EU President slams US economic policies

http://finance.yahoo.com/news/EU-presidency-US-economic-apf-14737788.html

U.K. bond auction fails due to lack of interest . . . inflation worries

Voltron says: first time since '95. Treasury auctions are less likely to fail because the Fed is going to be printing money and buying treasurys, but on a fixed schedule. If the Fed does not buy enough and a Treasury auction fails, TLT will drop thorough the floor.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQGG.mWeZ4eU

Rolling Stone "Gets It"

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print

Details on the bailout

Voltron says: Associated Press story on the bailout:

WASHINGTON (AP) - The Obama administration aimed squarely at the crisis clogging the nation's credit system Monday with a plan to take over up to $1 trillion in sour mortgage securities with the help of private investors. For once, Wall Street cheered. The announcement, closely stage-managed throughout the day, filled in crucial blanks in the administration's financial rescue package and formed what President Barack Obama called "one more critical element in our recovery.

Voltron says: "Wall Street cheered" Really?!? Who? Other than stock prices going up, I haven't heard much positive commentary other than from hedge fund managers awaiting the handout (although admittedly, I did not watch CNBC today). If the the announcement was "closely stage-managed" was the stock market also managed? Why take chances. I'm not bitter at all, I don't have any short positions, and I'm expecting stock prices to rise due to inflation, it's just the timing seems . . . convenient . . . and has not been been accompanied by enthusiastic comments from market participants.

The coordinated effort by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. relies on a mix of government and private money - mostly from institutional investors such as hedge funds - to help banks rid their balance sheets of real-estate related securities that are now extremely difficult to value.

The goal, said Obama, is to get banks lending again, so "families can get basic consumer loans, auto loans, student loans, (and so) that small businesses are able to finance themselves, and we can start getting this economy moving again."

Voltron says: same misguided "credit is the lifeblood of the economy" mantra.

It was a huge gambit and one that came like a tonic to Wall Street, which had panned an earlier outline of the program that lacked detail.

Stocks soared, the Dow Jones industrial average shooting up nearly 500 points, thanks to the bank-assets plan and a report showing an unexpected jump in home sales.

The introduction of the plan was closely choreographed so that the president - rather than Geithner - would be the first administration official to appear on camera at midday to discuss it. Geithner met earlier in the day, before markets opened, with a group of reporters at the Treasury Department to go over specifics. But cameras and broadcast-quality audio recorders were barred.

It was the reverse of what happened Feb. 10. Then, after Obama had helped raise expectations toward Geithner and the plan, the treasury secretary went before cameras and bombed. The Dow plunged about 300 points amid investor confusion about details.

Voltron says: hmmmm, not suspicious at all . . .

The fleshed-out plan is designed to help fix a value on damaged mortgage loans and other toxic securities.

If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses.

"This will help banks clean up their balance sheets and make it easier for them to raise capital," Geithner said.

The plan will take $75 billion to $100 billion from the government's existing $700 billion Troubled Asset Relief Program. The government will pair this with private investments and loans from the FDIC and the Fed to generate $500 billion in purchasing power.

Geithner said purchases eventually could grow to $1 trillion - roughly half of the estimated $2 trillion of toxic assets on bank books now.

Voltron says: good because we wouldn't want anymore half measures Why exactly are people enthusiastic about this?

On the hot seat, Geithner has a lot personally tied to the success of the new program. His performance in the Cabinet, including his slowness in learning about multimillion dollar executive bonuses paid by insurance giant AIG after taking bailout money, has been severely criticized by some in Congress.

Geithner testifies on Tuesday before the House Financial Services Committee.

Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan.

The plan was introduced ahead of a summit next week in London of 20 major and developing economies struggling with the global recession.

Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, other countries, particularly ones in Europe, are resisting U.S. calls for more stimulus and would prefer to see more internationally coordinated bank regulation.

The administration was expected to outline its plan for financial regulation overhaul later this week.

Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans.

Bair said the program should help banks clean up their balance sheets and raise fresh capital, though she added that "there may be some banks beyond help." The agency has said before it expects more bank failures, she said.

Voltron says: . . . but not really big banks, or banks that make large campaign contributions.

A joint statement by the Federal Reserve and Treasury Department said the Fed should play a "central role" in preventing future financial crises. That implied a wish that Congress expand the Fed's authority in regulating all financial institutions, not just banks.

Geithner said taxpayers still could lose money on the deal to soak up bad assets but there was no fixing the system without risk.

Voltron says: again . . . why "risk"? Why not "there is no fixing the system without cost" or "without effort" or "without sacrifice"? "Risk" implies that we can get out of this without cost or even profit. In reality it's a doubling down that will end in tears. What happed to LEADERSHIP: "I have nothing to offer but blood, toil, tears, and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many months of struggle and suffering." -Winston Churchill. I don't mean to get all "soap boxy". I'm just trying to point out patterns, so that we can better predict the future. Specifically, lack of leadership, lack of political will, lack of transparency, and a fundamental misunderstanding of the crisis.

Other options, such as having the government purchase the securities outright or letting them languish on bank balance sheets, would pose even greater vulnerabilities, he said, and it was important to find the right blend of risk versus reward.

"I am very confident this scheme dominates all the alternatives for trying to find that balance," he said.

The sentiment was echoed by congressional Democrats, who said risk seemed inevitable with any plan big enough to work.

But House Republican Whip Eric Cantor of Virginia called Obama's plan a "shell game" that hid the true cost.

He said he hoped the administration would consider instead an earlier Republican proposal to set up a government-sponsored insurance program for mortgage-related securities.

The administration plan "seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," Cantor said in a statement.

The new program marks a return by the government to a strategy of acquiring toxic securities. Henry Paulson, who was treasury secretary in the final days of the Bush administration, abandoned plans to purchase these securities, largely because they were impossible to price.

Voltron says: They aren't impossible to price. Just assume mortgages are only worth the rental income they could produce. The problem is that if you value all mortgages using that reasonable method, all of the major banks are insolvent. The government wants desperately for there to be a different answer.

The plan builds on earlier programs to pump money into banks, help some homeowners repay their mortgages and stimulate college, small business and other forms of lending.

"There's still great fragility in the financial systems, but we think that we are moving in the right direction," Obama said after meeting Geithner and Fed Chairman Ben Bernanke.

Obama said the plan will allow taxpayers to "share in the upside as well as the downside."

Voltron says: bullshit

Treasury officials had no firm forecast on when the government would begin making the asset purchases although market expectations were that the process could begin within weeks.

Voltron says: original story here: http://apnews.myway.com/article/20090323/D97420DG0.html

Why no inflation (yet)

Voltron says: As I mentioned back in September, the banks have a $4 Trillion dollar hole to fill. All the Trillions the Fed a printing are currently filling that hole. When it overflows, that's when the symptoms of inflation will become evident. Given the lack of political backbone shown so far, they won't have the willpower to turn off the spigot "just as things are starting to look up." I'm not ruling out the possibility that the stock market may crash again if the market is unable or unwilling to deploy the Fed's money quickly enough; however, I'm preparing to ride out the volatility until the dollar inevitable collapses.

UPDATE: BEIJING TO PITCH NEW GLOBAL CURRENCY; DUMP DOLLAR

Voltron says: Top story on drudereport.com right now: http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html

China wants the new currency to be "based on" a basket of commodities: http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168

Another Trillion down the drain

Voltron says: Treasury Secretary's new plan is a waste of another Trillion and a waste of time. Heck if Obama can't get Paul Krugman to cheerlead for him . . . who will? The only beneficiaries seem to be hedge funds that get a put option at taxpayer expense with 33 times leverage and 3% maximum downside risk that they can probably hedge. Sign me up! Won't fix anything though.

http://www.nakedcapitalism.com/2009/03/private-public-partnership-details.html
http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/

Updated Forecast

My thesis has been that prices would decline due to deleveraging but the government's inflationary policies would eventually cause nominal prices to rise. It's difficult to time a zig zag of prices going down then up, but it looks like we're turning the corner. The Fed's announcement that they are going to print a Trillion dollars and use it to buy debt is the proverbial "crossing of the Rubicon" The US Dollar is toast. I think the trigger will be some of the smaller holders of Treasurys (Singapore, for example) trying to dump their holdings before China does. This will cause a panic stampede out of Treasurys which will destroy the dollar.

Do not abuse leverage. The Fed is going to spend limitless amounts of money to pound interest rates and Gold prices into appearing "normal" when in fact they are on the verge of exploding. The tremendous volatility will shake out leveraged players.

I'm out of SRS

Voltron says: Well, the FED pulled the trigger. They announced they are buying treasuries which will be inflationary.

http://finance.yahoo.com/news/Fed-to-buy-up-to-300B-apf-14679757.html

I'm reversing my position, getting out of all short positions including SRS, deleveraging and shorting treasuries.

Voltron rants

Voltron says:  The furor over AIG bonuses masks the true crime.  The bonuses represent 1/10th of 1% of the $150 billion (and counting) of government "loans" that AIG has no chance of paying back.  All of the money going to AIG is going straight out the door to pay off bad Credit Default Swap bets made with Goldman Sachs, hedge fund speculators, and foreign banks such as Barclay's, UBS (Swiss Bank) and Societe General.  The administration keeps saying that "credit is the life blood of the economy" but China's philosophy is "production is the life blood of the economy".  Who do you think is going to win that debate?  If you borrow money to invest in production, you can pay it back with interest and perhaps turn a profit.  If you squander the money of flat screen TVs, vacations, and overpriced houses, there is no way you can pay it back.  Since T-Bills are just claims of future taxes, by extension, there is no way that will get paid back either.  Sure the government will pay back the notional amounts due, but the dollars will be practically worthless.  It sounds nuts, but we've had a new currency regime every thirty years or so since the country was founded.  Why would you think the current paper money regime with no collateral backing it would be the final regime for the ages.  It's absurd to think that.  The correct play is to short stocks and buy gold for now and be prepared to short treasuries in earnest.  The Fed is not going to make this easy, they are going to try to shake out the short sellers, depress the price of gold and prop up Treasuries.  Don't be afraid to "fight the Fed" and don't feel foolish when they move the market against you.  Take advantage of these moves to accumulate more BUT DO NOT USE LEVERAGE OR YOU WILL BE SQUEEZED OUT.

Competitive Devaluation

Voltron says: From the Financial Times:

If the world is really following the script of the 1930s, then we are due for competitive devaluations, as nations attempt to make [exports] more competitive at the expense of everyone else.

So the Swiss National Bank’s announcement that it is intervening to push down the Swiss franc sounds alarming. The speed with which the franc responded, dropping 3 per cent against the euro in a matter of minutes, also shows that if a central bank wants its currency to fall, it can deliver.

The problem is that not everyone can devalue at once . . .

Full article: http://www.ft.com/cms/s/0/f0b9ae7e-0f2a-11de-ba10-0000779fd2ac.html

Hedge fund investors turn to gold

http://www.ft.com/cms/s/0/37fcba70-0c0a-11de-b87d-0000779fd2ac.html?nclick_check=1

Buffett says U.S. Treasury bubble one for the ages

Voltron says: I've done well shorting Warren Buffett stocks such as Wells Fargo and Moody's; however, I think he has the right idea about Treasuries.

NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc sits on $25.54 billion of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.

In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.

But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors.

"The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash is earning close to nothing and will surely find its purchasing power eroded over time."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

....

He also cautioned Treasury investors not to feel "smug" when they see commentators endorsing their investments.

"Beware the investment activity that produces applause," Buffett wrote, "the great moves are usually greeted by yawns."

Full article: http://www.reuters.com/article/newsOne/idUSTRE51R1PU20090228

Good News and Bad News for SRS

It should be good news for commercial real estate.

The Federal Reserve and the Treasury announced Tuesday the launch of the long-anticipated Term Asset-Backed Securities Loan Facility. Eventually, it is expected to cover securitized loans tied to commercial properties such as buildings, hotels and apartments.

But some are worried the TALF program may not be enough to attract investors to the commercial-property sector in its current form.

There is a mismatch between the terms of the TALF funds -- which are three years -- and most commercial mortgages that are packaged into bonds, which typically run for seven or 10 years, with balloon payments at the end.

An investor using TALF funds to buy commercial mortgage-backed securities would have to line up alternative funding sources or plan to sell the assets to repay the TALF loan when it expires after three years.

"Purchasing long-term assets with shorter-term financing is a recipe for disaster," says Andy Solomon, a managing director in charge of commercial property debt investments at Angelo Gordon & Co.

ETFs (video)

Voltron says: I still have my SRS position, but I'm not adding any more Ultra Short ETFs to my long term portfolio. Jeff Macke makes an interesting analogy for Ultra Short ETFs in the video embedded below at around the 5 minute mark.

UPDATED: Voltron's New Strategy

Voltron says: Suppose you believe (as I do) that commercial real estate is going to collapse. Let's explore some different ways to profit from that thesis (in order of complexity) and discuss some of the pros and cons of each strategy.

Short Real Estate Index (IYR): Like all short positions, you have theoretically unlimited liability (suppose IYR goes to the moon) and limited profit potential (IYR cannot go below zero). For every dollar of capital you have, you'll most likely be able to short two dollars worth of IYR so your maximum leverage is 2 to 1.

Buy Put Option on Real Estate Index (IYR): Now you have limited liability (the option cost) and limited potential (again, IYR cannot go below zero). Leverage ratios are typically 4 or 5 to 1. Options expire, so you need to be right on the direction AND the timing. This property of all options is called "Time Dependence".

Buy UltraShort Real Estate Index (SRS): If you are unsure of the timing, the ultra short ETF may seem to be just the ticket. You have limited liability (because you simply buy the ETF), and potentially unlimited profit potential (assuming the price asymptotically approaches zero). You also get two times leverage. The problems with SRS, however, are manyfold. Suppose the you've made a lot of money in the ETF and then suddenly the IYR moves up 49% in one day - SRS would be down double: 98%. You would be unlikely to recover from this loss no matter low the IYR goes subsequently. This property is called "path dependence" and it also makes it difficult to derive a target price for SRS based on a target for IYR. For a more detailed explanation read this.

If you chart the Ultra Short Real Estate ETF (SRS) and it's evil twin, the Ultra Real Estate ETF (URE), you'll see that actually both drift down together and are both negative at times. This is due to the path dependence discussed above and is called "Volatility Drag".



you therefore may reasonably consider the following trade to make the volatility drag work in your favor:

Short Ultra Real Estate Index (URE): You're now taking advantage of the volatility drag; however, since it's a short position, you have unlimited liability.

Buy URE Put Option on Ultra Real Estate Index (URE): You're stll taking advantage of the volatility drag and since it's an option, you have limited liability. Hindsight being 20/20 buying a URE put would have been the optimum strategy. URE puts are currently too expensive to make this worthwhile; however, I am currently implementing this strategy for Oil (up), Gold (up) and S&P500 (down).

Here's a chart summarizing the strategies:

	Risk	Reward	Leverage	Time Dependence	Path Dependence	Volatility Drag
Short IYR	Unlimited	Limited	Up to Double	No	No	None
Buy IYR Put	Limited	Limited	High	Yes	No	None
Buy SRS	Limited	Unlimited	Double	No	Yes	Bad
Short URE	Unlimited	Limited	Double	No	Yes	Good
Buy SRS Call	Limited	Unlimited	Very High	Yes	Yes	Bad
Buy URE Put	Limited	Limited	Very High	Yes	Yes	Good

Optimism is one thing, but this is ridiculous

Voltron says: the worst case scenario that the FDIC will use for the bank stress tests is for housing prices to fall to historical norms, with no overshooting and the average unemployment rate next year to be 10.3 percent, basically in-line with forecasts.

http://krugman.blogs.nytimes.com/2009/02/25/not-much-stress/

The Formula That Killed Wall Street

Voltron says: A well written, readable, article in Wired magazine explains how a mathematical abstraction became the basis for the explosion in credit derivatives.  This particular formulation came about after I left Wall Street, but it falls into many common pitfalls.  One of them is that correlation between two assets is not constant and in a market panic, all assets become completely correlated.  Most books on "quantitative finance" only devote a few pages, at the end, on the model's weaknesses.  In reality, that should be the subject of most of the book, because that's what good traders need to worry about.  When I would interview job candidates, I would never ask them to "derive the model" . . . I'd ask them to list the assumptions of the model and then debate how realistic, risky and problematic those assumptions are.

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

Fed is committed to propping up banks

Voltron says: looks like the government intends to repeat the mistakes of Japan in the 90s.  "Lost Decade" here we come.

http://globaleconomicanalysis.blogspot.com/2009/02/bernanke-admits-fed-is-clueless-and.html
http://krugman.blogs.nytimes.com/2009/02/25/all-the-presidents-zombies/
http://www.bloomberg.com/apps/news?pid=20601087&sid=aF55puGwJuS0&refer=worldwide

Will The Fed's "Stress Test" Be Stressful Enough?

http://www.businessinsider.com/krugman-will-the-feds-stress-test-be-stressful-enough-2009-2

Next Crisis: Commercial Real Estate

Word of another wave of mortgage-related pain added to investor unease Monday after a top Fed official warned that American real estate troubles will go commercial this year. Nearly all asset classes took a hit for the day, with only the dollar showing appreciable gains.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said he was concerned that U.S. banks remain "pretty heavily exposed" to commercial real estate. "It is the one domestic factor that keeps me up at night," he said.

So far, the U.S. mortgage morass has been largely confined to the residential part of the market, but delinquencies on commercial real estate loans and mortgage-backed securities are expected to increase as businesses suffer the effects of a slowing economy. If 2007 and 2008 can be thought of as the peak of residential real estate issues, Lockhart told the Association for Financial Professionals after a speech, then "it is possible to think of 2009 as the year of commercial real estate."

Commercial values have fallen 16.0% from their peak in October 2007, according to the Moody's ratings agency, which expects further declines over the next 12 to 24 months with delinquencie rising as macroeconomic pressures take a toll on property cash flows.

full article here

Now It's Official: Stress Test Results Pre-Determined

Voltron says: Economist Yves Smith alleges that the government "stress test" evaluations of the major banks are a sham, and provides some interesting anecdotal evidence of their insolvency.

http://www.nakedcapitalism.com/2009/02/now-its-official-stress-test-results.html

I explained how commercial real estate loans can be hidden time bombs back in October: http://cfcsux.blogspot.com/2008/10/commercial-real-estate.html

Meredith Whitney trashes banks on her own

Voltron says: Just because nationalization is a bad idea doesn't mean it won't happen.  Meredith Whitney has been prescient, but political analysis carries more weight than financial analysis.

http://www.businessinsider.com/meredith-whitney-launches-meredith-whitney-advisory-groupand-trashes-citi-again-2009-2

I'm getting out of WFC

Voltron says: I'm getting out of my Wells Fargo short position and put options.  Too much danger of it popping on a rumor.  If it does pop, I may get back in.

SKF at 200

Voltron says:  I don't own any, but if I did I would be getting out because any snap back in financials could wipe out your profits.

Greenspan backs bank nationalization

http://www.ft.com/cms/s/0/e310cbf6-fd4e-11dd-a103-000077b07658.html

Another $500 Billion into the breach

Voltron says: The Treasury is pumping another $500 Billion into Fannie Mae and Freddie Mac.  This is somewhat sudden and unexpected.

http://www.mortgagenewsdaily.com/02182009_fannie_freddie_stock.asp

The Insolvency of the Fed

Voltron says: The Federal Reserve Bank is leveraged 50 to 1. If 2% of their assets default . . . the Fed itself is insolvent.

http://mises.org/story/3281

Bank Stress Tests

Voltron says: CreditSights made a loss estimate for the major banks.

	Potential Loss	Book Value	Ratio
Wells Fargo	$119 Billion	$35 Billion	3.5
Bank of America	$99 Billion	$60 Billion	1.7
JP Morgan	$124 Billion	$72 Billion	1.7
Citibank	$101 Billion	$50 Billion	2.0
Goldman Sachs	$147 Billion	$37 Billion	4.0
Morgan Stanley	$34 Billion	$29 Billion	1.2

Source: NYT

Peter Schiff on the Bailout (video)

Bank nationalization gains ground with Republicans

http://www.ft.com/cms/s/0/2ad3b750-fd27-11dd-a103-000077b07658.html?nclick_check=1

Treasury Secretary is a debt junkie himself

Voltron says: this is from an Associated Press story that seems to have been buried.

The [Geithners] bought a home in the Washington suburb of Bethesda, Md., in 1992 for $275,000, taking a mortgage of $202,300. Through a series of refinancings and the sale of two properties, they climbed the economic ladder until they bought a house for $1.6 million in Larchmont, N.Y., in 2004.

All of the Geithners' mortgages - from big banks including Nationsbanc, which is now Bank of America; Chase Manhattan, which is now J.P. Morgan Chase; and Wells Fargo - carried adjustable-rate mortgages with the risk that annual rate increases could raise their interest payments to as much as 11.25 percent, though the couple tended to refinance or sell their homes before they faced a rate adjustment.

They also took out second mortgages, now known as home equity lines of credit, borrowing a total of nearly $1 million in 2002 on their second Bethesda home, which they bought a year earlier for $1,085,000.

In 2004, they sold that house for $1.45 million and bought their current house in the New York suburb of Larchmont with a $1 million Wells Fargo mortgage, later adding a $400,000 home equity line of credit, also from Wells Fargo.

Analysts warn of commercial meltdown

http://www.nctimes.com/articles/2009/02/09/business/z210fe4e391c215d188257558007227c6.prt

Geithner's Bank Plan Led To Hasty Goldman Meeting

Voltron says: Goldman Sachs and Morgan Stanley are the only major financial institutions who are not insolvent and therefore have something to lose.  Goldman was so unimpressed with Treasury Secretary Geithner's vague plan that, according to CNBC, they held an emergency "secret squirrel" meeting to discuss alternatives.

http://www.cnbc.com/id/29163525

NYT: Audits at 18 banks are underway

http://www.nytimes.com/2009/02/12/business/12stress.html?_r=1

Peter Schiff Lightning Round (video)

Peter Schiff on CNBC (video)

38 Enrons?

http://abcnews.go.com/TheLaw/Economy/story?id=6855179&page=1

Wells Fargo analysis

http://www.safehaven.com/article-12582.htm

The problem with loan securitization

Pelosi Stimulus Casts Shadow Over Obama, America, World

http://www.safehaven.com/showarticle.cfm?id=12574&pv=1

Obama on Nationalization

Voltron says: Interesting article.  The President says that banking system is too big to nationalize.  Economist Nouriel Roubini thinks the current plan is to buy time until nationalization is politically feasible (in 6-12 months).

http://www.calculatedriskblog.com/2009/02/obama-on-nationalization.html

Economists React: Treasury Announcement Fails to Satisfy

Perhaps the centerpiece of today’s announcement is the commitment up to $1 trillion to revivify the collapsed market for securitized debt that previously allowed unprecedented levels of lending in the home, auto, student, and credit card sectors. Geithner makes the false assumption securitization is a prerequisite for healthy markets. Our nation’s short history with widely securitized debt has simply shown that the process can lead to massive mispricing of assets and risk. But, in the worldview of Geithner and his fellow economists, credit, rather than savings, is central figure in the economic equation. In his mind, anything that eases the process of lending is an end in itself. in so doing this plan guarantees that the U.S. economy will be pushed farther and farther out on a leveraged limb, until no amount of market medicine can prevent a total economic collapse. –Peter Schiff, Euro Pacific Capital

It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation. The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect… So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place. –Paul Krugman, Princeton University

Why Obama's new Tarp will fail to rescue the banks

http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html?nclick_check=1

Stimulus: A History of Folly

http://www.commentarymagazine.com/printarticle.cfm/special-preview-stimulus--a-history-of-folly-14953

Government Bonds May Be Last Bubble: Jim Rogers

http://www.cnbc.com/id/29115526/

Electronic run on the banks last September

Voltron says: Rep. Paul Kanjorski (D-PA) Capital Markets Subcommittee Chair, revealed on C-Span exactly what happened last summer that frightened the government into passing the original TARP legislation.  It's pretty scary how close we came to complete collapse of the entire financial system and the government.  For more background on what happened around that time read this : http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html?_r=1

Rep Paul Kanjorski [2:02]: They are right to this extent. Why did we do that? We did that because the Secretary [Paulson] …

Look, I was there when the Secretary and the Chairman of the Federal Reserve came those days and talked with members of Congress about what was going on. It was about September 15th [2008].

Here’s the facts, and we don’t even talk about these things. On Thursday [that would have been September 11, 2008], at about 11 O’clock in the morning, the Federal Reserve noticed a tremendous draw-down of … money market accounts in the United States. To the tune of $550 billion was being drawn out in a matter of an hour or two. The Treasury opened up its window to help. They pumped $105 billion in the system and quickly realized that they could not stem the tide.

We were having an electronic run on the banks.

They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic out there. And that’s what actually happened.

If they had not done that, their estimation was that by 2 o’clock that afternoon [Sept 11, 2008] $5.5 trillion would have been drawn out of the money market system of the United States — would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time [around Sept 15th?] about what would happen if that happened. It would have been the end of our economic system and our political system as we know it. And that’s why, when they made the point we’ve got to act and do things quickly we did.

Now Secretary Paulson said let’s buy out the subprime mortgages. That’s what he came to Congress [with] — but he said give us latitude and large authority to do many things as we decide … necessary. And give us $700 billion to do that.

Shortly after we enacted our bill with those very broad powers, the UK came out and said: No we don’t have enough money to buy toxic assets. Instead we’re going to put our [UK's] money into banks so that their equity grows and they’re not bankrupt. And so the UK started that process and that’s true. It was much cheaper to put more money in banks as equity investments than to start buying their bad assets. Because it became early determined that we’d probably have to spend $3 or $4 trillion of taxpayers’ money to buy these bad assets. And we didn’t have — we only had $700 billion.

So Paulson made a complete switch, went in and started putting money [into] buying securities and reinvesting into banks in the United States.

Why? Because if you don’t have a banking system you don’t have an economy … [4:49]

YouTube video of the interview http://www.youtube.com/watch?v=pD8viQ_DhS4.  

Voltron says:  If you watch the whole video, you'll here a nutty caller berate Rep Kanjorski on the bailout, and the congressman admits that the government has no idea what it is doing and sincerely suggests that perhaps the (crazy) caller might have a better idea.  

CNBC: Predicting Crisis: Dr. Doom & the Black Swan

http://www.cnbc.com//id/29103328

Stimulis (video)

SNL nails it again (video)

CBO: Obama stimulus harmful over long haul

http://www.washingtontimes.com/news/2009/feb/04/cbo-obama-stimulus-harmful-over-long-haul/

Suspending Mark To Market Accounting: The Tale Of Two Cows

http://clusterstock.alleyinsider.com/2009/2/suspending-mark-to-market-accounting-the-tale-of-two-cows

US Debt Levels

http://clusterstock.alleyinsider.com/2009/2/us-debt-levels-are-fine-debt-to-gdp-chart-is-wrong-and-meaningless

Commercial Real Estate: IYR, SRS: Pending Disaster

http://benbittrolff.blogspot.com/2009/02/commercial-real-estate-iyr-srs-pending.html

Looser standards?

Voltron says: <sarcasm>yeah thats what we need</sarcasm>

http://blownmortgage.com/2009/02/06/fannie-to-loosen-underwriting-guidelines/

Option ARMs and Recast Shock Syndrome

http://www.doctorhousingbubble.com/option-arms-and-recast-shock-syndrome-toxic-financial-products-are-imploding-on-schedule-examining-the-impact-on-california/

CNBC's Cramer requests SEC ban SKF

Voltron says: be sure to watch the video

http://www.cnbc.com/id/29016503

The slippery slope

Voltron says:  People are understandably upset that executives at companies receiving taxpayer bailout money are getting large bonuses.  Many of the companies in question were FORCED by the government to take bailout money because if only some companies were seen taking the money that would be seen as confirmation that they are weak and they would be targeted for destruction by speculators.  Goldman Sachs is looking to pay their bailout back immediately in order to cut the strings.  Bankers are gamblers and if you set up a situation where they can get an extra couple million in pay if they reject the bailout and manage to survive, they'll take their chances - slim as they may be.  It's fair to question why the government should be bailing anyone out, but keep in mind that as credit conditions worsened and banks wanted to stop lending their precious capital, the government twisted their arms into making loans that their better judgment told them not to make.  So now the government, by improperly exerting undue influence,  is morally obligated to help.

Real Unemployment

Meredith Whitney Discusses Bad Banks (VIDEO)

In Russia, Bailed-Out Banks Are Shorting Roubles

Voltron says: I like how they roll!

http://clusterstock.alleyinsider.com/2009/2/in-russia-bailed-out-banks-are-shorting-roubles

Use tax cuts to ignite incentives

Voltron says: It'll never happen, but it's a good idea.

From NPR Marketplace:

Todd Buchholz: There's a scene in "The Godfather" when hot-headed Sonny Corleone gets whacked by two thugs. The senior thug turns to the younger and says, "Leave the gun, take the cannoli."

Our hot-headed housing and banking sectors have been whacked, and now we wonder: What firms do we rescue? Which do we leave for the undertaker? The free market is not a pain-free market. Some live and some die.

Preventing failure is like trying to put the economy in a lockbox -- safe from damage, but unable to move ahead.

The end of the Cold War left thousands of aerospace engineers jobless. Now many work at Cisco and Apple.

Thank goodness Theodore Roosevelt didn't put the economy in a lockbox -- or we'd never have driven a car, flown on an airplane, or expected to live past age 50.

Neither Republican nor Democrat leaders have even a rule-of-thumb for rescuing firms. Lehman dies, AIG limps on. Heck, Larry Flynt is lobbying for a bailout of the porn industry. Great, even our national libido needs a stimulus package.

Now Congress wants to contort President Obama's $825 billion fiscal plan. Congressmen can't wait to put their names on bridges, tunnels, roller skating rinks for senior citizens. Lobbying in Washington is so crowded, corporate jets can't get landing slots.

This is a mess.

Rather than bailing out those who've failed, rather than tax rebates where we all just send checks to each other, rather than paving every road with gold-plated blacktop, let's ignite new incentives. Cut taxes for companies that hire new employees. Cut taxes for jobless workers who take a new job. Cut taxes for companies that buy new equipment. Cut taxes for tech firms that add to their R&D budgets. This is not tax-cutting gone foolishly wild.

Foolish is when you waste money giving it away to make up for past blunders. Foolish is when you give in because some CEO puts a gun to your head and says, "The whole world will end unless you give me money."

Enough foolishness. Leave the gun. Take the cannoli. Bet on the future

Wells Fargo funny business

http://www.minyanville.com/articles/print.php?a=20901

Political games

Voltron says: President Obama is proving to be Machiavellian. link here.

Updated Forecast

President Obama and Treasury Secretary Tim Geithner will propose a bailout package so breathtakingly massive (2-4 Trillion) that it will even give democrats pause. If congress fails to pass it, no matter what happens next, he's off the hook. Even China does not have the reserves to foot that bill, so unless the whole world is on board with bailing us out, the inflation caused by printing all that money will be massive.

The Dow is being supported by the President's Working Group on Financial Markets at 8,000. I expect the support to be broken with the next support at 6,000. This will be allowed in order to garner support for the bailout.

Horrible GBP numbers

Voltron says: The GDP numbers would have been worse except manufacturers could not cut production fast enough.  As a result, the GDP number also includes lots of unsold inventory.

http://www.nytimes.com/2009/01/31/business/economy/31econ.html?_r=1&hp=&pagewanted=print

Feds allege plot to destroy Fannie Mae data

http://finance.yahoo.com/news/Feds-allege-plot-to-destroy-apf-14208185.html

Apply for a bailout

http://mtblog.vanityfair.com/online/politics/2008/12/01/federalbailout.gif

Morgan Stanley extremely bearish

Voltron says: my old colleagues point out the risk of hyperinflation in the future and deflation near-term: link here and here

Dilbert

Ultrashort ETFs Can Work if You Trade Them Correctly -- Seeking Alpha

http://seekingalpha.com/article/116851-ultrashort-etfs-can-work-if-you-trade-them-correctly

In defense of Peter Schiff

Voltron says: GASG readers know that I've been a fan of Peter Schiff, his company EuroPacific Capital and his book "Crash Proof" There have been some articles (link here and here) that point out that although he predicted the popping of the housing bubble, his investment strategy of buying high dividend paying foreign stocks has not worked out well because it assumed that the rest of the world would "decouple" and the dollar would collapse. In fact the world stock markets have done even worse than the U.S. and this has been compounded by the rally in the dollar. I think that the rally in the dollar is temporary and it's impending collapse is still my greatest concern. My investments have done well because I predicted deflation would occur before the inflation sets in, but as soon as the situation turns around, I will be dumping my short positions and aligning my portfolio with Peter's. Eventually the dollar will collapse and the world will decouple. It is important to note, that the foreign stocks I've bought (DKA, DBN and DBU) have continued to pay very high dividends (almost 6%). So although they cost less now, they are still worth the same as they were based on cash flows and so they represent an even greater value. These companies are not laying people off and they are still profitable. It's like the opposite of the housing bubble . . . the thundering herd of idiots drove up house prices even though the cash flows (rent vs own) were negative. Peter failed to predict that the Thundering Herd of Idiots (THI™) would irrationally dump their (positive cash flow) foreign stocks and buy (negative cash flow) US Treasuries. Like the housing bubble, the "Treasury bubble" will pop and Foreign stocks will make a comeback with the exception of financial stocks, which Peter specifically warned against.

In Defense of Leveraged ETFs

Voltron says: a different analysis with links to several other articles embedded.

link here

CRE: When the Reserve Runs Dry

Voltron says: article predicts that commercial real estate projects will run out of reserves in late 2009 or early 2010. I explained this back in October here.

link here

Eric Oberg on the UltraShort Treasury ETF

Voltron Says: a good article on shorting treasuries by a former Goldman Sachs trader. He advises against shorting treasuries as a hedge against riskier forms of debt at this time. I agree, but keep in mind that cash is not a riskier form of debt.

link here

SRS tracking error

Voltron says: When I eyeball the chart of SRS versus the index it is supposed to track (IYR), it seems like SRS should be much higher. To put my mind at ease, I made a spreadsheet that calculates where SRS should be if it tracked the index perfectly since it's peak on Nov 20, 2008. It turns out not to be as bad as I thought . . . SRS should be about $11 higher (15%). The tracking error has been consistently negative and has been pretty stable around 15% since SRS went ex-dividend on Dec 23rd. If you reset and track the error since Dec 23rd, it swings positive and negative and is generally under 1%. Conclusion: SRS performs as advertised and errors are mostly due to anticipation of dividend payments which are required by tax law.

link to spreadsheet here

75% Of Latest Bank Of America Bailout Used To Pay Merrill Lynch Bonuses (BAC)

Voltron says: where is the public outrage?

http://clusterstock.alleyinsider.com/2009/1/75-of-latest-bank-of-america-bailout-paid-merrill-lynch-bonuses-bac

Holding inverse ETFs

Voltron says: article explains the dangers of holding inverse ETFs for long periods of time. I tried to trade in and out of it and time the market, I'm not sure I'd do any better.

link here

Asshat of the year award 2008

Voltron says: pretty funny. He has some unkind words for Proshares (SRS)

Why some hedge funds may be buying commercial real estate

http://seekingalpha.com/article/114750-the-logic-behind-bill-ackman-s-purchase-of-general-growth-properties

U.S. debt is losing its appeal in China

http://www.iht.com/bin/printfriendly.php?id=19167239

ETF Guide: Profit Responsibly - How To Use Short ETFs

http://www.etfguide.com/research/103/8/Profit-Responsibly---How-To-Use-Short-ETFs/

Is The Performance Of Real Estate ETFs Skewed? - Yahoo! Finance

http://finance.yahoo.com/news/Is-The-Performance-Of-Real-etfguide-13952819.html

Should You Bet Against Real Estate in 2009?

http://www.fool.com/investing/mutual-funds/2008/12/30/should-you-bet-against-real-estate-in-2009.aspx

Is Commercial Real Estate the Next to Decline? - Seeking Alpha

http://seekingalpha.com/article/112600-is-commercial-real-estate-the-next-to-decline

Uh Oh..... Monetary Flat Spin - The Market Ticker

http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html

Calculated Risk: NY Times on Possible CRE Bailout

http://www.calculatedriskblog.com/2008/12/ny-times-on-possible-cre-bailout.html

The full scope of the fraud revealed

http://www.nytimes.com/2008/12/28/business/28wamu.html?_r=1

Why You Need to Be Careful With Leveraged ETFs: Financial News - Yahoo! Finance

http://biz.yahoo.com/seekingalpha/081224/112167_id.html?.v=1

Why SRS is down today

Voltron says: SRS, SDS etc are down because they are paying big dividends today. $5.56 for SRS and 11.46 for SDS. Why does a leveraged short ETF pay dividends? I have no idea.

http://biz.yahoo.com/bw/081222/20081222005889.html

Calculated Risk: REIS: Commercial Real Estate Loan Defaults May Triple

http://www.calculatedriskblog.com/2008/12/reis-commercial-real-estate-loan.html

Developers say 'me too' to bailout - Dallas Business Journal:

http://dallas.bizjournals.com/dallas/stories/2008/12/22/daily10.html?ana=yfcpc

Fannie/Freddie loan modification program is a bad deal

http://mrmortgage.ml-implode.com/2008/12/17/fanniefreddie-come-get-your-loan-mod-pay-for-life/

Inflation is the only way out

http://www.project-syndicate.org/commentary/rogoff51

NYT: Debt Watchdogs - Tamed or Caught Napping?

http://www.nytimes.com/2008/12/07/business/07rating.html?_r=1

Commercial real estate heading South

Voltron says: and yet SRS is below 86. This is why Joe Schmuckatelli
doesn't go short.

http://optionarmageddon.ml-implode.com/2008/12/08/cre-heading-south/#comment-2039

Ouch! Borrowers Keep Defaulting After Mortgage Modification

http://clusterstock.alleyinsider.com/2008/12/ouch-borrowers-keep-defaulting-after-mortgage-modification

Voltron says: No duh. Economists like to pretend that they don't know
why this is happening. Yet there is a term for it, "ruthless default",
if you have a non-recourse loan you effectively have a put option. If
the house is worth less than the motgage, it is irrational not to
default.

Hard Assets Conference

Voltron says:

I went to the Hard Assets Conference in San Francisco on Sunday with my college roommate Nate.

The trade show booths were mostly mines and metal dealers. Surprisingly Futures contracts and ETFs were completely absent. Europacific Capital had a booth manned by the Los Angles office staff. Monex and Kitco had booths. I'm interested in a Kitco Royal Canadian Mint account as slightly more liquid complement to Europacific's Perth Mint account.

Peter Schiff gave the Keynote address as well as a standing room only client workshop. I'm sure they will show up on YouTube in a few days.

Peter Schiff gave his usual spiel and acknowledged that his more conservative buy strategies have not worked lately, but his aggressive short strategies have. He expressed confidence that this situation would change as soon as all the de-leveraging stopped and the dollar inevitably collapses. After Peter was asked several questions about timing the market, my guest, Nate cracked me up, saying "So, we're already lying on the tracks, we just don't know the train schedule"

More importantly I was able to ask Peter Schiff a few questions at his booth. I asked him about shorting bonds as a way to hedge against inflation and he as unequivocally in favor of it, which surprised me. He said that he was short bonds, which in the short term has been losing money but was very confident that this would change when the dollar collapses. I also asked him about what type of margin foreign investors are allowed to hold when the short U.S. stocks and he didn't really know the answer, but I hope he'll look into the idea and his company will offer ways to short U.S. assets without having to hold dollars and other U.S. assets as margin.

The answers to your questions emerged during his talks. He's bullish on China and Europe, he is a big fan of Jim Rogers and had a large poster of him in his booth. Oil will definitely hit $150 a barrel again.

As a side note, If you're ever in the city by the bay, stay at the Marine Memorial Club. It's a $299 room for $80 if you're active duty. There is a free brunch buffet and happy hour for guests everyday on the 12th floor with skyline views.

Nate twisted my arm into staying for some of the other speakers, which turned out to be interesting.

The first guy, James Dines, writes a commodities investment newsletter. He must be in his late seventies and takes his cue from his contemporary, Hugh Heffner, by surrounding himself with five impossibly beautiful hired mannequins - Dines' Angels, if you will. He also likes to tell off-color jokes. Anyhow he's bullish on Uranium because the Chinese are building nuclear power plants.

Adrian Day gave a speech echoing Peter Schiff and repeatedly garnering unwanted applause when he was critical of the government's bail-out plans. The audience, which in San Francisco, I imagine would be about as liberal as you will get at an investor's conference, had zero confidence in the government.

Anyhow, it was well worth it. If you're in Chinatown visit House of Nanking for a tasty soup-Nazi chinese food experience and "Kennedy's Irish Pub & Curry House" for an all-in-one evening for great pan-indian food and irish pub-house fun.

The unthinkable is happening!

Despite the trillions spent by the government, the "Goldilocks" economy has turned into what Peter Schiff calls the "Humpty Humpty" Economy and the unthinkable nightmare that Henry Paulson warned congress about may happen soon: Goldman Sachs might actually lose a little money . . . . My . . . . God . . . . . .

http://clusterstock.alleyinsider.com/2008/12/world-really-is-ending-goldman-to-post-2b-loss-gs-

Meredith Whitney: Yes, We're Still Screwed--And So Is Wells Fargo

From Clusterstock.com:

CNBC's Maria Bartiromo spoke with Oppenheimer analyst Meredith Whitney this afternoon. Meredith has a new report out arguing that banks are about to start yanking consumer credit lines and that this will further smash consumer spending.

We'll provide some excerpts from Meredith's report tomorrow. For now, here's are some bullet points the excellent interview, followed by the transcript (courtesy CNBC):

• Banks are beginning to pull consumer credit card lines. This will hammer consumer spending deep into 2009.
• Bank earnings estimates are still way too high, and banks will soon guide analysts down.
• Banks are still hoarding cash and they'd be idiots not to
• The bottom will come when liquidity starts to flow back into the system. We're not there yet.
• Citi (C) stock has not seen its lows.
• All the banks need more capital, and they'll be back for more.
• Wells Fargo (WFC) is the biggest short in the sector

Transcript:

MARIA BARTIROMO: I'M JOINED BY MEREDITH WHITNEY. SHE IS EXECUTIVE DIRECTOR OF EQUITY RESEARCH AT OPPENHEIMER. NICE TO SEE YOU AGAIN, MEREDITH. SO WE JUST HEARD HANK PAULSON TELL US WHERE HE THINKS WE ARE. LET ME GET YOUR TAKE ON THAT. WHERE ARE WE IN THE DOWN CYCLE? YOU HAVE BEEN AMONG THE FEW AND FIRST REALLY TO PREDICT HOW TOUGH THINGS WOULD GET.

MEREDITH WHITNEY: WELL, HANK PAULSON COULD CHANGE HIS MIND, RIGHT, LIKE HE'S DONE SO MANY TIMES. BUT WITH ALL DUE RESPECT TO HANK PAULSON, IT'S BEEN AN INCREDIBLY FLUID SITUATION. ONE THING'S CLEAR. AND I FOCUS A LOT ON THIS TODAY -- YOU HAVE HAD A MARKET THAT'S BEEN SO SHUT DOWN BY THE SHUTDOWN OF THE SECURITIZATION MARKET. SO THAT'S IMPACTED THE HOUSING MARKET. WHAT YOU HAVEN'T SEEN YET, DIGESTED BY THE MARKET, IS BANKS PULLING LINES FROM CONSUMERS. AND ACROSS THE BOARD YOU SAW THE BIG BANKS THAT COMMAND SO MUCH OF THE MARKET SHARE OF KEY PRODUCTS LIKE MORTGAGES AND CREDIT CARDS, START TO PULL LINES IN THE THIRD QUARTER. AND THAT'S GOING TO CONTINUE INTO THE FOURTH QUARTER AND THAT'S GOING TO CONTINUE INTO 2009. SO YOU'RE GOING TO START TO SEE THE CONSUMER REALLY GET STRAINED ON THEIR CREDIT CARD LINES.

PEOPLE THINK THE NEXT SHOE TO DROP IS THE CREDIT CARD, CREDIT COSTS. MEANING THE CHARGES GOING UP. NO IT'S THE CREDIT CARD LINES BEING PULLED BY BANK LENDERS IN ANTICIPATION OF WORSENING CREDIT, FUNDING PROBLEMS AND THEN REGULATORY CHANGES ON THE HORIZON. SO JUST WHEN A CONSUMER'S LOSING THEIR JOB, THAT'S THEIR FIRST SOURCE OF CASH, THEIR FIRST SOURCE OF LIQUIDITY, THEN THEY LOSE THEIR SECOND BIG SOURCE OF LIQUIDITY WHICH IS THEIR CREDIT CARD LINE. 90% OF CREDIT CARD USERS REVOLVE ONE TIME A YEAR. 45% REVOLVE MANY TIMES A YEAR. YOU CUT THAT BACK AND YOU REALLY DO DAMAGE TO U.S. CONSUMER SPENDING.

BARTIROMO: THAT'S SOMETHING THAT MENTIONED IN YOUR OP ED TODAY IN THE FINANCIAL TIMES. LET ME ASK YOU, YOU THINK THEN, THIS GETS WORSE, NUMBER ONE, IS THAT SORT OF ANTICIPATION PRICED INTO THE MARKET?

WHITNEY: NO WAY. I THINK, FIRST OF ALL, FROM MY GROUP ESTIMATES ARE SO -- MY ESTIMATES ARE 30 TO 50% LOWER THAN STREET ESTIMATES. GOLDMAN SACHS IS HAVING A CONFERENCE THIS WEEK. I WOULD EXPECT PEOPLE TO PRE-ANNOUNCE INTO THAT CONFERENCE -- YOU KNOW LOOK, YOU'RE WORKING OFF OF LOWER ASSET BASES, COMPRESSED MARGINS, AND HIGHER CREDIT CALLS, OF COURSE EARNINGS ARE GOING TO BE LOWER. I'LL TAKE AS EXAMPLE, LIKE J.P. MORGAN'S JAMIE DIMON. WHEN HE SPOKE AT THE MERRILL CONFERENCE, I THOUGHT HE SHOUTED FROM THE TOP OF THE MOUNTAIN THAT 2009 WAS GOING TO BE A TOUGH YEAR YET ESTIMATES REALLY DIDN'T COME DOWN. THEY HAVE TO COME DOWN FOR THE GROUP. ON THAT BASIS, THE STOCKS ARE VERY, VERY EXPENSIVE.

BARTIROMO: I WANT TO ASK YOU ABOUT THE OP ED THAT YOU WROTE. BEFORE WE GET INTO THAT, YOU SAID ESTIMATES HAVE TO COME DOWN. GOLDMAN SACHS TODAY, THE ESTIMATES CAME DOWN. THAT STOCK IS REALLLY TAKING A HIT TODAY, AMONG OTHERS. GOING INTO THIS CONFERENCE NEXT WEEK, WHO'S GOING TO PREANNOUNCE IN YOUR VIEW? WHO ARE THE EASY ONES, THE LOW HANGING FRUIT THAT PREANNOUNCE?

WHITNEY: WELL, I DON'T KNOW IF THEY'LL NECESSARILY PREANNOUNCE, BUT THEY'RE GOING TO GUIDE A LOT LOWER. AND THAT COULD BE EVERYONE. I THINK J.P. MORGAN'S GOING TO SAY MORE OF THE SAME. I WOULD SAY EVERYTHING SINGLE FINANCIAL IS GOING TO COME OUT AND SAY WE'RE GOING TO KITCHEN
SINK. WELLS FARGO, AS AN EXAMPLE, THEY'VE GOT ELEVEN CHARGES IN THE FOURTH QUARTER ASSOCIATED WITH THEIR WACHOVIA PORTFOLIO. BUT THEY'RE GOING TO PROBABLY KITCHEN SINK THE FOURTH QUARTER AS WELL TO TRY TO BOLSTER RESERVES. THE BANKS HAVE STOOD VERY UNDER RESERVED FROM A HISTORIC BASIS.

BARTIROMO: YOU WROTE THE OP-ED IN THE FINANCIAL TIMES TODAY AND YOU WENT THROUGH FOUR IDEAS FOR SOLUTIONS. YOU'VE BEEN LOOKING AT THIS FOR A LONG TIME. LET'S GO THROUGH SOME OF THOSE SOLUTIONS THAT NEED TO HAPPEN IN ORDER TO ACTUALLY PERHAPS SEE SOME KIND OF A TURN IN THE BOTTOM. NUMBER ONE, YOU SAY RE-REGIONALIZE BANKS. WHAT DOES THAT MEAN?

WHITNEY: WELL IT MEANS THAT OVER THE PAST 20 YEARS, AS THE FINANCIAL SYSTEM HAS MODERNIZED, SO MUCH OF THE BANKING SYSTEM, BIG PRODUCTS LIKE CREDIT CARDS AND MORTGAGES, HAVE CONSOLIDATED NATIONALLY. SO FIVE LENDERS CONTROL TWO-THIRDS OF THE MARKET AND MORTGAGES. FIVE LENDERS CONTROL TWO-THIRDS OF THE MARKET AND CREDIT CARDS. SO WHEN THOSE LENDERS DECIDE TO PULL BACK, EVERYONE FEELS THE PAIN.

BARTIROMO: TOO MUCH CONCENTRATION?

WHITNEY: TOO MUCH CONCENTRATION. IT USED TO BE YOUR LOCAL LENDER KNEW YOU. YOU KNEW YOUR CUSTOMER. AND SO YOU HAD LOCAL LENDING. YOU KNOW THE REGIONAL BANKS, THE SMALL REGIONAL BANKS HAVE CLEAN BALANCE SHEETS. ARE NOT IN THIS TROUBLE BUT THEY'VE LOST THIS SKILL SET EXPERTISE. THE
PROCESSING/SERVICING OF UNDERRATING CREDIT CARDS. AND SO THEY'VE THE CAPITAL TO LEND OUT, THEY DON'T HAVE THE SKILL SET. WE'VE GOT TO GET MORE OF THE REGIONAL BANKS LENDING.

BARTIROMO: NUMBER TWO, YOU SAY IS EXPAND FDIC GUARANTEE FOR BANK DEBT?

WHITNEY: SO MANY OF THE BANKS ISSUED FDIC GUARANTEED BANK DEBT LAST WEEK. SOLD LIKE HOTCAKES. IT WAS A GREAT FUNDING VEHICLE FOR THE BANKS BUT IT EXPIRES IN JUNE. SO, BANKS NEED TO KNOW THEY HAVE A LONGER RUNWAY OF ACCESSING CHEAP CAPITAL.

BARTIROMO: SO THAT THEY DON'T HOARD THEIR CASH?

WHITNEY: BECAUSE RIGHT NOW THEY ARE HOARDING -- ANY SEMI-CONCIOUS BANK MANAGER IS HOARDING THEIR CASH AND LIQUIDITY.

BARTIROMO: NUMBER THREE IS DELAY ACCOUNTING RULE IMPLEMENTATION. THE ACCOUNTING RULE CHANGE.

WHITNEY: YEAH. I THINK FAS 140 IS A HUGE MIRAGE. IT HAD GOOD INTENTIONS, WHICH IS BRING OFF-BALANCE SHEET ASSETS ON BALANCE SHEETS SO FOR GREATER TRANSPARENCY. BUT ONE OF THE BIG ASSETS, THE EASIEST ASSET THAT COMES BACK ON BALANCE SHEET IS CREDIT CARD ASSETS. IT'S MORE EXPENSIVE FOR BANKS TO RESERVE AGAINST THIS. BANKS CAN'T AFFORD IT AND PLUS THERE'S BETTER GRANULARITY OF TRANSPARENCY OFF-BALANCE SHEET AND WHAT'S CALLED MASTER TRUST CREDIT REPORTS.

BARTIROMO: INTERESTING, BETTER CLARITY OFF BALANCE SHEET. AMEND PROPOSAL TO UNFAIR AND DECEPTIVE LENDING PRACTICES.

WHITNEY: THIS IS A VERY NERDY, CREDIT CARD SPECIFIC BILL WHICH HAS A LOT OF GOOD INTENTIONS LIKE, GIVE A CUSTOMER A LONGER PERIOD OF TIME TO PAY THEIR CREDIT CARD BILL. DON'T DO ABUSIVE PRACTICES LIKE TEASER RATES WHERE I LURE YOU IN WITH ONE RATE AND THEN CHARGE YOU ANOTHER FOR YOUR BALANCE. BUT THERE'S ONE BUT VERY VERY DANGEROUS CHANGE IN HERE, WHICH IS BY THE WAY ALREADY BEEN ACCEPTED BY THE THREE REGULATORY BODIES THAT COVER THE CREDIT CARDS. SO THIS IS GOING TO GO INTO EFFECT AS IS AND BE DANGEROUS, WHICH IS, IT ELIMINATES, DRAMATICALLY REDUCES, A LENDER'S ABILITY TO REPRICE AN UNSECURED CREDIT CARD LOAN. ALL THE BANKS THAT I SPEAK TO, ALL THE BANKS WHO SAID THIS WILL END IN UNINTENDED CONSEQUENCES, AND I THINK THE BANKS PULLING $2 TRILLION AT LEAST OF CREDIT CARD LIQUIDITY FROM THE SYSTEM IS VERY DANGEROUS FOR THE U.S. ECONOMY.

BARTIROMO: LET ME SWITCH GEARS AND GET YOUR TAKE ON WHAT HAS HAPPENED OVER THE PAST TWO WEEKS. WE SAW THE GOVERNMENT COME IN, SUPPORT CITIGROUP, THAT SACKED RALLIES OFF THE LOW OF $3 AND CHANGE. NOW BACK UP TO CLOSE TO 7 OR UNDER 7, REALLY. WHAT DO YOU THINK ABOUT THE CITIGROUP PLAN AND DO YOU THINK THAT THAT STOCK HAS SEEN THE WORST?

WHITNEY: I DON'T THINK THE STOCK HAS SEEN THE WORST. I THINK THAT THE PLAN FOR EQUITY SHAREHOLDERS WAS SO GENEROUS AND THEN THE CONVERSE OF THAT IS-- WAS SUCH AN AFFRONT TO U.S. TAXPAYERS, THAT I DIDN'T WANT TO COMPLAIN ABOUT THINGS ANY MORE. I JUST REALLY WANTED THE MAIN MOTIVATIONS OF WHY I WROTE THIS OP-ED PIECE TO TRY TO PROVIDE SOLUTIONS BECAUSE BEING NEGATIVE ONLY GETS YOU SO FAR. CLEARLY THE GOVERNMENT APPRECIATES THAT THESE BANKS NEED MORE CAPITAL. AND THEY CAN'T RE-CAPITALIZE ALL THESE BANKS THEMSELVES. SO THEY LEFT THE WINDOW OPEN FOR EQUITY BECAUSE THEY KNOW THAT THE PRIVATE INVESTOR, YOU AND ME, HAVE TO BUY SHARES OF THESE COMPANIES TO ULTIMATELY RECAPITALIZE THIS SYSTEM. SO BANKS LIKE CITI AND OTHER -- THE BIG BANKS, CAN'T FAIL BECAUSE LOOK, YOU'D WIPE OUT MOST OF THE INSURANCE DEPOSIT THAT COVERS THEIR DEPOSITS. IT WOULD BE A DISASTER FOR THE SYSTEM. CERTAINLY FOR CONFIDENCE. SO YOU KEEP THEM ON WHAT I WOULD DESCRIBE AS A METHODONE CLINIC TYPE OF REHABILITATION. BUT I STILL THE GOVERNMENT SHOULD HAVE GOTTEN MUCH MORE FOR ITS MONEY. I UNDERSTAND WHY THEY DID IT THIS WAY, BUT THERE'S NO GUARANTEE THAT INVESTORS ARE GOING TO COME BACK AND RECAPITALIZE CITI WITH THEIR OWN SHAREHOLDERS.

BARTIROMO: DO YOU THINK THE FIRM IS GOING TO EVENTUALLY NEED MORE CAPITAL AND AS A RESULT THE STOCK TRADES DOWN BECAUSE OF THIS ACKNOWLEDGEMENT BY THE MARKET THAT WE'RE NOT DONE HERE?

WHITNEY: EVERY SINGLE BANK THAT I COVER, PARTICULARLY ALL THE LARGE BANKS, WILL NEED MORE CAPITAL BECAUSE THIS STILL IS JUST PLUGGING HOLES. ANY OF THE EQUITY CAPITALS NOT GOING TO CREATE NEW GROWTH OR -- ALL OF THE BANKS ARE CONTRACTING THEIR BALANCE SHEET. SO THERE'S NOT A DOUBT IN MY MIND THAT ALL OF THESE BANKS ARE GOING TO NEED MORE CAPITAL.

BARTIROMO: FINAL QUESTION, AS WE APPROACH THE CLOSE AND THE MARKET IS DOWN 600 POINTS. IS THAT WHAT'S BEHIND THIS CONTINUATION OF A SELLOFF IN EQUITIES? WHEN WE FIRST TALKED LAST WEEK, WHEN WE WERE DECIDING WHEN YOU WERE AVAILABLE TO COME ON THE PROGRAM, I THOUGHT, MAYBE AT SOME POINT SHE'S GOING TO MAKE AN AGGRESSIVE CALL AND TURN POSITIVE HERE. WHAT IS IT GOING TO TAKE FOR TO YOU TURN POSITIVE?

WHITNEY: IT'S EASY. WHEN YOU SEE LIQUIDITY COME BACK IN THE SYSTEM AND THE DENOMINATOR EXPAND, MEANING BANKS START TO LEND AGAIN, MONEY GOING TOWARDS GROWTH, YOU SEE THAT THE SYSTEM IS SHRINKING, MORE MONEY COMING OUT OF THE SYSTEM. IT'S LIKE IF YOU TAKE OIL AND GAS OUT OF AN ENGINE IT STOPS. LIQUIDITY IS COMING OUT OF THE ENGINE, AS AND A RESULT, THESE BANKS HAVE TO SHRINK TO GROW. SO YOU'RE GOING TO HAVE TO SEE -- AN EXAMPLE WOULD BE IN 1998 WHEN INVESTORS CAME BACK TO THE SECURITIZATION MARKET, AND THE BOND MARKET IN 2002, 2003, THE SYSTE REALLY GOT GLOBALIZED AND PETRO DOLLAR MONEY GREW HAND OVER FIST. SO YOU SAW LIQUIDITY CAME BACK INTO THE SYSTEM. I DON'T KNOW WHAT IT'S GOING TO BE BUT THE SYSTEM IS SHRINKING NOW AND ONCE IT TURNS THE CORNER-- THAT WILL PRECEDE NUMBERS IN THE COMPANIES WILL PARTICIPATE. I HAVEN'T MISSED A BOTTOM YET. SO I THINK THAT THERE'S TIME HERE. I CAN'T WAIT UNTIL WE GET THERE.

BARTIROMO: PETRO DOLLARS ARE ALSO SHRINKING. YOUR SELL RIGHT NOW, THE
BIGGEST SELL IN THE FINANCIAL SERVICES GROUP WOULD BE?

WHITNEY: WELLS FARGO.

BARTIROMO: WELLS FARGO. MEREDITH GREAT TO HAVE YOU ON THE PROGRAM.

Voltron says: a link to Meredith Whitney's op-ed piece is here. I agree with her investment advice but not her proposed government solutions to the crisis.