Con-tango

Bailouts and Lynching

30’s Depression

I’ve been reading a little, here and there, to get a feel of what people think should be done with the proposed Paulson-Bernanke bailout.
Its been very interesting, from professor Sheehan who does not see the bailout as a requirement imperative, Buffet’s support with an advice to sell a few of the toxic papers to learn and pay market price, Krugman’s leaning on a traditional approach which warrants buying the securities of troubled companies to privatize later on, to a flooding of mail and telephone calls to lawmakers from enfuriated taxpayers whose majority outright oppose any bailout and a minority agrees to a very restrictive one, with a healthy dose of wall street exec lynching.

So, will the elected lawmakers approve this necessary piece of legislation, with 99 out of 100 taxpayers opposing the bailout?

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On mice

What to do with mice?

I thought this hilarious email from Hal was a good starting point for the (first moral hazard) question which is haunting us all: if the bailout is approved, will the mice get away with the cheese, or will the execs get away with a slap on the rolex and dozens of millions?

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country
has had crisis that has caused the need for large transfer of funds of
800 billion dollars US. If you would assist me in this transfer, it
would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be
my replacement as Ministry of the Treasury in January. As a Senator,
you may know him as the leader of the American banking deregulation
movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We
need the funds as quickly as possible. We cannot directly transfer
these funds in the names of our close friends because we are constantly
under surveillance. My family lawyer advised me that I should look for
a reliable and trustworthy person who will act as a next of kin so the
funds can be transferred.

Please reply with all of your bank account, IRA and college
fund account numbers and those of your children and grandchildren to
wallstreetbailout@treasury.gov so that we may transfer your commission
for this transaction. After I receive that information, I will respond
with detailed information about safeguards that will be used to protect
the funds.

Yours Faithfully Minister of Treasury Paulson

During 2007 broker execs earned $39 billion (see here and past history here)  in bonuses only. It doesn’t sound right !

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Of mice and mousetraps

Mouse on a mission!
Courtesy of bluegreen.blog

Mr. Paulson recalls this foretelling conversation with Ben Bernanke:

“Going back a long time, maybe a year ago, Ben, as a world-class
economist, said to me, ‘When you look at the housing bubble and the
correction, if the price decline was significant enough,’ ” the only
solution might be a large-scale government intervention, Mr. Paulson
said. “He talked about what had happened when there had been other
situations historically.”

Mr. Paulson said he agreed but hoped it
would not come to that. “I knew he was right theoretically,” he said.
“But I also had, and we both did, some hope that, with all the
liquidity out there from investors, that after a certain decline that
we would reach a bottom.”

So, this odd couple, finally decided that holistic sweeping measures needed to be brought to the attention and approved by Congress in order to solve the financial crisis, –the one at a time institution approach was not working.

So, the $1 Trillion question is, are these measures the right ones?

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China plays its Morgan card

Andy Xie. Economist
Courtesy of ICBI

Picked up this comment in the Washington Post:

Andy Xie, an independent economist who was formerly Morgan Stanley‘s
chief Asia economist, said the United States needs to accept that a
large amount of U.S. assets must be transferred to other countries’
ownership. "If the U.S. is not willing to accept that," Xie said, "they
will have to print money and the dollar will fall. And we will be
headed toward a global financial meltdown."

Quite startling, if you ask me, Andy has a point there.

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Lehman will be remembered

Henry M Paulson,  Jr
Secretary of the Treasury

A pivotal point, in my opinion, credit is tightening within a weak economy.

According to this Bloomberg note, today:

Sept. 15 (Bloomberg) — The Federal Reserve added $70
billion in reserves to the banking system, the most since the
September 2001 terrorist attacks, to keep bank borrowing costs
low after the bankruptcy of Leman Brothers Holdings Inc.    

Fed funds traded as high as 6 percent, or 4 percentage
points above the central bank’s target rate for overnight loans
between banks, according to ICAP Plc, the world’s largest inter-
dealer broker. The margin is the greatest since Bloomberg began
tracking the data in 1998. The rate dropped to as low as
1.75 percent after the Fed added the temporary reserves.    

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Solar Energy

SUNRGI Solar Cell Array

Ok, I know, yesterday was a bloodbath… The DOW dropped 350+, oil touched its highest ever, $140…
Not to mention, Bank of America’s 7,500 layoff and Citigroup’s $8.9 billion writeoff…

So things are not looking good. But, they could be worse, and they’re not because Bernanke is there, and that’s that.

But, I recently ran into the amazing advances of alternative fuels, in particular, solar generation of energy.

It’s a fascinating subject, with plenty of opportunities to invest. But, I also think it’s relevant because it will start to shape, sooner than we think,  the investment landscape.

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The pivot

I just finished reading The game is up from The Economist.

If these securities are now downgraded, banks could be forced to
offload lots of illiquid instruments into a falling market—one of the
fastest ways to lose money yet devised. But if there are no buyers,
banks may have to sell something else to shore up their balance sheets.

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