
by Larry Levin
You may remember Dead Man Walking, a popular movie in 1995 concerning capital punishment. In the film, when a prisoner is being led to his maker, guards would call out, dead man walking - dead man walking. It's appropriate that a prison guard would say this phrase twice, because starting Monday we now have two financial behemoths that are, in fact, dead men walking.
I waited until Sunday morning to write this missive so that I could confirm the nationalization of Fannie Mae and Freddie Mac. Oh happy day - it's a fact! As of this morning, Treasury Secretary Hank Paulson and Representative Barney Frank have both confirmed that your tax dollars will be bailing out these massive financial firms. However, Barney Frank who is chairman of the House Financial Services Committee said he had no details on the intervention plan, which is nice. You just have to love it when the CHAIRMAN of the House Financial Services Committee has NO IDEA what is happening. Lovely!
Indeed, few details have been made public so far. But in a move to quell the average slack-jawed yokel that will believe anything, the government will be firing the CEOs of both FNM and FRE. Golly gee, that makes it all better. The truth is; the current CEOs had little or nothing to do with this turn of events. The CEOs that were part of the problem have already been fired. I wonder if the government or the press will mention that.
Now that we taxpayers will be footing the bill WITHOUT a vote, I have a thought: will the government be demanding that the CEOs return any portion of the their outrageous and fallacious salaries and bonuses? HA! Don't hold your breath. Now that We The People are in charge, we should exact it from them - NOW!
You may be wondering how much new garbage-debt we're on the hook for. Well, you are now the proud owner of liabilities relating to almost $6-TRILLION of mortgage debt. Seeing that sum in numerical form is staggering - $6,000,000,000,000.00. See those homes getting foreclosed down the street? You are now responsible for paying off the mortgage for those homes, which you never had the privilege of owning and had no say in approving the financing for the clowns who bought them with no money down, even though they had credit card debt up to their eyeballs. I'm guessing the Carlton Sheets can't-lose-money-making-system that these people bought off of late night television failed to mention that housing prices never go up in value ad-infinitum. When hairdressers are getting loans for $500,000.00 homes with no money down, you know there's a disconnect with reality. Why didn't the politicians and Wall Street see it? In a word: greed.
Not too long ago I wrote about the FNM CEO's claim that the government's backstop was nice, but not needed. They were, he said, more than adequately capitalized. Of course, I laughed at his assertion! At the time I should have gone into detail as to why I knew he was lying, but these missives are intended to be rather short. The NY Times, however, went into detail. It recently penned a story that Fannie and Freddie have been over stating their capital reserves. In other words, they have been lying all along as to how well capitalized they really were. Go figure.
Part of the article read: The government's planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter. Indeed, one person briefed on the company's finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.
The government needs to stop handing out our money to any company that screws up. If I trade poorly, can I go to Hank Paulson and ask for free money too? Hell no! But the government continues to allow major companies in America to report false income statements to keep the common shareholders ignorant and happy, keep ripping off the public, and then when it all falls apart go to Stutterin-Hank Paulson and ask him to fix everything. What a country! What a joke!
I wonder how the markets will take to this news. This week we could see one of two completely different scenarios play out. The bailout of FNM and FRE could create a "Praise the Lord" rally in equity markets as risk will be thought to be forever backstopped by you tax dollars. The recognition of just how calamitous the situation has become; however, could lead to an "Oh Crap" reaction that creates another sell-off as the realization of just how bad the conditions have become forces people to unload shares of anything tied to financial institutions.
With the massive additional debt ($6-TRILLION) added on to the balance sheet of the US government, one must also wonder how the currency and treasury markets will take the news? I'm guessing it won't be taken lightly.
Have you wondered what the real debt of the USA was prior to this additional liability? Please don't confuse the budget deficit, which is an annual number, with the aggregate total. In 2006, in an article published by the St Louis Federal Reserve Bank, Professor Laurence Kotlikoff stated the US was technically bankrupt as there was no way the US could pay the $65.9 trillion it owed.
Clearly, Professor Kotlikoff was conservative in his estimate or we're going downhill faster than he knew. Just a few months ago, on May 28, 2008 Richard W. Fisher, President and CEO of the Dallas Federal Reserve Bank estimated the obligations of the US to be actually $99.2 trillion, 50 % higher than Kotlikoff's figures. And if we add the new debt, courtesy of Wall Street bankers, the obligations of the US taxpayer rise to an impossible-to-repay sum of $105,200,000,000,000.00. Pretty soon, Atlas is going to shrug.
Fisher stated:
In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words-"frightful storm"-deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.
If you like these figures and the additional $6-Trillion debt that was foisted upon you, the taxpayer, then I have a suggestion; continue voting for the same rotten Senators and House Representatives that you have for all these years. Only a thought-challenged moron truly believes a President can do everything; without new fannies in the seats of Congress, nothing will change.
Real Time Trading Signals*for
Trade Date: 9/5/08
E-Mini S&P Trades*
(before fees and commissions):
1) OTF sell @ 10:30am at 1223.00 = -.50 (1 lot)
2) VA buy @ 1:20pm at 1235.50 = +3.50 (1 lot)
3) Algorithm positions (6)...combined total...+2.75
ZB (30 Year Bond) Trades*
(before fees and commissions):
1) Sell @ 7:37am at 119.290 = -1.5*3
2) Sell @ 8:24am at 119.200 = -2.0*3
3) Buy @ 9:21am at 119.250 = +3.5 (1 lot)
4) Buy @ 12:15pm at 119.085 = +3.5 (1 lot)...combined total...-3.5
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