Wednesday, 28 January 2009 23:00

I guess I need to go back to DC

From Bloomberg on Stimulus Bill Mish-Mash:

Senate Version

The Senate version of the stimulus bill already differs from the House plan. The Senate Finance Committee voted this week to add a $70 billion alternative-minimum tax cut to the package.

Lawmakers in the two chambers also differ over how much to spend on highway projects, renewable-energy tax breaks and expanding access to broadband.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said the House plan doesn’t include enough tax cuts and that many of them that are in the bill would go to those who don’t pay federal income taxes. He said Republicans want to add provisions aimed at fighting the housing crisis by having the federal government back fixed-rate 4 percent mortgages. Why? Why! Why?

“It’s clear that we need to go directly at the housing problem,” McConnell said. “Republicans have a proposal for lower-interest rate mortgages that we think would help ease the problems that started the economic downturn.” Oh, that's why. Let me quote this again, “Republicans have a proposal for lower-interest rate mortgages that we think would help ease the problems that started the economic downturn.”. I'll forgive Senator McConnell since he may not read my blog, but lower interest rate mortgages (in combo with "It ain't my money" style underwriting) is what provided the fuel for the economic downturn. We wouldn't be in a downturn if we didn't climb so damn high up the bubble mountain in the first place. Now, you want to bring us back up to the peak of market distortion?! Overproof rum makes a pretty poor remedy for a hangover! I really don't understand why politicians think that more of the problem will lead to the solution! Interest rates are already hovering near a historical low. Houses are not selling, except for the synthetic sales which are actually banks flushing bad assets out of their system at lower and lower price points. See my explanation of this phenomena (be sure to review the comments below the article), and the more detailed review by Mr. Mortgage.

True stimulus in an environment such as this should not rely on dated and stale academic dogma. No tax cuts, no cutting already very low mortgage rates after a low mortgage rate inspired property and credit bubble, no additional nonsense. Let the fragile break, let the insolvent fail, and let the imprudent risk takers face the consequences of their actions. I heard Nassim Taleb state the other day, that the US is allowing the pilot that crashed the plane to continue flying. Here are some REAL solutions to some very real problems:

  1. Stimulus dollars should be spent on direct stimulus. The smaller community banks and private investors should be given guarantees (similar to those used in government guaranteed student loans) for lending to small businesses. This will create a multiplier to leverage government funds by a multiple, stimulate lending, but to a sector than is not overly bubblified, and most importantly - it will create jobs, and it will create jobs now, not later, next year or whenever.
  2. Stimulus dollars should go into very limited guarantees (ex. non-recourse loans) to risk takers who are willing to sift through the garbage of the big and medium banks and buy the assets off of them. I know I would be first in line for such a deal. Now we have instant price discovery (albeit, not true price discovery since the government had to give away near risk free money, but beggars can't be choosers, now can they?), and a clearing out of bad debt. But that price discovery may bankrupt many banks, right? Well, it's going to happen anyway. It's just a matter of whether it will happen now, or then. At least with this plan, there is a less painful pricing point, due to the government's less intrusive (but still evident) market intrusion of supplying overly favorable access to funds.
  3. Admit the banking system is insolvent and let the (if not force the) most insolvent to fail. Solution number two (above) will insure that capitalists will be there to pick up the pieces before they even hit the ground and put them to work immediately, for the opportunity for outsized profit will create a mad rush. This mad rush will force prices to equilibrium, which is how Mother Market is supposed to work in the first place. Why let greed only effect this country in a negative way?
  4. Harness the massive stores of intellectual capital to be found in this country. Create perpetual licensing and financing arrangements for patented technology and ideas sitting idle in universities of this country. Combine this with idea number 1 above, and you will create a new technology and idea export boom. Think Google, Intel, Apple - all companies that created over a trillion dollars (combined) of wealth and productivity by leveraging patented ideas and technology found idle in our system of academic universities. This means, more jobs, more organically generated wealth, and more GDP growth. Remember, when people are making money, they don't need subsidized mortgage rates. They can buy their houses, cars and baubles, the old fashioned way - ex. through work and compensation for work.
  5. Once, we get back onto our feet, make real substantive investment in our public education system and make it accountable - without excuses. If you really want to give tax breaks, give them to for-profit elementary and high school enitities and sit back and watch them compete with public school system and the not-for-profit private schools. No matter who wins or loses, the students will win. Just imagine a high school where BoomBustBlog was required daily reading!
  6. Subscribe to BoomBustBlog.com!
Last modified on Wednesday, 28 January 2009 23:00

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  • Comment Link gjk313 Tuesday, 03 February 2009 14:40 posted by gjk313

    This just gets more pathetic each day. Today GS downgrades and lowers targets for a bunch of the banks. Why now? They could have saved investors a lot of money and also saved themselves the expense of their useless analysts by simply purchasing a subscription to this blog a few months ago. What a joke. Wall Street is going to be more desolate than Detroit soon.

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  • Comment Link phirang Tuesday, 03 February 2009 12:42 posted by phirang

    It seems that the Treasury is going to way over-pay for these crappy bad-bank assets, and that's that.

    http://www.ritholtz.com/blog/2009/02/banksters-in-dc/

    Reggie, please verify if these rumors have any veracity!

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  • Comment Link shaunsnoll Friday, 30 January 2009 19:13 posted by shaunsnoll

    if i were short the financials i would cover before earnings for similar reasons to that, they have repeatedly used their earnings releases as an opportunity to twist the numbers with accounting that the foolisht think things are better and rush in. most are too lazy to strip out the garbage

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  • Comment Link NDbadger Friday, 30 January 2009 14:53 posted by NDbadger

    I wanted to chime in on the bad bank discussion. First, what the government is doing now bears very little resemblance to the RTC. With the RTC, the S&L were first put into receivership and then the bad assets were removed from balance sheets. The debt of the S&Ls was restructured and the cleaned institutions were then spun out and the bad assets were sold to investors. Today, the government plans on buying up the bad assets (or insuring the bad assets at below market rates, economically equivalent) at above market prices to help recapitalize the banks, without putting them in receivership.
    Bad assets in this case included MBS and whole loans. This is a major rape of the taxpayer in my opinion.

    In any case, after the bad assets are removed from bank balance sheets, if the institution still needs capital, my guess is it will be provided by taxpayers who will then own common, and current shareholders will be severely diluted.
    Obviously, the extent of dilution will vary with: 1) exposure to the toxic assets, 2) price the governments sets for the assets 3) markdowns the banks have already taken. The more the government pays for the assets, the more recapitalization will get done by the transaction, and the less shareholder dilution.

    Most banks have barely begun to mark down the assets. In most cases they are marked at around 95 cents on the dollar. These banks will likely face substantial dilution as the Fed and FDIC probably can’t get away with paying that much for the assets (although they can probably get away with providing cheap insurance, as few people seem to realize this is the same thing.) It won’t take much of a price below the 95 cents on the dollar to wipe out most if not all of the equity of the banks on Reggie’s doo-doo list.

    But GS & MS’s assets are marked at 50 cents on the dollar. These companies will get a huge windfall when they sell the assets to us at a higher than market price. I don’t know if Reggie is still bearish on GS, and admittedly, I still think their derivatives book is a huge risk, but I also think they could potentially blow the quarter away if the government gets its “bailout plan” up and running as quickly as they say they want to.

    Obviously there are caveats. 1)The government may not be successful in launching the plan, although I suspect they will, as I think they are just going to fund it with the $350 billion remaining in TARP and leveraging the Fed’s balance sheet. 2) there other assets continue to deteriorate. Primarily because of 2, I still think the plan will ultimately fail and that we will see continued nationalization down the road. But some institutions, like GS may get saved.

    Anyway, I’m wondering if other people see this and also think GS is a potentially good long trade? Or if I am missing something and full of sh*t.

    Thanks muchly,

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  • Comment Link nyse Thursday, 29 January 2009 14:28 posted by nyse

    I am constantly amazed at the asinine solutions our elected officials come up with. What a joke. Love this blog

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  • Comment Link mattowan Thursday, 29 January 2009 13:20 posted by mattowan

    Reggie, I am sure you see that the stimulus that passed the house last night bears no resemblance to what you proposed above. Instead, our congress proposed the largest expansion of entitlement spending in our lifetimes, very very little of which will actually do anything to help our economy. While this may present some investment opportunities in the near term I wonder what it will do to our country in the long term.

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  • Comment Link jarret Thursday, 29 January 2009 12:24 posted by jarret

    Hi Reggie

    Is there a way to get an email notification of ANY comments that are made accross any thread as I would be interested as I think several others would as well.

    I know that I can do it on an individual blog but I dont want to always post something just to keep up with what the group and yourself is talking about.

    Thanks as always.

    Jarret

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  • Comment Link boodioo Thursday, 29 January 2009 11:03 posted by boodioo

    Hi Reggie,
    Thanks a lot for all the input. Great blog!

    One question. When you say: "once you have money (significant profit) on the table, you should lock it in. You can easily lock in profits without closing out your position",
    how do you lock the profits ?

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