Tuesday, February 10, 2009

Geithner's Wall Street Cram-Down

It was pretty evident that Wall Street didn't like what Treasury Secretary Timothy Geithner was telling them when he began outlining the details of TARP II, the $350 billion Obama administration's side of the original $700 billion plan approved in October of 2008.

Stocks were already trading lower when Geithner stepped to the mic, but they really tanked as he drilled out scant details of the government's plan. The Dow was down about 45 points when he started speaking at 11:00 am. By the time he was finished, just a half hour later, the blue chip index was off nearly 300. Matters proceeded to become materially worse from there. The Dow was down more than 400 points before a last-gasp rally trimmed the losses by about 40 points in the final 15 minutes.

Dow 7,888.88, -381.99 (4.62%)
NASDAQ 1,524.73, -66.83 (4.20%)
S&P 500 827.17, -42.72 (4.91%)
NYSE Composite 5,214.34, -265.54 (4.85%)

Some of the more vocal Wall Street banking crowd are complaining that Geithner's plan - which reportedly has provisions for the assumption of some of the banks' toxic assets by private investors - is short on specifics.

The truth of the matter is that it likely opens the banks in question to too much public scrutiny, as evidenced by the government's new web site, financialstability.gov.

For a glimpse of what's ahead for the Bailout Bunch, the site currently links to Treasury's own Emergency Economic Stabilization Act web site. drilling down just a page reveals, under "Systemically Significantly Failing Institutions" we find reams of info on Bank of America, Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan Chase, Wells Fargo & Co., Bank of New York Mellon, State Street, Merrill Lynch, AIG, plus Chrysler, General Motors and GMAC.

How appropriate and sweetly ironic that these banks and businesses are grouped under such a heading. Most, if not all, are already insolvent. Bloggers and economists should have a field day with all the fresh light shining on these cheaters, liars and scoundrels. There's a wealth of information there, much of it which will almost surely facilitate the demise of these failed firms.

Could the government actually be forcing the banks to confess to their excess and the extent of their failures? It sure looks that way, and, if so, it's a great step forward. Wall Street fails to see it that way, but, clue to the clueless, Wall Street isn't America and the fate of 300 million Americans is not inexorably tied to the ups and downs of the Dow Jones Industrials.

Main Street may finally be catching a break as the banks are forced to come clean, which means that a good number of them will be forced into bankruptcy and/or liquidation, the key step in ridding the market of malinvestments and failed institutions.

Could it be that Secretary Geithner, under the thumb of President Obama, has finally gotten religion and intends to actually correct the mess that he was already a party to? Could be. Obama's sincerity and forthrightness was on display just last night at his first press conference when he left the door a bit ajar in his response to a reporter's question about investigating former administration officials.

His response to a question about Senator Patrick Leahy's calling for a "truth commission" was decidedly grey-area, as the President said much to the affect that while he preferred to "look forward" he would not block investigative efforts. Between those comments and the Geithner cram-down on Wall Street, maybe real healing in America can begin.

This writer honestly hasn't felt this good about a serious market tumble since the dot-com bust, the key being Geithner's fairly obvious signal that the rules have changed and the hand-outs and free rides are now relics of the past.

Advancing issues were absolutely overwhelmed by decliners in the broadest selling since November. Losers led gainers, 5405-1145, a nearly 5-1 edge. New lows continued to strengthen ahead of new highs, 203-19. A major part of the story was volume, which was very strong, indicating that this bust was the real deal.

NYSE Volume 1,757,078,000
NASDAQ Volume 2,473,252,000

Financial stocks took a beating, especially the most egregious offenders. Bank of America (BAC) lost 1.33 to close at 5.56 (-19.30%). There was false hope recently as BofA rallied from below $4 to above $6, a level at which major funds could still participate. It now looks to fall below $5 again, signaling a continuance of the classic death spiral.

Ironically, this stock looks very much like Countrywide did in January of 2008, after Bank of America had assumed most of the company's assets. Countrywide eventually was fully assumed by Bank of America. Much of the same bad debt which killed that company are now crushing CEO Ken Lewis' company. Bank of America has been insolvent for quite some time and it will be interesting to watch the continuing saga of what was once America's largest banking interest.

Citigroup (C), another of the walking dead, was hammered 0.60, to 3.35 (-15.19). This company's future may be numbered in weeks rather than months.

Goldman Sachs (GS) was hard hit, dropping 7.49, to 90.40 (-7.65%). Morgan Stanley (MS)lost 2.82, to 20.79 (-11.95). JP Morgan Chase fell 2.66, to 24.62 (-9.75).

Commodities were mostly mixed with oil down substantially, losing 2.01, closing at $37.55, a three-week low. The metals were moving in the opposite directed, hurriedly. Gold shot up 21.40, to $914.20. Silver gained 30 cents, to 13.13.

The precious metals prices are signaling another flight to safety. Clearly, equities are not the place to be now, as they haven't been for the past 18 months, and they still won't be for some time even though today's decline could be interpreted as the beginning of the recovery. The dollar was up sharply against other currencies.

While our own corrupt bankers and wheedlers express themselves with outcries of fear and panic, smart money is on the greenback and gold, a combination that may not seem plausible at first, though it's better understood when seen in the light of a basic turnover of power. It's clear that the Obama administration is not going to tolerate much less than complete transparency. THAT is a very positive development.

Silver remains my #1 investment. On the other hand, opportunities may begin to emerge in black market tobacco and stinging race and sports fixers, the ultimate revenge play.

Today's losses were surely not the last, as the Dow closed at its lowest level since November 20 of last year and is also the first close since then below 7900. Wall Street is in serious jeopardy of breaking apart at the seams. Another precipitous move lower could be in the cards as the market must retest 7550 on the Dow, though that move actually seems a foregone conclusion after today.

It was a poor day for Wall Street, but a darned good one for the United States of America.

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