Crisis Diary as it unfolds ….

12-Jan-09 to 18-Jan-09: Oh, no…not again!

Please, oh good Lord, please have some mercy! This is how Mr. Helicopter Ben is praying these days.
Imagine this. Ben is sitting at the Fed window (yes, the same window which he opened for every crook on the street last year) and CEOs of AIG, Big-3, Citi, BofA, WF et al are waiting in the queue for their turn. Everybody takes his turn, gulps down few billions of taxpayers’ money and goes back to stand at the end of the queue waiting for his next turn. The line never ends. Ben is printing money which evaporates at a rate faster than the rate at which any Obama-supporting group fills up on facebook. And where does this money go? Mostly in further writedowns and in executive compensations aka retention bonuses.

Glass is neither half full nor half empty. It is completely empty and broken. No matter how much water you pour in it , glass stays empty .

Bailout and more bailouts

Bailout saga returned last week. Gov’t bailed out BofA in much the same fashion as it did Citi a month back.

Bank of America announced the results hours after it won $20 billion in new capital from the government’s $700 billion Troubled Asset Relief Program (TARP).

Won? I did not understand what CNBC meant by that. So when you lose money and go begging, you win. Nice. Heads I win, tails you lose. Socialize losses, privatize gains. Well played capitalism! I don’t think I am a lefty. But I believe if gov’t must bailout these banks, gov’t should at least punish common-stock holders and management for their sloppy handling.

In other main news, Citi finally decided to break itself in two entities isolating all cancerous cells.

“It’s one of the first steps toward some positive news and the end of this nightmare,” said Michael Holland, founder of Holland & Co in New York, which manages more than $4 billion of investment

I agree.

On the similar lines, uncle Sam is planning to create big giant state-owned bad bank for everyone to dump their garbage. This is return of TARP. TARP has already used more than half of its allocated money and hardly any of it went to buying troubled assets, which was the original objective of TARP. TARP-phase 1 was more of a Troubled Bank Capitalization Program.

Paul Krugman (here and here), who always argued for capitalization and gov’t equity stake in troubled banks, did not like the new ‘bad bank’ idea a bit. In his compelling argument he says,

I suspect, though I’m not certain, that policymakers are once more coming around to the view that mortgage-backed securities are being systematically underpriced. But do we really know this? And how are we going to ensure that this doesn’t end up being a huge giveaway to financial firms?

I’m not dead set against this proposal — but I’m still waiting for some explanation of why this is supposed to be more than rearranging the deck chairs on the Titanic.

To answer Paul’s question on giveaway, no sir, we are worried at this point if it is a giveaway to banks. The financial markets are in crisis and this is the only way stock market can go up and continue to go further up. We are not worried about taxpayers at the moment, next elections are not due for another four years.

UK follows US’s footsteps

Meanwhile, UK is also planning for similar ‘bad bank’ program. Look at the numbers, they are just staggering.

The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders’ bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government’s total commitment to solving the banking crisis to almost £1 trillion in taxpayers’ money that has either been spent or pledged.

That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain’s annual GDP of £1.4 trillion.

The £1 trillion figure includes the £500 billion announced in October to buy shares in the banks and to guarantee their debt. It also includes a further £100 billion fund, which will also be announced next week as part of the rescue package, to provide the banks with cash to lend to ordinary customers and businesses.

As well as creating a bad bank, the Government is planning to use Northern Rock as a “good bank” which can dramatically increase lending to individuals and businesses.

During initial days of TARP, US followed UK’s idea of capitalizing banks instead of buying sh!t. Now UK wants to follow US idea of bad bank. What gives?

Oil Contango

What’s the deal with oil? Why such contango? Are all arbitrageurs dead? Nobody has any money to lend even when clear risk-free opportunity of making a quick buck is staring in the face?

Mark Thoma posted this puzzle on this blog. IMO, the winner is ‘Counter-party risk’.

The entire idea of ‘bad bank’ is also aimed at bringing trust back to the system. Just the problem is how to effect the idea of bad bank making sure that everyone gets the fair deal.

Crisis Watch for the week

In the good news, TED continues to improve. In the bad news VIX and S&P are catching cold. Will TED follow thru?
TED spread 1.03
S&P: 850.12 (-4.5%)
VIX: 46.11 (+10.00%)


January 18, 2009 Posted by | Crisis Snapshot | , , , , , , | 1 Comment