Friday, October 3, 2008

Weekend Weimer and Beagle

Earlier this week, Mr$s. Bonndad and I went out to dinner. She asked me if there was anything on the counter that would be attractive to Sarge the Weimer. I said no. So we left.

When we came back we found a chewed can on the floor that use to be a can of Bush's baked beans.

Sarge is fine.

Have a good weekend.

This Week's Economic News Stinks

From the BLS:

Nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs.

With the exception of education and health care and government employees, every other job sector was down. If we take out this months total birth/death model adjustments we get a total job loss of 201,000 (yes, the birth/death model is still adding jobs to the total number of jobs created).

This report represents an acceleration of the trend we have been seeing -- job losses are getting worse. We see that in the new jobless claims:

The number of U.S. workers filing new claims for jobless benefits rose to their highest in seven years due to the impact of hurricanes Ike and Gustav, the government said in a report on Thursday.

The number of initial jobless claims was 497,000 in the week ended September 27, the highest since 517,000 in the week ended September 29, 2001 and above Wall Street economists' forecasts of 475,000.

"It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 45,000 claims to the total," the Labor Department said in its weekly report.

While the numbers from the hurricanes may seem to be distorting the totals, this chart from Calculated Risk says otherwise (click on the chart for a larger image):

As a result of the weak employment situation car sales are tanking:

Toyota, Chrysler, Ford and Nissan Motor Co. reported U.S. sales declines of more than 30% for the month compared with September 2007, while Honda Motor Co. and General Motors Corp. showed sharp downturns as well.

Overall, the industry sold only 964,873 vehicles -- a 26.6% slide from a year earlier and its biggest percentage drop in 17 years, Autodata Corp. said Wednesday.

Industry executives blamed public unwillingness to make purchases amid the nation's financial troubles, as well as a lack of credit from lenders.

"It's tantamount, really, to a natural disaster," said George Pipas, chief sales analyst at Ford. Showroom traffic, he added, was at levels associated with "a large storm or the aftermath of 9/11."

According to CNW Marketing Research, visits to auto dealerships in the last 10 days of September declined 51% compared with the same period last year, the largest slide in at least 22 years.

Toyota's U.S. sales last month were down 32.3% from the year-earlier period, while Ford declined 33.7%, Nissan slipped 36.8% and Honda fell 24%. Since January, Toyota's sales are down 10.4%, while Ford's have fallen 17.1%. Maserati and Bentley were the only makers to post gains in September.

Until last month, Honda had been one of the few carmakers to show a net gain on the year, but declines in August and September have now sucked it down to an overall 1.1% downturn through the first three quarters. Truck- and SUV-heavy Chrysler saw a 32.8% decline for the period, and is off 25% on the year.

GM had a relatively modest 15.5% decline, provoking a near celebratory response from the nation's largest automaker.

While I would blame the credit crunch for some of this, I also think there is a huge drop in consumer confidence right now. With an important election a little more than a month away, constant negative economic news and a financial system that is literally in a meltdown there is no inventive to purchase a car (or any other durable good) right now.

Also note this is an across the board hit. The Japanese and US makers are dropping equally. It's not a change of preference from one brand to another. Instead it's a complete boycott.

On Wednesday we learned that the US manufacturing sector is not doing very well:

The nation's manufacturing firms were contracting at a much faster pace than expected in September, one of the clearest signs to date that the economy has entered recession territory, according to a closely watched survey of top executives released Wednesday.

The Institute for Supply Management index fell to 43.5% from 49.9% in August, much lower than the 49.6% expected by economists surveyed by MarketWatch. See Economic Calendar.

This marked the sharpest one-month drop in the index since 1984. The index is now at its lowest level since October 2001. Read full survey.

Prior to September, the ISM has been treading water, hovering around 50. This seen as a signal the economy was muddling along. But now economists said there is little chance that months of negative growth can be avoided.

This shouldn't be surprising either. Not only is domestic demand dropping, but Europe and Asia are also slowing down. Therefore the export story is going away.

And finally, confirming the obvious slowdown in purchases is the drop in consumer spending is this report of, well, consumer spending from Monday:

Hard-pressed U.S. consumers curbed their spending during August despite an unexpected jump in incomes, according to a government report on Monday that implied worry about the economy's direction was deepening.

The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise.

Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July's revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain. Incomes had been boosted early in the year by payments made under an economic stimulus program but that has largely worn off.

So -- people are spending less as evidenced in the macro spending numbers and auto sales numbers. The reason is the continued weakness in the job markets. And it's only going to get worse.

Friday Forex Round-Up

On the weekly dollar chart, notice the following:

-- The dollar is clearly in a rally

-- The 10 and 20 week SMA are both advancing

-- The 50 week SMA is turning positive

-- Prices are above all the SMAs

-- Prices have broken through more resistance levels established last year

On the daily chart, notice the following:

-- All the SMAs are moving higher

-- The 10 day SMA is between the 20 and 50 day SMA. Aside from that, the SMAs are in a very bullish alignment

-- Prices are above all the SMAs

-- Prices are about to cross over a very important technical level.

Bottom line: these are bullish charts. Both indicate further advances are coming down the pike.

Thursday, October 2, 2008

Today's Markets

On the weekly chart notice that prices are in a clear pattern of lower lows and lower highs. This indicates we're in a bear market. Also note:

-- Prices are below all the weekly SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are moving lower

This is as bearish as you can get.

On the daily chart, notice the following:

-- Prices are below all the SMAa

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are moving lower

Both charts are extremely bearish.

We're Nowhere Near A Bottom in Housing

From Bloomberg:

Home prices dropped in 24 of 25 U.S. metropolitan areas in July from a year earlier, led by declines in Las Vegas and the coastal cities of California, as foreclosures depressed property prices.

Las Vegas had the biggest drop on a per-square foot basis, falling 33 percent, New York-based real estate data company Radar Logic Inc. said in a report today. Los Angeles, Phoenix, Sacramento and San Francisco each dropped about 28 percent. Three of the five worst-performing markets were in California.

``Buyers are increasingly reluctant,'' Radar Logic Chief Executive Officer Michael Feder said in an interview. ``There has been an awful lot of talk about the declining of the housing markets.''

U.S. foreclosures rose to a record 2.75 percent of all mortgages in the second quarter, according to the Washington- based Mortgage Bankers Association. Foreclosed houses tend to sell at a discount of about 20 percent, according to research by Lehman Brothers Holdings Inc. Those discounts are weighing on prices throughout the country, Radar Logic said.

This confirms the information from the latest Case Shiller news release:

Data through July 2008, released today by Standard & Poor's for its S&P/Case-Shiller(1) Home Price Indices, the leading measure of U.S. home prices, shows continued record declines and a continuation in the trend of double digit declines across many cities in the prices of existing single family homes across the United States.

The 10-City Composite and the 20-City Composite Home Price Indices reached new record annual declines of 17.5% and 16.3%, respectively. The 10-City level marked its 10th consecutive monthly report of a record decline, beginning with data reported for October 2007. As depicted on the chart above, during the 1990-92 cycle the record low was -6.3%. While the annual returns of the two indices continue to reach record lows, the pace of the decline has slowed, particularly over the last three months. For the three months of May thru July, home prices cumulatively fell about 2.2%; whereas for the three months of February thru April, and November 2007 thru January, the cumulative rates of decline were closer to 6.0-6.5%.

This is the central problem with the bail-out proposal. At the heart of the economy's problems lie housing prices. As prices drop in value more and more loans wind-up "underwater", meaning the mortgage is worth more than the property. This encourages people to stop paying their mortgage, leading to an increase in foreclosures (which the first article notes are at a record). Banks take these houses and either put them on their balance sheet or sell them at a discount. Either way, the underlying mortgage is not completely paid off, causing the mortgage holder to lose money. Simply put, the only way to stop this problem is to stop home prices from declining. And that's not going to happen anytime soon.

Fed Considers Rate Cut

From the WSJ:

Federal Reserve officials are weighing further interest-rate cuts, even if Congress passes a $700 billion rescue plan, in the face of a deteriorating economic outlook and severely strained financial conditions.

The Fed's willingness to consider additional cuts marks a turnaround from the past few months, when soaring food and energy prices turned its attention to inflation risks. At a regular September meeting, after oil prices had receded, officials still declined to move the central bank's federal-funds target rate from 2%.

A reduction in rates is still far from certain, in part because of inflation worries. But in just the past few weeks, as the credit crisis pummeled the financial system, economic data have become steadily worse, raising fears of a recession.

Rates are currently at 2%. Rates have dropped from 5.25% to 2% and we are currently in a credit crunch. The interest rate isn't the problem. The problem is is confidence in whoever you're lending to. If you think a borrower is about to goo bankrupt -- or may be bankrupt between the time you lend him money and the time he pays it back -- you're not going to make the loan. And that is exactly what is happening right now:

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a $700 billion plan to rescue beleaguered financial institutions.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

``We still see upward pressure on maturities from one week,'' said Patrick Jacq, a fixed-income strategist in Paris at BNP Paribas SA, France's biggest bank. ``The situation is still blocked and we're unlikely to see spreads decline before confidence has been restored.''

Credit markets have frozen as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Libor, set by 16 banks in a daily survey by the British Bankers' Association, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.

This problem has nothing to do with interest rates. With the year over year inflation rate at 5.4% and the compound 3-month rate at 7.2%, interest rates are actually negative. In addition, the Fed has a ton of lending facilities in place that are flooding the market with money.

This is about confidence. And there is nothing the Fed can do about that.

Thursday Oil Market Round-Up

Click on the chart for a larger image.

On oil's weekly chart, notice the following:

-- Oil broke the multi-year uptrend a few weeks ago

-- Prices are below all the weekly SMAs

-- The 10 and 20 week SMA are both moving lower

-- The 10 week SMA is about to mover through the 50 week SMA

On the daily chart, notice the following:

-- Prices have been dropping for about two months

-- Prices are below all the SMAs

-- The 20 and 50 week SMA are both headed lower

-- The 10 day SMA is about to move through the 20 day SMA

-- Prices are having a difficult time getting higher than the 20 week SMA

Bottom line: this is now a bearish chart. The weekly chart has broken the mult-year uptrend and has numerous bear market indicators. The daily chart has been dropping for two months and the longer SMAs are both moving lower.

Wednesday, October 1, 2008

Today's Markets

Note the following:

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

Also note that since the market dropped like a stone on the failed bail-out day, the market has been treading at the low end of the week's trading range. The big issue here is the bail-out in the Senate. If we see that go through I would expect a rally. I would also expect the opposite to be true.

Read This Now

Barry nails it.

Make A Crappy Product .... Get A Government Loan!!!

From the WSJ:

President Bush on Tuesday signed into law a low-interest loan package to aid U.S. auto makers, but those struggling companies will still have to wait months to find out how and when they can tap the $25 billion designated to smooth their transition to building more fuel-efficient vehicles.

The loan package was approved last year as a way to help auto makers and their suppliers meet fuel-economy standards set by the federal government. But the funding for the package wasn't passed by Congress until this year. One estimate put the total cost to auto makers at $100 billion to meet stricter efficiency standards that require vehicles to reach 35 miles per gallon by 2020.

General Motors Corp., Ford Motor Co. and Chrysler LLC have argued it was essential to get the loan help as soon as possible to rejigger plants to build smaller cars and infuse money into programs for gas-electric hybrids and other vehicles relying on alternative fuels. The recent credit crunch, along with double-digit declines in U.S. auto sales, have only put additional pressure on the auto makers to gain quick access government-backed loans, according to industry analysts.

"The auto loans can't come soon enough," said Kip Penniman, automotive analyst at KDP investment Advisors. Calling the loans a "lifeline" for GM in particular, Mr. Penniman said each of the auto makers will likely need to access some of that funding next year. Detroit's Big Three, once bullish on a turnaround in the auto sector in 2009, now expect to be another challenging year for auto sales in the U.S.

This infuriates me to no end. These companies relied on the gas guzzler model of business -- build it big, powerful and without any concept of fuel efficiency. Price them at a good price point so we make good money on them. Deny the possibility of peak oil whenever possible. Rinse. Repeat.

When that stopped being effective, they started to give cars away with "employee pricing". That means the car companies started selling cars at really low levels -- just barely enough to make a profit (if that). But there was a problem with this model. Consumers are now conditioned to expect car companies to offer fire sale prices on their models. So they're going to wait until car companies offer these prices again before they buy.

And as profits circled the bowel, the car companies are coming to the US government and saying, "lend me a ton of money, or half a million people will be unemployed withing two years." That's the real leverage in this deal -- the employees.

Seriously -- would you make a low interest loan to companies with the following stock charts?

This Is a Really Stupid Idea

From the WSJ:

The Securities and Exchange Commission and the U.S. accounting-standard setter issued guidance that will allow companies to use more flexibility when valuing securities in a market that has dried up, a move the banking industry hopes will relieve pressure on company balance sheets.

Tuesday, the SEC and Financial Accounting Standards Board issued "clarification" to accounting rules that require companies to value securities at the price for which they can be sold in the market, known as mark-to-market, or fair value, accounting. FASB said it is preparing additional guidance for later this week.

The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. They were welcomed by banking and financial-services groups that have lobbied the SEC and FASB to change the rules. Those efforts were ramped up in recent days as Congress was drafting a rescue bill.

Because of the credit crunch, the industry has said both the accounting treatment and how it is interpreted by auditors was too conservative and resulted in losses at financial institutions that were bigger than they should have been. They said the rules forced companies to write down assets tied to companies that had no chance of defaulting largely because there were few buyers or sellers.

The move Tuesday addressed many of their concerns. The SEC and FASB stopped short of bowing to pressure from some lawmakers and lobbyists who were seeking a complete suspension of fair-value accounting.

There is a reason these assets are valued at firesale prices: these are the only prices we can actually sell them at. That is where a "willing buyer and a willing seller -- neither being under a compulsion to sell -- would actually sell the stuff. There's a reason these assets are priced at those levels -- they're crap.

I love the model argument. "According to this model, this security is really worth x." Really? Then you buy it and put it in your personal account. I'm sure the bank would be willing to slice off a small piece for your IRA. Just let me know when you're ready.

It's amazing to me how all the "free market people" have utterly thrown their principles away during this crisis. Let's see the credibility go by the wayside.

Wednesday Commodities Round-Up

On the right hand side of the blog you can see a schedule of when I write about certain topics. That schedule has been thrown out the window over the last few weeks as the markets have gone crazy. I'm going to make a concerted effort to get back to that schedule. To that end...

Click on a picture to get a bigger image.

On the weekly commodities chart (the CRB index) notice the following:

-- The 10 and 20 week SMA are both moving lower

-- The 10 week SMA has crossed below the 20 week SMA

-- The 10 week SMA has crossed below the 50 week SMA

-- Prices are below all the SMAs

-- Prices have moved through important technical levels established over two years ago.

On the daily chart, notice the following:

-- Prices have been dropping for about three months

-- The 20 and 50 day SMAs are all moving lower

-- The 10 is moving sideways, but this is the most volatile SMA.

-- Prices are below all the SMAs

-- Prices have been using the 20 day SMA as technical resistance

Bottom line: both of these charts are pointing lower. This is good news for the Fed, as it gives them room to lower rates. Now the next question is would that be a good idea right now considering record low interest rates got us in this mess to start....

Tuesday, September 30, 2008

Today's Markets

On the daily chart, notice the following:

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- Today's price action stopped the bleeding, but didn't do much beyond that.

This Is a Really Stupid Idea

From Bloomberg:

The U.S. Securities and Exchange Commission and the Financial Accounting Standards Board may issue additional guidance on fair-value accounting rules, people familiar with the matter said.

The SEC may say companies can rely more on assumptions such as expected cash flows in assessing how much assets are worth, said the people, who declined to be identified because the plans haven't been completed. The guidance pertains to a requirement that banks review their assets each quarter and write them down if values have declined.

That's right -- let's start making shit up. Whenever we don't like what the market says, we just make up new rules until the market is more to our liking.

We're Nowhere Near A Bottom in Housing

From Bloomberg

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.

Note the year over year rate accelerated. While I don't expect that situation to continue, it's obvious the rate of decline is not letting up.

Over the last few months there were some commentators who noted the rate of decline in individual cities was increasing. Therefore, there were signs of a bottoming. Folks -- my hope is that at the end of this year we'll have some visibility regarding when there might be a bottom. Maybe.

Hedge Funds -- The Next Problem?

From CNBC:

First, the money rushed into hedge funds. Now, some fear, it could rush out.

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

“Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

Hedge Funds utilize a securities law that basically states a money manager does not have to register with the SEC if he only sells to "accredited investors." The standard definition for this is a person with $1 million in net worth or $200,000+ year in income for two years in a row (it might be $250,00). By only selling to these people, hedge fund managers don't have to make reports to the SEC. That means we have no idea how much money is actually invested in these vehicles or what investments they own.

There are several other important points. Most hedge funds have a policy that states a person can't simply withdraw money, but can only do so after a specified period of time like 1 year. In addition, some hedge funds only allow people to withdraw at the beginning of the quarter or month etc... That means a hedge fund could experience a flood of redemptions within a short period of time.

Here's the nightmare scenario. Fund A has a poor quarter. A bunch of people redeem shares. This forces Fund A to liquidate a large position in security X, causing security X to drop in price. This leads to Fund B taking a hit and the cycle repeats itself over and over again, essentially showballing downhill.

Yesterday's Markets

OK -- we're back. I hope everyone had a decent night sleep (if that was possible given the circumstances).

Let's look at the charts.

Click on them to get a bigger picture:

Notice the following:

-- The markets opened lower. This was not because of the bail-out package but because there were several other bank problems in Europe. However, the markets moved sideways until the vote. Then the markets essentially went cliff diving.

-- Notice how the markets dove 4 points on the news that the measure failed. That should tell you a great deal about what the markets want right now.

On the three month chart, notice the following:

-- First, ignore the double printing of yesterday's bar. I have no idea why that happens.

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are headed lower

-- Prices are below all the SMAs in a big way.

This is a bearish chart -- big time.

On the 7-year chart, notice we've moved through the 50% retracement level and are moving to the 61.8% level. Simply using Fib ratios we're looking at roughly the 110 area as out next level of support.

On the multi-year QQQQ chart, notice the index has broken through all important multi-year areas of support. However -- this weeks bar is only from 1-day. That bar could change by Friday, which could somehow keep this latest weekly bar above the long-term support line. However, this chart indicates that NASDAQ is about to break down as well.

On the IWMS, notice we've approached 65 several times this year but have been rebuffed. Now we're approaching that level again and we have a damn good reason to break through it. We haven't -- yet. But we could.

Bottom line: all three averages are looking to break multi-year support.

Monday, September 29, 2008


OK -- take a deep breath for a moment. I know it's probably hard right now. But this is not the time to do any analysis. It is the time to walk away until tomorrow morning.

I will have a complete market analysis up by 8AM CST -- that's a half hour before the market opens. I will try to have it up sooner but that might be difficult. There is a lot of information to sort through right now.

Liquidity Is Still A Huge Issue

From Marketwatch:

The Fed said it was boosting the size of its dollar swap arrangements to $620 billion from $290 billion previously. The agreement, with nine central banks, allows authorities to provide short-term dollar loans to commercial banks in an effort to ease short-term funding woes that have resulted from reluctance by commercial banks to lend short-term funds to each other through the interbank market.


"Market participants are reluctant to engage in transactions with each other because of heightened counterparty risk and fear that they could be the next in line to experience a 'bank run' and therefore need all the liquidity they can get themselves," wrote economists at Danske Bank in Copenhagen.

Such fears left Bradford & Bingley and Fortis struggling for funding. Their subsequent collapse then contributed to further tensions in the money market.

Amid the money-market tensions, central banks have been "forced to get more and more active in providing liquidity to the market because the market isn't doing it internally," said Don Smith, an economist at brokerage firm ICAP.

Think about this. The Federal Reserve is doubling their injections into the financial system because of the current situation. And the central issue is lack of trust. Everyone is concerned that the company they lend money to won't be around in a week or even tomorrow. As a result, no one is lending any money -- even really short-term money. That tells us there is pure fear in the market right now. Until that fear subsides we've got problems. Big problems.

Citigroup Buys Wachovia

From Marketwatch:

Citi will acquire "the bulk of Wachovia's assets and liabilities," the FDIC statement said. Under the agreement, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, while the FDIC will take losses beyond that.


The Wachovia deal was facilitated by the FDIC with the blessing of the Federal Reserve and the Treasury Dept.

Let's back up for a moment and look at the above information in a bit more detail.

1.) 13.46% of Wachovia's loans were bad. That should tell you how bad things are out there. This is also why I am deeply concerned about this "mark to market" study they want to include in the bail-out bill. If we start using a mark to fantasy asset valuation model we're in deep trouble.

However, consider the depth of the problem. Over 10% of the loans were in poor shape. That's a ton of loans.

The reason?

Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.

Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels.

Gee - y'think? Someone had absolutely no idea about the problems coming down the pike when they made that purchase. That shows a completely stupid management that deserves to fail in my book.

2.) The FDIC and Federal Reserve are busy bees aren't they? They're playing deal maker for anyone, trying to avoid a ton of problems for the US taxpayer if at all possible. My guess is the bank insurance program is under serious strain right now and the FDIC and Treasury are trying to avoid another set of problems. Here's the reason I think that:

Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in the statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

Citi is first in line to absorb losses. Federal authorities start to absorb losses after the $42 billion is absorbed.

And here's another set of problems for Citi:

``Of course they are going to raise capital,'' Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC. ``I don't know how they absorb $42 billion on the income basis they have,'' Whitney said.

Who is going to provide money to Citi? Who in their right mind thinks any financial company is worth the paper they are printed on right now?

Bottom line: the Feds are trying to patch up one hole, while creating another down the line.

Why the Mark To Market Issue is So Important

Consider the following from a Reuter's story on Wachovia:

Investor concern about Wachovia intensified on Friday after JPMorgan said it would take a $31 billion write-down on loans it acquired when it took over Washington Mutual Inc's banking unit on Thursday.

One of the biggest issues facing anybody with an interest in the financial sector is this: what is the actual value of the company? Mark to market forces a company to acknowledge reality by providing market determined prices for its assets. The idea that the SEC needs to study mark to market is ludicrous. What is essentially being asked is "how much can we lie to shareholders about the value of our assets?"

The Treasury Plan

From the WSJ:

The bill authorizes $700 billion for the fund in installments. Treasury will first get $250 billion, with an additional $100 billion immediately accessible. Congress would have the option of blocking the final installment of $350 billion by issuing a joint resolution within 15 days of any requests.

Although I don't like the spending this is a lot more palatable. It gives the Treasury enough money to probably make a dent in the current situation while allowing Congress to use the "power of the purse" to control the situation.

Treasury plans to hire asset managers to determine how to buy bad loans and other ailing assets from financial institutions. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. The legislation requires Treasury to set guidelines within 45 days for pricing methods and setting the value of troubled assets, as well as mechanisms for purchasing assets, procedures for selecting asset managers and criteria for identifying troubled assets to buy.

The legislation requires Treasury to purchase assets at the lowest price, and allows the government to buy through auction or direct from institutions.

Treasury expects to start buying the simplest assets first -- mortgage-backed securities, for example -- followed by more complex securities. Treasury likely will publish a list of the assets it is seeking to purchase. Banks and other institutions are expected to submit bids in a competition to sell bad loans and securities.


This is where we had problems before and still have them. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. That phrase should scare the hell out of anyone reading it -- and rightfully so. It's a terrifying phrase.

This isn't too hard people. If you're going to do this you should set a few basic guidelines. One -- those who made really stupid decisions in buying this paper without analyzing it should not be able to dump it at an above market rate. Letting them do so subsidizing that mistake on the backs of taxpayers.

I have no problem with hiring asset managers. I've worked with these type of people before and they're very capable. But with the amount of money involved -- and with tax dollars on the table -- more details need to be included here.

The legislation places restrictions on executive compensation for certain companies that sell assets to Treasury. If Treasury buys assets from a company directly -- something it would do if a firm were failing -- then no "golden parachute" exit payments could be made during the period when Treasury has an ownership stake in the firm. Companies that sell assets to Treasury through an auction process will be subject to some limits. Firms that sell more than $300 million of assets to Treasury won't be allowed to make any new golden-parachute payments to top executives. A tax-deduction limit on compensation above $500,000 also will apply.

This should be regulated by Boards of Directors. But that isn't going to happen anytime soon. So this is a good start. Paying people for failure encourages bad management decisions. Someone has to tell that to companies in the market place.

The legislation requires Treasury to receive warrants in companies that participate in the program. If a company sells its assets through an auction, Treasury will get a nominal amount of nonvoting warrants. If Treasury buys assets directly, it could get a majority equity stake.

No problems here. The bottom line is we're engaging in a partial nationalization scheme here. Might as well go full boat and actually own part of these companies.

The Troubled Asset Relief Fund will be overseen by a bipartisan congressional commission that will receive reports from Treasury every 30 days. The program will also be overseen by a board comprising the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission, the Housing and Urban Development Department and the Federal Housing Finance Agency.

The office of accountability will have an inspector-general office within Treasury.

Treasury will have to submit a written report to Congress no later than April 30 on the overall financial regulatory system and "its effectiveness at overseeing the participants in the financial markets, including the over-the-counter swaps market and government-sponsored enterprises" and recommend improvements.

Not good. There are a lot of inside players here who have an interest in not performing decent oversight. I would prefer to see some outside parties from industry players who aren't participating in the program (which might be hard to find). In lieu of that, perhaps econ and finance professors who know high-finance. This looks like letting the fox guard the hen house.

If after five years the government has a net loss, the president will be required to submit a legislative proposal to seek reimbursement from the financial institutions that participated.

Good idea, but we need more meat on the bones. My guess is there isn't any meat because doing so would make this a non-starter legislatively.

Treasury will buy mortgage-backed securities, mortgages and other assets secured by residential real estate. The legislation requires Treasury to use its position as the investor in those loans and securities to "encourage the servicers of the underlying mortgages" to help minimize foreclosures.

It also calls for Treasury to "identify opportunities" to acquire "classes of troubled assets" that will improve the ability of Treasury to help modify and restructure loans. The idea is that Treasury would be more patient with homeowners who have fallen behind on their payments than commercial lenders.

There is way too much soft language in this section to make it meaningful. The Treasury will "use its position to encourage...." Simply put this is feel-ggod language that has no bite. It's a dead issue.

The bill would require Treasury to establish, alongside the asset-purchase plan, a program to insure mortgage-backed securities. Financial institutions that want to participate would essentially pay the government a fee and, in return, the government would insure their assets against any future losses.

This should have been done when times were good. This will help should there be another crisis in 10 or more years. For now, this is a good start.

The legislation would require the Securities and Exchange Commission to study so-called mark-to-market accounting standards, which require that firms reflect the market value of assets on their books. Such accounting has culminated in many financial institutions writing down big losses as the value of certain assets has fallen in price. The SEC would have to study the accounting rule's effect on balance sheets and report to Congress within 90 days of its findings.

Excuse me? How in the hell did this get in there? This looks to me like the beginning of serious trouble. First, the SEC is a neutered animal right now. It has done nothing during the current crisis to warrant any confidence in any of its abilities. Secondly, I can tell you exactly what that report will say. "Mark to market caused the problem. Let's use a new "mark to fantasy" method of accounting that will make the books look really good." That's where this one is leading folks.