This one ended quickly.
As I said at the top of the morning post, this week is off to a bad start. While we tried to remain optimistic in the morning, by 10:27 we became concerned by the weakness and at 10:34 I said to members: "Have to give up and cover tighter, not seeing what’s going to turn us around at the moment. XXX " Unlike many big down days we deal with, there was nothing today that gave us occasion to uncover. We took chances with AAPL and GOOG but we're already planning our escape if they can't pull it together tomorrow.
Last Tuesday morning, we were coming off a string of, not only misses, but downside guidance from AAPL, SNDK, TXN and AXP on Monday night and then misses from KEY, ERIC and WB in the morning. Paulson came on TV Tuesday morning to reassure the markets but, a week later at 2:30 today, he had the opposite effect as his big announcement turned out to be yet another wacky scheme for his broker pals to make even more money selling questionable paper – this time it is Covered Bonds. Covered bonds achieve higher ratings than regular notes by augmenting the issuer's pledge to pay with a group of assets such as mortgages that can be sold in a default. The extra security allows lenders to pay less interest.
Covered bonds allow for extension of credit to a bank SIV or trust that will be serviced by income from hypothecated assets on the bank's balance sheet (which themselves have been called into question lately). The assets stay on the bank's balance sheet unless there is a default on the bonds, at which time the assets are forfeit as collateral to the trust vehicle servicing the covered bond. Even better, by wrapping their smelly fish in new wrapping paper, the banks can now drop them off with the Fed, who will accept them as collateral at the discount window for direct loans to commercial banks.
I predicted this Paulson-led end run on the banks weeks ago as this is the end-stage of the game Jefferson warned us of 230 years ago when he said: "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.” Well they inflated the housing prices, deflated the dollar and the commodity bubble and loan resets have deprived the people of all property and now "THEY" are going after the property in bulk by attacking the banks.
Londonbanker at RGE monitor (and they are from Europe, where Paulson's miracle of covered bonds is old hat) lays out this scenario for the gobbling up of small banks by GS and company:
"Lists will circulate of troubled banks likely to go into FDIC receivership. Blogs have been full of such lists as of this week, quite suddenly, as it happens. The FDIC has to have a list because there are so many banks approaching insolvency that they are queued for FDIC receivership rather like planes circling Heathrow waiting for runway clearance to land.
"Several of the central players in the recent market dramas – particularly those investment banks and hedge funds on close terms with Mr Paulson (naming no names, but initials GS comes to mind) – will go strong and aggressive for the covered bond market. They will go around to their list of troubled banks, which of course they will have compiled independently using Texas Ratio maybe, rather than having any foreknowledge of FDIC concerns. They will issue covered bonds to these trouble banks against any assets with real, provable value left on the banks' balance sheets. They will be praised to the heavens by their friends in Washington as providing timely and necessary liquidity to a troubled banking system, proving the efficiency of the free market, bravely bearing the risk of new credit in exchange for troubled bank assets.
When the troubled bank nonetheless fails, our golden circle creditors get the good collateral in an expedited release from FDIC under its new policy statement. The FDIC is left with all the toxic waste assets and liability for depositor insurance claims, with no prospect of recovery of any value from the insolvent bank liquidation.
"When the FDIC itself becomes insolvent, which it surely must do as this game gets played to its obvious outcome, then the FDIC gets a GSE-style bailout via Treasury finance and the poor taxpayers get reamed again."
Really folks, these guys aren't joking, this is dangerous stuff and a crisis has been fomented by people looking to drive the banks down to literally 10 cents on the dollar while other manipulators have been tasked to destroy people's confidence in the Fed to make them seem like they can't handle the crisis while misdirecting retail investors who lose everything while the Fed is manipulated into bailing out the rich at the expense of everyone else.
This is how it works folks, they herd the assets (and real estate is the most real of all assets) into pools and then they poison the pools, force everyone out, buy the assets up cheap and then miraculously (at great expense to the taxpayers) turn it around and end up hodling the deed to most of the land in the country which they will then sell back to the people for 5 to 10 times more than they paid for it until the land is once again in the hands of the people, at which point they start the cycle all over again. This scam was run in the great depression and it took us 30 years to recover from that one!
The markets may have a tough time recovering from a retest of 11,000 as we are not looking like we are going to hold any particular levels until we get a retest of our lows. Oil popped up $1.45 today but could not crack $125 but anything over $110 is still bad for the economy as we need another stimulus-sized boost to stay out of trouble this quarter. At 20Mb per day of oil used, getting on track to saving another $160Bn a year in fuel costs means we need oil to come down about $20 from last quarter's average price of $125. $20 x 20M x 365 = $146Bn less fuel spending at $105, if we can get oil to $85, we put a quick $300Bn back into US consumers' pockets and $1.2Tn globally. Combine that with an easing of pressure on food and finished goods that use oil and we're looking at perhaps $3Tn put back into the global economy at $85 a barrel – roughly 5% of the global GDP.
Banks have written off $500Bn worth of loans to date worldwide. What a difference $3Tn would make towards helping homeowners pay off some of those mortgage and other loans that are being defaulted on as we spend (at $125) $10.75Bn a day on oil alone (unrefined), just under $4Tn a year that goes up in smoke and provides no more economic benefit than when those same 86M barrels a day used to cost us $1.1Tn at $35. Your car goes to the same office, the bus takes the kids to the same school and the machine stamps out the same number of "World's Greatest Dad" statues at $1.1Tn a year as it does at $4Tn a year. The difference is that the extra $3Tn comes disproportionately out of the pockets of the poor and is concentrated into the energy sector, which has swelled in valuation from $2Tn to $6Tn in the past 5 years for producing the same amount of oil as they did 5 years ago.
This cripples other industries who compete for the same dollar and it is they who should be pushing for Congress to take action, it is they (the other 90% of the economy) that should question why Senate Republicans blocked legislation intended to curb speculation in oil futures on Friday. Democrats said Republicans were essentially filibustering a measure they supported since there is a bipartisan sentiment that speculation has been a factor in the jump in oil prices. Democrats accused the Republicans of stalling since Democrats had offered a chance for at least one broad amendment that could encompass oil drilling and other initiatives. “They don’t want to do anything on energy except talk about it,” said Senator Harry Reid, Democrat of Nevada, the majority leader.
Talk is cheap Congress, we have real problems here – let's do something about them!
