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Leftovers

By Larry Doyle on January 30, 2009 at 8:15 AM in American Consumers, Bank Nationalization, Banking Institutions, Current Affairs, Economic Stimulus, Economy

Growing up as one of eight kids, seven boys, dinnertime was always interesting. More often than not, milk was spilled, vegetables were hidden, and you better not be late because the food went quickly. Every week to ten days, get ready for leftovers.

In a similar vein, today’s market activity, economic news, and financial stories felt like one of those “leftover” dinners. There is still plenty of juice in the meat, but we have already seen some of these items. Let me put some ketchup, A-1, black pepper, and worcestershire out here to spice things up.

The stock market on Thursday totally reversed Wednesday’s upward move. Does that mean investors are discounting the concept of Bank Transition that we discussed the other day? Not at all. In fact, I still have “reason for optimism” because an entity like Bank Transition is critically important to rebuilding the financial foundation of our country. If anybody wants to reread that piece, though, don’t overlook the fact that I said we will still experience serious economic pain for an extended period.

That said, if we want to come out on the other side of this, sooner rather than later and in better shape, we need Bank Transition. Hopefully, readers can understand the context of my writing. I am not a day trader. I still think we will likely see the lows seen on November 20th. The mere fact that Bank Transition will likely be launched gives me reason for optimism. I hope that clarifies things. If not, please don’t be bashful.

The best performing sectors of the market on Thursday were focused on renewable energy and gold. The worst performing sectors were in recreational products and real estate services.

The longer maturities within the government bond market continued to sell off hard. The 10-year government bond is now back to near 2.9%, while the 30-year government bond is near 3.6%. Each of these rates is up approximately 1% in the last 3 weeks. Why?? Massive deficit spending and the resulting enormous government demand for money, both here and around the world. This demand will likely drive these rates even higher and “crowd out” private borrowers thus keeping corporate, consumer, and municipal rates at elevated levels, as well.

A loyal reader shared a piece with us yesterday on the consternation within the Chinese investment community over the financial issues within our country and the resulting underperformance of Chinese investments in our markets. This consternation caused the Chinese to sell a fair amount of assets and move into lower yielding Treasury securities. The Chinese economic minister speaking at the World Economic Forum in Davos, Switzerland was not overly enthused about our new Treasury Secretary taking them to task about the value of the Chinese yuan. This “dilemma” continues to evolve. We’ll be watching and we thank our reader for sharing that article.

Mr. Soros commented that the Euro may not survive without a global plan for dealing with toxic debt. This is the same financier who has made massive bets across a wide array of markets over the course of his career and then proceeded to talk his position. Not that many financiers do not do the exact same thing, but prior to any news source asking him his opinion, they should ask him his “financial position” so that his opinion can be taken with the pound of salt it deserves.

President Obama called Wall Street bonuses recently paid out “shameful.” Congressman Christopher Dodd indicated that he is looking for every legal means to reclaim bankers’ bonuses. I will grant you that the manner in which certain firms and certain executives have handled bonus payments is shameful. However, for both President Obama and Congressman Dodd to issue blanket statements like that is the height of pandering.

Senator Chris Dodd and former Countrywide CEO, Angelo Mozilo

Let me remind both of them that certain firms did not want government money but were compelled to take it. Let me also remind them that they were the two single greatest recipients of money from Freddie and Fannie. Yes, the same Freddie and Fannie that have come back for more and more money as their mortgage portfolios sink deeper into oblivion because their colleague Barney Frank wanted to “roll the dice.” Let me also remind Mr. Dodd that he STILL owes the American public an answer about the VIP mortgage he received from Countrywide under the “friends of Angelo” program. Please keep the pandering to a minimum and be honest with the American public on those issues. In doing so, perhaps some greater credibility may be gained.

As President Obama said in his inaugural speech, those who handle the public’s money “will be held to account.”

HARP

The “A” team Obama promised is looking more and more like “F” troop.
Sassy

Harp, that is funny!
LD, I am also the youngest of eight children, so I know where you are coming from there.
Without large home gardens, and lots of home canning, we would not have eaten at all…even left-overs.
That said, my husband’s breakfast chums include the following small businesses…optician, tire store, shoe repair, transmission shop, plumber, and cycle shop.
Employing 1 to 10 employees, these folks are not wealthy, and are past retirement age, but they keep going.
Not all employers spend their time looking for special handouts, just a fair shake!
Thanks!
http://Godhelpusall lee M

Barney Frank and Christopher Dodd are both guilty of aiding and abetting the disasters at Fannie Mae and Freddie Mac. Dodd’s mtg with Countrywide and Frank’s dalliance with Moss at Freddie Mac were both glossed over when they should have been investigated for conflict of interest.

As long as the foxes guard the hen houses nothing is going to change. How can we have any hope for improvement when the same dirty producers direct the play? Transperancy? What’s that? A new word of which nobody in government knows the definition.
mountainaires

Ha! Good one, Harp! Really good!
fiscalliberal

Regarding the economy. Here in Michigan we are having some of the best cross country skiing that I can remember. My daughter is comming to visit from South Carolina and I went to REI to buy her a set of skii’s. They are nearly sold out. Sales person said it was he best year they have had in memory.

Lesson? People are going back to quality. In the 60′s, people bought Pendalton shirts for Christmas because they were well constructed and lasted a long time and had utility to the recipient.

So despite the gloom and doom, things might be starting to trend the right way. We just need to fall back on our better judgement. Small vignette.
mountainaires

“Those who handle the public’s money will be held to account…”

LD, you didn’t really believe him, did you?

I’ve become more cynical by the minute over the past 8 years, so I always look for the agenda now. I have no hope left that anyone will ever be held to account for anything–except little people who are powerless against the state.

Take a look at this payroll tax cut in the stimulus bill. It’s going to weaken social security, and the very people who will need every dime of their social security in the future, because they don’t have a pension, are the ones who will not have enough social security credits paid into the system.

If there is any Social Security in the future.

Employers won’t have to match the 6.2 % on employees’ payroll taxes, so it’s a great tax cut for them, but then they never have to worry about paying the costs for it later, while workers will lose SS credits and receive less SS in the end, right?
LD

Mountainaires….I’m not that naive but it does make it VERY easy to reference it in light of all the issues that will be coming down the pike.

Your point is well taken. I view so much of what comes out of Washington politicos and Wall Street management as “pandering” to the public. It truly motivates me in my writing.
athy

LD
Good post. Interesting observations.

IMO, I dont trust the ‘good bank’ scenario where the government (and in the long run -the taxpayers) buy toxic assets back from the private banks so that this can free up the private banks so that they can inject more money to the economy via increased credit.

This is being considered all in the name of preventing the nationalization of our banking system?
What’s up with that? Has anyone really studied what would happen if our government owned the banks?

Are we really better off with a banking system made up of private banks who are SUPPOSIDLY held to accountability to the public by our quasi public federal reserve system members?

I could be wrong however the buyback of toxic assets reminds me of what happened recently with the buyback, repackaging and remarketing of the bad mortgages. All these repackaged mortgage-based assets were then bought by who? Major investors-including pension fund managers. Who gets hurt in the end-the taxpayer.

I am not comfortable with our quasi private federal reserve system.

He who controls the printing of money and the issuance of credit controls the nation.

Who really controls the economy- the government? the taxpayers? laws of economics? or…FOR PROFIT PRIVATE BANKERS whose purpose for existance is to increase return on investments?
LD

Athy…

I appreciate your concern and level of distrust. This Bank Transition needs a few things in order to make it effective.

1.transparency
2.joint efforts between government, bankers, and independent overseers
3. competitive auction process for purposes of selling assets that are taken over…

Away from Bank Transition, the FDIC should
4. take over banks that are deemed insolvent, sell the divisions that have value and close the doors.

Regulators need to
5. be fully engaged and proactive in managing bank capital ratios

In order for our economy to get back on track the blood (money) needs to flow.

IMO, Bank Transition is not the only part of the equation but it is an important piece. There are plenty of questions about implementation and execution but I do think that some form of it needs to occur.

Thanks for writing.
http://Godhelpusall lee M

Athy, you are correct in not being comfortable with the Federal Reserve Bank.

The Federal Reserve is not owned by the Federal Government but is a private corporation owned by 10 banks, most of which are foreign banks. David Rockefeller owns 22% of the Federal Reserve. The Federal Reserve is a central system of banking owned both privately and publicly to control the supply of money in the American economy and to set fiscal policy. The names of the members that sit on the Federal Reserve’s Governor’s board are kept private.

When the Federal Reserve Act was passed on Dec.13, 1913, Charles Lindbergh, who was a congressman at the time, said – “The Act establishes the most gigantic trust on earth. When the president signs this bill, the invisible government of the monetary power will be legalized. The greatest crime of the ages is perpetuated by this banking and currency bill”.

When Woodrow Wilson signed this bill into law in 1913 he gave this entity the power to control our very existence.

“Power corrupts, and absolute power corrupts absolutely” – Lord Acton -

With David Rockefeller’s tentacles entwined in the Federal Reserve, The Bilderberg Group, The Trilateralist Commission, etc. we have a right to be uncomfortable. These people have been preaching “New World Order” for years. With each bail-out and government takeover of banks and business, we are descending ever deeper into the hands of the money men.
getfitnow

Yep! didn’t hear BO crying how shameful when he was receiving campaign donations. Sadly, I think the public believes or wants to believe that most of his donations where “small”.

I don’t trust him (I believe he’s just the spokesman), Reid, Pelosi and committee chairmen like Dodd, Franks, Obie and the like. It’s the republicans all over again.
http://uppitywoman08.wordpress.com Uppity Woman

Mozilo looks like rigor mortis. Nice of Dodd to suddenly be so interested, considering thanks to him and his buddy Barney, Fannie Mae tanked and started this whole mess.

These guys are all financially incesuous pigs and it’s like having a bunch of foxes guarding the chickens.
Lizzy

Hi LD,
I enjoyed the post. I saw an intervoew on PBS about who assmes the responsibility and takes the loss for toxic assets. It has not been discussed much but should the people pay through their taxes or should the stock holders and/or bond holders assume the loss. I would like to hear your thoughts on this topic, if it fits with the week’s leftovers.
LD

Lizzy,

….and that is largely the crux of the matter. I will make the following comments.

1. In certain situations where the losses are so great as to render the bank insolvent the assets should be transferred to Bank Transition, other divisions that have value should be sold or spun off, the doors can then be shut with shareholders largely wiped out and bondholders accruing some percentage of return based on how much value is gained in selling divisions.

2. In other situations, we would have variations on that scenario of differring measures.

I will admit that this is a situation in which NOBODY will be happy.

3. One final comment, I do believe that in forming a Bank Transition and transferring assets into it in a transparent process that private capital will be attracted to buy assets. Having that happen will be enormously beneficial and ultimately critically important to the process.