Dr. Roubini:I understand your points about the rescue plan being flawed because: 1) it doesn’t directly recapitalize the banks through the government taking an equity stake in them, e.g., buying preferred shares; and 2) it doesn’t provide for any “cram down” of mortgage debt to assure relief to stressed consumers. What I fail to understand are the reasons that Ben Bernanke, who spent the better part of his academic career studying the Great Depression and thinking about how to deal with economic crises, apparently did not emphasize the need for such provisions in a plan. Why, I wonder, did he and Secretary Paulson focus principally on the government buying up the bad debt alone? Why would a guy who is so intimately familiar with the economic history of the Great Depression not insist on creating a HOLC-like program as a critical component of any rescue plan?Thank you,SWK

Great summary – and great conference call .I think even Russia reimposed the short-selling ban earlier this week though.http://www.forbes.com/afxnewslimited/feeds/afx/2008/09/30/afx5487322.html

@SWKI think the credit market is absolutely discounting the package as useless. Even with the passage of the bill through the Senate, the money market freeze remains, and I suspect got even colder. Credit markets sold off aggressively and sovereign CDS on both the US and the UK widened.Liquidation of assets and deleveraging continues apace and I doubt the package will address any of these issues. The key word here is DELEVERAGE. It happening posthaste in the shadow banking system and it will impact the financial system severely.Spending US$700b for a bandaid on a jugular wound is really pointless.

For those who have not seen it:Representative Brad Sherman (D-CA) => presents a strong Skeptical view of Senate Plan that he is circulating around the Congress and to the public.It’s not a done deal by any means …

When elections come in Nov, I will be placing home-made billboard all around my neighborhood telling people not to vote for Senators and Congrfessmen who said YES to the rescue bill. That includes Senator Feinstein. Politicians are going to find the campaign trail extremely tough this year … whn all kinds of negative advertising comes out of the grassroots consitituency. Senator Feinstein put her faith in a few thousand votes – probably from corporate reps. Fine … she can go get a job with one of them!PeteCA

As much as I hate to agree with Feinstein, she’s right. It’s not a bailout of wall street and it’s not a final solution but the longer we wait for that magic pill that will solve all our problems the deeper the U.S. and the world will fall into recession or even depression. Unitl capital markets start operating again businesses will fail, and that my friend has nothing to do with the creative profit schemes derived by highly incentivized investment bankers. I guess all those CA residents who bought properties they couldn’t afford becasue the mortage bankers got the LIAR loans are bummed theyn’t not going to get the free ride they were promised.

There is a reason why some of the assets at the big Wall St banks cannot be valued. Not just because they’re toxic waste. It’s because they are ILLEGAL.In order to get find a way out of the frightening dilemma, the banks have to launder the assets and the paperwork. The only way to do that it to dump them in a giant cesspool of other mortgage-based securities and CDS contracts – so big that investigastors can’t positively identity who wrote what … or which assets are covered. Gosh, that $700 billion slush fund belonging to Hank Paulson sure looks awfully attractive right now, doesn’t it?It is imperative that the Dept. of Justice insists that ALL assets sold to the Government be scrutinized and go into a temporary holding tank, before being transferred to NeverNeverLand. It’s also imperative that the DOJ insists that all assets have complete and detailed documentation, including who originated the transaction, when, and exactly what mortage or CDS assets are being covered. Any asset that cannot meet these critieria – should not be sold or transferred.PeteCA

@ Roubini: “5:24: This bailout package isn’t going to do the trick. That’s why the market isn’t cheering it any more: Nobody trusts anybody any more. “We’ve reached the point where $700 billion doesn’t make any difference given reaction of market.”I called my broker this week for advice on my Roger’s fund. He said to expect hyperinflation and hold on to commodities, that the Fed is attempting the impossible–to bail out $40 trillion in highly-leveraged derivatives at risk and sloshing around in the markets — derivatives that leveraged capital hundreds of times over. His statement confirms Roubini’s: “We’ve reached the point where $700 billion doesn’t make any difference…”

I don’t normally read stuff form the following site, but a friend asked me to check it out. I’m not sure what credibility to give it, but it sure gets one’s attention.This from a friend in Atlanta with strong banking connections: “Reliable word that Bank of America branch managers just received a letter or memo from the USFed instructing them to perhaps be ready for a one-week universal shut-down of the banking system, including access to checking accounts, savings accounts and credit cards. Reliable word has it that BofA bank branches received a shipment of signs last week, reading “WE’RE SORRY, BUT DUE TO CIRCUMSTANCES BEYOND OUR CONTROL, WE CANNOT BE OPEN AT THIS TIME.”Here’s the whole text Breakdown Approaches Climax

Where is KJ Foehr our “new post” caller?This has been the 2nd time I find I am talking to myself.

Businesses will fail if the bleeding isn’t stopped at it’s source – homeowners.This BAILOUT as it stands is an effort in futility.

That certainly sounds plausible.

AfA, as the unofficial busybody on this blog, I am reposting your dialogue from the previous thread. It is not right that a person should be talking to himself, and, anyway, it’s very interesting. Hope this doesn’t turn out to be a mess and hope I don’t get into trouble. You wrote:Supporting the “Operation Save the Fed” thesis:”With the worsening in mortgage markets since last quarter, we estimate a range of $2 billion to $6 billion of unrealized losses,[related to the Fed's exposure to BSC]” the New York-based [BoA's] analysts wrote. AfAMarc August wrote:@AfASorry, I don’t seem to be able to reply within the posts.The authorization limits the amount outstanding. Basically it is a working line of credit. This does not limit the number of transactions, however, any losses they incur will reduce their remaining working line. Their ability to contain losses preserves the ability to reinvest. Marc AugustAfA wrote:I have a strong feeling/conviction that the $700B is just an amuse-gueule. Paulson’s plan, if (don’t laugh) passed will just make it easier for raising more money later.Assume, as I said earlier:1-Average loss/paper = 20%2-Average turnover = 1 month*3-Duration = 3 months (Until Paulso leaves office)@Oct.30: Amount outstanding in securities = $700B@Nov.01: Cash in hand = $700*80% = $560B: Buy new securities/ outstanding = $560B: Ask authorization for new issuance: $140B@Nov.30: Amount outstanding in securities = $700B@Dec.01: Cash in hand = $560B: Ask authorization for additional $140B@Dec.30: Amount outstanding in securities = $700B@Jan.01: Cash in hand = $560B: Ask authorization for additional $140B: Amount outstanding in securities = $700B…They can do it for as long as it takes even before tapping the last $700B, making total losses virtually unlimited/undetermined. And they have to do it this way if they want to have any real impact on the market/really rob taxpayers (depending on your vision of things)*Turnover means that a typical security is sold one month after being purchased. Of course not the whole $700B worth of securities will be bought and sold at the same time, but it was assumed so for illustration purposes. AfAMark wrote:If this headline isn’t one for the “no sh#t” category:U.S. Stocks Drop on Concern Banking Rescue Won’t Prevent Worsening Economyhttp://www.bloomberg.com/apps/news?pid=20601087&sid=aeelyBI721Bo&refer=homeFundamentals, fundamentals… haven’t we been saying this all along? MarkAfa wrote:That exactly what I said to myself when I saw it this afternoon. Funny how bloombergers turn and twist any Market reaction the wrong way.Before the bailout … oops Rescue plan was voted for by Senate:- When markets went up: “Asian markets rally on expectations Rescue plan would be voted”- When markets went down: “Markets slump over suspicions plan would not be voted”And now this. As the other guy said: Fun-Da-Mentals. AfAMarc August wrote:@AfAIf your example is using new auhorizations in addition to the original $700 billion, this would work. I assume this is what your example implies.I also believe that once approved, more will probably follow. New fear generation=new money. Marc AugustAfA wrote:Yes, that is the way I feel. Again, if Paulson has any intention to salvage the credit markets, $700B is a drop in the sea, where the rule will be first come, only one served.Asking “un poco más” is much easier once all authorizations/powers are agreed upon/given by Legislators, no need for new hearings, debates or votes.Ask gambling junk addicts. AfA

Dr. Roubini,Where does all this end ? How do we get back to square one OR get back to the good days ? I think government intervention is a necessary evil now and will delay the impending collapse of the finance system. You mention about a two-pronged approach, assisting the market side and also the debt reduction side for the home owners. Is this to avert the depression OR will it delay a depression?

[Irish]Bailout inept and potentially dangerous>http://www.irishtimes.com/newspaper/opinion/2008/1002/1222815457103_pf.htmlThu, Oct 02, 2008OPINION:The Government has acted in haste and the banking bailout will be regretted at leisure, writes Morgan KellyTHIS IS the wrong solution to the wrong problem. It has put the Irish taxpayer at risk of considerable losses, and does nothing to solve the real problem of Irish banks, which is a shortage of capital.Irish banks get about one-third of their funds by borrowing from foreign banks. What precipitated the crisis on Monday was that foreign banks stopped lending to them. What we need to understand is what caused foreign banks to stop lending to Irish banks while they kept lending to most other banks in Europe. Once we understand the answer to this question we will understand how inept and potentially dangerous the Government’s attempted bailout really is.The reason that foreign banks started to shun Irish banks is that international investors have gradually become aware of the scale and recklessness of Irish bank lending to builders and property speculators. Irish banks are currently owed €110 billion by builders and developers. Of every €100 that Irish residents have deposited in banks, €60 has been lent for property speculation.As the property bubble has burst, it is looking increasingly unlikely that banks will get back more than a fraction of this. In particular, very little of the €25 billion lent to builders to construct the ghost estates and vacant apartment blocks that now blight the landscape will ever be seen again. Foreign banks know of these toxic loans – even if Irish banks are still trying to disguise them – and are frightened by them. That is why they stopped lending to our banks, and why the Government was panicked into taking their place.The difficulty that Irish banks had in raising funds was a symptom of the bad debts that foreign investors know have eaten up most of their capital. By treating the symptom, the Government has ignored the cause which is the shortage of bank capital.The failure of Government policy can be seen in the share price of banks. On Tuesday evening after the bailout had been announced, the shares of the three retail banks were still slightly lower than they had been on Monday morning before the panic. If all that was wrong was a shortage of liquidity then they should have roared back to their levels of a year ago.Is this just abstract carping? Surely deposits are again flowing into Irish banks, and all their troubles are behind them. Unfortunately not.The amount that a bank can lend is proportional to its capital: the amount of money that its owners have invested in it. As banks suffer bad debts, this capital falls and the amount that they can lend contracts.Effectively the Irish banks are heading in the same direction that the Japanese banks were in the 1990s: zombies that are kept on life support by the Government, but without the capital to provide firms and households with the borrowing that they need. However this cosy Japanese solution to an Irish problem could come unstuck if bank auditors refuse to sign off on the valuations that banks are still putting on their dead assets. This would precipitate a new crisis that would make last Monday seem like a picnic.The Irish Government should have done what the Swedes did in 1991. The Swedish government stepped in and, in return for banks’ admitting the scale of their losses and firing the senior managers that had caused their problems, provided capital in return for a share of ownership.As the Swedish economy recovered, the government was able to sell off its share in the banks, with the result that the Swedish taxpayer lost nothing on the bailout. In Finland, by contrast, the government denied that there was any problem until their banking system had collapsed and was then forced into a ruinously expensive bailout. The Government should have offered new capital to four of the institutions, and left the others, where the real problems lie, to fend for themselves.Not only does the Government guarantee of bank borrowing fail to solve the underlying problem of bad loans; it faces the Irish taxpayer with a real risk of enormous losses.By insuring the borrowing of banks with toxic assets, the Government has taken up where the collapsed American insurer AIG left off. It was by guaranteeing to cover any losses to institutions that lent to client banks, what was called monoline insurance, that the world’s largest insurance company went bankrupt. The particular risk that the Government now faces is that Irish banks will package toxic loans as asset-backed securities and sell them off with a Government guarantee, passing on their losses to the Irish taxpayer.Suppose that you are a bank that has lent €100 million each to 10 developers who are having problems meeting their repayments. What you do is bundle the loans into one asset and sell it, with Brian Lenihan’s signature on the bottom, on financial markets for €1 billion. When the borrowers default, the taxpayer will be left taking up the tab.The following months will see a battle of wits between banks and the Financial Regulator, as banks try to offload bad debts on to the taxpayer and the regulator tries to stop them. As this realisation dawns on investors we can expect bank shares to soar in the coming weeks, and the cost of Government borrowing to rocket.Irish banks were facing potential losses on their property lending of the order of €10 billion to €20 billion. Thanks to Brian Lenihan’s master stroke it looks as if it will be you, rather than bank shareholders, who will be taking the loss.• Morgan Kelly is professor of economics in UCD© 2008 The Irish Times

Maybe, Bernanke is now too much acting and thinking under the influence of the bigger ego of Paulson. And we now the background of this one.

You may be right on Bernanke, I’m not well enough informed on economics. We agree on who is in charge these days. Considering the background of that one, considering the content of his first 3 page proposal, I have no illusions anymore.

NO PRIVATE MATTERThe aim of the coming re-regulation should be to detach private finance from the provision of social goods and servicesExcerpt:The present crisis has not resulted from lending to industrial and commercial corporations but from an overextension of mortgages. This simple observation reflects the profound transformation of finance during the last three decades. Lending to individuals has emerged as a profitable strategy for banks since the early 1980s. Financial firms have been drawing profits increasingly from the incomes of wage earners.At the same time, working people have been driven into the arms of financial institutions to meet housing, retirement, education and healthcare needs. Public provision has been systematically limited in these fields as neoliberalism became dominant, thus opening space for private finance.In their dealings with individuals, financial firms enjoy advantages of information, power, and resources. The result often is mis-selling of policies and overcharging for services. But unfortunately for banks, these markets are also prone to bubbles. Mortgage credit, for instance, often translates into price increases, in turn inducing more lending. Rising house prices create an illusion of wealth, but mortgage repayments must be made out of real incomes, and these have not been systematically rising in the developed world during the last three decades.Hence the paradox of the current crisis: the worst financial turmoil since the 1930s was triggered by defaults among some of the poorest people in the US. From 2001 to 2006 financial institutions foisted predatory mortgages of more than $1tn on poor communities that had been hitherto excluded from formal borrowing. This was hailed as an apparent “democratisation” of private finance. We now know that it was a disaster for the poor as well as for banks.http://www.guardian.co.uk/commentisfree/2008/oct/02/creditcrunch.marketturmoil

Buffett showing his expertise in the insurance business? Asking better guarantees than credit default swaps? Promises made with the hands on their wallets?

Love the quote!From http://www.bloomberg.com/apps/news?pid=20601087&sid=a9FDRUP3akdY&refer=homeAmericans’ lack of financial sophistication is a cause, not just a symptom, of the credit crunch, said James Bowers, managing director of the Center for Economic and Entrepreneurial Literacy, a nonprofit group in Washington. It may be a reason people are willing to take out loans for homes they can’t afford or add to credit card debt at adjustable rates.“When we go to a mechanic, we trust them to fix our problems,” he said. “But right now, the mechanics on Wall Street can’t get their own cars to start.”

Alessandro:You’re right about my assumptions, but I’m not yet convinced they are meritless assumptions. Mr. Bernanke and Mr. Paulson are both intelligent men with ample and impressive backgrounds. Still, even the best and the brightest may struggle in the face of complex challenges for which there are no easy or ready solutions. Clearly, both men were late to recognize, or at least to accept and acknowledge publicly, signals that a global financial crisis was on it’s way. If I were to drop either of my assumptions, then, I might be inclined to let go of the first.I do not agree with the view of what is likely a majority of our posters that Mr. Bernanke and Mr. Paulson don’t care. I think they are decent men who are struggling to do what they believe is right, not just what is expedient or what will help their friends. I may disagree with their decisions, but I respect them for the heavy responsibilities they have assumed and continue to shoulder.Sometimes, candidly, I wish I had become a physicist!SWK

Wells Fargo merge with Wachovia…replaces Citi deal

And why would Canada be on your list of countries that will “just about collapse out of sight?”According to the CIA World FactBook -Current Account Balance- Canada ranks #23. Not great, but they’re in positive territory. The US, on the other hand, ranks dead last (at #188). [ref https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.htmlClimbing out of a hole which is getting increasingly more deep is a tough feat. I’d like to know of an example of some other country that’s pulled this off on its own.

Mayday, mayday, mayday! FFR at 0.67!http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfmMiss America said he expect either the bailout or the rate-cut. Rate-cut now well in the 100bps range!

- + – = -But as you know, financials have their own accounting rules.

Another unbelievably valuable post. The truth is emerging in clearer and clearer form. All boiling up from nearly $300tn in high-voltage derivative risk of leveraged capital a hundred times over.

“…but mortgage repayments must be made out of real incomes, and these have not been systematically rising in the developed world during the last three decades.”No outcome without income.

It would be nice if Dr. Roubini would take a peak under the covers of the insurance companies, specifically the ones that decided to get into financial management with annuities, pensions, 401ks and creating their own funds of funds containing “insurance products”. You would think credit default swaps would be right up their ally.

I’m going to put a billboard around my neighborhood thanking all the bankers and politicians for turning my nation into a nation of $8.00/hr earners who are forced to take out loans to survive.

To understand the current crisis it is necessary to understand the market, and to do that one needs to consider what investors in the market should be doing to take advantage of the situation. Warren Buffet gets this and is buying carefully in the opportunity of a lifetime. The main problem though is that the market is too large for investors to fix by buying like Buffet does. If Buffet had enough money though he could probably fix the crisis by himself, by buying enough to clear up the lack of liquidity. But the US government has enough money to do this, it is just a matter of it buying to maximise its own gains, and act as a rational market investor. If it does enough of this it will help prices sufficiently that it would make a huge profit when it resells its equity later.So if the US government bought assets with Paulson’s 700 billion at the lowest prices then it would be doing what Buffet would do. Also if it recapitalised banks by buying equity it also is doing what Buffet would do on a larger scale. If it buys as carefully as Buffet would then it is also using the market to punish bad investment decisions, rather than rewarding them. This buying if done transparently enough should be corruption free and inject money into the system where it needs it most. As the market recovers it could even sell some of these assets before the recession ended at a small profit, reinvest the proceeds and continue until the problem is solved. They could even take equity positions in some hedge funds to recapitalise them as well. If the government makes enough money it can give the money back to the market by e.g. capital gain tax cuts later.This is the way any market crisis is normally resolved, by investors buying undervalued assets and selling them later. As the government does this it would inspire other investors to do the same, believing they will miss out on bargains. A lot of investors are waiting on the sidelines to buy at the bottom, and the government can make this happen sooner. Liquidity in the hands a rational investor is the only solution to this crisis.Assets would be valued by selecting a time before the bubble and calculating a current price adjusting for inflation. This tells the market what assets should be worth. Then the government buys from the steepest discount off this valuation first to minimise fraud, and perhaps offers the assets immediately back for sale at this valuation. Eventually people will see those prices as fair and they will start to sell, perhaps after a few years. Assets offered to the government would be put on public auction for a period of time, with the owner setting a public reserve. The government could also form an investment fund with private investors and they could jointly purchase assets. Depending on how it went the government could issue more shares in the fund to investors so it can transition to private ownership, the government selling all its shares eventually.

Was it not her who said “let them eat cake”? or I got my history mixed up?

he is FLEEING

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