Prof. Ben Addresses the Lizard-brain: Steady-hands Vs DiscomBOOBulations (Update)
The title is deliberate not a really bad typo, thought it started out Freudian and became an accurate
label. We are in a nasty situation and badly discombobulated but the BOOBs are making it worse by piling on like the mobs in a Roman arena looking for blood. There's very little example of adult behavior in the last couple of weeks from the Finance guys to Congress (can you believe 'ol Hang 'em High Chuck ? This is a US Senator ?). Fortunately for us the adults are concentrated in the Administration and other places of power and seem to be doing their best to channel the anger while continuing to do their jobs. We seem back to an event-based and interrupt-driven reactionary posting cycle but as we tried to point out this firestorm is really dangerous. Much as it would satisfying to let your neighbor go up with his house it threatens yours, the neighborhood, the town and the state. Literally ! No hype. In fact just to jar your lizard-brains a bit let me re-use a graphic we created in trying to convey the extent of the credit market carnage and the risks when we created a composite of screen-shots from the movie Virus. (Back to Stalingrad: Containing the Contagion, Moving Forward ?) Ask yourself just how angry are you ? Willing to die along with your neighbor angry ? Or willing to save your family now and revenge later ? Remember, revenue is a dish best served cold !
Listen to Uncle Ben
This post started out to quickly draw your attention to some really critical vidclips we ran across where you can see some adults in action, including Ben Bernanke, Tim Geithner, Pres. Obama and three local politicians (Ahnuld, Bloomberg and Rendell) all of whom are focused on constructive, calm and reasoned ways to deal with a crisis that's not going to be magically over. With the AIG Firestorm continuing to rage we ended up postponing, letting the last post run and adding some more readings excerpts. But let's start with Uncle Ben's discussions of the crisis, the risks last Fall and now, what it'll take to fix things and what the outlook is. You really owe it to yourself to watch this, even take notes IOHO. He says it a lot and tells you more, especially if you listen carefully and for the human inside the Chairman. This interview is, btw, historically unique and Sixty Minutes had done a great public service. We also included some other clips from Barry in LA to Sec. Geithner at the recent WSJ "Future of Finance" conference, which is on C-Span. That one is about as important - true to form the media didn't hear what he was saying and the talking heads and politicians have not helped AT ALL. Both these guys are about as angry as we are, but are doing something about it, know what to do and have a much more realistic grasp on the emotions and politics than they are given credit for. The word that comes to mind is MATURITY.
Surviving Stalingrad: Just How Bad Was It ?
Last Fall as the wheels were coming off the wagon we compared the emergency efforts of the Fed and Treasury to Stalingrad. We should have compared it to the Battle of Moscow because that was a last ditch effort that saved Russia, and was pulled off by a miracle. Back then we talked about the collapse of Western Civilization, being we thought a tad hyperbolic but "truthy". One of the most startling, among many, learnings we had listening to Uncle Ben was that in fact it really was that close. For example there was no authorization for the government to inject capital into a private enterprise and, when it turned out LEH's books were god-awful, they had to let it go. The TARP included such authorization and was passed about two days before AIG blew up. If LEH destroyed the markets can you imagine what would have happened if the orders of magnitude AIG had gone south ? Great Depression indeed !! It was that close. The last post (Burn the Witches: Private Outrage, Public Policy and Butterfly Effects (Updates)) discussed the fiscal and monetary situations and how close to the edges we were so we won't repeat but take a look at this market chart. The markets crashed 20% in Oct. and almost went kaboom again in Nov. as all the ramifications of how deep the doodoo was were absorbed. Ben is right - we were on the edge. There's another little learning hiding here though. We were able to decode the situation and get it right, AT THE TIME, not by special insight or brilliance but by stepping back and applying logic. Instead of trying to read tea leaves if the pundits would apply some logic and data they too could be informed, instead of inflaming. (Oh, btw, we also share some key trading bloggers insightful recent posts on how real this rally is as well).
Some More Adults: Schwarzenegger, Rendell, Bloomberg
At the same time, roughly, that Ben was doing Sixty Minutes these guys were on "Meet the Press" trying to explain why this situation was dire, why they supported the Rescue Bill and budget proposals and thought it was good for the country. Not sure to be honest they've honed their act in terms of getting simple explanations and metaphors developed but this is three responsible officials on the firing line who have come together in a constructive, moderate, pragmatic and bi-partisan way to do what's best for their constituents and the country. Would that more were like them. Oh please !
Putting out the Firestorm to Deal With the Contagion
Circling back to our key concern at this point, is revenge worth the costs ? In the readings you'll find these clips and some others. You'll also find some readings that "walk back the cat". That's a phrase from the military intelligence world that's used to describe the process of working back thru an event and figuring out what went on, who was involved, what they did, how they did it and any why. We use the examples of BAC's purchase of Merrill, the Citi rescue and then excerpt extensively from Geithner's WSJ OpEd piece on the plan he's put forth. There are serious questions about it but, in the spirit of applying logic, it follows along the lines he outlined five weeks ago and should have been expected, it's as good as anything and stands a decent chance of working. It's also our best bet and will be adjusted to the circumstances. There's no magic answers here, it'll take skill, guts, discipline and perserverence. It'd help if a bunch of yahoos weren't standing around riding the fireman while they're trying to save our lives. For my own sake I hope the Yahoos go back under their rocks until they find something constructive to contribute before the whole neighborhood goes up and takes me and my family and friends along with it. Nothing but enlightened self-interest here folks !
NPR on Anger Management:Update
Does Getting Angry Make You Angrier? Anger seems to be the emotion of the moment. The president says he's angry. Members of Congress say they're angry. The public, we're told, is angry.But should angry people act out how they feel? The popular idea is that venting your anger helps get rid of it. There's even a woman in San Diego who makes money helping people do that. But now, psychologists are saying that venting does more harm than good.
Key Video Clips
Brokaw, Burnett on economy, media: Tom Brokaw and Erin Burnett join David Gregory to answer viewer's questions about the media, leadership during the economic crisis, and investing in your retirement.
Ben Bernanke's Greatest Challenge Aside from the president he's the most powerful man working to save the economy, but you have never seen an interview with Ben Bernanke. Bernanke is the chairman of the Board of Governors of the Federal Reserve System, better known as the Fed. The words of any Fed chairman cause fortunes to rise and fall and so, by tradition, chairmen of the Fed do not do interviews - that is until now. The Federal Reserve controls the economy by setting interest rates. But after the crash of 2008, Bernanke invoked emergency powers, and with unprecedented aggressiveness has thrown a trillion dollars at the crisis. Ben Bernanke may be the most important Fed chairman in history. The question is, can he help lead America out of this deep recession and when?
Obama On AIG Rage, Recession, Challenges By most accounts, this past week was one of the most difficult in the young presidency of Barack Obama. At the heart of it all was the public upheaval over $165 million in bonuses paid to employees of AIG, a company largely responsible for bringing the world's financial system to its knees and now being propped up by U.S. taxpayers. The bonuses touched off a cultural war between Wall Street and Main Street, both of whose support the president needs to help stabilize the economy. After campaigning in California to drum up support for his $3.6 trillion budget, the president sat down with 60 Minutes in the Oval Office for a conversation about the AIG debacle, the economy, and getting the hang of the world's most difficult job.
Bloomberg, Rendell & Schwarzenegger Three political heavyweights and the founders of Building America's Future - NYC Mayor Michael Bloomberg, Gov. Ed Rendell (D-PA), and Gov. Arnold Schwarzenegger (R-CA) - meet with President Obama on Friday and join us exclusively to talk about the economy, bailouts, and stimulus. Plus, a special economic and political roundtable with NBC's Tom Brokaw and CNBC's Erin Burnett.
(*****) Sec. Geithner on “The Global Imperative: A New Financial System” Alan Murray, Wall Street Journal, Deputy Managing Editor and Executive Editor for the Journal Online talks with Treasury Secretary Timothy Geithner on how the current economy shapes the future of finance initiatives.
Key Stories: Walking Back the Cat
In Merrill Deal, U.S. Played Hardball Kenneth Lewis is getting a hard lesson in the new balance of power between Washington and Wall Street.The Bank of America Corp. chairman and chief executive had agreed to buy brokerage giant Merrill Lynch & Co. in September, possibly saving it from collapse. But by early December, Merrill's losses were spiraling out of control. Internal calculations showed Merrill had a horrifying pretax loss of $13.3 billion for the previous two months, and December was looking even worse.Mr. Lewis had had enough. On Wednesday, Dec. 17, he flew to Washington, ready to declare that he was through with Merrill, people close to the executive say."I need you to know how bad the picture looks," Mr. Lewis told then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, according to accounts of the conversation by people inside the government. Mr. Lewis said Bank of America had a legal basis to abandon the deal.The threats left no doubt: The federal government saw itself as firmly in charge of U.S. financial institutions propped up since October by infusions of taxpayer-funded capital.During the four weeks that followed Mr. Lewis's conference call, federal officials and Bank of America hashed out a deal to salvage the Merrill takeover. The government agreed to provide $20 billion in additional aid for the Charlotte, N.C., bank, and to provide protection against losses on $118 billion in troubled assets.Federal officials have said little publicly about their oversight of the institutions that received capital from the Troubled Asset Relief Program. Initially, the government seemed reluctant to use the ownership stakes it got in banks ranging from J.P. Morgan Chase & Co. to Saigon National Bank as leverage over bank executives. But the tough negotiations with Bank of America, along with recent moves by federal officials related to executive compensation and other issues, suggest that the government's attitude toward the troubled banking industry has changed, as financial markets have deteriorated further and political ire has risen.
Citigroup Chafes Under U.S. OverseersIn a recent phone call with a senior government official, Citigroup Inc. Chief Executive Vikram Pandit revealed who's on top in the new world of American finance."Don't give up on us," Mr. Pandit said, pleading with the official not to push out top management. "Give us a chance to execute."Mr. Pandit is on the verge of ceding yet more control to the government. Citigroup is in talks with federal officials about the U.S. taking greater ownership of the bank by converting its 7.8% stake of preferred shares to as much as 40% of Citigroup's common stock. Doing so would give the wobbling bank a desperately needed boost to its capital, but less control of its destiny. Interviews with more than 30 banking-industry executives, regulators, government officials and others show that the U.S.-Citigroup relationship, one of the most important products of the American financial-system bailout, is off to a very rocky start.Citigroup executives are attempting to strike a seemingly impossible balance: Run the business in a way that will please their new federal masters, but also help the bank rebound from $28 billion in losses over the past five quarters.Former federal officials have dubbed Citigroup the "Death Star," comparing the bank's threat to the financial system with the planet-destroying super weapon in the "Star Wars" movies. Privately, in the words of one official, they regard the banking giant as "unmanageable." Complicating the issue is the government's back-and-forth between bouts of micromanaging the banking giant and periods of ignoring it. In trying to be neither an active nor a passive investor, the U.S. is directing the business without a firm strategy or particular expertise.In a recent meeting with investment bankers, Citigroup's investment-banking chief, John Havens, was pushing his deputies to further streamline operations in order to reduce costs. One executive asked whether the changes needed to be made quickly. The question "is typical Citi," Mr. Havens replied, suggesting that decisions at the company take too long, according to a person at the meeting. "That's why Geithner is so intolerant with us these days," Mr. Havens told the bankers.Now, gallows humor is setting in. This week, some employees noted that they always thought that working for Citigroup -- with its unwieldy bureaucracy and clashing fiefdoms -- was like working for the government anyway.
Geithner: 'My Plan for Bad Bank Assets' The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.
Adult Supervision and Systemic Reform
Government Looks to Cap Firms' Risks Treasury Secretary Timothy Geithner, in a bid to forestall a repeat of the financial crisis, suggested the Obama administration may limit the ability of big firms to take risks. Mr. Geithner said the government must provide significant amounts of financing to the private sector in order to restart paralyzed financial markets.Mr. Geithner said the government is trying to create a market where none exists in order to get bad loans and other assets off the books of financial firms.Among the things the administration plans to push for is authority to wind down a large, complex institution. Mr. Geithner called it "tragic" that no such authority exists.The administration, in trying to deal with the current mess, is committed to providing enough capital so banks feel confident to begin lending again, even if there is a deeper recession, Mr. Geithner said. The nation's largest banks are currently undergoing "stress tests" to determine their ability to weather worse economic conditions. Banks that are found to lack capital will be required to raise money and Mr. Geithner said the government will funnel as much money as needed to those firms.
Group Offers Boards Repair PlanThe leading U.S. organization of directors says its members must do a better job governing corporate America, or risk further alienation of wary shareholders.In a report to be released Tuesday, the National Association of Corporate Directors urges boards to bolster their handling of risk oversight, corporate strategy, executive compensation and investor communications. Among other things, the report suggests directors consider creating so-called bonus banks for executives, which would pay out over time if executives reach key goals."The only folks who can fix corporate America are the directors," NACD President Kenneth Daly said in an interview. "Boards are really trying to do a good job. But they aren't all doing a great job in all areas."The governance drive comes amid intensified scrutiny of corporate boards for poor oversight of management leading up to the credit crisis and recession. A new federal law requires 400 companies receiving bailout money to give stockholders an advisory vote on executive-compensation practices. Congress likely will extend the requirement to all listed companies. At many companies, individual directors are now subject to possible dismissal if they don't win a majority of votes cast during annual meetings.No report alone, regardless of its source, will restore investor confidence, some governance specialists say. "The public wants to see good results, not just good principles," said Lucian Bebchuk, a Harvard Law School professor and head of its corporate-governance program.At Home Depot Inc., where Ms. Hill is the lead director, the board recently enlarged its involvement in corporate strategy -- another approach endorsed by the NACD.At the request of CEO Frank Blake, Home Depot directors spent a Saturday in October discussing possible strategic shifts with top management. Ms. Hill said it was the first all-day strategy-planning session involving directors since she joined the board a decade ago. The discussion contributed to Home Depot's January decision to close its 34 Home Expo Design Centers, Ms. Hill said.The NACD report also urges boards to constantly review their size and makeup "to ensure a close fit" with the company's strategic direction. Aetna and Dow Chemical directors go a step further. They recruit new members with "the expertise and experience to oversee [future] strategic thrusts," Ms. Franklin said. Their recruitment efforts sometimes begin years before an expected vacancy, she added.
Judging the Outlook
Channeling the 80's Macro Man was admonished last night not to repeat his mantra about 6% rallies. Coming so soon after the last 6% rally, there would appear to be little utility in doing so, so he won't. Instead, he'll cue up the Smiths' "Stop Me If You've Hear This One Before". The 23% rally off the recent lows has been impressive, but let's remember that it's the fourth such rally of similar magnitude of the last six months.....many of which have been centered around policy developments. So while he's retreated to the equity market sidelines, nursing his wounds, Macro Man retains a less-than-enthusiastic outlook moving forwards. The question he has re: the PPIF is not why an asset manager would participate, but rather why a bank would sell assets at a level that would be economically viable for the buyer. While it is true that fund managers will be putting up a small sliver of equity relative to the assets that they can buy, what this means is that if the managers overpay it will take only a small decline in the value of the assets to completely wipe out that equity. If these investments are placed in specially-crafted vehicles, this will encourage them to drive the hardest bargain possible. Would you invest in a fund that has an equal chance of doubling its money or losing all of its equity/ Neither would Macro Man. It will be worth following ABX to see if markets start getting legitimately excited. So far, it's been met with a yawn.
Game Plan - 3/24/09 839.43 is the next important resistance level. That was the high on the day before the Gap of Doom, February 13th, and is a Fibonacci confluence level that I can arrive at four different ways. If the SPX can break through that level, the next stop is the February 9th high at 875-878, which is also a confluence level.But what about the Geithner Gap? If Monday morning’s gap turns out to be a “measuring gap” then you calculate the target by placing the gap in the middle of the trend. So, the uptrend began at 666, and the Geithner Gap opened at 772, so 772-666=106 points. And 106+772=878, which just so happens to match the February peaks, and my Fibonacci projections. Here is a chart where I use a fib retracement to align the gap and arrive at the projection (Matt's SPX Chart - click to view):So, if the rally is to continue, it is geared for 878. Of course, the market is terribly overbought now, and with the Gap of Doom more-or-less filled, the market should turn down. Filling the gap is bullish in the intermediate term, but usually bearish in the short term since gaps often serve as targets that terminate trends.If the market pulls back, we want to see if the Geithner Gap gets filled. If it does, then a good chunk of the rational for 878 goes out the window.