2008 Latest Edition - Did You Know 3.0 - From Meeting in Rome this Year

If you didn't feel small and insignificant before you watch this video, you definitely will after!!!

This video was played at the Sony BMG Rome Meeting this year.

Uncle Jay Explains: Year-end! 12-22-08

Now This Really Sums it up

A REAL and PROVEN Solution to The Crisis

The following article was posted by Karl Denninger on his Martket-ticker blog. http://market-ticker.denninger.net/archives/605-Genesis-Plan-Now-Known-Workable.html

This is a very insightful look into the current financial crisis and what can be done to solve the root problems associated with the crash.

Please read this and forward this information to EVERYONE YOU KNOW.

Hobo


The Genesis Plan is Now Known Workable

We learned a number of things today - important things.

First - Lehman's CDS and bond auction process told us two things:

Even though they were dirtier than a hobo who hadn't had a bath in a month, they had enough value left in their bonds to wind up positive. Yes, it was less than a dime on the dollar. But it was a positive number. That's all that matters.
There were no fails on the posting of collateral against settlement.
Now for the last year we have been told that:

You can't trigger the CDS, it will cause a systemic, chain-reaction style nuclear meltdown.
These firms are so broke that there is no value left in them.
Both are now known to be false.

This gives us hope - and a path out of the darkness.

Its called "The Genesis Plan" and is what I have proposed.

The question raised about this plan is whether the "cramdown" provisions could possibly work - that is, if put through them, would the firm come out the other end, or be squashed like a bug as there was insufficient equity left in the bonds.

We now know the answer for one of the worst of the ugly - the equity is there, even if only by a scrape, to clear the firm's balance sheet and spit it out on the other side.

Folks, if there was a time to absolutely flood your Congressmen, the media, and every pundit and wonk you can find, this is it.

The short version of The Genesis Plan is:

Everyone must expose their balance sheet; all Level 2 and 3 assets must be declared and all models disclosed in full immediately and every quarter hereafter.
The CDS monster must be caged by forcing it onto an exchange where O/I and margin supervision can be maintained. This is already in process and must be completed.
Leverage must be returned to no more than 12:1 across the system - no exceptions.
The last point is obvious - every firm that has detonated has had leverage well beyond 12:1. None that have had less leverage have blown up. Game, set, match.

#2 is obvious and in process.

This leaves #1.

Now doing #1 will cause some insolvencies to be uncovered. Maybe a lot of them.

For each of those firms perform a "cramdown" of the debt to equity, using the retained value in the bonds to cover the liabilities that rendered the firm insolvent.

If there is recovery value (in most cases there will be, as we saw with Lehman) then the bondholders get newly-issued equity in ratable proportion to their (former) ownership of the bonds. The existing equity is wiped out. The firm, having no balance sheet debt whatsoever, can then immediately raise capital in the market to recapitalize itself (having a clean balance sheet this is a trivial task)

For those firms that have zero equity remaining, the government can step in and inject capital via a super-senior tranche as necessary to establish a working capital base. Remember, with a 6% Tier 1 capital requirement a little goes a long way - $10 billion injected results in over $160 billion of available gearing! Bingo - the firm is back on its feet. Protect the taxpayer in these transactions by attaching an onerous coupon to the issue so that it will be rapidly repaid (e.g. 3mo LIBOR + 600 bips) and cleared.

The objection to this plan will be that existing equity holders will be wiped out and bondholders will take a haircut.

Well, bond holders are no worse off than if the firm went under. They would get their recovery value anyway, and they still do - its just in the form of equity instead of cash.

As for equity holders, they're wiped out in a bankruptcy too.

The real objection to this is going to come from the executives, who will see their stock options rendered worthless along with their restricted shares. However, they remain in place (if the shareholders will have 'em) and as a consequence can rebuild their equity over time.

I have a solution for that problem too - make clear that any firm that turns down this demand is free to do so, but they will receive exactly zero access to the discount window or any other Fed or government borrowing facility, and if they go down, that's too bad - no help. We let Mr. Market take care of 'ya. Either take this deal now, or take your chances.

The Genesis Plan is demonstrably superior to the TARP/EESA for the following reasons:

The Genesis Plan immediately restores trust to the credit markets as balance sheets are instantaneously exposed and remain able to be evaluated by the marketplace. EESA does nothing to guarantee the return of trust to the credit markets as it does not deal with the underlying issue at all - the lies told by executives and firms in terms of their exposure to credit risk of all types.
The Genesis Plan addresses the root cause of all of the large-firm failures since the first of 2008 - excessive leverage. TARP/EESA is silent on the root cause of these business failures.
The Genesis Plan can be represented in a half-dozen pages of legislation. The EESA required over 100 to put in proper oversight. Since there is nothing other than ministerial activity required under The Genesis Plan and no discretion to abuse, such oversight is not necessary as with the EESA.
The Genesis Plan uses no taxpayer money at all for most institutions, and where taxpayer money is required it is intrinsically protected since it will sit at the top of a (new and clean) capital structure. The TARP/EESA uses all taxpayer and no private funds.
The Genesis Plan, when taxpayer money is used, goes directly to Tier 1 capital and thus is "high power" money; that is, it supports lending of $10-12 for every dollar put in. TARP/EESA is twelve times less efficient in the use of funds in that by purchasing assets zero leverage is obtained for each taxpayer dollar deployed.
The Genesis Plan promotes restoration of normal lending activity as it clears the impaired firm's balance sheet debt and immediately eliminates the issue of counterparty trust. TARP/EESA does not clear (although it does help remove items from) the firm's balance sheets and does nothing to address counterparty trust.
The Genesis Plan requires no lengthy administrative or "start up" time. It can literally be "up and running" immediately, with the exception of the CDS exchange, which is already under way. TARP/EESA was claimed to be required "immediately" but now is said to not be likely to actually go into effect until November at the earliest.
The Genesis Plan uses existing agencies who are already tasked with the required functions - auditing and reporting (OTS, OCC and the FDIC) and thus has very low "parasitic" costs. TARP/EESA establishes a new government agency and thus has a high parasitic cost requirement.
The Genesis Plan exposes the taxpayer to no credit risk. EESA/TARP exposes the taxpayer to $700 billion in taxpayer risk - or more.
While there were a few signs of credit market stress easing (a bit) today, there were also more anecdotes of things getting much worse. I see nothing to suggest that short-term lending has returned to normal, and until I do, I remain on high alert for the sort of disruptive events that can impact your life in very undesirable ways.

Yes, the market bounced hard today. Twice. Artificial? Maybe. Inside knowledge? More probably. Will whatever the "crackberry network" was buzzing about work? Likely not for more than a few days, but with the market this jittery, it doesn't matter - when the VIX is this high anything that makes people jump causes this sort of reaction - in either direction.

Get on it folks - plaster the media and your elected officials with the fact that we now have hard evidence that this path forward will not only work on a technical basis, but if it is adopted it will clear the credit markets almost immediately, which is the key element of this mess that must be resolved.

Any public official or media that wants to get ahold of me - the contact link works, and you're invited to use it.

We must fix this mess and we must do it now!

Today the Bottom Fell Out

Tonight while drinking my gin and bitters (Wall Street On The Rocks) I found this great video on youtube...

It REALLY sums things up.

Why The Fannie-Freddie Bailout Will Fail

The following is an excerpt from Martin Weiss's Money and Markets Newsletter.

http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=2198

I suggest you pay attention to what Martin is saying....he is much more often right than wrong in these matters.


Why The Fannie-Freddie Bailout Will Fail
by Martin D. Weiss, Ph.D.

With yesterday's announcement of the most massive federal bailout of all time, it's now official: Fannie Mae and Freddie Mac, the two largest mortgage lenders on Earth, are bankrupt.

Some Washington bigwigs and bureaucrats will inevitably try to spin it. They'll avoid the "b" word with vengeance. They'll push the "c" word (conservatorship) with passion. And in the newspeak of 21st century bailouts, they'll tell you "it all depends on what the definition of solvency is."

The truth: Without their accounting smoke and mirrors, Fannie and Freddie have no capital. The government is seizing control of their operations. Their chief executives are getting fired. Common shareholders will be virtually wiped out. Preferred shareholders will get pennies. If that's not wholesale bankruptcy, what is?
Some Wall Street pundits and pros will also try to twist the facts to their own liking. They'll treat the bailout like long-awaited manna from heaven. They'll declare that the "credit crisis is now behind us." They may even jump in to buy select financial stocks. And then they'll try to persuade you to do the same.
The reality: This was the same pitch we heard in August of last year when the world's central banks made a coordinated attempt to rescue credit markets with massive injections of fresh cash. It was also the same pitch we heard in March when the Fed bailed out Bear Stearns. But each time, the crisis got progressively worse. Each time, investors lost fortunes.

Together, both Washington and Wall Street are trying to persuade you that, "no matter what, the government will save us from financial disaster." But the real lessons already learned from these events are another matter entirely:

Lesson #1. Each successive round of the credit crisis is far deeper and broader than the previous.

In 2007, the big news was big losses; in 2008, it's big bankruptcies.

In March, the failure of Bear Stearns shattered $395 billion in assets. Now, just six months later, the failure of Fannie Mae and Freddie Mac is impacting $1.7 trillion in combined assets, or over four times more. And considering the $5.3 trillion in mortgages that Fannie-Freddie own or guarantee, the impact is actually thirteen times greater than the Bear Stearns failure.

Lesson #2. Despite unprecedented countermeasures, Washington has been unable to stem the tide.

Yes, the Fed can inject hundreds of billions into the banking system. But if banks don't lend, the money goes nowhere.

Sure, the Treasury can inject up to $200 billion of capital into Fannie and Freddie. But if their mortgage portfolio is full of holes, all that new capital goes down the drain.

And of course, the U.S. government has vast resources. But if the $49 trillion mountain of U.S. debts and the $180 trillion pile-up of U.S. derivatives are beginning to crumble, all those resources don't amount to more than a band-aid and a prayer.

Lesson #3. Shareholders are the first victims.
Bear Stearns shareholders got wiped out. Fannie and Freddie Mac shareholders are getting wiped out. Ditto for shareholders in any of Detroit's Big Three that go belly-up, any bank taken over by the FDIC or any insurer taken over by state insurance commissioners.

The Next Lesson:
The Primary Mission of the Fannie-Freddie
Bailout Will Ultimately End in Failure

Most people assume that when the government steps in, that's it. The story dies and investors shift their attention to other concerns. In smaller bailouts, perhaps. But not in this Mother of All Bailouts.
The taxpayer cost for just these two companies — up to $200 billion — is more than the total cost of bailing out thousands of S&Ls in the 1970s. But it's still just a fraction of the liability the government is now assuming.
Why?

First, because the number of home foreclosures and mortgage delinquencies has now surged to a shocking four million — and a substantial portion of the massive losses stemming from this calamity have yet to appear on Fannie's and Freddie's books.

Second, because the U.S. recession is still in an early stage, with surging unemployment just beginning to cause still another surge in foreclosures and mortgage delinquencies.

Third, even before Fannie and Freddie begin to feel the full brunt of the mortgage and recession calamity, their capital had already been grossly overstated.
Indeed, right at this moment, while Wall Street analysts are trying to evaluate the details of a bailout plan that's supposed to save them, regulators and their advisers are poring over the Freddie-Fannie accounting mess they're supposed to inherit. According to Gretchen Morgenson and Charles Duhigg's column in yesterday's New York Times, "Mortgage Giant Overstated the Size of Its Capital Base" ...
Freddie Mac's portfolio contains many securities backed by subprime and Alt-A loans. But the company has not written down the value of many of those loans to reflect current market prices.

For years, both Freddie and Fannie have effectively recognized losses whenever payments on a loan are 90 days past due. But in recent months, the companies saidthey would wait until payments were TWO YEARS late. As a result, tens of thousands of other loans have also not been marked down in value.

Both companies have grossly inflated their capital by relying on accumulated tax credits that can supposedly be used to offset future profits. Fannie says it gets a $36 billion capital boost from tax credits, while Freddie claims a $28 billion benefit. But unless these companies can generate profits, which now seems highly unlikely, all of the tax credits are useless. Not one penny of these so-called "assets" could ever be sold. And every single penny will now vanish as the company goes into receivership.

In short, the federal government is buying a pig in a poke — a bottomless pit that will suck up many times more capital than they're revealing. My forecast:
Just to keep Fannie and Freddie solvent will take so much capital, there will be no funds available to pursue the primary mission of this bailout — to pump money into the mortgage market and save it from collapse. That mission will ultimately end in failure.

The Most Important Lesson of All:
As the U.S. Treasury Assumes
Responsibility for $5.3 Trillion in Mortgages,
It Places Its Own Borrowing Ability at Risk

The immediate reason the government decided not to wait any longer to bail out Freddie and Fannie was very simple: All over the world, investors were beginning to reject their bonds, refusing to lend them any more money. So the price of Fannie and Freddie bonds plunged, and the yields on those bonds went through the roof.
As a result, to borrow money, Fannie-Freddie had to pay higher and higher interest rates, far above the rates paid by the U.S. Treasury Department. And they had to pass those higher rates on to any homeowner taking out a new home loan, driving 30-year fixed-rate mortgages sharply higher as well.
Now, with the U.S. Treasury itself stepping in to directly guarantee Fannie-Freddie debts, Washington and Wall Street are hoping this rapidly deteriorating scenario will be reversed.

They hope investors will flock back to Fannie and Freddie bonds.

They hope investors will resume lending them money at a rate that's much closer to the Treasury rates.

And they hope Fannie and Freddie will again be able to feed that low-cost money into the mortgage market just like they used to.

In other words, they hope the U.S. Treasury will lift up the credit of Fannie and Freddie.

There's just one not-so-small hitch in this rosy scenario: Fannie's and Freddie's mortgage obligations are just as big as the total amount of Treasury debt outstanding.So rather than the Treasury lifting up Fannie and Freddie, what about a scenario in which Fannie and Freddie drag down the U.S. Treasury?

To understand the magnitude of this dilemma, just look at the numbers ...
Mortgages owned or guaranteed by Fannie and Freddie: $5.3 trillion.


Treasury securities outstanding as of March 31, according to the Fed's Flow of Funds (report page 87, pdf page 95): Also $5.3 trillion.

If Fannie's and Freddie's obligations were equivalent to 10% or even 20% of the U.S. Treasury debts, the idea that they could fit under the Treasury's "full faith and credit" umbrella might make sense. But that's not the situation we have here — Fannie's and Freddie's obligations are the equivalent of 100% of the Treasury's debts.

And it's actually worse than that:
Foreign investors, the most likely to dump their holdings if they lose confidence in the United States, hold an estimated 20% of the Fannie- and Freddie-backed mortgages outstanding. But ...

Foreign investors own 52.7% of the Treasury securities outstanding (excluding those held by the Fed).

So based on the above stats, Treasury securities are actually more vulnerable to foreign selling than Fannie and Freddie bonds.

What happens if the international mistrust and fear afflicting Fannie and Freddie bonds infects U.S. Treasury bonds? Foreign investors would start dumping Treasury securities en masse. They'd drive Treasury rates sharply higher. And they'd wind up forcing Fannie and Freddie to pay much higher rates for their borrowings after all.
How will you know? Just watch the all-critical spread (difference) between the yield on Fannie-Freddie bonds, considered lower quality, and the yield on equivalent government bonds, considered high quality. Then consider these two possibilities:
If that spread narrows mostly because Fannie and Freddie interest rates are coming down toward the level of the Treasury rates, fine. That means the immediate goal of the bailout is being achieved. BUT ...

If the spread narrows mostly because Treasury rates are going up toward the level of Fannie's and Freddie's rates, that's not so fine. It not only means a failure to achieve the immediate goals, but it will also imply that the entire Fannie-Freddie bailout is backfiring on the Treasury.





The Treasury will ultimately have to effectively abandon Fannie and Freddie: It will set a cap on the resources it will commit. It will not write a blank check. In the final analysis, it must save its own neck first.

Take A Load Off Fannie

The Story of Fannie Mae as told by The Band.

We are looking at buying this new hybrid

This hybrid gets over 100 smiles per gallon! With the current cost of fuel, it may become necessary for us to go green.