Archive for September, 2008
September 30, 2008 1:05PM
By Alexis Glick
Wow. Certainly struck a chord on that bailout blog! I am thrilled to see the discussion unfold in the commentary. That is why I write this blog. I also notice that everyone who replied did not want to see a bailout. So what would you prefer to see? If we can mutually agree that something needs to happen, what would you like to see happen? Send me your ideas. I am not suggesting that any one of us doesn’t understand the issues. I am simply suggesting that the evidence each day builds in favor of something. What that something is, nobody knows for sure. I just wonder what happens if the market were to sell off another 1,000 or 2,000 points. At one point do we address the fear? Look at something that a frequent guest of mine Richard Suttmeier wrote from ValuEngine. He has been well ahead of this story and is a student of banking. He knows the intricacies of the banking infrastructure in ways that I certainly don’t.
The Technical Line in the Sand – 10,625 Dow
The rebound for the Dow Industrial Average needs to result in a close today above the 120-month simple moving average at 10,625 to avoid a monthly close below that average since July 1982. If we get the negative close, we confirm a multi-year BEAR MARKET.
Dow Theory is in Bearish Mode
Closes on Monday were below the July 15 closing lows for both the Dow Transports and the Dow Industrials: 4,657.56 Dow Transports and 10,962.54 Dow Industrials were the July closing lows.
Suttmeier’s Fearless Prediction of the Week
Here’s what I predicted in the VE Sector Focus: “With or without a $700 billion Wall Street Bailout Bill the Dow Industrial Average will not end September below its 120-month simple moving average at 10,625.” We need the Dow up 259 at today’s close for my prediction to be correct. I thought that the longer-term bearish call will be delayed until the end of October.
The catalyst to confirm a multi-year BEAR MARKET will be miserable third quarter earnings from community and regional banks.
Congratulations to FDIC Chair Sheila Bair – She gets it!
FDIC Chair Sheila Bair successfully orchestrated the failure of WaMu, and the take-under of Wachovia by Citigroup.
WaMu was the sixth largest US bank with $353 billion in assets at the end of the second quarter. There was a run on the bank last week, and with $60 billion in Alt-A Loans failing action was needed. The FDIC in cutting a deal with JP Morgan protected 100% of US deposits, which pushes JP Morgan’s assets to $1.8 trillion, second to Bank of America.
Monday’s deal was a more complex. Citigroup takes over the banking operations of Wachovia on more creative thinking by Sheila Bair. Citi becomes the first $2.1 trillion bank with $782 billion of Wachovia. Wachovia has a $122 billion exposure to Alt-A mortgages. Without analyzing the details it appears that Wachovia will operate as an independent entity similar to Countrywide and for the same reason – These combo’s are above the legal limit for deposits in California.
I credit Monday’s FDIC actions on Wachovia as a reason the Bailout Plan was defeated. In the FDIC press release Sheila Bair stated, “On the whole, the commercial banking system in the United States remains well capitalized.” “This action was necessary to maintain confidence in the banking industry given current financial market conditions.”
Kudos to Sheila Bair!
The FDIC Dug Deep into its Toolbox in the Citi / Wachovia Deal
The tool is called the “systemic risk exception”. Using this exception for the first time, the FDIC covered part of Citi’s cost should the loss on Wachovia’s assets exceed $42 billion. In return the FDIC received $12 billion in preferred stock and warrants from Citi. This allowed all depositors to be protected.
The FDIC completed the deal without formal failure conducting what’s called an open-bank transaction, for the first time since 1992.
This systemic-risk exception required the approval of the Federal Reserve Board and Treasury Department and consultation with President Bush. This is what we need to avoid a $700 billion bailout bill. This cooperation between regulators to do what’s right for the American people, within the letter of the laws and lifelines available is a huge help in thawing the Credit Markets.
The FDIC should be the centerpiece to a Housing Solution without a Bailout Bill
The FDIC should use a provision of the 1991 law and request that all US deposits be backed by the US government. This will stop runs on the banks both through lines on Main Street, and through on-line banking. This would restart the flow of credit on Main Street as smaller banks are reluctant to lend as depositors go elsewhere.
The FDIC has two lines of credit with the US Treasury. A $30 billion line direct to the US Treasury has never been tapped. A $40 billion line of credit to the Federal Finance Bank, which is used on occasion when the FDIC takes on illiquid assets.
Funding for mortgage relieve through the FDIC can be funded by the Federal Finance Bank
The US Treasury should increase the size of US Treasury auctions at these historically low rates and put the proceeds under the Federal Finance Bank, which would fund an FDIC Mortgage Relief program. In effect the FDIC would channel low interest loans through the Federal Finance Bank to give every homeowner a “Mortgage Mulligan.” This is better than bailing out Wall Street.
What the US Treasury should be doing with Fannie & Freddie
Let’s get the geniuses of the new Federal Housing Finance Agency to do their job and evaluate the $5.4 trillion in Fannie and Freddie mortgages that are already on the back of US taxpayers. When this agency sets a fair market value for toxic mortgages the credit markets can begin the thaw.
The Federal Reserve should expand the use of existing tools to get credit flowing.
The New York Federal Reserve should take the toxic collateral from commercial banks and primary dealers on a 90 day Repo in exchange for a special 90-day US Treasury bill at a value of 22 cents on the dollar for the mortgage-related collateral. The Federal Reserve should cut the discount rate to 1%, keeping the federal funds rate at 2%. This takes us through year end, and should get the credit market less stressed.
Let’s use the tools we have, and let capitalism live on in the United States of America.
September 30, 2008 9:50AM
By Alexis Glick
I know that the vast majority of Americans do not want a bailout but we need it. This is not about Wall Street–it’s about main street. If it wasn’t conveyed properly, everyone in Congress from congressional members to the president to Secretary Paulson to Fed Chairman Ben Bernanke need to tell you why.
1. The Fed’s balance sheet in August 2007 was $800 billion. Today it is estimated to be $300 billion . While the central bank can expand reserves and put the printing presses in overdrive, the trend is not a promising one.
2. In the past ten days through the help of the FDIC Washington Mutual failed and was sold to JPMorgan and Wachovia Bank’s banking operations were sold to Citigroup in a deal orchestrated by the FDIC. In both cases, the Chairman Sheila Bair created a miracle and prevented the collapse of two gigantic banks with huge deposits. All of those deposits were protected. The bad news, more banks are falling like rocks and within days, if not weeks, more could fall if something is not done to save them.
3. We lost $1.3 trillion in wealth yesterday when the market sold off 777 points. Look at that number. I know we are talking about freeing up $700 billion tax dollars, our money, but it doesn’t mean we will have to use all of it or that we will lose it. We could make money.
4. Today is quarter end for hedge funds. It is not pretty! Nadsaq was down 199 points, largest percentage loss of all of the indices yesterday down almost 10%. Why? Because hedge funds who invest heavily in tech are seeing record requests for redemptions. People want their money back and they need to sell assets to raise cash. That will continue today. Not good.
5. The biggest holders of equities are Calpers (a pension fund for the State of California), the State of New Jersey and other pension or mutual funds. Our money. This is our money.
6. Caterpillar, one of the best known names in this country, raised $1.3 billion last week in the biggest bond offering ever and it paid one of the highest yields in 9 years. All corporations are facing this new reality, how to get access to cash to pay for payroll, goods and day to day activities.
Believe me, I don’t want this to happen but it has to happen. This is the United States of America. Your voices were heard yesterday in Congress. That is what makes this democracy so special. But, don’t let your anger overlook the bigger story here. We need help. This may not be the solution you like but we are running out of options. We have been pumping cash into the credit markets for months, cut rates, orchestrated massive loans and bank deals. We don’t have that many more options left.
September 26, 2008 5:15PM
By Alexis Glick
Karl Case is a professor of Economics at Wellesley College. He is also one half of the S&P Case-Shiller Index, which measures property values in regional areas throughout the country. When he speaks, people listen.
Karl Case recently scrapped his latest forecast for a housing recovery in early 2009 because of the uncertainty surrounding the credit markets. One in ten mortgage loans are in default or delinquency. Home prices have fallen for eight consecutive quarters, according to the S&P Case-Shiller Index. Treasury Secretary Paulson noted in his testimony this week that housing created this mess and housing has to get us out of it. Look at some of the comments Case made to me.
“The real estate market has been unbelievable for 30 years. If you go back and look at the price index for the last 30 years it never fell between 1975 and 2005—there were regional declines, but every regional decline was covered up by another regional boom. So we got the impression that, with growing population and a limited amount of land, that housing in effect could stay steady or go up forever and this just proves everybody wrong—those of us watching these bubbles, I’ve been watching them since 1985 have been concerned that something like this could happen, but I don’t think anyone could have predicted the order of magnitude—this is really unbelievable how quick the bomb hit.”
“The whole economy has $12 trillion in mortgages backed by a single asset class: single family homes, and we had a lot riding in that one variable, so it caught people by surprise and the analytical guys were running regressions with default rates and foreclosure rates that made them sure they understood how this stuff would behave in a downturn, but they were wrong.”
Here is the interview in its entirety. It’s worth watching. He pulls no punches.
September 26, 2008 3:43PM
By Alexis Glick
Forgive me for taking so long to post this next blog but these unprecedented times have kept me incredibly busy.
Wayne Angell, former Federal Reserve governor who served during the first seven years of the Greenspan era, joined me for a lengthy sit-down interview yesterday. We talked about the reasons why the banking system came unglued, what we could have done to prevent this and how something called the Community Reinvestment Act contributed to the problem that we have today.
The CRA was created in 1977. The act encouraged Fannie Mae to lend to home buyers buy encouraging mortgage companies, commercial banks and savings and loans to lend. It also encouraged Freddie Mac to buy mortgages on the secondary market, package them and sell them as securities. In hindsight, it sounds like the cause of many of today’s problems. Well according to Wayne Angell, it is. He willingly accepts blame for what he and the Greenspan era did under his watch and gives his take on how to solve this problem. He believes the U.S. dollar and free trade with other countries will continue to keep this economy afloat while other areas are weak.
Note: Every Federal Reserve governor that I have talked to (three this week), says it is probably the worst event since the Depression; but they also say the Fed has the funds to handle it. Clearly, they know better. That makes me feel a little better.
September 24, 2008 6:56PM
By Alexis Glick
In an exclusive interview this morning with former SEC Chairman William Donaldson, he went on the record for the first time since these bailout talks began. If you don’t know or remember him, he was famous for fighting for greater transparency and regulation. In fact, it was speculated that he was pushed out of his role because he fought hard for stricter guidelines and was not willing to allow the uptick rule to be repealed under his watch.
So much has changed since he left, and he is not one to question intentions or blame specific parties, but he is calling for BIG changes. He thinks the uptick rule needs to be brought back, things like corporate repurchases in the last half hour of trading needs to be reconsidered, a board of independent advisers needs to oversee the Treasury as we make this massive investment in troubled assets — and he believes $700 billion is just a starting point. He is still a vocal activist for shareholder rights and investor protection.
Today he did not hold anything back. I, for one, think Donaldson needs to have a bigger voice in how we clean up this mess. If it were me, I would make him one of those independent advisers.
September 24, 2008 3:26PM
By Alexis Glick
Checkmate. McCain made the first move and it is a brilliant move. He just decided to cancel campaigning to return to Washington and deal with the rescue plan. The financial well-being of this country has been his weak point, and the numbers over the past week have been moving strongly in Obama’s direction. McCain is not only telling Obama that he should suspend his campaigning, but he is also suggesting that they postpone their foreign policy debate this Friday night. Foreign policy is McCain’s strong suit. A very tactical and brilliant move on McCain’s part to redirect the attention back on him.
This is precisely what I talked about in my blog last night. One candidate had to take ownership of this story and make it clear that he was taking credit for helping get the rescue plan accomplished. McCain made that move.
As I said in my blog post, the pending recess and the risk to one of the candidates if a deal were not done by Friday’s debate were important things to consider. One of two things can happen from here: either a deal gets done by week end or one of these candidates bare the brunt of the blame. McCain said he reached out to the Obama camp and used comparisons to 9/11. He said this national crisis is too big and too important not to address it on a bipartisan level. This is the man that said “he would rather lose a campaign then lose a war.” Anxious to see what the Obama camp says in return. This is still Obama’s opportunity to capitalize on the weakness of this economy.
What will happen next?
September 23, 2008 5:20PM
By Alexis Glick
It’s only a matter of days. This deal is going to happen whether we like it or not. It’s time to wake up and smell the coffee.
Today Bernanke, Paulson and Cox testified in front of the Senate Finance Committee. They got skewered by members of both parties. Some of the most outspoken critics were Senator Shelby, the ranking Republican, and Senator Jim Bunning who said, “It’s financial socialism, and it’s un-American.”
The rhetoric may have been tough, and I must admit I was surprised the markets held in there for them, essentially buying Congress and the panelists more time to talk about the plan; but, the clock is ticking and everyone knows it. Bernanke stated the facts. He is not a Wall Street guy and never has been. He’s a historian who spent most of his career studying the Great Depression. He knows what happened and understands the ramifications of the New Deal. He put it out there in plain English today when he said, “I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover.” That is all the American taxpayer needed to hear. It was loud and clear. The Fed Chair doesn’t have an agenda. He doesn’t want this to happen. He needs to turn this around.
Tomorrow, the gentlemen I mentioned above will go in front of the House and experience another bashing session. The rhetoric will be fierce. This is every ranking Democrat’s and Republican’s opportunity to cry foul. Here’s the thing… they say they will not go on recess Friday if they need to remain in session to get this done. But you know Congress — they went on recess for five weeks while oil prices were at historic levels despite calls to stay and sign an energy bill. They will do it again.
This bill or plan or whatever you want to call it, will get done and my money is betting that it will happen late Thursday evening. The markets will react on Friday. Congressional members stand for re-election in a little over 30 days. All members of the House and one-third of the Senate need to return home to their constituents and say ‘we did it.’ They have no choice. The longer they fight over the details, the more the markets will react negatively and the bigger the consequences.
This is an opportunity for one of these two presidential candidates to step up and say do it. If one of them can appear to orchestrate the deal and get their respective party to cross the line and shake hands on it, they will declare victory.
Don’t forget there is a debate on Friday night. Who stands to lose going in to that debate if nothing has been accomplished?
September 22, 2008 5:51PM
By Alexis Glick
How often can you say that you spoke to two former Federal Reserve governors in one day? That happened today starting with Former Fed Governor Lyle Gramley this morning on The Opening Bell. He was a Fed Governor for 5 years from May 28, 1980 to September 1, 1985.
Just to be clear, there are seven members of the Board of Governors of the Federal Reserve. They are nominated by the president and confirmed by the Senate. A full term is 14 years. One term begins every two years, on Feb. 1 of even-numbered years.
Lyle Gramley today said the following in response to the bailout.
“In the first quarter the flow of credit to consumers and businesses declined by 40%, in the second quarter it declined by 35% more, it was headed down into the third quarter. We were heading for a catastrophe – something had to be done. The root of the problem has been these toxic mortgages out there. ”
Here he is.
In the early part of the afternoon I took a trip up to Columbia University to interview Frederic Mishkin, a former Fed governor and Columbia University Business School professor on a first on FOX Business. He stepped down as Fed governor about three weeks ago due to a potential conflict in updating his No. 1 best selling text book called, “The Economics of Money, Banking and Financial Markets.” This was always the plan. In his two years as Fed governor he witnessed and participated in an unprecedented period of time for the financial markets. In past speeches he predicted the unwinding of the financial markets and on many occasions, compared the current situation to the Depression Era.
“I don’t think it is far off the mark to characterize the turmoil of the past year as one of the worst financial shocks that the U.S. has confronted since the Great Depression.”
He said this on July 2 at a forum in Israel.
Look at what he told me today about how this financial crisis is different than the Depression, why Bernanke is the right guy, how the investment banking model failed, and how the Federal Regulatory System will be changed.
