Why are the Markets Crashing, Yet Again?

The government needs to cut the bull, because the markets have already figured things out.

The sickening incompetence or outright graft which led to the handling of the likes of AIG, Freddie and Fannie by the US Government has led to a collapse in the economy – in consumption, in lending, in asset prices and in production. A clean sweep.

AIG
The US Government does not want to bring the debt of AIG onto the books of Uncle Sam. So what did they do.

What did this do? It hurt the taxpayer. The Government had the ability to just take over AIG. That would offer the taxpayer two benefits –

1. You will know how much you need to put in to make AIG solvent
2. You will own the entity after it is capitalized and you will be able to sell it to make up for some of the losses you sustained while getting the company healthy again

But what did the Government do? They played their typical accounting games. They bought the most of AIG they could buy (79.99%), without having to actually take over the company. This allowed the Government to –
1. Overpay for AIG’s assets
2. Keep the debt of AIG off the balance Sheet of the US Treasury
3. Stick the taxpayer with an open-ended obligation for untold $100’s of billions

I think it also allowed the management of AIG to hide a bunch of the illegal stuff they did, which got the company into its mess in the first place.

Who benefits from this? The shareholders. The US Government not only left them with 20% ownership in the company, they also guaranteed ALL of the Preferred stock! Are you freakin kidding me?

The markets are crashing, because this is idiocy. Idiocy! All it does is put in a middle man who’s goals are polar opposites from those of the taxpayer. The taxpayer wants to get lending going again in a manner which costs them as little as possible. The banks want to suck as much cash as they can out of the taxpayer to prop up their “earnings” and their stock prices.

This is failure by definition. I haven’t been in an Econ class in 20 years and I could write a book on this stuff. But you’re telling me that there isn’t somebody smart enough in Washington to fix what is wrong?

What do the markets want?
They want the Government to fix the problem.
The citizens voted for Obama to fix the problem.

What is the problem?
Insolvent banks can’t lend money, because nobody is buying their worthless debt anymore (more on this in a minute).

How do you fix it?
Simple. TAKE 100% CONTROL OF THE INSOLVENT BANKS WHO ARE TOO BIG TO FAIL.
Cut the accounting games.
Stop promising payouts on shares of preferred stock in companies that are worthless.
Put the taxpayer first! The goal of this plan should be minimize the cost to the taxpayer, while getting banks solvent and lending again.

This is simple. Take over the banks and take all the bad debt off of their books. Give them a bunch of money and tell them to start making good loans immediately.

What does this do? It creates a network of healthy banks. These banks wont need FDIC to bail out their money market funds. They will become safe havens for peoples’ safe money. You don’t have any risk if your bank is solvent and backed directly by the government.

This will allow the banks to make money and rebuild their businesses. At some point, you sell the banks to the public markets and use the proceeds to repay the taxpayer for the staggering losses they will take for bringing all that toxic debt onto the balance sheet of the US Government.

The big problem with that solution is that you need to change the culture of the banks. They can’t operate anymore like they want to. The markets just aren’t buying what they are selling.

So what does the Fed do? You’re not going to believe this one. Instead of fixing the problem, it promises to buy what the banks are selling, with taxpayer money. It promised today to do so, even though the Fed knows it won’t work.

What do the markets do? They crash, yet again!

American Express
The other day, American Express became what is called a “Bank Holding Company”. Funny, I always thought they were a credit card company. You know why they did this?

Let me explain how Amex and the other credit card companies work. They lend money to card holders. Say they loan $100 million today. In order to make loans tomorrow, they either need to raise new cash by borrowing themselves, or they need to package up that $100 million and sell it. This packaging process is called “securitization”, as in you create a security to trade.

There just isn’t anybody willing to buy these bundled credit card loans from Amex. Just as there aren’t buyers for bundled mortgages or car loans or student loans...

So what happens, Amex becomes a “Bank Holding Company”. They do this, so that they can the credit card loans nobody else want to the taxpayer, via the Fed checkbook.

Do you see why I am so mad? We are getting stuck with a bunch of worthless (stuff) that nobody else wants, and we’re overpaying for it.

Did you see the other day that Bloomberg sued the Fed to get the Fed to tell them what they did with the first $2 trillion it has already used to buy toxic debt from banks, hedge funds, and other countries?

The Fed won’t tell us what they bought or what they paid for it. A news agency is actually suing them to get them to divulge the information. With the markets crashing, you know the numbers aren’t good.

The markets are pricing in several potential scenarios –
1. Obama tells the banks to get in line behind the taxpayer and just flat out nationalizes the banks (my preferred route)
2. Congress gets enough heat from voters that is forces the Fed to divulge what it did with the first $2 trillion and the game of buying toxic debt from banks ends
3. There just isn’t enough free capital floating around to buy all the new debt we need to sell. The US Budget Deficit is now $6 billion A DAY!!

I think there is a seismic shift coming and it will at the expense of the banks and their stock and bond holders.

I will buy assets when somebody, anybody, other than the US Government is willing to buy an asset, any asset.I still think that stock prices are too high and will need to fall further to find a place where investors are willing to buy stocks and hold them for more than an hour. That has been my overall thesis and it has been very profitable, so I will stick to it until I start to see evidence that the markets are changing.I think that bond prices are too high and rates will have to increase substantially to compensate bond investors for the risks they are buying.I think that real estate prices are too high and will need to fall down to a level where they are actually affordable relative to average levels of income.Prices will start to go up on a sustained basis, after they have fallen down to levels where investors are willing to buy them.One more thing on Real Estate
Yesterday, the Government made a proposal that would effectively make the US Government a vender of exotic mortgages.

The bottom line is that housing prices are still too high. You know this, because the goal of the Government plan is to break mortgages of defaulting homeowners into two parts, charging zero interest on one part and an artificially low rate on the other.

So by definition, the amount of the mortgage is so big, relative to income, that the government has to effectively write off part of it, and lower the rate on the other money to several points below the rate of inflation.I think the question that everybody but the media is asking is why isn't this being done on the back of the shareholders of the banks who made these loans? Why should the taxpayer be stuck with the liability?I'm telling you, people are irate! The truth is percolating to the surface. The stuff I have been writing about has been on target. At some point, there will be a change in policy and the shareholders and bondholders of banks will be left with nothing but maybe a handful of warrants.