The Federal Reserve announced last week its intention to purchase $300 Billion in U.S Treasury bonds. On the surface, this may seem to be positive, a vote of confidence of sorts. However, if you go below the surface you see that this is the Fed’s loudest and clearest statement to date about just how dire the economic outlook is. This was not a surprise move, the Fed had announced some time ago its intention to purchase treasuries. In the Fed’s eyes, being the buyer of last resort was inevitable and needed to underpin the economy. However, this move would not have been necessary if individual investors and governments were willing to continue buying and holding U.S. treasury bonds. Due to the U.S. economy, there has been a clear lack of interest to stay invested in low-yielding treasuries and the U.S. dollar. Recently, the main buyers of bonds have been speculators looking to unload when the Fed commenced buying. These are short-term traders, not long-term investors.
The Fed is in a tough spot. It has ballooned its balance sheet to encourage bank lending and consumer spending. But its efforts have not had a great affect on the economy. Since it cannot cut the Fed Funds Rate any further, it must now attack the problem from another angle. By purchasing bonds, it drives up demand, which in turn drives up the price of bonds. This in turn pushes bond interest rates down, taking mortgage rates with it. Mortgage rates will fall, and bond sellers will have an influx of cash to re-invest in the economy. Banks will lend again, and consumers will borrow at low rates. Sounds like a good plan, right? Not so Fast.
The Fed has displayed a willingness to continue printing money to grow the money supply and now to buy treasuries. Although this policy may succeed in halting the slide of assets like real estate and stocks, this feat comes with a huge price. Every dollar printed to buy bonds or increase the money supply results in more inflation and a continued debasing of the dollar, eventually sending our cost of living through the roof. In the future, this could be a more severe problem than the one we now face. Upon the Fed announcement, other currencies jumped against the dollar, as did gold. The Chinese Premier publicly expressed concern about China’s enormous investment in the U.S. China is the largest foreign creditor to the United States. Whether they will continue to buy low-yielding treasuries when they could earn better returns elsewhere is in question. Worse still, they could decide not to hold existing bonds to maturity, choosing instead to unload them.
To understand why Chairman Bernanke took these steps, consider this. He is well known as a student of the Great Depression. He knows that monetary policy on the part of the Federal Reserve in 1928-1929 played a great part in causing the stock market crash in October 1929, and subsequent depression. During those 2 years leading up to the crash, stocks shot up 90 percent. In recent years, from 2003-2007, the DJIA has had a similar rise. In both situations, the boom was largely artificial. Sensing the problem, in 1928 and 1929 the Fed started raising interest rates and selling government securities in an attempt to slow down spending. Those in the know then began selling stocks and buying gold. A similar pattern has been repeated in the last 2 years where gold is up nearly 50%. Bernanke, knowing very well what happened 80 years ago and seeing similar signs recently, is doing the exact opposite of what took place at the hands of the pre-Great Depression Fed in an attempt to avoid the same fate. Instead of raising interest rates, he has been aggressively lowering them. Instead of selling government securities, he has announced the largest purchase of long-term bonds since the 1960’s. Instead of constricting the money supply, he has been greatly expanding it.
At what point, however, does the cure become worse than the disease? While some great initiatives and important Acts came out of the Roosevelt’s New Deal, massive government intervention has never resulted in prosperity and growth. Even Roosevelt’s own Treasury Secretary six years into the New Deal, conceded that there was just as much unemployment as when that administration began, and in addition, enormous debt had been added. New Deal proponents argue that GDP increased 60% during those years, which is true. Omitted is the fact that the national debt nearly doubled in the same period. Unemployment remained in double digits throughout the New Deal and did not recede into single digits until we entered WWII. By the end of the war, it was 2%. The U.S. emerged from depression, but whether this was due to, or in spite of the New Deal is a matter that could be debated.
A recent Newsweek cover showed Uncle Sam with the words “I Want YOU to Start Spending!” Uncle, that’s how we got into this problem. We’ve become a nation of borrowers and over-consumers in an economy that has become largely service based. At some point we moved away from saving and producing in a manufacturing economy. Japan suffered through recession for years because they were unwilling to take the pain and correction, and instead prolonged an economic recovery. And Japan is a country with a high savings rate, trade surpluses, and a manufacturing based economy. The U.S. has none of the above.
I hope Chairman Bernanke is right. I hope the housing and stock markets find a bottom, unemployment peaks, and the credit markets start functioning again. Then, the real test will come. There is a tremendous amount of money on the sidelines, waiting. When individuals and businesses again have the confidence to open their wallets and start spending, Uncle Sam may get his wish, in spades. I hope then, that Chairman Bernanke has a great sense of timing regarding policy change. I also hope, for our sake, that he has the political gumption necessary to be as aggressive in stopping a runaway inflation train as he has been to throw everything he has at the recession. Otherwise, the cure may be worse than the disease.
Wednesday, March 25, 2009
Wednesday, March 11, 2009
The Great Evaporation:
When Buy and Hold became Hold and Cry
It’s no secret that virtually every investor has felt the pain of plummeting 401K’s, IRA’s, college funds, and other investment accounts. Human nature dictated that “If I hold on a little longer, it will come back; I’ll be made whole again.” The idea of selling stocks and booking huge losses is in direct contradiction to long-term investment philosophy, in which bull and bear markets are customary and expected. However, this has not been a run-of-the-mill bear market. It became and still is the “Great Evaporation”, where vast amounts of American wealth disappeared. I remember hearing market ‘experts’ and analysts discuss the downturn around January 2008 when the DJIA was around 12,000 (at that point it was down more than 2,000 points off its high). Some speculated that the sub-prime mortgage crisis was nearly over and things were already getting better; some predicted a market rebound was imminent followed by ascension to levels never seen before. And why not? The Fed had been steadily growing the money supply and injecting liquidity into the credit markets, which was viewed as proactive and positive. There was widespread feeling that the downturn was a much needed market correction from an artificial high. Some said it was healthy. There was a sense of security. Unfortunately, it was a false sense of security.
Bear Stearns, the country's fifth-largest investment bank in 2008, was founded in 1923. It had reached a peak price of $171.52 in January 2007. In March of last year, it was sold for just $2 a share, down 93% from its closing price just 2 days earlier. This was just 2 months after experts predicted a new market high. Thousands of employees and investors lost everything.
After the Bear Stearns collapse, for some, the point of no return had been reached. The possibility of being made whole again became a dream. In the coming months, the stock market gave up more ground, with the DJIA fluctuating in the 10,000 – 11,000 range. Although this was a far cry from the highs of October 2007, to many, the market appeared to be stabilizing, and investors were hoping that the worst had passed. Few knew what lay ahead. The sub-prime debacle ballooned into a full-fledged housing crisis, and bank failures accelerated. Wall Street suffered huge losses, and unemployment began its climb. Once mighty companies who traded as blue chips were now beginning to look about as valuable as corn chips.
Things looked so bleak that in October 2008, before TARP was passed, there were dire warnings and predictions in Washington of catastrophe if Congress did not act. Congressman Brad Sherman of California told the House in a speech in early October: "Many of us were told in private conversations that if we voted against this bill on Monday that the sky would fall, the market would drop two or three thousand points the first day, another couple of thousand the second day, and a few members were even told that there would be martial law in America if we voted no."
According to Senator James Inhofe of Oklahoma, Henry Paulson painted a very dark picture.
“He said, ‘This is going to be far worse than the Great Depression in the ’30s,’” Inhofe said. “And all these things – he was very descriptive of exactly what would happen if we didn’t buy out these toxic assets which he abandoned the day after he got the money.”
A month and a half later, Paulson completely changed course on his bailout plan. Instead of buying up toxic assets as he originally put forth, he announced the Treasury would instead inject capital directly into banks. How was this change possible? Was Paulson lying when he terrified Congress, or merely incredibly incompetent? Which is worse? Either way, he should be held to account for being the protagonist in The Great Evaporation.
In early October 2008, the DJIA was still in the 10,000 range, and unemployment was about 6%. SINCE THEN there has been an ADDITIONAL 25% evaporation of people’s 401K’s, etc., and a 2% jump in unemployment from 6% to 8%, which translates into approximately 2.6 million MORE jobs lost, all in the past 22 weeks. Does anyone feel like we’re better off now than pre-TARP, or that we’ve turned some sort of corner?
Now we stand at market levels last seen in 1997. As we digest day to day news, the stock market will enjoy bear market rallies as it searches for a bottom. However, in order to break the back of the bear, the market must acquire and maintain a 30% increase over current levels. This is simply not realistic in the near term. But, Barack Obama says not to worry about the stock market, it’s just a tracking poll. Try explaining that to a 75 year old retiree on a fixed income who has lost 60% of his life savings, Barack.
There are too many negatives, especially in the U.S. Future indications of labor trends point to continuing job losses, perhaps into the double-digits. Capex spending (buildings, machinery) is down nearly 30%. Companies would be buying today if they expected prices to go up in the future; they’re putting off buying. What does that tell you? Credit markets are still largely stagnant. Housing is still searching for a bottom. Manufacturing production and demand are both down. Income is down. Taxes are being increased. At some point, money velocity will cause inflation pressure. I hate to be a doomsayer or even a pessimist; but I’m glad to be a realist. Please understand that I am proud to be one of many self-proclaimed non-experts; Lord knows we don’t deserve to be mentioned in the same sentence as pros like Henry Paulson or other Wall Street wizards, and Capitol Hill Intelligentsia.
People are celebrating over an announcement by Citi that they were cash-positive in the first 2 months of 2009, even though this was before write-downs. Citi stock skyrocketed 50%. If it keeps moving up, you may be even able to buy a cup of coffee with a Citi share soon. Have people forgotten that in November, we the taxpayers gave Citi $27 billion on top of $25 billion just weeks before? Citi also announced coming layoffs of 75,000 employees. Massive layoffs, huge taxpayer funded cash injections, penny-stock status, and we’re supposed to be impressed that, a few months later, Citi has more cash on hand than expected? Ah, but in return, Citi gave the government preferred equity with an 8 percent dividend. Will that dividend be re-paid to us, the taxpayers? Don’t hold your breath. Memo to the Citi CEO: Shutup and put together consecutive quarters of profitability, then announce how wonderful you are.
Oh, and Barney Frank will finally be holding a House Financial Services Committee meeting to discuss mark-to market rules. I know I feel invigorated.
Well, here are my layperson’s recommendations to the Charlatan, the Banking Queen; and Paulson the Great Evaporator. Note: These should have been implemented last year, but hey, better late than never. Also, none involve borrowing money we do not have, or increasing taxes.
1.
If you don’t want to repeal mark-to-market; (so called fair-value accounting) rules, please see your way clear to at least modify the rules so that banks are not forced to value assets at pennies on the dollar when they are clearly worth more; this will help all sorts of things like capital margins, credit ratings, lending, profits, and job growth.
2.
Reduce payroll tax so that everyone WHO EARNS income keeps more of it, rather than mailing out ‘stimulus checks’ which are no more than welfare payments to those who already pay no tax.
3.
Capital Gains
Reducing or eliminating capital gains tax will free up money to invest in economy-growing activities. Just look at Singapore and China.
4.
Corporate Tax
Reducing the Corporate Tax rate will also free up investment capital, and attract new businesses that would otherwise organize in other countries.
5.
Avoid buy American or other protectionist legislation. Anything gained in higher tariffs and in buying less from other countries will more than be wiped out when they do the same to us.
6.
Modify Sarbanes – Oxley legislation. It has not had its desired effect. It has not prevented any bankruptcies, and has placed a huge financial burden on the backs of companies, especially those who desire to go public. Even Senator Oxley who co-wrote the bill said "Frankly, I would have written it differently, and he would have written it differently," he added, referring to the bill. "But it was not normal times."
I think one of the greatest losses of Sarbanes – Oxley is, how do we know that the next drug and disease researcher or even the next Google was not regulated out of existence before it even had a chance because of additional costs imposed on them by overly constrictive legislation that, while however well intentioned, offered little to no benefit in return?
Bloated and intrusive government should never tread where competent private sector producers live and work. Where is Reagan when we need him? Healthy business is where economies get revived, and where the bleeding is stopped. Big government is where healthy businesses and strong economies get crippled.
Also, since Henry Paulson worked so hard and accomplished so much, I think he should take vacation. Hell, he’s earned it. A hunting trip with Dick Cheney would be nice, Mr. Paulson, don’t you think? Why don’t you ring him up?
Bear Stearns, the country's fifth-largest investment bank in 2008, was founded in 1923. It had reached a peak price of $171.52 in January 2007. In March of last year, it was sold for just $2 a share, down 93% from its closing price just 2 days earlier. This was just 2 months after experts predicted a new market high. Thousands of employees and investors lost everything.
After the Bear Stearns collapse, for some, the point of no return had been reached. The possibility of being made whole again became a dream. In the coming months, the stock market gave up more ground, with the DJIA fluctuating in the 10,000 – 11,000 range. Although this was a far cry from the highs of October 2007, to many, the market appeared to be stabilizing, and investors were hoping that the worst had passed. Few knew what lay ahead. The sub-prime debacle ballooned into a full-fledged housing crisis, and bank failures accelerated. Wall Street suffered huge losses, and unemployment began its climb. Once mighty companies who traded as blue chips were now beginning to look about as valuable as corn chips.
Things looked so bleak that in October 2008, before TARP was passed, there were dire warnings and predictions in Washington of catastrophe if Congress did not act. Congressman Brad Sherman of California told the House in a speech in early October: "Many of us were told in private conversations that if we voted against this bill on Monday that the sky would fall, the market would drop two or three thousand points the first day, another couple of thousand the second day, and a few members were even told that there would be martial law in America if we voted no."
According to Senator James Inhofe of Oklahoma, Henry Paulson painted a very dark picture.
“He said, ‘This is going to be far worse than the Great Depression in the ’30s,’” Inhofe said. “And all these things – he was very descriptive of exactly what would happen if we didn’t buy out these toxic assets which he abandoned the day after he got the money.”
A month and a half later, Paulson completely changed course on his bailout plan. Instead of buying up toxic assets as he originally put forth, he announced the Treasury would instead inject capital directly into banks. How was this change possible? Was Paulson lying when he terrified Congress, or merely incredibly incompetent? Which is worse? Either way, he should be held to account for being the protagonist in The Great Evaporation.
In early October 2008, the DJIA was still in the 10,000 range, and unemployment was about 6%. SINCE THEN there has been an ADDITIONAL 25% evaporation of people’s 401K’s, etc., and a 2% jump in unemployment from 6% to 8%, which translates into approximately 2.6 million MORE jobs lost, all in the past 22 weeks. Does anyone feel like we’re better off now than pre-TARP, or that we’ve turned some sort of corner?
Now we stand at market levels last seen in 1997. As we digest day to day news, the stock market will enjoy bear market rallies as it searches for a bottom. However, in order to break the back of the bear, the market must acquire and maintain a 30% increase over current levels. This is simply not realistic in the near term. But, Barack Obama says not to worry about the stock market, it’s just a tracking poll. Try explaining that to a 75 year old retiree on a fixed income who has lost 60% of his life savings, Barack.
There are too many negatives, especially in the U.S. Future indications of labor trends point to continuing job losses, perhaps into the double-digits. Capex spending (buildings, machinery) is down nearly 30%. Companies would be buying today if they expected prices to go up in the future; they’re putting off buying. What does that tell you? Credit markets are still largely stagnant. Housing is still searching for a bottom. Manufacturing production and demand are both down. Income is down. Taxes are being increased. At some point, money velocity will cause inflation pressure. I hate to be a doomsayer or even a pessimist; but I’m glad to be a realist. Please understand that I am proud to be one of many self-proclaimed non-experts; Lord knows we don’t deserve to be mentioned in the same sentence as pros like Henry Paulson or other Wall Street wizards, and Capitol Hill Intelligentsia.
People are celebrating over an announcement by Citi that they were cash-positive in the first 2 months of 2009, even though this was before write-downs. Citi stock skyrocketed 50%. If it keeps moving up, you may be even able to buy a cup of coffee with a Citi share soon. Have people forgotten that in November, we the taxpayers gave Citi $27 billion on top of $25 billion just weeks before? Citi also announced coming layoffs of 75,000 employees. Massive layoffs, huge taxpayer funded cash injections, penny-stock status, and we’re supposed to be impressed that, a few months later, Citi has more cash on hand than expected? Ah, but in return, Citi gave the government preferred equity with an 8 percent dividend. Will that dividend be re-paid to us, the taxpayers? Don’t hold your breath. Memo to the Citi CEO: Shutup and put together consecutive quarters of profitability, then announce how wonderful you are.
Oh, and Barney Frank will finally be holding a House Financial Services Committee meeting to discuss mark-to market rules. I know I feel invigorated.
Well, here are my layperson’s recommendations to the Charlatan, the Banking Queen; and Paulson the Great Evaporator. Note: These should have been implemented last year, but hey, better late than never. Also, none involve borrowing money we do not have, or increasing taxes.
1.
If you don’t want to repeal mark-to-market; (so called fair-value accounting) rules, please see your way clear to at least modify the rules so that banks are not forced to value assets at pennies on the dollar when they are clearly worth more; this will help all sorts of things like capital margins, credit ratings, lending, profits, and job growth.
2.
Reduce payroll tax so that everyone WHO EARNS income keeps more of it, rather than mailing out ‘stimulus checks’ which are no more than welfare payments to those who already pay no tax.
3.
Capital Gains
Reducing or eliminating capital gains tax will free up money to invest in economy-growing activities. Just look at Singapore and China.
4.
Corporate Tax
Reducing the Corporate Tax rate will also free up investment capital, and attract new businesses that would otherwise organize in other countries.
5.
Avoid buy American or other protectionist legislation. Anything gained in higher tariffs and in buying less from other countries will more than be wiped out when they do the same to us.
6.
Modify Sarbanes – Oxley legislation. It has not had its desired effect. It has not prevented any bankruptcies, and has placed a huge financial burden on the backs of companies, especially those who desire to go public. Even Senator Oxley who co-wrote the bill said "Frankly, I would have written it differently, and he would have written it differently," he added, referring to the bill. "But it was not normal times."
I think one of the greatest losses of Sarbanes – Oxley is, how do we know that the next drug and disease researcher or even the next Google was not regulated out of existence before it even had a chance because of additional costs imposed on them by overly constrictive legislation that, while however well intentioned, offered little to no benefit in return?
Bloated and intrusive government should never tread where competent private sector producers live and work. Where is Reagan when we need him? Healthy business is where economies get revived, and where the bleeding is stopped. Big government is where healthy businesses and strong economies get crippled.
Also, since Henry Paulson worked so hard and accomplished so much, I think he should take vacation. Hell, he’s earned it. A hunting trip with Dick Cheney would be nice, Mr. Paulson, don’t you think? Why don’t you ring him up?
Wednesday, March 4, 2009
The Government Infected us with the Disease, Now it’s Killing us with the Cure
On February 10, 2007, The Group of Seven Finance Ministers met in Germany to discuss worldwide financial problems. One of the main concerns was the lack of regulation of hedge funds. This was identified as a huge source of risk for the financial system. The hedge fund red flag at the Group of Seven meeting should not have been the only one. Treasury Secretary Henry Paulson spoke. That alone should have been a red flag. He noted that the U.S. residential housing market had been cooling over the last year but “appears to have stabilized.” Yes, he actually said it appears to have stabilized.
Was anyone listening about the lack of regulation of hedge funds? Apparently not. Hedge funds are largely unregulated, unlike Mutual Funds. They manipulate the market by buying huge amounts of stock to drive prices up and engage in short selling to drive stocks down. They also use Credit Default Swaps to their advantage. These are basically insurance policies that companies pay to insure against default on bonds they have sold to investors. As companies’ losses climb and value dives, the cost of this insurance skyrockets. This is what happened to companies like Lehman Brothers in 2008. Instead of paying, say $10,000 to insure $1 million in debt, Lehman had to pay 10 times that.
As selling in the stock market accelerated, hedge funds had to generate cash and meet client redemption demands. They did this in part by profiting on shorting the stock, and simultaneously buying Credit Default Swaps. Lehman’s losses and insurance costs soared, and they finally failed. This was due in large part to the actions of hedge funds. Shareholders and employees were wiped out. Hedge funds made billions by shorting the stock all the way to zero; then got paid massively when the Lehman credit default swaps were settled (this happened on October 21, 2008). So who underwrote and paid on these CDS contracts, you might ask? If you guessed AIG, you’re correct. The same AIG that we, the taxpayer, gave $85 Billion to last year. How convenient. Did that money go to actually to help AIG, or to pay the huge windfalls on the CDS contracts that AIG sold? We’ may never know, you can guess what I think. In the end, we, the taxpayers are paying for all this madness. And the hedge funds keep manipulating, and keep operating, all legally.
Back on May 17, 2007, Federal Reserve Chairman Ben Bernanke said the growing number of mortgage defaults “will not seriously harm the U.S. economy.” Yes, he actually said defaults will not seriously harm the U.S. economy.
3 banks failed in 2007. On February 28, 2008, when testifying before the Senate Banking, Housing and Urban Affairs Committee, Federal Reserve Chairman Ben Bernanke said, "There probably will be some bank failures." Well, he was right about that. From January 2008 through October 2008, 17 more banks failed.
Then, the collective brain trust really got to work. Last October, the government essentially began nationalizing banks by taking large bank interests with tax payer money, and in doing so, they set into motion a series of events. As part of the TARP Program, they purchased banks’ preferred shares (rather than common shares) in order to, among other things, avoid common share dilution. Keep in mind that this was done by the supposed brilliant minds in our government with the intention that it would help ‘stop the bleeding’ and begin to put a bottom in the market. Of course, they were wrong.
When the TARP Program was announced on Oct 14, 2008, the DJIA was at 9,310. Bank losses and the market downward spiral continued. Since banks’ equity ratios have plummeted because of price decline, banks realized that they would need to raise more equity. Well, the easiest way to do that is for the government to convert preferred shares into common shares. Many common shareholders, seeing the writing on the wall and fearing further decline and dilution of their shares, started to accelerate their selling. Potential bank stock buyers have avoided banks stocks for the same reasons, and stock prices, helped along by massive selling and poor earnings have continued their precipitous decline.
So, in effect, we have actually been dealing with a government induced run on bank stocks. The government began a process which effectively eliminated bank stock buyers, accelerated selling, and furtherer bankrupted and diluted common shareholders. If the government converts from preferred to common shares, it would then own huge stakes, with voting rights, in Bank of America, JP Morgan, Citi, Wells Fargo, KeyCorp, and others. If you’re a common shareholder, this is like owning a house with your brother at 50% each, and suddenly other investors come in and now your share is only 20%.
All in all, 25 banks failed in 2008. 16 More have failed in just the fist two months of 2009. Today the DJIA stands at 6,865, a drop of nearly 27% from the October 14 TARP announcement. The February 2009 drop for the S&P 500 was the second worst on record, second only to the slide in 1933 during the peak of the Great Depression.
The ‘infection’ is the cumulative effect on us by our elected and appointed leaders, some of whom still don’t know what they were doing; and other charlatans who have made decisions that were clearly not in the best interest of the American people. And many of these people are still steering the ship.
The government ‘cure’ is massive spending of money that we must borrow, bigger government, more intervention into your life, and tax increases on the very people who can help grow the economy and create jobs.
"These capitalists generally act harmoniously and in concert to fleece the people, and now that they have got into a quarrel with themselves, we are called upon to appropriate the people's money to settle the quarrel."
- Abraham Lincoln in his speech to Illinois legislature, Jan. 1837.
Next:
What we should have done (and can still do) to jumpstart the economy, curb the rise of unemployment, and help slow the decline of stocks and 401K’s; without borrowing money or raising taxes.
Was anyone listening about the lack of regulation of hedge funds? Apparently not. Hedge funds are largely unregulated, unlike Mutual Funds. They manipulate the market by buying huge amounts of stock to drive prices up and engage in short selling to drive stocks down. They also use Credit Default Swaps to their advantage. These are basically insurance policies that companies pay to insure against default on bonds they have sold to investors. As companies’ losses climb and value dives, the cost of this insurance skyrockets. This is what happened to companies like Lehman Brothers in 2008. Instead of paying, say $10,000 to insure $1 million in debt, Lehman had to pay 10 times that.
As selling in the stock market accelerated, hedge funds had to generate cash and meet client redemption demands. They did this in part by profiting on shorting the stock, and simultaneously buying Credit Default Swaps. Lehman’s losses and insurance costs soared, and they finally failed. This was due in large part to the actions of hedge funds. Shareholders and employees were wiped out. Hedge funds made billions by shorting the stock all the way to zero; then got paid massively when the Lehman credit default swaps were settled (this happened on October 21, 2008). So who underwrote and paid on these CDS contracts, you might ask? If you guessed AIG, you’re correct. The same AIG that we, the taxpayer, gave $85 Billion to last year. How convenient. Did that money go to actually to help AIG, or to pay the huge windfalls on the CDS contracts that AIG sold? We’ may never know, you can guess what I think. In the end, we, the taxpayers are paying for all this madness. And the hedge funds keep manipulating, and keep operating, all legally.
Back on May 17, 2007, Federal Reserve Chairman Ben Bernanke said the growing number of mortgage defaults “will not seriously harm the U.S. economy.” Yes, he actually said defaults will not seriously harm the U.S. economy.
3 banks failed in 2007. On February 28, 2008, when testifying before the Senate Banking, Housing and Urban Affairs Committee, Federal Reserve Chairman Ben Bernanke said, "There probably will be some bank failures." Well, he was right about that. From January 2008 through October 2008, 17 more banks failed.
Then, the collective brain trust really got to work. Last October, the government essentially began nationalizing banks by taking large bank interests with tax payer money, and in doing so, they set into motion a series of events. As part of the TARP Program, they purchased banks’ preferred shares (rather than common shares) in order to, among other things, avoid common share dilution. Keep in mind that this was done by the supposed brilliant minds in our government with the intention that it would help ‘stop the bleeding’ and begin to put a bottom in the market. Of course, they were wrong.
When the TARP Program was announced on Oct 14, 2008, the DJIA was at 9,310. Bank losses and the market downward spiral continued. Since banks’ equity ratios have plummeted because of price decline, banks realized that they would need to raise more equity. Well, the easiest way to do that is for the government to convert preferred shares into common shares. Many common shareholders, seeing the writing on the wall and fearing further decline and dilution of their shares, started to accelerate their selling. Potential bank stock buyers have avoided banks stocks for the same reasons, and stock prices, helped along by massive selling and poor earnings have continued their precipitous decline.
So, in effect, we have actually been dealing with a government induced run on bank stocks. The government began a process which effectively eliminated bank stock buyers, accelerated selling, and furtherer bankrupted and diluted common shareholders. If the government converts from preferred to common shares, it would then own huge stakes, with voting rights, in Bank of America, JP Morgan, Citi, Wells Fargo, KeyCorp, and others. If you’re a common shareholder, this is like owning a house with your brother at 50% each, and suddenly other investors come in and now your share is only 20%.
All in all, 25 banks failed in 2008. 16 More have failed in just the fist two months of 2009. Today the DJIA stands at 6,865, a drop of nearly 27% from the October 14 TARP announcement. The February 2009 drop for the S&P 500 was the second worst on record, second only to the slide in 1933 during the peak of the Great Depression.
The ‘infection’ is the cumulative effect on us by our elected and appointed leaders, some of whom still don’t know what they were doing; and other charlatans who have made decisions that were clearly not in the best interest of the American people. And many of these people are still steering the ship.
The government ‘cure’ is massive spending of money that we must borrow, bigger government, more intervention into your life, and tax increases on the very people who can help grow the economy and create jobs.
"These capitalists generally act harmoniously and in concert to fleece the people, and now that they have got into a quarrel with themselves, we are called upon to appropriate the people's money to settle the quarrel."
- Abraham Lincoln in his speech to Illinois legislature, Jan. 1837.
Next:
What we should have done (and can still do) to jumpstart the economy, curb the rise of unemployment, and help slow the decline of stocks and 401K’s; without borrowing money or raising taxes.
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