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Start imagining the questions you’ll want to ask LD when you call in at (347) 677-0792.

I’m hoping to call in with a problem I’m having with my auto insurance wrongly charging me for someone else’s auto insurance, and trying to get reimbursed by them.

How about you? Are you having more problems like mine these days? Are these companies so desperate for cash that they’re, um, looking the other way about these kinds of clear instances of wrongdoing by one or more employees? (There WAS wrongdoing in my case since the employee was supposed to erase — destroy — my debit card information, but obviously did not do so, and instead used it to pay someone else’s insurance. Ugh. And this is not a sleazy cheap insurance company. This is a premiere company affiliated with another prominent, esteemed company.)

You may also want to call in about what to do with your 401K. You MAY have questions about the national and world economies — the “big picture” stuff! WHATEVER you want to ask, go for it!

TUNE IN Sunday night at 8:00 p.m. Larry Johnson will be handling your calls, and talking with LD. Who could ask for anything more?!?!?!?!?

OPEN THREAD!

As you all know, Nancy Pelosi has instructed the CEOs of Ford, GM and Chrysler to return to congress with a viable plan for the $25 billion dollar bailout money they have requested in a panic.

During their first visit with congress, it was very clear that either none of the three had a clue what they intended to do with the money or……..they just didn’t want to admit that they were going to use it to make payroll and maybe take a nice trip the the Bahamas or something. Modeling themselves after AIG, maybe a nice trip to England for partridge hunting might be in order.

Rep. Brad Sherman, D-California, asked the three CEOs to “raise their hand if they flew here commercial. Let the record show, no hands went up. Second, I’m going to ask you to raise your hand if you are planning to sell your jet in place now and fly back commercial. Let the record show, no hands went up.”

So you see, these three turkeys didn’t do very well on that begging trip.

Even Nancy, who would pretty much hand out money for a circus cockroach act if the presenter sucked up well enough and it meant a nice contribution to her next race, was unimpressed with the Big Three CEOs. But that wasn’t difficult even for a money groupie like herself. If any of you watched these three overpaid clowns on CSPAN, you know that their appearance on Capital Hill pretty much debunked the concept that ludicrously high CEO salaries and bonuses attract the Best and the Brightest.

Uppity decided to go undercover and dig deeper into the minds of these three honchos who make more money in an hour than most of you make in a year.

So Uppity tracked the three CEOs, Goniff, Finagler and Swindler, and notest that they went off to a special retreat together in Palm Beach for a little golf, a massage, a nice haircut, a bit of sailing, some new Italian silk suits from that cool tailor they know, and a couple of laughs over how their companies promised to make more fuel efficient cars back in 1980.

In between the Beluga caviar, cold cracked lobster claws with shaved-truffle butter, rack of Austrialian lamb and two of those remaining five bottles of Chateau Mouton-Rothschild 1945, Uppity can attest that they put their three Best and Brightest minds together and crafted their financial plan for the $25 billion. The result was a work of art which only three American multimillionaire CEOs could possibly produce between belches. This was a particularly difficult task for them to achieve in the absence of a large team of lower level faceless eager lackies hoping to get noticed, who actually do their thinking for them on a regular basis, while they hang out at the spa waiting to take the credit for good ideas.

I don’t mind telling you that Uppity was able to secretly infiltrate their meeting and partially record the fruits of their labor between their bashes with the girls in that special company executive suite. Uppity was particularly pleased when they took lengthy off-site breaks such as this, because she was able to set up her covert equipment and partake of the wine and lobster while they were gone.

As you can see below, they were indeed clever enough to craft a money plan that would work well for selected Congressional financial wizards such as Barney Frank of Fannie Mae fame.

Now see, if these guys would only listen to me they would have provided a Plan that Congress REALLY understands:

If you are surprised by this appointment consideration, please know that I am not. And if you don’t know who Penny Pritzker is, you can count on me to refresh your memory.

Penny was Barack Obama’s national campaign finance chair and now she would like to become Secretary of Commerce. Well I suppose we should all be grateful that she hasn’t been tapped as Secretary of Treasury, considering she owes the Federal Government nearly a half billion dollars in restitution for her seized Superior Bank in Illinois.

Yes, my friends, Penny Pritzker, the Mother of subprime lenders, former owner of the seized Superior Bank is on Barack Obama’s short list for Secretary of Commerce.

I am sure all those customers she screwed are thrilled. In fact one of them had quite a bit to say about Barack Obama and his relationship with Prizker right here on this radio show after ole Penny’s bank went under and left her with a large part of her life’s savings flushed down the proverbial drain. (Note: If Play doesn’t work, click on MP3 Stream link, you don’t want to miss this woman’s story)

I can assure you this woman wasn’t psychic when she expressed concern that Pritzker would become a member of an Obama cabinet. She just happened to understand the concept of “Show me who your friends are and I will tell you what you are“.

You might say that Penny was a Pioneer of sorts. After all, her Superior Bank folded like a plastic door in a cheap banquet room years before the rest of the dominoes fell.

You might even say that the Superior Bank was a boilerplate for what’s happening today on Wall Street. She avoided the rush, so to speak. Her bank failed in 2001. I discussed this here on April 4, 2008. So did plenty of other bloggers, including RBO. Of course, all of this was dutifully ignored by those bastions of integrity, MSNBC and CNN.

For those of you who need a refresher course, here are some clips from that non-fiction story:

The Pritzkers are one of the nation’s wealthiest families and heirs to the fortune created by the Hyatt hotels. Yes, Penny is a billionaire. So basically, Penny could squash me like a bug right now for writing this.

Among their other endeavors, the Pritzkers were the owners of Superior Bank in Hinsdale, Illinois when it was seized.

Yes, I did say seized.

Penny Pritzker, Barack Obama’s great Chicago (of course!) friend was a pioneer you might say! She was a failed subprime lender who set the tone all the way back to 2001. She did it before it was even in style.

Here’s a little press release from the Office of Thrift Supervision back in 2001:

OTS Closes Superior Bank FSB; Hinsdale, Ill. Thrift is Insolvent

WASHINGTON – The Office of Thrift Supervision (OTS) closed Superior Bank FSB, Hinsdale, Ill., today and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

The FDIC transferred the insured deposits and substantially all the assets of Superior Bank into a newly chartered, full-service mutual savings bank, known as Superior Federal, FSB, which will open for business on Monday morning. All depositors of Superior Bank automatically become depositors of Superior Federal, and will have immediate access to their insured funds. All 18 of Superior Bank’s Chicago metropolitan area offices will open for business Monday and will continue to offer full banking services, including online banking. Superior Bank’s loan production and servicing operations will also continue to operate normally.

OTS used its authority under the FDIC Improvement Act of 1991 to close Superior Bank when it found that the bank remained critically undercapitalized — that its tangible equity capital was less than two percent of its total assets. The bank failed to implement a capital restoration plan that it submitted to OTS on May 24 this year.

Superior Bank suffered as a result of its former high-risk business strategy, which was focused on the generation of significant volumes of subprime mortgage and automobile loans for securitization and sale in the secondary market. OTS found that the bank also suffered from poor lending practices, improper record keeping and accounting, and ineffective board and management supervision.

Superior became critically undercapitalized largely due to incorrect accounting treatment and aggressive assumptions for valuing residual assets. The bank also experienced significant losses during 2000 from its automobile lending program.

OTS has determined that Superior Bank is insolvent, having incurred losses that have depleted all or substantially all of its capital. OTS also determined that Superior Bank was no longer able to transact business in a safe and sound manner.

OTS notified the bank of its serious concerns in July 2000.

The bank was purchased by two families in 1988 — the Pritzker family of Chicago, owner of Hyatt Hotels and other interests, and the Dworman family of New York, with interests in real estate and financial services activities — and was operated through a complex network of holding companies.

In light of these findings, OTS determined that closure and the appointment of FDIC as receiver were necessary to protect the interests of the bank’s insured depositors.

As of March 31, 2001, the failed bank had total assets of $1.9 billion and total deposits of $1.5 billion. FDIC insures depositors’ accounts up to the statutory limit of $100,000.

Superior is the only bank that OTS has closed in 2001, and only the fourth OTS-regulated institution closed in the past five years.

The FDIC has established a toll free telephone number for customers of Superior. That number is 1-800-331-6306, and will be available until midnight tonight and then from 7 a.m. to 7 p.m. daily thereafter.

At the time of this seizure, it was determined that Penny Pritzker and her family owed $460,000,000 to the Federal Government. Yes, that’s right folks. Nearly a half a billion dollars. Gee, i wonder if that’s all paid back yet, don’t you?

Back in September, 2008, I discussed Penny and her siezed subprime lending institution yet again and so did RBO. I felt she deserved another go-around considering she certainly appeared to be a prime forerunner of today’s Wall Street Meltdown–and this didn’t seem to bother Barack Obama one bit:

You see, while Barack Obama is faking outrage over all the bankruptcies and bailouts, he doesn’t mention that a number of his top ten contributors are from Wall Street, including Goldman Sachs, Lehman and the JP Morgan Chase. He also fails to mention that one of the first subprime lenders to stick it to borrowers and have her bank seized is a woman named Penny Pritzker, who just happens to be Barack Obama’s campaign Finance Chair (as confirmed on April 3, 2008) and a potential Secretary of the Treasury in an Obama administration.

Power and Control blogger has this to say:

This is a long and complicated story about how Obama backers were behind the mortgage industry meltdown. It hast to start some where, so lets start with a well known Chicago name Penny Pritzker. It starts with a bank failure.

And now, Penny is being considered as Secretary of Commerce. Kind of makes you feel all warm and fuzzy, doesn’t it? Don’t you always have a warm feeling when you meet one of Barack Obama’s close friends?

But don’t worry. Penny is going to fix herself and her friends us up really well. After all, look how well she has looked out for the little people in the past.

I guess the main stream media didn’t think this Petty little Penny Pritzker Problem (say that three times fast) was important enough to look into back when some of us was being sooooooooo trivial about it.

Change You Simply Cannot Believe.

Additional links on this bilking of innocent people:
NY Times, December, 2001
FDIC Failed Bank Information - Superior Bank
OTS Closes Superior Bank FSB; Hinsdale, Ill. Thrift is Insolvent
OTS Announces Resolution of Charges Against Auditor of Closed Superior Bank FSB

Additional Uppity Coverage of this marvelous “choice” for Secretary of Commerce:

Barack Obama’s Finance Chairwoman and the Seized Superior Bank (April 4, 2008)

Obama’s Finance Chair - Failed Bank Owner Penny Pritzker and Wall Street Today (September 14, 2008

RBO: Penny Pritzker’s Problem (September 16, 2008)

1. G-20 Summit….I had high hopes that commitments to global coordinated tax cuts would emanate from this summit. Talk about a major “whiff” on behalf of the global leaders. All I see is that leaders expressed a “promise” to work together on the critical issues. Wow, how gracious of them. Over and above this promise, I sensed that global leaders want to wait until the Obama administration takes charge and work with them. Believe me, with all due respect to Barack and team, if anybody thinks they have a magic bullet and will “inspire” a heightened level of confidence in the markets and economy, well….don’t hold your breath.

Read more on how “G-20 leaders Tighten Grips on Banks”

2. The Bush administration indicates that it will not allocate any of the remaining $350bln that Congress approved under the TARP (Troubled Asset Repurchase Program). I read this as the administration (specifically Paulson) is aware that the money is not flowing through the credit channels to consumers. I also read it as putting the political pressure and onus on the Democrats.

Let Barack sign the checks so that he and the Dems will have their signatures on whatever bailouts and further socialization occur, especially in the auto industry!! Markets read this as a further indication that losses are so deeply embedded in the system that only time and “private money” can truly bring needed change. But how does “private money” receive incentive to enter the market? Let that private money have a greater slice of the returns via a decrease in the capital gains tax rate.

Read more about how “Paulson Unlikely to Launch New Rescue Programs”

3. Citigroup announces layoffs of 50,000, representing app 15% of their global workforce. Reviews by many indicate that “the model” is broken. We wrote extensively about this “originate to distribute” model last week and highlighted how it is broken. Worth a review if you have not read it. “Wall St. Model is Broken….and Won’t Soon Be Fixed”.

Read more about “Citi Lays out Plan for Cuts”

3. We are also seeing more and more indications that banks are increasing rates on credit cards knowing full well that they will have to put the loans written on those cards right into their portfolios.

4. Freddie Mac and Fannie Mae are only able to finance themselves via the short term debt market. Lenders will not buy longer term debt from these entities because of the fear that Uncle Sam will realize that you can’t have a socialized housing finance system in perpetuity. Given F/F’s inability to place long term debt, I think that there is a very strong chance that F/F will significantly slow their purchase of newly originated home mortgages and that those mortgage rates will likely move higher to a level where private money is willing to purchase them. In my opinion, if you are looking to take out a mortgage, I would do it sooner rather than later.

5. A number of major insurance companies saw their stocks fall 20%+ today as the market realizes that these entities are also sitting on a significant level of embedded losses in their investment portfolios along with likely losses in variable annuities written that guarantee a fixed payout (Hartford, Met Life, Prudential).

6. Goldman Sachs senior executives announce that they will forego bonuses in 2008. Well, with their stock down 70% on the year that is mighty gracious of them.

In summary, today’s news and market price action indicates to me that both the governments and market participants are coming to the realization that there truly is only so much that can be done. Ultimately, a market will find its own level where buyers (private money) enter and purchase assets from sellers. While sellers of assets certainly want government intervention to maintain a “false” sense of market equilibrium, the unintended consequence of that is that the buyers stay on the sidelines that much longer.

The other subtle story that I see in today’s news is the sense that Bush and team are very clearly telling the Dems and Obama, “if you’re so smart, then be our guest and figure it out”. As an American, I wish Obama and team all the best, but the market is the market and it is neither easily fooled nor appreciative of policies that punish private capital at the behest of promoting social good. The market is very supportive of policies that support private capital that generate social good. Make no mistake; the housing policy for the last 5 yrs has been one based on “socialized finance”. If we make the same mistakes with the auto industry and others, our collective pain will last that much longer. (Seeing a breaking story that Senator Reid is unveiling a bill to aid the auto industry)

We are seeing this lesson every day; whether we are learning from it is an entirely different matter. Given that policy makers who brought us the socialized housing finance system are also now working on auto policy makes me and other private investors nervous about committing capital into this market.

LD

Next month in Atlanta, a federal court will hear the high-profile appeal of former Alabama governor Don E. Siegelman, whose conviction on corruption charges in 2006 became one of the most publicly debated cases to emerge from eight years of controversy at the Bush Justice Department. Now new documents highlight alleged misconduct by the Bush-appointed U.S. attorney and other prosecutors in the case, including what appears to be extensive and unusual contact between the prosecution and the jury.

2) A paper in NC wonders if Presidential power, which has metastasized over the last few years, will be curbed in an Obama administration. The author sees in Emanuel’s decision to leave Congress to be Obama’s Chief of Staff confirmation that no job in Congress would compare with power in the Executive branch.

Read the rest ->

Presidential power has only further increased since [Andrew] Jackson. The need for government to act quickly in times of crisis, the centering of the president as the icon of national identity in popular culture and the executive branch’s control of information, among other factors, have vested a power in the presidency that far surpasses that of the other branches.

Thus it becomes not surprising to see one of the most powerful members of Congress [Emanuel] agree to become a White House staffer.

THE MORE SERIOUS QUESTION IS WHETHER A TRUE BALANCE OF POWER can be reconstructed. It needs to be. The Framers believed that an imbalance of power among the branches would inevitably lead to abuse and incompetence. The last eight years have proved them right. The Bush administration made constant claims to unlimited power that Congress had neither the will nor the ability to turn back. The resulting morass is history.

Whether an Obama administration will work to restore the constitutional balance is only speculation. The challenge is considerable. Checks and balances are inefficient, and ceding power to a coordinate branch is not easy, particularly when there are so many dire challenges facing the nation. But Emanuel’s choice to accept the chief of staff position rather than continue in Congress vividly demonstrates how much the need to repair the constitutional structure is in order.

I see this question as a moral one in addition to a constitutional one. I wonder if Obama will return any presidential power “to the people.” Hmmmmm.

3) Realclearpolitics has a transcript of Michael Steele announcing his bid for RNC chair. Now THAT would be interesting.

STEELE: I want the gig. I’m ready, I’m ready to lead this party. I think we’ve been kind of wandering and doubting ourselves for far too long. And I think this past election was the culmination of that self-doubt which has to end.

We have a message, I think, of empowerment and ownership and opportunity that resonates United States with Americans. We just need to get back to.

So, we could have an AA RNC chief, and AA president and de facto head of the Democratic party and ???? as DNC chief? Now that should make for some very entertaining racial politics.

4) The WaPo has a piece today about the ever-not-changing work of K Street. Apparently lobbyists see an incoming Obama administration as a reason to re-arrange the deck chairs rather than change how they do business. Out with republican head lobbyists and in with the democratic. Sigh. Oh, yeah, don’t forget the nepotism. Gotta have nepotism.

“Barack Obama campaigned on change. Well, change is good for the lobbying business,” said Ed Rogers, who was an aide to President Ronald Reagan and whose firm has represented such clients as Citigroup, Pfizer and Raytheon. “People will need the expertise and guidance more in the next year than they have in the last five.”

Many of the issues Obama has expressed an interest in tackling early, such as health-care policy, energy and taxes, have broad implications for some of the lobbying world’s most free-spending corporate clients. Patrick Von Bargen, a former chief of staff to Sen. Jeff Bingaman (D-N.M.) and aide to William Donaldson, the former chairman of the Securities and Exchange Commission, said he joined Quinn Gillespie this month with the expectation that his knowledge of clean energy issues would be a valued commodity.

“People who have labored in Democratic vineyards for years are familiar with the people involved, but also with the substantive issues, and how Democrats approach those issues,” he said.
——————
Ron Kaufman, a Republican lobbyist at Dutko Worldwide who served as a close adviser to President George H.W. Bush and Massachusetts Gov. Mitt Romney, said he cannot recall a better time to be a Democratic staff member looking for work. But he said his firm has always tried to keep both sides of the aisle covered so it does not have to panic during shifts in political control.

“The only change for us is that the Democrats are now the varsity squad, and I’ve been demoted to the junior varsity,” Kaufman joked.
——————-
Steve Elmendorf, a former top adviser to former House minority leader Richard A. Gephardt (D-Mo.), said that he understands why Obama took that approach, but that he does not believe lobbyists will be turned away. “I don’t think they’ve said ‘We’re not going to talk to lobbyists,’ ” Elmendorf said. “They are going to talk to stakeholders. The stakeholders are all going to be represented by lobbyists. It’s not going to be a black-and-white thing.”

Elmendorf is one of several who foresee a boon for the industry. A new Democratic administration and an increasing Democratic tilt in Congress means more activist government, he said. “That means businesses will have the potential for more things to happen to them. If they think that’s coming, they will be hiring people to figure out how to contend with that.”

BO has said he doesn’t want lobbyists to have unfettered access. But I think this stand is likely to quietly die a “death of 1000 cuts” as the collective power of all these lobbyists and their industries / interest groups do everything they can to preserve their influence. This could be very interesting to watch. Get out your hypocrisy-meters. And get out the hip-waders.

5) Newser has a story about the MLK family wanting its piece of the action from MLK / Obama merchandising. Now, as controllers of the MLK estate, etc, it is within the family’s rights to look after its interests. But scurrying after merchandising dollars strikes me as tacky. Of course, it is understandable that the family wants to protect its brand Of course, I don’t personally think of MLK as a BRAND, but I guess that’s a matter of perspective?

The family of the Rev. Martin Luther King Jr. is demanding a share of the proceeds from the sudden wave of T-shirts, posters and other merchandise depicting the slain civil rights leader alongside Barack Obama.

Isaac Newton Farris Jr., King’s nephew and head of the nonprofit King Center in Atlanta, said the estate is entitled to hundreds of thousands of dollars in licensing fees _ maybe even millions.

“Some of this is probably putting food on people’s plates. We’re not trying to stop anybody from legitimately supporting themselves,” he said, “but we cannot allow our brand to be abused.”

MLK Brand??

6) One of the justifications for “undocumented workers” has long been that those people do the jobs “American’s don’t want to do.” Does that include teaching? Perhaps so, because the Dallas public schools have been hiring people without SSNs and arbitrarily assigning one to them “until they receive a valid number.” Of course, there’s a chance those SSN numbers might be REAL to someone else. The Dallas News has the story:

Years after being advised by a state agency to stop, the Dallas Independent School District continued to provide foreign citizens with fake Social Security numbers to get them on the payroll quickly.

Some of the numbers were real Social Security numbers already assigned to people elsewhere. And in some cases, the state’s educator certification office unknowingly used the bogus numbers to run criminal background checks on the new hires, most of whom were brought in to teach bilingual classes.
—————
The investigative report, obtained by The News through a records request, found “that the inappropriate procedure of assigning false SSNs has been systemic for several years” within DISD’s alternative certification program, which prepares new teachers for state certification when they don’t have traditional credentials.

A call Thursday to DISD’s alternative certification office was not returned. In recent years, DISD has hired people from various countries, including Mexico and Spain, to deal with a shortage of bilingual teachers.
—————-
In July, the district discovered that 26 of the false numbers were in use after matching DISD employee Social Security numbers with the Social Security Administration database. The numbers were already being used in Pennsylvania. DISD officials did not know Thursday whether the practice had caused problems for anyone holding the legitimate numbers.

Anyone out there having received an IRS notice of unpaid taxes on undeclared income might want to keep an eye on this story.

7) Still don’t see how the damaged economy will touch you? This article in the Christian Science Monitor should help clear THAT up somewhat.

If the states had their way, they would like Congress to give them help in four areas: help with the growing number of people applying for Medicaid, more funding for the rising unemployed, help with the growing number on food stamps, and an injection of funds to jump-start infrastructure projects that are ready to go.

In my area, the local schools have requested and gotten substantial increases each year. Since I live in a “progressive” area, increases are regularly sought for a variety of things: sidewalks (good), artwork around a remote public works building (?), community gardens (are you kidding me?), stormwater run-off infrastructure, another municipal pool (we only have 3) with glass pebbles inlaid on the floor, and more money for roads (well, . . . ) even as development in the form of housing continues unabated, with taller and taller and “greener and greener” condos going up

Oh, and we don’t allow “big box” stores in my community. They’re so, so, tacky and cheap, you know. So everyone drives over the county line to shop at Target and the brain trust here loses out on what remaining retail sales taxes are available. Even as more housing is built, property taxes increase because new housing does not pay for itself in terms of schools, sewer, water, and other city services - at least not here.
And the local university (isn’t there always one in a “progressive” town?) often buys up tracts of land, taking it off the tax rolls. So, as the university uses more services, it also cuts available tax funds to the town. And the university has a multi-billion dollar endowment. . .

Sigh.

HRC’s stimulus proposal addresses a number of fronts (expanding unemployment insurance, addressing Medicaid, funding infrastructure projects and clean energy, modify mortgages) which will need focus from Congress to create a demonstrative impact on our economy. Some of the programs will clearly be impactful while others may have unintended negative consequences. We will have to take some prudent but necessary risks to achieve positive results.

The TARP bailout/rescue plan proposed to date has not inspired confidence nor generated any real impact for three reasons:

1. the banks have such sizable embedded losses that the funds already injected are being and will be used to recapitalize the balance sheets …

2. investors have little to no appetite to purchase loans currently on the banks’ books which were not properly underwritten and will likely continue to suffer an ever increasing level of delinquencies and defaults …

3. little to no demand for funds due to the fact that most individuals and institutions are looking to decrease their debt service not increase it …

As a result our economy spirals downward. HRC’s plan addresses some of our most serious needs. I commend her.

That said, I assume we will plod and muddle our way through this fiasco and come out the other side in a few years. Will anything have really changed? Will we have learned our lessons? Will we move forward in hopes that we leave our nation a better place for future generations? Let’s look at the trend lines on a number of fronts that have to change if we want to return to real long term prosperity. While each of these points is targeted at us collectively, we do not need to be reminded that the collective is merely a function of totalling the individuals. For all young readers, instill discipline in your personal lives from a financial perspective and otherwise!!

1. Personal Savings: during the ’80s we had on average a 9% personal savings rate, during the 90s that rate moved to 5%, now it is 1% and trending lower … this must change … we can’t be totally dependent on foreign financing …

2. Total Liabilities: across all our programs we have total long term liabilities of $52 trillion dollars … and growing … this must change …

3. Debt vs GDP: I find it somewhat hard to believe but a lot of what has happened is hard to believe, but a highly respected commentator this morning highlighted the fact that over the last 15 yrs that our total debts have outpaced our GDP by a rate of 3 to 1 … this must change consistent with point 1 …

4. Dropout Rate: as I have highlighted in a previous post, our inner city dropout rate is 50%. We will not be competitive economically with an education system that underperforms this dramatically … this must change …

5. Birth Rates: as I have highlighted in a previous post, 70% of new borne African Americans enter this world into single parent families (50% of Hispanics, 30% of Caucasians) … this must change …

While HRC’s proposal addresses some near term and long term needs, how do we change our national mindset and break the trend lines in points 1-5. If we do not break these trend lines, I firmly believe that our way of life will be seriously threatened and that future generations will be burdened with debts that will choke off their ability to grow the economy and achieve long term prosperity.

Through the powers of modern medicine our population is aging. Any country worth its salt is indebted to care for its elderly. Our elderly are largely children who came from “the greatest generation”.

I do think as a nation we should study that “greatest generation” because clearly they were products of the Great Depression. That generation sacrificed tremendously during and after World War II. They promoted the principles of work ethic, thrift, and love of country, faith, and family. In my humble opinion as a nation we do not have enough of those traits. Many make unbelievable sacrifices but many do not. It is pointless and counterproductive to highlight who may sacrifice and who may not. We are one nation.

How do we achieve a growth in those principles and what may come out of it?

I know that Barack Obama and Rahm Emanuel have touched on the idea of a mandatory civil service and/or civil defense. I think they have been delinquent in not offering more details or in being more careful with their wording on this topic. Some have parodied Obama and he deserves it because his wording in this area is fairly cryptic.

I love the idea of a genuine mandatory civil service. (***Hear me out before you think I have lost my marbles) I am all about work ethic, thrift, love of country, family, faith, private sector,and fiscal discipline personally and professionally.

I would propose a private-public partnership where applicable in a mandatory civil service program. I think the idea of a 3 month program is nothing more than a vacation. I think a year is reasonable and impactful. As a father, I think if a year is good, then two years is great.

There are numerous nations around the globe that have mandatory civil service. As the wealthiest nation in the world regrettably we have developed a sense of entitlement and it is very unhealthy.

Please review this wikipedia link to see which nations have and do not have mandatory civil service, both military and non-military.

I would propose a number of options for our population from ages 18-24 which represents approximately 10% of our population. Assuming one year of service we are talking about adding on average 5 million people per year working to support our nation and our economy. The options would include programs like the following (I do not pretend to think that I have all the answers or all the options … please add more ideas)

1. All parts of the military.

2. Student Conservation Association … fabulous organization that just celebrated its 50th anniversary … our family has personal experience … SCA is awesome!!!

3. Knowledge is Power Program … fabulous organization dedicated to working with inner city students …

4. City Year … fabulous program that works with youth primarily in cities around the country …

5. Americorps … program launched during the Clinton administration to promote civil service …

6. Over and above these programs I would look to have a powerful teacher assistance program in all our public schools in order to lower the student-teacher ratios …

7. I would also look to partner with private social programs that are clearly effective and working to help those suffering from drug and alcohol abuse, family issues, at risk youth et al …

8. Provide workers and labor for infrastructure projects …

9 … the possibilities are endless …

In summary, I would hope that through this program as a nation we can break the cycle of entitlement, the polarization of haves vs have nots, the lack of thrift and personal responsibility, and on and on we go.

We will need to do more than implement a program like this to change those trend lines I highlighted above but as far as I can see the status quo is not an option. For those who may think or say that we can’t do this or that it won’t work, I would respond “show me a better option in which we can generate better returns on capital invested, both monetary and human,in the short term and the long term”.

God Bless America!!

LD

***I should have been more explicit in my initial post. I am not saying that people would not be paid for their service. That payment could be in the form of cash, scholarship, et al.***

P.S. I would be remiss not to comment on today’s dramatic price action in the market. I was actually more focused on the Senate Banking Committee meeting with various reps from the large money center banks.

I saw that the Dow was down 300 which prompted me to nudge Susan to post my story from yesterday. At that point the market had a vicious short covering rally. I believe that was largely a function of GWB’s speech cautioning global governments not to interfere excessively in the marketplace going forward and that Congress realizes that they do not have the political will to give GM a quick fix bailout.

Against the backdrop of those two stories I think market participants felt, ‘well perhaps we may just be able to get government out of here so we can go back to work like we used to”.

I will attach links to those two stories.

“Hopes for GM Bailout Dim”

“Bush Defends Capitalism Ahead of G-20 Summit”

Again, stories like these are great for short covering rallies but the fact remains the direction of our economy is not changed by them.

Among those top economists missing were Nobel Laureate Paul Krugman, who sadly erred in criticizing Baracks woefully inadequate health care and economic plans during the primaries, and James Galbraith (yes, the son of Kenneth). I do not know what James did wrong to not get invited. Here is James, on Thursday’s Morning Joe — NOW, you may not agree with Dr. Galbraith’s commentaries on conservative thinking, but I believe it is always good to listen to all kinds of viewpoints, if for no other reason than that it requires us to rethink and re-express our own viewpoints. So, below, I ENCOURAGE YOU TO DISAGREE with him! Take him on! The last thing we should do at No Quarter, I believe, is simply give you solely what you’d like to hear. For one thing, this is an incredibly confusing and complicated time, and so it’s good to question ourselves as well as everyone else.

And here is a truly fascinating peek at how British politicians operate differently than ours in the U.S., from the editor of the UK’s The Week:

…….

*Just keep this among ourselves without discussion, may we? We are trying NOT to draw attention because some people will not stop until they destroy my entire life. If they do that, I will self-immolate in front of the Federal Building at the nearest major city. If only to shame the thugs. I will have nothing left soon enough if they succeed, so I may have next to no choice left anyway. (Please don’t get excited. I love the critters I feed too much to do anything drastic. I’m not being dramatic. Someday, however, I may be forced to be practical. Besides, ever since I saw “Harold and Maude,” I embraced much of that movie’s message anyway, which is to enjoy life as much as one can, and if people or external forces make it impossible to enjoy life even at a subsistence level, then it is time to exit before it gets too bad.) If I may be harsh with you for a moment, don’t contribute to the problems by asking a lot of questions. I really thought people would figure this out without my having to say anything, but apparently not. Thank you for caring so much. It’s touching to me beyond any words I can express. I wish to be useful and kind — for the very few minutes, sometimes a couple hours, each day that I can sit up (and always in incessant pain, even following two major surgeries this past year) — but some people have made it nearly impossible for me to even do that without being in fear for my life. But I have made sure that everyone knows the danger I’m in, including all of my neighbors who all have guns and are on high alert and will call 911. I have informed every official person in my life, from my doctor to the police. They all know, so nobody will get away with this. Including some very disturbed relatives who I suspect are behind this. Best not to comment down in the comments area about this, please oh please. I’ve said far more than I should have, but the # of questions made that necessary. Leave it be. Don’t e-mail and ask questions. I will not answer. Thank you, and I love you too.

ALL THAT SAID, please speak up about the videos!

Larry’s post yesterday — “Canaries Dying in the Mine Shaft — was such a poignant story of how this monstrous economic crisis is hitting all kinds of people, from the guy who runs a car wash to the car dealer who needs his cars kept clean but can’t afford to pay the car wash owner. And, I hear story after story about automobile dealerships around the country that are going out of business, and that alone affects countless other businesses and their employees.

It’s very frightening, isn’t it.

…………………………………………

Markets trade down another 5% and close within spitting distance of October’s closing lows seen on Oct 10. I remain decidedly negative on the market and the economy despite every effort made by global governments. In fact, the pace of the economic slowdown is quickening. It’s all about delivering and liquidity.

We have much to address, so let’s get after it.

Retail….
1. Best Buy comments that they see a “seismic slowdown” in 4th quarter projected sales. Expect to see significant sales and price cuts on electronics going into the holiday season.

2. Survey of credit card holders indicates the following: 53% have more debt than they are comfortable handling. Of that group 73% indicate that they will likely spend less this holiday season….lots of regifting….

Economy
1. Julian Robertson, one of the most highly regarded money managers of the last 40 yrs, indicates that “we have not seen the capitulation in our economy and that the foreseeable future will be a long, tough period for the American people. He also offered that Nancy Pelosi wants to throw money down the toilet to save the automotive industry. (more on this later)

2. Moody’s ratings expects defaults on distressed debt situations to almost quadruple in the next year to north of 10%. This expected level of defaults is why high yield debt is trading near a 20% yield level. Lots of RISK! Companies will be severely challenged to refinance their debt.

3. Jamie Dimon, CEO of JP Morgan, indicates that the economic recession will be worse than the credit crisis.

Auto Situation
1. Pelosi, Frank, Obama and team clearly want to see a bailout for the automotive industry with GWB’s signature. The package being discussed is $25bln but with no specifics highlighted as of yet. Expect hearings next week in Washington on this issue. From the standpoint that Uncle Sam has already committed north of a trillion dollars to the financial system, a 25bln capital injection is a drop in the bucket but it goes a lot deeper than that. First off, the cash burn rate for the Big 3 at the anemic pace of auto sales is currently 5+bln per month, so 25bln gets us to next March. Big deal.

IMO, I would not give this industry $20 without an agreement to restructure. Very simply I would propose that these automotive corporations duplicate the business model of Toyota and Honda which have domestic plants throughout the South. Not trying to be punitive but a business is not a business unless it can sustain itself.

These companies including the UAW have no choice but to accede to the demand to restructure. If they do not want to accept that model, then ….they have no other choice. The idea that we would give them a taxpayer rescue package with equity warrants and restrictions on executive compensation is a joke, or as Julian Robertson said, “throwing money down the toilet”. The UAW will kick and scream and believe me I empathize but we live in a dynamic world in which markets change. As a nation we need to accept and understand that principle if we want to compete in the global marketplace. This restructuring should have occurred years ago!!

I will say as I listen to Mr. Frank discuss this situation, he does not inspire confidence.

Housing/Wall St.
1. Hank Paulson indicated today that Treasury will not look to use any of the 700bln authorized by Congress to buy up distressed mortgage assets but would in turn utilize money not already committed to bring liquidity into the consumer asset space.

What does this mean and how did the market take this news?
–Wall St. banks and investment banks are pissed because they thought they would be able to sell distressed mortgage assets into Uncle Sam at elevated prices.

–Paulson now knows that by buying distressed mortgage assets, much like by making direct capital injections into the banks, consumer credit will not flow. WHY?? As we have been saying here at NQ, the losses embedded in the banking system likely run upwards of 1 trillion over and above the 500bln already acknowledged. Thus, any capital that goes into the banks will be used to recapitalize not to be lent out. The market took Paulson’s message as an indication that future (already embedded) losses must be greater than initially thought and thus the market sold off hard today.

–Paulson wants to target bringing liquidity into the Asset Backed Market, (remember the one where volume is down 75-80% year over year) so that credit for consumers loosens. I commend Hank for his herculean effort but I do not see this working unless the government set up a separate entity to issue loans. Will Uncle Sam run individual credit checks as well and effectively go into business vs the banks? Doubtful.

–Speaking of credit crunch, I heard a statistic today that I find hard to believe but it came from a credible source. He shared that Bank of America wrote a total of 7 Jumbo mortgages in the entire country in the month of October. (Jumbos are greater than 415k) Is that possible??

2. Why does Paulson want to target the consumer credit space? He knows that that is the next shoe to drop in terms of losses by AMEX, Visa, Master Card, Capital One, et al…

He is hoping and praying that the Asset Backed Market can restart so that these companies and other credit companies can sell loans currently on their books. We tried to cover this in our other piece as to why investors are not willing to buy these loans.

Simply put, credit cards taken out by a large number of borrowers over the last three to four years using their house as a piggy bank and now in the face of a rapidly rising unemployment rate will have severe defaults. No bid for assets like that anywhere close to where they may want to sell them.

3. Transparency
I had an exchange with a reader as to why the government is not revealing which banks have been participating in certain specific programs launched over the last few months. I made the case that the government is trying to protect the participating banks and in turn the taxpayers by not revealing the names.

The reader responded as to why and how could he ever invest in a bank. That is a very good point, investing in banks now is a much higher risk proposition because one does not know just how deep losses are in individual banks. Who does know?? Hank Paulson knows and he does not want to reveal those figures because they would further spook the markets. We got a whiff of that today.

4. Citigroup is expected to lay off 25-30% of its capital markets staff next week. The depth of this cut is truly draconian and indicates that they do not view this market downturn as merely a normal recessionary move but rather a significant fundamental shift in the Wall St. model. You know it’s broken as we highlighted in our earlier piece. Citi’s cuts confirm this.

Global Governments
1. Russia allows the ruble to move outside a trading band. The ruble gets hit hard as do Russian equities.

Read more as to “Russia Weakens Ruble to Fight Drain on Cash Reserves.”

It was the devaluing of the Russian currency back in 1998 that sparked the global financial crisis back then.

2. Could the U.S. ever lose its implicit AAA rating? There is a better chance now than a few months ago given the enormous debt that we are accruing.

Read more, as to how the “US May Lose its AAA Rating.”

Commodities
1. Oil and copper had a one-day bounce on Monday after the Chinese stimulus package was announced but they have quickly reversed course and are back down to new lows for this move. Oil closed at $55.78. Commodities are pricing in a protracted economic slowdown. I still believe that hard assets will outperform when the economy stabilizes due to a global currency devaluation.

Government Bonds
1. In a flight to quality move, government bonds rallied and rates were lower by .10 (rates down, prices up)

2. Riskier bonds are more closely tracking the equity markets given the likely increase in defaults.

3. Hearing more and more rumblings about municipal defaults. Name I heard today was City of Philadelphia.

Companies
1. GE gets its debt guaranteed by FDIC insurance. GE much like other entities that rely on short term funding will be hard pressed going forward. They are completely dependent on Uncle Sam’s backstopping short term facilities. What happens when Uncle Sam does not show up for work one day??

2. Intel cuts its 4th quarter forecast across all divisions and all geographic areas. This put pressure on the market after the close.

3. Insurance companies along with the credit finance companies have been under increased pressure and it will likely continue. Various research reports have highlighted (I should say lowlighted) Hartford Financial , Protective Life, Principal Financial, and Prudential (check with your agents if you have policies with these outfits…)

Political
The constraints on the incoming administration get tighter each and every day. The markets want discipline. In fact, I firmly believe that the market is getting tired of more and more talk of bailout packages. These packages may bring a cushion but they prolong and exacerbate the situation over the long haul. Private capital does not want to invest alongside the government.

Stimulus Package
There is little doubt that we will receive a package either before or after inauguration. The standard package that we saw last Spring is nothing more than giving a shot of whiskey to a drunk. I read the ideas proposed by HRC. There is a lot to discuss on this topic. I am all for funding projects in which the government can contract with private industry for capital improvements and infrastructure. I am not supportive of creating more government bureaucracy to manage projects.

I will save another few ideas I have for a separate article.

GOOD NEWS!!

My 4th grader received a 30/31 on his recent Math test.

Boston Red Sox “freeze” ticket prices at 2008 levels.

Hedge funds on the “hot seat” today as a number of them go in front of Congress. I would like to see some Congressman have the courage to truly get after Soros for activities and influence of MoveON.org.

All the best.

LD

Step aside, LD! We have the genius now:

It’s time we forewarn ourselves so we can stop ‘em dead in their tracks — and we can toss their greedy schemes in the wood chipper before they mess us up again! Me? I’m tryin’ to figure out who murdered the LAW [and those safety nets that kept average Americans safe].)

[Note from Larry Johnson--Folks, this is a very important piece and deserves your time and attention. It is long and it is challenging but LD, who knows the Wall Street world from the inside, is giving you the Willy Wonka tour of the Money Factory. Please check it out.]

Despite billions and now trillions of dollars in capital injections and equity investments made by our government, private equity, and sovereign wealth funds, our economic turmoil is a long way from being over. I do find it interesting that despite numerous Wall St. titans having indicated to us at different points over the last year that we were in the 7th inning of this fiasco, that now a recurring theme is that we should not expect any real economic recovery until 2010. Actually maybe we were in the 7th inning but it was the 7th inning of the first game of a 4 game set.

Well, if we want to figure out where and when we are moving forward, I think it would be beneficial to know from where and when we came.

For those over 50 years of age, perhaps you remember when mortgage money dried up. Perhaps you also recall the days of putting down 20% before you even thought of buying a home. In any event, the growth of the secondary mortgage market in the mid 1980s was a result of some very sharp financial minds on Wall St. who engineered a product called a Collateralized Mortgage Obligation (CMO).

CMOS and their cousins that grew from that model were and are not necessarily bad structures. However, much like prescription drugs. if and when they are abused. they can be deadly.

CMOs used the stream of cash flows from a standard fixed rate mortgage to create specific bonds which met the investment desires of a wide array of investors, including money market funds, bank portfolios, insurance companies, money managers, and pension funds. Prior to the development of the CMO, mortgages were an investment that typically only met the needs of bank portfolios.

As the CMO market grew, two developments occurred. First and foremost, Wall St. firms (which were making on average 1 point on each deal … on an average deal size of 300 million, the Wall St. underwriter made $3 million dollars … not too shabby) had an appetite for more and more mortgage collateral to do more and more deals.

In the mid-1980s, most CMO deals were done with private homebuilders such as Pulte Homes, Centex, Ryland et al. The second development was more substantial. If Wall St. could use mortgage collateral to execute CMOs, why couldn’t they use other forms of loans/assets to create similar sorts of structured products. Thus in the late 1980s the Asset Backed Securities market was launched using credit card loans, auto loans, computer leases, equipment leases, and the like. Again, all Wall St. was doing was using the stream of cash flows from these well underwritten loans to create securities that met the guidelines and needs of a wide array of investors. Again prior to the developments of these markets, the banks underwrote these loans at rates and terms that met their own portfolio needs (REMEMBER THIS POINT!!).

In the late ’80s Freddie Mac and Fannie Mae got a whiff of the profitability of these CMO deals and used their significant lobbying power to get legislation passed that made it advantageous from a tax standpoint for CMOs to be launched through them. While some Wall St. firms were reluctant to support Freddie and Fannie in this process, given F/F ’s position in the business they won out. (REMEMBER THIS POINT!!)

As the CMO and ABS engines grew ever stronger throughout the early to mid 90s, Wall St. needed to find more and more collateral to continue to feed this profit monster. Some Wall St. firms either purchased or made strategic alliances with originators (Lehman Bros bought Aurora Mortgage in Aurora, Colorado … Bear Stearns owned EMC Mortgage in Texas … Merrill Lynch purchased First Franklin, a sub-prime originator, from National City Bank) while some originators formed their own broker dealers to retain the profits of distributing these products (Countrywide Mortgage formed Countrywide Securities, JPM Chase grew its own investment banking presence in the late ’90s as did Bank of America)

In the midst of this growth, Wall St. continued to use this CMO model not only across other consumer asset classes but then branched out and used it with corporate loans as well. Thus Wall St. structured CLOs (collateralized loan obligations using the same financial engineering).

While there were hiccups with different deals for the most part the machine ran smoothly. The machine, though, was built on the premise of strict underwriting of the underlying loans and a robust ratings process.

However, at the turn of the century there were two critically important developments that occurred to truly escalate the disastrous situation we have currently. A number of individuals from Wall St. realized that they could form their own firms (hedge funds) which allowed them a greater share of the profits from this structured financial engineering with less internal or external oversight. (REMEMBER THIS POINT!!)

A large number of qualified analysts from the rating agencies left those firms to come to Wall St. to participate in the profit machine. This shift of talent both to hedge funds and from ratings agencies dramatically exacerbated and accelerated the financial meltdown of the last two years. (***given the amount of money in these hedge funds as well as the amount “earned” by the hedge fund managers it should be no surprise that they became very influential in currying political favor … especially with Barack this go round!!)

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Hedge funds factored into the fray in two ways. They partnered with their friends on Wall St. in managing CBOs and CLOs and they purchased the cheapest bonds in the deals or so they thought. Rating agencies either were not smart enough to know what they were rating or were blinded by their own stream of profits given the growing volume of deals. They were negligent or complicit or both. Honestly there was nobody who truly was looking out for the investors, who it was assumed should look out for themselves. Where was the SEC when you really needed them??!! This was all hunky dory as long as the economy was humming and delinquencies and defaults by consumers, homeowners, and corporations were well behaved.

In 2005 or thereabouts Wall St. had such a voracious appetite for volume of collateral product that they pressed the envelope even further and came up with “synthetic” structures. These structures purely used a pool of known collateral (be it sub-prime mortgages, home equity loans, corporate loans, et al) as a reference pool for the stream of cash flows in the deal. Wow!!

Without the need for actual collateral Wall St. really rocked. (REMEMBER THIS POINT)

Under the “originate to distribute” model Wall St. hired reams of financial quants and engineers to structure deals. Wall St. grew their distribution efforts globally to sell these products far and wide.

Life was good!! … or so they thought.

Wall St. actually started to think they were as smart as everybody told them. Wall St. thought that their own models were so robust because they had the smartest minds build them. Wall St. thought that they had become so effective at “distributing” risk that they were blind to the fact of just how much risk they “created”. Then the music stopped. The Fed needed to increase rates to slow the pace of inflation that was emanating from global economic growth especially in Asia. Mortgage rates reset at higher levels. Freddie and Fannie started to show signs of distress. Wall St. pressed so hard that they “killed the goose that had laid the golden eggs”.

Against that backdrop, through the 3rd quarter in 2008, check out the volume of underwritings in these respective sectors vs 3rd quarter 2007.

The mortgage and asset backed markets (including commercial mortgages) are twice the size of the overall U.S. government bond market and app half the size of the U.S. equity markets. The mortgage market doubled in size from the end of 2003 until the end of 2007!!!

Investors now fully appreciate that with the economy slowing and seemingly picking up speed that delinquencies and defaults will continue to ratchet higher. The embedded losses are only exacerbated by the massive leveraging that occurred via the use of “synthetic” cash flows. No, the media has no appreciation for this and will not share it with the public.

Where are the other shoes that have yet to drop??

Please refer back to the “synthetic” structure that I discussed. These synthetic structures grew exponentially with the growth of a product called the “credit default swap” or CDS. This product, in theory, is outstanding because it acts to protect investors against defaults on the underlying referenced corporation or entity (such as sub-prime mortgages). That said, instead of helping to distribute risk the CDS market has effectively “created” risk because it has grown to the point where it now is 10 times the size of the overall corporate bond market that it is supposed to be tracking.

Yes, the tail is very much wagging the dog. Hedge funds dominate the trading activity with close to 60% of the overall trading volume. Hedge funds have gotten good press so far for not having had many “blow ups”!!

Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt that they have positions that are grossly mismarked and that they have many positions that are totally illiquid. For many investors in these funds these are truly “roach motels”. Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.

Read more how “Hedge Funds on Hot Seat.”

In the S&L crisis of the late ’80s the overall cost was estimated to be $100bln+ with the government taking over and liquidating failed institutions. Now given the tremendous systemic risk that links Wall. St investment banks to hedge funds to insurance companies, to sovereign wealth funds to commercial banks to municipalities the losses are untold.

To think that a stimulus package of even $300bln along with the $700bln commitment that has already been made is going to “fix” our economy is foolhardy. We will definitely get “bear market” rallies in the stock market and politicians and market timers who will tell you that all is well but don’t get fooled by “that man behind the curtain”. The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.

When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!

Please read this article in Monday’s WSJ highlighting how Uncle Sam is reworking the terms of the rescue package for AIG. This article highlights the systemic risk (Goldman Sachs is widely speculated to have the greatest counterparty risk exposure to AIG) and the very fluid nature of the deteriorating situation. Guess what? As taxpayers we have the bulk of the risk as we own 80% of AIG and will very likely lose a lot of money on this deal. That said, the near term losses would very likely be even greater if AIG were not propped up by the government. It is not a given that our longer term losses and negative impact on GDP won’t exceed the perils of immediate losses. We have a high stakes game of craps on our hands.

“Government, AIG Near Pact to Scrap Original Terms of Deal” … oh what fun!!

I have little doubt that we will also in large measure “nationalize” the auto industry. Read here how the “Auto Makers Force Bailout Issue” …

IMO, there are only a few moves that Obama, Summers, Geithner, Volcker, Buffet or Rubin can do to change this situation for the better. Those moves include:

1. lowering the tax rate on capital gains (I’m not so sure that Barack wants to do that)
2. categorically state that tax rates will not change (not sure he will do that either)
3. spending freeze!! (also not sure he wants to do this either).

Even with those moves, it may only shorten the length of our very deep recession but will not negate it.

Honestly, I have to believe that Barack is kicking himself thinking that his entire program to create social change may very well be at the mercy of these economic constraints. IMO, if he and/or the Democratic leadership aggressively push the tax/spend agenda, the markets will punish them in very short order.

With the unemployment rate headed higher, to at least 8% if not 9% or 10%+, I firmly believe that people will use any money from the government to simply pay off existing debt. That is the rational move at this point. Our U.S. personal savings rate is 1%!!! In China the personal savings rate is 40%!! The party’s over, the lights have come back on, and somebody has to pay the bill. Yep, that’s right and regrettably that bill is on the U.S. taxpayer. Screwed again.

The government has already massively increased it’s own debt and will “crowd out ” lending into other sectors.

If we go back to the first point I asked you to remember, with the “originate to distribute” model broken and not soon if ever to return, banks will now only underwrite those loans (consumer or corporate) that they feel comfortable putting into their own portfolio at terms and rates that are amenable to both sides. That is why I think rates for these loans will be higher and volumes will be lower. Batten down the hatches.

Paulson knew of the consequences of this scenario earlier this year. He hoped the banks could sell assets, he says as much in this piece … “Paulson, Bernanke Strained for Consensus In Bailout.”

As Maryann Hurley a Vice-President of D.A. Davidson recently said, “When the banks shed their balance sheets of a lot of these unwanted and poorly performing assets.” they may start to lend again. Hurley added that consumers need to fix their balance sheets as well after years of going into debt. The lack of a rigorous underwriting process is coming home to roost.

She adds, “I’m guessing it’s not going to be before 2010 at best and it’s most likely 2011 before the economy really starts to turn around.”

7th inning of game 1 of a 4 game set …

LD