SP Futures Hourly Chart at Market Close

Tomorrow appears to be showtime for Turbo Tim, Zimbabwe Ben, and Leisure Suit Larry. The Yes We Can Man probably will get a few more chances if he throws one or all of them to the wolves if the plan fails which it probably will. We'll have to wait to see it.

If it is the "guarantee program" then it is only as good as the price floors of the guarantees. Too high and the banks are welfare queens. And to say that the 'market will set the price' with an implicit price guarantee from Treasury underpinning it sounds like the Son of Fannie and Freddie, and not even a remotely fair price for the taxpayers.

The most serious flaw in the solution, of course, is that bank lending is really not the problem. Easy money for lending was the solution Greenspan used the last five times we reached a point like this, a little worse on each revisit. We have probably reached the limit of the law of diminishing returns of hitting that old easy money for the banks booty call again.

Why? Because the consumers themselves have hit the wall. Years of suppressing the median wage and understating inflation as a matter of government industrial policy have left the consumer flat out busted.

Saving the banks so they can lend more is like fixing the holes and repairing the engines on the Titanic so it can ram the iceberg again. Can we please consider changing course?

How to Resolve the Mortgage Crisis

Chris Whalen, The Institutional Risk Analyst, is making more sense on a rational way of resolving the subprime mortgage crisis than Tim Geithner, Ben Bernanke, and Larry Summers rolled together.

This is a bit of a read. We're looking for a video of his interviews on Bloomberg the past few days, and today in particular. But his common sense approach makes more sense than anything we have heard from the Washington Whiz Kids.

On top of his recommendation, Obama needs to target the stimulus more precisely and concentrate on driving employment and the median wage in the short term with both money and policy changes.

In fact, it is from the policy changes that the greatest gains would be achieved. Obama and crew need to stop putting out fires ad hoc in the manner of Bush and start working on a serious and well thought plan that the market can understand, whether they may like it or not.

Much of the stimulus package looks like payoffs to constituents and special interests, a perennial problem in the Federal government. The Democrats have to stop playing 'Let's Make a Deal' and strike a vision, share it, and then go for it. That is what FDR did in his first hundred days. His crew made errors in implementation, but the vision was coherent.

Obama needs to find his footing and start thinking out of the box. And it is not likely he will obtain that from Geithner or Summers, and does not have time to wait for the Volcker Committee to weigh in with a compromised solution.

Its a tough spot for any manager. Crisis management shows the weakness of his managerial experience. Bush was dying on the vine on his own watch. It tests a person like nothing else.

Its also an opportunity for growth, and Obama has about three months of goodwill capital to spend, and some bright people on deck. Time to stop making deals, and listening to the vested interests of everyone, and get to work striking a vision that his team can implement towards. A good start would be to strike the note of reform and level with the people, and do something about it other than symbolic gestures and fine rhetoric. Its time to tell the truth.

Can We Fix the Banks, Help Homeowners, and Rebuild the Mortgage Markets? Can Do.

"Here's the basic approach:

* The US Treasury would tender for all of the private label CDO/MBS extending between a range of dates, say 2004 forward to year-end 2007, representing trillions of dollars in assets held by investors and banks globally. The pricing on this paper will reflect current market prices, but say the average price was 50% of face value. Only issues that actually have an enforceable legal claim to collateral will be eligible. Derivative structures without collateral will not be eligible.

* Treasury then transfers all of the purchased toxic paper to the FDIC Deposit Insurance Fund, which acting as receiver under 12 USC restructures the trusts that are the legal issuers of the bonds and recovers legal ownership of the underlying collateral. The FDIC arguably has the power to call in all bonds and related investment contracts, and extinguish the claims of those parties which do not respond to the Treasury tender. The legal finality of an FDIC-managed receivership under 12 USC is what is required to end the toxic asset issue once and for all. The bankruptcy courts could be used in a similar fashion, but the unique legal authority of the FDIC suggests to us that this agency should run the process as part of its larger asset sale operations.

* This now "clean" whole loan collateral will then be re-sold to solvent banks in the localities where the property is located, using zip codes and other means to identify eligible buyers, priced at say 90 cents on the dollar, with a full recourse guarantee from the FDIC and financing from the Federal Reserve Bank in the relevant district. The banks will initially be guaranteed a minimum net interest margin and servicing income, and immediately begin to service the loan and manage the credit locally. Indeed, the participating bank must agree to retain and service the loan so long as government financing is used. The bank has the option to repay the financing from Treasury and take full, non-recourse possession of the loan.

We don't pretend that this simple outline is sufficient treatment of this proposal, but we have heard several permutations of this approach from veteran bankers in the loan origination channel all over the US. We see several advantages to this "community bank" approach to the crisis, which might be combined with modest additional capital infusions to solvent community and regional banks like WABC, if they even need it.

* First, it puts the trillions of dollars in now illiquid mortgage loan collateral trapped inside thousands of securitization deals back into strong local hands, who are responsible and incentivized to both manage and service the loan.

* Second, it re-liquefies the balance sheets of the US banking industry and it will vastly improve the prospects for home owners and housing markets around the country. If we are going to further lever the balance sheets of the Treasury and Fed, let's do it for a real reason and with a clear purpose.

* Third, the approach outlined above provides the Obama Administration and the US Treasury with maximum bang for the buck in terms of both addressing the solvency problems facing the banks and also helping the economy and the housing industry.

One downside: This new market paradigm suggests that loan servicing as a standalone business may be at risk. Once community banks begin to accumulate significant local servicing portfolios, they may rediscover the benefits of keeping the credits that they originate. Sorry Wilbur!

And what about valuation? Well, as our friend Kyle Bass of Hayman Capital likes to remind us, all of these assets are valued and traded every day. It's just a matter of organizing the purchase process in a transparent and competent fashion. Starting with our friends at shops like Hayman, Black Rock and RW Pressprich, we know people who know how to trade illiquid assets."

When Will the Wall Street Money Center Banks Be Nationalized?

"Most of the big banks need to be put into some form of bankruptcy and recapitalized, and I think everybody understands that." Ken Rogoff

The major US money center banks will be nationalized. The only questions are when and how.

When is difficult. Rumours abound. A common rumour is for a bank holiday sometime around the President's day holiday in the US on February 16, or later in February.

This may be too early, but no matter. It is coming.

Its the how that is more interesting in terms of meaningful speculation and the impact on any intended recovery.

How will we nationalize the banks? How far will nationalization have to go?

With regard to nationalization the bank toadies and spin doctors say things like "Would you want the government running the banks?" Well, we think this is the usual deceptive rhetoric we get these days instead of serious discussion and hard news.

In a nationalization it is highly unlikely that the government will want to 'run the banks,' although it is hard to see how they could do a job that would be much worse than the overpaid princes of Wall Street who now stand exposed as having ruined the national economy through incredible dereliction of any standard of sound and responsible management.

Rather, there is a range the process which will be called nationalization.

If we hold the current course at some point the government will place enough capital and hold enough preferred stock in the banks to effectively own them, but passively. The problem with that is the mismanagement and losses will continue to deepen, and the government (public) will own the acid core of thirty years of white collar crime, burning a hole in the fabric of the national economy and monetary system.

It will be a financial Vietnam, with Larry Summers playing Robert McNamara and Obama as LBJ. It will be a cascade of corruption and deception and will tear the country apart.

At the other end of the nationalization spectrum, he government will 'take over' the bad banks as they did in the S&L crisis, and restructure them.

There are between five to ten banks in the country that are hopelessly insolvent through mismanagement bordering on fraud. At the moment they are sucking up capital at a ferocious rate through bailouts, and crowding out constructive uses of capital.

They cannot precipitously fail, but they can and should be taken into receivership by the FDIC, their books opened, their assets sold, debts written off, and the remains either buried peacefully or allowed to emerge as new banks with different management if there is enough left to make it respectable.

Who will lend? The regional banks. They are the bulwark of the banking system. It is in the money center banks where the contagion continually spawns.

To attempt to maintain the status quo is no longer possible, no matter how much money and influence and political power that the ten Wall Street banks may wield in Washington.

The shareholders will be effectively zeroed out as they should, the bondholders handed a steep haircut on the order of 40%, the creditors paid 70 cents on the dollar, if that.

Credit default swaps and other bets will be dealt with harshly. If a bank has a heavy interaction with a money center bank in Credit Default Swaps or other 'weapons of mass destruction' to the point where it places it insolvent guess what, it can join the restructuring club.

The depositors will be, MUST be, kept whole, to almost 100% on all private non-corporate deposits. Pensions must be kept whole above and beyond the limits of the Pension Benefit Guaranty Corporation.

If the Congress, and this Administration, continued to bend the fate of this country to the bankers of Wall Street there will come a time when the people will simply say 'enough.' Of this we no longer have any doubt. And the pain from that will be much greater than the short term pain we will receive in restructuring the system now.

And it will be painful. But necessary. We do not have a cold. We do not have the flu or the sniffles, a temporary setback. We have a serious gangrenous infection that must be dealt with before it takes down the body politic.

We can choose to linger, to waste away in our corruption as Japan has done. But we do not think that the US public will accept the chains of servitude gracefully. They are too heavily equipped with options, thanks to the foresight of the founding fathers.

If this seems to harsh, too black and white, too unthinkable, here is a recent interview from Ken Rogoff with BBC Hardtalk to help punctuate the seriousness of the situation.

The simple truth is we no longer have any choice, any options. We elected the Obama Administration to reform Washington and the economic and political system in this country.

Ok guys. Reform.

The deeper we go down this rabbit hole the more difficult it will be to return to the light of day.

You may wish to take the time to listen to Ken Rogoff in this BBC interview on Hardtalk. Mr. Rogoff is a noted economist who is completing an intense study of financial crises.

We obviously do not agree with everything Ken Rogoff says. That would be improbable.

He starts from the assumption that we have free trade in the world today and should maintain it, whereas we believe that free trade went out the window with the devaluation and pegging of the Chinese renminbi in the 1990's, if not before that with aggressive Asian mercantilism supported by US multinationals and Wal-Mart.

But other than that, it sounds like the standard fare served at Le Café Américain for the past two years at least, and it is a happy and humbling experience to see someone express similar ideas with such gravitas.

It is clearly stated, it is well thought, and it is absolutely essential. It is what a substantive news program looks and sounds like. We rarely get anything like it except on the Web and on Public Television.

Rogoff on BBC HardTalk

GM to Invest $1 Billion of its US Rescue Package in Modernization - In Brazil

Here is a nice example of how investing in nationless corporations, without conditions, does very little for your use of capital and your good intentions. Because in fact the US rescue package was not an investment, but a grant. We do not investment our tax receipts in private corporations. We provide relief, grants, subsidization. If the investment was a good commercial arrangement it would not require your public assistance funds.

If General Motors wishes to upgrade its facilities in Brazil, it ought to seek the money from profit-seeking private investment, or from the government of Brazil.

And anyone who believes that General Motors should be able to do whatever they wish with a grant from the public treasury is a either a fool or a fraud. And that same measure applies doubly to the packages for the Wall Street banks which are as much bribe as bailout.

On a related topic, there is a significant amount of 'Smoot Hawley II,' anti-protectionist rubbish talk swilling around the webs. If free trade did exist as the norm then it would be a good thing to uphold it. As it is, rogue players have turned that into a farce.

The problem with the industrial policy of the US is that we do not have one, whereas several other powers do and follow it, aggressively.

We stand for 'free trade' where other countries manipulate their trade policies and currencies to advance mercantilism that happens to be favored by many US corporate powers in search of cheap labor and the circumvention of environmental, health, child labor, and assorted public reform policies.

Inevitably, and this is what the corporate spinmeisters do not wish you to know, is that unrestrained 'free trade' will conflict and be used to undermine domestic policy and civic standards to the lowest common denominator of human misery and exploitation in the world.

We are playing by the rules of soccer in a game of lacrosse.

Follow Up On February 10: GM has subsequently stated that the head of GM in Brazil was misquoted or mistaken, and that the billion dollars is coming from local sources.

GM Says Not Sending Any Money to Brazil

Latin American Herald Tribune
General Motors to Invest $1 Billion in Brazil Operations -- Money to Come from U.S. Rescue Program
By Russ Dallen

SAO PAULO -- General Motors plans to invest $1 billion in Brazil to avoid the kind of problems the U.S. automaker is facing in its home market, said the beleaguered car maker.

According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the U.S. government and will be used to "complete the renovation of the line of products up to 2012."

"It wouldn't be logical to withdraw the investment from where we're growing, and our goal is to protect investments in emerging markets," he said in a statement published by the business daily Gazeta Mercantil.

Meanwhile, he cut the company's revenue forecast for this year by 14% to $9.5 billion from $11 billion, as the economic crisis began to cause rapid slowdowns in sales.

GM already announced three programs of paid leave, and Ardila added that GM Brazil "is going to wait and see how the market behaves in order to know what decision to take" with regard to possible layoffs.

For Ardila, the injection in Brazil's automobile sector of 8 billion reais ($3.51 billion) recently announced by the federal and state governments of Sao Paulo "has already begun to revive sales," which fell by 12% in October.

The executive said that the company will operate a "conservative" scenario in 2009 with an estimated production of 2.6 million units, and another more "optimistic" that contemplates sales of 2.9 million.

This year sales will reach 2.85 million vehicles, which represents a growth of 15% over last year.