http://money.cnn.com/2008/09/30/news/economy/plan_b/index.htm?postversion=2008093014

In summary it discusses suggestions of alternative measures to a bailout plan as a plan B. Plan B is not directly using taxpayer dollars but is refered to as “Keeping the powder dry” if the bailout fails and should not be used prior to the vote on the bailout since it it works it will put less pressure on the congress to pass the bill. WTF, so it’s better to blast our national debt into orbit as a test and if that doesn’t work go for the cheaper measures? Howabout reversing that strategy?

…
Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
…

In stocks what’s conservative?

S&P Index Funds, like SPY. Your money moves exactly as the S&P 500, the benchmark of stocks, moves.

Jason, you don’t think the Dow tanking, a credit crunch (or a return to best loan practices, take your pick), or a recession/depression affects Seattle area house prices? I heard on the radio today about a lady who can’t sell her house in Bellevue because interested buyers can’t get loans.

Yeah, let’s punish that family of four for getting lured by the rosy perspectives the financial companies and undoubtedly all their friends and family has been giving them for years. How republican to think they, not their lenders, need to be punished for buying a house for their family.

When I switched on the car radio this morning it was on FM92.5 at about 8:30am. They discussed the bailout plan and had invited an “expert” from Seattletimes that called himself “doctor finance”. One person asked a question if the statements down the line that if the plan doesn’t pass ALL the people who say No Bailout! will loose their homes? Doctor finance answer: Yes.
It seems to be the new “buy now or be priced out forever” scare-mongering.

Please post more stuff about Seattle specifically. I really don’t care that 800% of Seattle Bubble readers have written to their Congressman about the bailout. Seattle Bubble readers don’t make for an interesting lobbying group.

Love,
Jason

Tuesday September 30, 6:04 am ET

By Tarmo Virki

OSLO (Reuters) – Microsoft Chief Executive Steve Ballmer said on Tuesday no company was immune to the global financial crisis, which he expects to sap both consumer and business spending.

“Financial issues are going to affect both business spending and consumer spending, and particularly … spending by the financial services industry,” Ballmer told reporters on the sidelines of a news conference in the Norwegian capital.

“I think one has to anticipate that no company is immune to these issues,” he said, but declined to be more specific.

98115renter: (from link) “With this vote, [Republicans have] taken responsibility for this economy, and they will be held accountable.”

I agree. I see this of their own making. Their president and his appointees caused the bulk of the fear & uncertainty in the markets. Bush has no credibility (deservedly), so Republicans in Congress are loathe to help him (cut to commercial: “he/she voted with Bush 90% of the time”). Paulson’s plan was the epitome of greed. But the message to Democrats was clear: pass, or get the blame for what our scare tactics have wrought. I still don’t like it that lots of Democrats said yes; I would rather they have taken a chance on their own careers for the long-term good of the country.

institutional investors

entire financial system

Let’s reread scotsman #133

There was a concern about all the little securities that have cropped up since mortgages maxed out the consumer. If you open those up you will find nothing inside, that’s why the financial institutions need hard dollars, like $700 billion. It’s hard to float credit with credit, at some point you need money to cover the spread.

We have a stock market that is over priced. Mortgage backed securities is the current bubble that will need to be dealt with ten years from now. What we are dealing with today is the stock market bubble which is deflating. There’s nothing there.

No we don’t have Singer, or Woolworths. There are no more tangible companies with real assets to be divided up and sold off. That’s been done, there is nothing left. We are trading paper for paper.

The consumer was the last tangible in the financial market. That’s now done.

My solution was, my point for a long time, is to build your own Real Estate portfolio as a tangible, managed, retirement account. Today with what has happened, coupled with what I’ve learned here on this blog, BTW, it would be foolish to hide your head in the sand.

So what would be next? Where would your money be best spent?

Are you talking about a fund or picking stocks directly. Huge difference.

Crazy? Yeah, kinda. The problem is not knowing exactly what to buy. The market is tanking because the folks that do this for a living are moving loads of cash out of equity positions because they can’t get a read. If your going to bet on something 10-15 years down the road do a ton of research and stay with something boring :-)

Buffalo buffalo buffalo Buffalo buffalo.

Just my 2 cents…

‘ And let us recognize above all the 228 who voted no — the authors of this revolt of the nihilists. They showed the world how much they detest their own leaders and the collected expertise of the Treasury and Fed. They did the momentarily popular thing, and if the country slides into a deep recession, they will have the time and leisure to watch public opinion shift against them.

House Republicans led the way and will get most of the blame. It has been interesting to watch them on their single-minded mission to destroy the Republican Party. Not long ago, they led an anti-immigration crusade that drove away Hispanic support. Then, too, they listened to the loudest and angriest voices in their party, oblivious to the complicated anxieties that lurk in most American minds.

Now they have once again confused talk radio with reality. If this economy slides, they will go down in history as the Smoot-Hawleys of the 21st century. With this vote, they’ve taken responsibility for this economy, and they will be held accountable. The short-term blows will fall on John McCain, the long-term stress on the existence of the G.O.P. as we know it. ‘

I wonder how many offers were put on houses today in the Seattle area.

I understand that the original debts have metamorphosed into many forms, and found their way onto many different balance sheets. But those SIVs, etc. and the eventual losses they may or may not represent are separate from the issues that constrict more straight forward traditional lending, and especially inter-bank lending. The credit crisis is not so much, at least at this point, about the future losses to pension funds, etc., but more about regional bank liquidity.

You’re right that there is much about this that no one understands. Some feel that the higher level “engineered” constructs you mention will eventually unwind to an essentially neutral or zero position/impact, since there are so many cross guarantees, etc. But the core debt, mortgages without sufficient collateral, and other consumer/business debts without real value still need to flush out of the system before it can recover. The bottom line remains who’s going to get stuck with the losses, and how can we restore the reasonable flow of credit in the mean time?

Exit pay packages (cash, pension, benefits, accelerated stock and options and other compensation) for CEOs of financial firms and mortgage lenders:
.
Merril Lynch – Stanley O’Neal – Oct 29, 2007 – $161,000,000
Citigroup – Charles Prince – Nov 4, 2007 – $105,000,000
Washington Mutual – Kerry Killinger – Sept 8, 2008 – $44,000,000
Wachovia – Ken Thompson – June 1,2008 – $42,000,000
Lehman Bro’s – Richard Fuld – Sept 17, 2008 – $24,000,000
Washington Mutual – Alan Fishman – Sept 25, 2008 – $19,000,000
Freddie Mac – Richard Syron – Sept 8, 2008 – $16,000,000
Bear Stearns – James Cayne – Jan 8 2008 – $13,000,000
Merril Lynch – John Thain – Sept 14,2008 – $9,000,000
Fannie Mae – Daniel Mudd – Sept 8, 2008 – $8,000,000
AIG – Robert Willumstad – Sept 17, 2008 – $22,000,000 (declined)
.

What you said was just the first daisy of a daisy-chain. Things are not that simple now days. Financial engineers in Lehman Brothers, Bear Stearn and Merill Lynch bundled mortgage notes together and issued bonds to other institutional investors. Other institutional investors re-bundled again and sold to other institutional investors with the help of financial engineers. Some institutional investors than chopped the bonds to small pieces and peddled to small investors. Hedge funds, pension funds, money market funds and banks all participated in the daisy-chain. To guarantee the credit of the underlying bonds, Lehman Brother issued credit default swaps to the bond holders which in turn arranged the counterparties like AIG to insure. When a bunch of folks couldn’t pay their mortgages, it cut off the live lines through the entire daisy chain. Nobody even knows the exact amount of liabilities of those credit default swaps. The S&L crisis in 80s was just like you described. These smart alecks with dollar signs in their eyes created some monsters that very few people fully understood.

Karl Denniger’s plan is indeed elegant and effective, and his site full of very intellegent folks. Unfortunately, it’s probably politically impossible. At its core, it forces losses to be taken as existing equity is wiped out and replaced with the converted debt. This reduces outstanding debt, pulls debt/income ratios back into balance, and frees up future consumption. But equity holders take it in the shorts.

The current bailout mess is, at its heart, all about who gets stuck with the inevitable losses that must be taken to clear the system. The first bill was all about shifting them to the taxpayer. The current bill is more about delaying them to the future…. and hoping everything magically improves and disappears. Think of it as “Pink Ponies” on a national level…

If the market crashes another 5000 points, and the credit markets seize, Ray Pepper, myself, and others will gladly step up to the plate and buy the best companies for the cheapest prices. Joe Kennedy shorted the stock market and then bought real estate during the subsequent depression. He went from $4 million in 1929 to $180 million in 1935. So please tell me again why I should be worried about the market crashing another 5000 points.

You are witnessing the greatest money making opportunity in your entire life, and you are going to miss it because you can’t get over what happened to you yesterday. So I ask you, were you more alive then or now?

If you’re tough, you’ll accept what has happened to you, learn from it, and choose to live a wiser life. Here are some investment tips that are currently serving me well. YMMV

1) Don’t invest money you can’t afford to lose.

2) The market represents risk. Profits are never realized until you cash out.

3) What matters most is the slope of the curve, not the direction. You can make just as much money in a bear market as you can a bull.

4) Sell when people are greedy, buy when they are fearful.

5) Markets are ever changing. Never attempt to apply yesterday’s winning investment strategy to today’s market. Having said that, do apply patterns and cycles that you observe to correlate with specific conditions.

6) Listen to your grandfather when he tells you about the true value of money.

7) A penny saved is a penny earned.

8) Don’t throw good money after bad. Instead, reassess the situation from scratch. The company you want to get even on could be the worst pick of the litter.

9) Money that you borrow is not a part of your yearly income. In fact, it counts against it.

10) Never make an important investment decision when you are emotional (especially if you’re greedy or fearful).

Bonus tip: Unless you want to become a buffalo, don’t follow the herd.

There are millions of responsible debtors out there, all making their payments just fine. The problems are with the ones on the margin. In the scenario you describe there are several ways out. Bankruptcy is certainly one, but only those who are really up against the wall will choose it. My guess is that the vast majority will go through their budgets and cut everything they can to free up cash to make payments on the cards. They can also sell toys (boats, extra cars, etc.) to generate cash. They can get second jobs. What they can’t do is continue to expand their lifestyles, and the national economy, by continuing to buy more stuff. After a year or so they can have the card balances paid down, then qualify for the refi, etc. Suddenly life will be looking better. But there isn’t anyway to get from A to B, both individually and as a nation, without suffering some pain. Either more work, or letting go (temporarily) of a given level of lifestyle will be required.

It is all this questionable debt, credit card, mortgage, car loans, etc. that has caused the credit crisis. If you are bank A, you don’t even want to lend to me, bank B, overnight because you don’t know how much of this crap I have on my books. My bank could fail a year from now because of it, or it could fail tonight. Why loan to me if you can’t be assured of repayment? You already have enough problems of your own, on your own books. Everything locks up until the debt is guaranteed, or shown to be in reasonable proportion to income, or written off and disposed of.

Warren B. was probably thinking here was a chance to get a stake in a major bank for cheap, leveraged off the government. The proposed bailout would have had the government come in and buy bad loans from the banks, leveraging up their balance sheets, and hence the value and future viability of his investment. Then they could go onto buy and detoxify other banks, growing his initial stake. It may still work. Or he may end up like the poor folks who kicked $6.0 billion into WAMU only to watch it vanish. I doubt he will suffer that fate. His bank of choice is in better shape, and a major player as this all goes forward.

http://www.denninger.net/letters/fixit.pdf

Circulate this to all your congressman!

However, there is an opportunity here to simultaneously stabilize the financial system, drastically slow the rate of home foreclosures and turn a large profit for the taxpayers. To wit:

The second largest problem with the bad securities (the largest being the horrible underwriting on the mortgages) is that workout negotiations with individual borrowers are impossible. To make an agreement that would, for example, transform a $500,000 “walkaway” mortgage into a $350,000 mortgage that the borrower can actually afford, *every single investor* must give their written consent (and most experts think such an agreement would *still* not conform with SEC rules). So the Treasury holds reverse auctions and the institutions compete to sell their junk at the lowest cents-on-the-dollar price, and $700 billion dollars later the Treasury is the world’s largest holder of mortgage-backed securities. The authorizing legislation explicitly directs them to do workouts with the individual borrowers, SEC rules be "golly"ed. So they will, hugely increasing the value of the portfolio using a Special Power that the private sector won’t have. They basically buy junk, wave a Federal magic wand over it, and then sell it back to the markets as good paper. The profits will go back into the Federal coffers to pay for other stuff.

The Treasury can be in a most enviable position: A buyer’s market with no real competing buyers, and everything available to buy is worth much more in the Treasury’s hands then in anyone else’s. It’s like a huge example of The Winner’s Curse, only in reverse–the winner always gets *more* benefit from the auction then they expect. In absolute terms, this might be the biggest arbitrage opportunity any “investor” has ever had.

We need to thank Jay Inslee. There will be a lot of pressure on the Dem “nays” to switch their votes. And he is the lone dem here.

the Fannie/Freddie Bailout passed with 229 Dem yeas and only 45 Republican yeas.

The “nay” votes were as follows: Dem THREE, Republican 149.

Do you see the problem here? The Dems have been passing these Wall Street Bailouts all year with little Republican support.

Previously, since constituents were not watching, the Dems didn’t care. THIS time, the public *was* watching and *did* care, so they were counting on Republican support as a cover for their dirty deeds.

There will be a LOT of pressure on Dems and a few Repubs. to switch their votes. The Realtor Lobby is apparently gearing up for an onslaught. Reicherts’ aide said his office had recieved many calls from angry Realtors.

Call the toll free #’s above at post #65(?). KEEP IT UP.

Also, you can send two free faxes a day at http://www.faxzero.com. Very easy.
Reicherts’ fax is :202-225-4282

Jillayne, I talked to Inslees’ aide today using the toll free switchboard.

Keep it up folks! It’s worked and we must keep going to ensure final results. the big guns are coming out now, stock market plunges meant to “scare” you, lobbyists, etc. So keep going FULL FORCE!

Thanks for the review. Question: There are probably millions of consumers out there who are CURRENT on their mortgage and probably even have some equity but have built up lots of credit debt.

They can’t refi anymore to pay off their credit cards…but they still can afford their mortgage. What does a consumer do to default on their credit cards to wipe everything clean: file bankruptcy?

If so, I’m thiniking we’ll continue to see bank losses for many, many years because of the consumer debt write-offs.

Essentially, banks made lots of loans, and some of them went bad, i.e. people stopped making their loan payments because they couldn’t AFFORD them. It may have been because the payments reset as interest rates increased, or maybe they couldn’t afford them in the first place. Maybe they were counting on continued appreciation, ever increasing HELOCs to bail them out, etc,. But the bottom line is they could no longer afford the payments.

When the loans went bad, the banks had to write them down, decreasing their assets, affecting their required their reserves, lowering their liquidity. Now they don’t have as much cash as they need to be able to continue doing business as usual. And some call it a crisis. Maybe it’s just a pull-back? People with good credit can still get loans. But unlike the days gone past, not everybody can get a loan.

But at a macro level the core problem remains. People, consumers, are broke. They’ve borrowed as much debt as they can afford to service- and then some. Too much debt in the system, not enough income. No room to borrow any more to continue to “grow” the economy.

Too much debt, not enough income in an economy based on consumer spending (70% of GNP) means things are going to grind to a halt. This is why the bailout won’t work, no matter how big it is. It doesn’t pay down the excessive consumer and business debt that has been driving the system. It doesn’t restore the balance between debt and income. The debt has to be either paid off, or allowed to go bad. The consumer needs to learn to save again, then resume purchasing from savings.

It’s reset time, folks. You can inject liquidity, adjust reserve requirements, all the tricks than have been discussed. But ultimately someone has to take the hit on a ton of bad debt that hovers over the economy. Two choices- write it off, or pay it off, but the government bailout plans are only a bandaid that don’t cure the illness. Paying it off takes time, and means current consumption has to be cut to free up the money for payments. Writing it off is faster, but means someone has to take the loss.

It’s time to take the medicine. As always, the winning strategy is to swallow quickly, rinse out your mouth, then get well and go back out to play..

http://www.nakedcapitalism.com/2008/09/nouriel-roubini-really-really-hates.html

“Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money…”