analyst Bove who believes these steps backstops the bank's liabilities.

"It would take a Depression every bit as large and long as the 1930s debacle to shake this company's viability," Bove said.

Care to test that theory? Nevermind...we're testing that right now.

Be prepared.

Cross-posted at the Frog Pond.

Global No Confidence Vote: Event Horizon

As the hell of October in the markets comes to a close this week, the world is wondering what November will bring, and most investors aren't going to like the answer. This week is already shaping up to be a disaster, the Nikkei has now hit a 26-year low, Euro markets are down 4-6% at this hour, and US futures are pointing to another big loss.

Stocks tumbled, extending the MSCI World Index's biggest monthly drop on record, as concern grew that government efforts to stabilize financial markets won't avert a global recession. Treasuries rose as investors sought the safety of government bonds.

U.S. index futures slid, indicating the market's worst monthly slump in 70 years may deepen. Hong Kong's Hang Seng Index sank as much as 15 percent, the most since the 1989 Tiananmen Square crackdown, as money-market rates rose. Hungary's BUX Index lost 10 percent after the International Monetary Fund said it will give the country ``a substantial financing package.''

``We've gone from financial worries to economic worries,'' said Roland Lescure, who manages the equivalent of $128 billion as chief investment officer of Groupama Asset Management in Paris. ``We're looking for direction for the economy. The problem is stock market declines lead to more declines. It's linked to forced selling.''

The new downward pressure on the markets are coming from the death spiral of hedge funds and emerging markets. As both groups continue to collapse, they are dragging the rest of the economy down with them.

The damage to the global financial system is too pervasive and too widespread to stop. High-flying hedge funds are having to sell off huge blocks of stock to raise cash...lowering the prices of stocks worldwide, causing them to have to sell more stock to raise more cash to continue to operate as the rest of their stock assets decrease in value. This classic death spiral is close to claiming trillions in hedge fund assets now as investors continue to pull their money out. A worldwide system of margin calls -- banks demanding loans used to buy stock be repaid now that the stock has collapsed -- is about to wreck the entire house of cards, for the only way to pay these loans back is to sell stock and force more margin calls. We're trapped in tailspin, and there's no way out until we hit the bottom. Hedge funds will be the next casualty...and the one that kills the system.

All these funds operated with virtually no regulatory oversight -- because they accepted funds only from wealthy investors, not the general public. They then "leveraged" this capital, borrowing billions more that they invested exotically, often "hedging" their bets by making investments set up to pay off when stocks and other assets lost value.

No one benefited more from all this hedging legerdemain than hedge fund managers themselves. They became the planet's highest-paid power-suits. In 2002, 25 hedge fund managers pulled in over $30 million each. In 2006, reports the trade journal Alpha, the top 25 hedge fund managers each made at least $230 million. Last year, 43 of them walked off with at least that many millions.

But now the hedge fund bubble is bursting. High-leverage strategies don't work when banks aren't lending. And new regulations have put a crimp on "short selling," the betting on assets to fall in value. The result? Last month ended up as the hedge fund industry's second-worst year on record.

So far this year, the industry's top index has dropped 13.9 percent. Some analysts are predicting that as many as half the world's hedge funds may shut down before the current crisis ends.

That has wealthy investors spooked. In September alone, investors yanked $43 billion out of U.S. hedge funds, shifting their cash to investments less risky. Hedge fund managers have become so alarmed they're offering to slash their standard -- and exorbitantly high -- fees if investors agree not to ask the funds to redeem their investments.

And the largest investors in hedge funds?

You got it in one. 401(k) funds and pension plans.

We're past the event horizon, past the point where the black hole is now pulling us in despite anything we try. Global emerging markets in Europe, Asia, and South America are near collapse. Hong Kong's Hang Seng index has gone from 32,000 to 11,000 in the last 12 months. Ukraine and Hungary have become the latest countries to ask for IMF loans to keep them out of bankruptcy. South Korea cuts its central bank rate by 75 BP, but to no avail as the South Korean currency, the Won, continues to fall apart.

``More aggressive cuts are on the way,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, who expects Korea's key rate will be slashed to around 3 percent by the first half of 2009. ``The government would need to expand tax cuts and increase fiscal spending to support the economy.'

South Korea last week said it will spend as much as 8 trillion won ($5.5 billion) helping the construction industry, including buying unsold homes and land. The central bank said Oct. 24 it will inject 2 trillion won into the financial system through repurchase-agreement operations.

South Korea's total external debt was $420 billion as of June, according to the finance ministry. Of that, $176 billion was short-term debt due to mature within a year.

It's not banks that are needing bailouts now...it's entire countries.

And November will be much, much worse, folks. We're talking entire countries on the edge of economic obliteration. Wednesday's Fed meeting and subsequent rate cut won't matter a bit.

The global financial system continues to break down, one day at a time.

Be prepared.

Global No Confidence Vote: Bush Boom Kaboom

October 9 is a very important date in the recent history of the Bush Economy.

On October 9, 2002, the Dow hit its lowest point so far during the President's two terms: 7,286.27.

On October 9, 2007, the Dow hit its highest point in the Bush Presidency: 14,164.53.

Stocks drifted higher through the morning, flattened out in the early afternoon and then began to rise as investors digested the minutes from the Sept. 18 Fed meeting, released at around 2:00 p.m. ET.

"The market had a desire to keep going up and there was nothing in the minutes to prevent it," said Paul Mendelsohn, president and chief investment officer at Windham Financial Services.

Mendelsohn said that investors were a little cautious leading into the minutes but once they saw that there was nothing particularly surprising in the minutes, they redoubled their efforts to move stocks higher.

The Dow and S&P 500 carving out fresh all-time highs will give the stock market more ammunition in the short term, he said, provided that the earnings don't derail the momentum.

Investors already know that third-quarter earnings growth will be at the slowest pace in more than five years. But outside of the financial and homebuilding sectors, there may be expectations for results to beat, particularly in the case of multi-national companies that should benefit from the weak dollar, Mendelsohn said.

The period is called the "Bush Boom", the greatest economic story ever told if you ask Sean Hannity or Larry Kudlow. (You know, despite Bill Clinton taking the Dow from 3,500 to 10,500 during the course of his Presidency, tripling its value.)

Today, one year later after the Bush Boom, we have the Bush Kaboom. Today, October 9, 2008, the Dow closed at 8579.19...a loss of 39.4% in one year.

In the five years of the Bush Boom, the Dow gained 6878 points.

In the year since, we've given 5585 of those points back.

By January 20, 2009 I'm betting 7286.27 would be a really great level for the Dow to be at. I'm convinced we may be looking at Bush ending where Bill Clinton started on January 20, 1993...

3241.95.

We've lost over 2500 points in just 9 trading days...37% of the Bush Boom has vanished in the space of two weeks. We'd set a new low in Bushonomics sometime next week.

At that pace the Dow is gone well before January. Hell, it doesn't even make it to December.

The credit markets are still clogged. The housing market is still in freefall. The derivatives are still crushing the lifeblood out of companies. The cardiac arrest is now global.

The Great Reset Button has been hit. Things are accelerating now at a pace that even my wildest nightmares couldn't birth.

Tomorrow's G7 meeting is the last stand of the Alamo. Whatever comes out of this meeting is the world's last bullet in the gun.

This weekend's G7 finance ministers meeting will focus discussion on the current market turmoil as 'global phenomena,' Treasury Undersecretary for International Affairs David McCormick said today.

'We are all affected by it, and strengthened international collaboration is needed now more than ever to find collective solutions to achieve stable and efficient financial markets and restore the health of the world economy,' McCormick said today in a pre-meeting press conference.

McCormick noted that he and Treasury Secretary Henry Paulson have been in regular contact with the G7 and other international counterparts, but Friday's meeting 'will provide us with a timely opportunity to further strengthen our collaboration.'

The Undersecretary said that the US will not seek a 'one size fits all' global approach dealing with the current economic crisis, but would instead favor a framework in how to address economic strengthening. McCormick said that inflation is something the finance ministers will be 'mindful of' in their discussions this weekend, but is unlikely to be the focus as it was in their last meeting.

Don't fool yourselves. Inflation is very much on the minds of these ministers. They are wondering just how much hyperinflation it will take to "save" the global economy. That's the last magic bullet.

And should that magic bullet fail, as every other bullet has failed, then we get front row seats to the end. Even if it succeeds...we still get front row seats to the end.

The end is the final Bush/Cheney October Surprise. What does it entail? Who knows? My nightmares aren't talking much these days...they're too busy watching their 401(k)s become 911(doa)s. But any way you slice it the GOP is across the board dead. All the power Bush and Cheney have taken for themselves will be given to Barry and Joe in a matter of months.

Or at least, that's the plan on paper. The reality...well the last 3 weeks shows that reality can hit a snag every now and then.

Given what this President and Vice President have done in the last 8 years, do you honestly think they will sit back and allow John McSame to lose this election?

Do you think there will even BE an election? I'm not sure we won't be under martial law by then.

The next 3 weeks is the end of one story.

Who will write the next one? I don't know. I don't think it will be Obama, but I have hope.

But whatever that story will be, it will be a horror tale that will make your soul curdle and your blood boil. Whoever gets to write it, the poor miserable schmucks in the tale will be us. We will be hurting. The only question is how long and how deep it will be...a two or three year vicious recession and a lesson learned, a generation humbled...or a ten-year global depression and the resource wars that will come with it...or something in between. I don't know.

But be prepared. This time, I mean it. Be prepared...for anything. We're in uncharted parts of the map, folks. Tectonic plates are moving in our history. The new order that emerges from this will not be the same as what we have lived with so far. America will be radically different...and soon. Those standing near the edges will get smashed.

A wise man knows that the Chinese symbol for crisis contains the symbol for opportunity.

An even wiser man once said that "any man who can hitch the length and breadth of the galaxy, rough it, slum it, struggle against terrible odds, win through, and still knows where his towel is is clearly a man to be reckoned with."

Be prepared. Have a towel on hand. Things will get messy shortly.

Kaboom!

Cross-posted at the Frog Pond.

Global No-Confidence Vote: It's All Local

It seems Jefferson County, Alabama (home of Birmingham) is facing the largest municipal bankruptcy since the OC went under in '94.

Jefferson County, Alabama, won't make an $83.5 million payment on some of its $3.2 billion of sewer bonds, as it continues to seek more time to negotiate an end to the debt crisis that has pushed it close to bankruptcy.

Jefferson County Commission President Bettye Fine Collins said yesterday that Wall Street creditors indicated they would be willing to extend a new agreement allowing the county to avoid paying all that it is required on its bonds. Meantime, the county will miss a payment on a portion of the debt, she said.

``We don't have the funds to cover these interest payments,'' Collins, a Republican, said in a telephone interview from Birmingham.

Jefferson County, which includes Birmingham, has prepared to file for bankruptcy protection if it can't reach an agreement with JPMorgan Chase & Co. and other creditors to refinance bonds whose interest rates soared as high as 10 percent because of the U.S. financial crisis spawned by the subprime mortgage meltdown. The county is among U.S. states and cities in the $2.6 trillion municipal market whose finances have been pinched by debt costs that have risen more than fourfold in some cases.

Ahh, but Jefferson County isn't alone, folks. Times are tough for local governments across the country.

Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening.

The sudden loss of credit, one of the ripple effects of the current financial turmoil, is affecting local governments in all parts of the country, rich and poor alike. In New York, a real estate boom has suddenly gone bust. Washington has shelved a planned bond offering to pay for terminal expansion and parking garages already under construction at Dulles and Reagan National Airports.

Billings, Mont., is struggling to come up with $70 million more for a new emergency room. And Maine has been unable to raise $50 million for highway repairs.

“We really are in terra incognita here,” said Robert O. Lenna, executive director of the Maine Municipal Bond Bank, which helps that state’s towns and school districts raise money. He said he had worked in public finance for 34 years and had never seen credit evaporate so completely.

Maine had already begun some of its road work when the bond markets stopped functioning, so now it is scrambling for bank loans to keep the dump trucks rolling. If money does not start flowing soon, Mr. Lenna said, Maine will have to cancel some of its road and bridge projects.

The only alternative would be what New York City did on Monday: Go into the locked-up markets and whip up demand by offering to pay investors a very high return.

Analysts said the dysfunction in the municipal bond markets appeared to signal the end of an era of relatively cheap money for governments and, probably, the start of an era of tough choices for communities. When the market starts moving again, they said, it will look a lot like the municipal bond market of 10 years ago, before the arrival of financial wizardry in the form of structured-finance products, which lowered borrowing costs but added big new risks. Instead, governments will probably be issuing plain-vanilla bonds with fixed rates of interest, higher than they are accustomed to.

And higher rates suggest some degree of belt-tightening, especially difficult in places where tax revenues are being squeezed because of falling real estate values and the slowing economy.

It's bad out there. I have a friend who works for the City of Cincinnati in the budget department and she tells me things are bad, and that significant city job cuts are coming. It's like that all over the country, folks. Service cuts, job cuts, and tax hikes are coming for the local and county governments where YOU live and work, and Jefferson County, Alabama isn't going to be alone in having to consider municipal bankruptcy.

It's going to get bad for a lot of taxpayers next year. Unemployment is going to be up significantly, bailout or no bailout. With home prices continuing to drop and property tax revenues dropping as a result, and the credit crunch meaning these governments can't borrow money cheaply any more to cover costs, you're going to see a lot of local governments have to make some very tough and very unpopular decisions. They WILL have to slash the services you depend on or raise taxes sharply.

If they don't, they'll go under.

Imagine the bailout argument being repeated across nearly every county and city government in America right now. Who is going to bail them out? Who is going to lend them money by allowing them to issue bonds? What if bonds are rejected by voters in places where bond referendums go to the ballots?

We're talking about local and country governments across America declaring bankruptcy. And the Bailout in front of Congress this week does little to address the problem. Home prices will continue to drop well into 2009 if not 2010, meaning lower tax revenue, astronomical bond interest, and job and service cuts. The job cuts mean higher local unemployment and lower revenues as people move out of the area looking for new jobs or are forced to move.

It's a nasty spiral. And it's taking place right now, where you live.

Your local government's not going to be able to help you in the months ahead. Odds are very good major tax increases, local job cuts, and local service cuts are coming. They are going to be dramatic.

You're on your own.

Be prepared.

Cross-posted at the Frog Pond.