Wednesday, September 24, 2008

Just Another $700,000,000,000 Day at the Office

The debate on Capitol (or should it be "Capital") Hill rages over whether to grant Treasury Secretary Henry Paulson a $700 billion check to ball out failing - or already failed - financial institutions.

On Tuesday, the Secretary and Fed head Ben Bernanke gave testimony and fielded questions from the Senate. Today, it was members of the House of Representatives who took turns poking and prodding the "Desperate Duo." The hue and cry for accountability, protection and limitations on executive pay could not have been louder.

On the last point, Paulson and Bernanke finally gave in, bowing to congress' demands that CEO and top executive pay be slashed for firms participating in the plan. Whatever they lawmakers come up with, it will likely be watered down, non-binding and easily skirted. With $700 billion floating around, who's going to miss a couple hundred million for Paulson's buddies here and there?

The debate also raged on message boards. A message I posted on one such board seemed to sum up the situation to the satisfaction of a number of participants. It follows, in part, below:

Fannie and Freddie, the guarantors of about 50% of all mortgage loans in the US have already been taken over by the govt. The "banks" who made the loans repackaged the mortgages and sold them to investors.

The stupidity of the top financial firms was in their greed, they kept a lot of these mortgage packages - officially off their books - but still there, and in some cases borrowed against those same, bad funds to leverage themselves even more, until it all began to unravel.

Instead of dispersing the risk, they kept much of the risk concentrated in their off-balance sheet transactions, a la Enron. There are numerous parties and counter parties, all leveraged out through derivatives which will cause unknown damage across the credit spectrum.

At this point in time, the $700 billion has little to do with mortgages, and much more to do with credit risk, leverage and derivative exposure by top financial firms. There's no regulation of this money and risk and it continues to flare up as companies are exposed. Some of it is criminal, some just bad judgment. These companies caused the problem by not diversifying risk like they were supposed to according to their models and were leveraged 35-1 in some cases. Now it is unwinding and the carnage could be great though there will be survivors.

It needs to be unwound without bailouts and tax money or else it will just continue and will result in a real catastrophe down the road. You can't just play games and never get caught. There are consequences and the bailout is designed to take the burden off the financial companies which will be harmed or are already insolvent.

That pretty much summarizes my position. Meanwhile, a number of developments overnight and during the day are worth noting.

The FBI has launched a preliminary fraud investigation into the workings of Fannie Mae, Freddie Mac, Lehman Bros., and AIG, along with 22 other firms. The agency seeks information and background leading up to the various bailouts - all manufactured with close care by Paulson and Bernanke, I should add - and whether fraudulent practices were used in the lead-up to the eventual massive bailout proposal now under debate.

Goldman Sachs (Paulson's former firm) and Morgan Stanley were granted quick approval to change their designation from investment banks to holding - or, commercial - banks, in addition, they are seeking exemptions to retain their commodities and other businesses that normally don't fall under the rules. The speed at which these approvals were granted was breathtaking. No accounting, no review, no peering into the firms' practices. I suppose that when you're sweeping billions under the rug, you take care to do so quickly.

Dow 10,825.17 -29.00; NASDAQ 2,155.68 +2.35; S&P 500 1,185.87 -2.35; NYSE Composite 7,768.82 -16.45

President Bush will address the nation at 9:00 ET tonight on the airwaves. Hurrah!

In light of the confluence of events, the markets took a breather, trading in a narrow range. That still didn't prevent declining issues to outpace advancers, 3938-2363, or for new lows to overwhelm new highs, 294-19. Yes, 19.

Commodities were mixed, with oil falling 88 cents, to $105.73, gold up $3.80 to $895.00 and silver up 27 cents to $13.44.

John McCain could simply not resist the opportunity to grandstand, calling for cancellation of Friday's scheduled debate between him and Barack Obama, ostensibly to return to Washington to help get the legislation passed. He must be really worried about debating head-to-head with Obama.

What's sure to follow are calls that the Democrats are dragging their feet on this legislation. The administration surely wants to get its mitts on that bundle of cash and, as usual, they will hold a gun to the head of Democrats and the American public to get it.

What a day!

Volume was extremely light.

NYSE Volume 1,081,259,000
NASDAQ Volume 1,815,884,000

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