Whitney Cuts Banks and GDP Outlook, Senators Preen and Posture

The Senators ask this morning how to regain the public's confidence in the financial system, and we would like to add, in the government, the Senators themselves.

They don't want to hear the answer, but here it is.

Stop lying. Stop manipulating. Stop deceiving. Stop taking things that are not yours. Stop trying to defraud people. Stop favoring people who give you money and favors. Stop selling things under false pretenses. Stop manipulating the news and the markets as you are doing this morning once again.

The Lehman bankruptcy proceedings seem to be moving forward reasonably well. Let's assess how that is going, and if it is appropriate, let's try it again and see what happens. We'd vote for Goldman Sachs, and then Morgan Stanley.

Start acting transparently, openly, honestly.

Some of you are deeply complicit in this fraud that was perpetrated on the American public and the world. Do the right thing and step aside. Resign. No one will trust you now. Sorry but that is how life works. We are a forgiving people, maybe a little distracted at times, but not completely stupid.

Then we might begin to move forward again, but slowly.

And let's take a minute to feel good about the fact that the Senators office were flooded with calls, emails, and personal visits from their constituents almost universally opposing the Paulson plan. They noticed. Now we must see what they do, and act accordingly in the elections.

But we cannot move forward without a reasonable appreciation of the facts. Here is what a factual outlook on the economy looks like, not the dissembling of Paulson and Bernanke.

Analyst Whitney sees "little hope" from bailout plan
Tue Sep 23, 2008 8:42am EDT

Sept 23 (Reuters) - The credit crisis that began last summer has intensified so much that any U.S. government bailout plan has "little hope" of improving core fundamentals over the near and medium term, said analyst Meredith Whitney, who expects the country's GDP to take a hit from likely moves by state governments to cut costs.

The Oppenheimer & Co analyst cut her outlook on U.S. banks and expects further dividend cuts and capital raises.

Whitney also said home prices were not close to bottoming and expects prices to ultimately be at least 25 percent lower from current levels. She expects homeownership rate to decline further.

The analyst also noted that unemployment was up over 40 percent year-on-year in key states, and said unemployment is "headed materially higher."

Given that over 12 percent of the U.S. GDP is driven by state and local government spending, and with many key states' 2009 budgets being under-funded, governments will be forced to cut costs and this will weigh significantly on GDP, Whitney said.

"Credit market disruption has had underappreciated consequences on the economy... A virtual suction of liquidity has occurred in the credit and lending markets, and consumer and corporate credit is already showing the effects," Whitney wrote in a note to clients.

"Since the onset of the credit crisis, over $2 trillion less liquidity has flown through the U.S. domestic capital markets than during the same time period a year prior," she added.

Q3 OUTLOOK

Analyst Whitney forecast a third-quarter loss of 36 cents a share for Citigroup Inc. She had a prior profit view of 8 cents a share.

Whitney widened her third-quarter loss forecast for Wachovia Corp to 31 cents a share from 15 cents.

She cut third-quarter earnings estimates for Bank of America Corp to 40 cents a share from 75 cents, for JPMorgan Chase & Co to 21 cents a share from 40 cents a share, and for Wells Fargo & Co to 13 cents a share from 17 cents.

Shares of Citigroup closed at $20.01 Monday on the New York Stock Exchange, while those of Bank of America closed at $34.15.

Shares of JPMorgan closed at $40.80, Wachovia's at $18.75 and Wells Fargo's at $35.18. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)

Putin Joins China in a Call for a New Global Financial Structure Not Based on the Dollar

China Calls for a New International Financial System Not Dependent on the US

Tass
Putin calls for changing the architecture of the international financial system
20.09.2008, 17.56

SOCHI, September 20 (Itar-Tass) -- Prime Minister Vladimir Putin called for changing the architecture of the international financial system.

“We all need to think about changing the architecture of international finances and diversifying risks. The whole world economy cannot depend on one money-printing machine,” Putin said at the final press conference after a meeting of the Russian-French bilateral commission on cooperation in Sochi on Saturday.

“This is a very serious issue that should be addressed in a calm, attentive and working manner without haste together with our colleagues from Europe and America,” Putin said. “This issue should be considered not in a confrontation-like way but very benevolently in order to find the most acceptable ways for the development of the world economy and world finances.”

French Prime Minister Francois Fillon said he would put forth several initiatives within days for dealing with the world financial crisis.

He said it was not possible yet to say whether France or Europe has survived the financial crisis. He believes it necessary to strengthen control and bring more transparency into cooperation between fiscal authorities of different countries.

“We will be working on this together in the next couple of weeks,” he said.

Goldman Sachs and Morgan Stanley May Be Primary Beneficiaries of the Bailout

The Bailout Program as it is currently proposed by the Treasury may not be much more than a windfall profits package for a few Wall Street investment banks such as Morgan Stanley and Goldman Sachs.

One of the most significant obstacles to the financial markets is the lack of transparency, confidence and trust. One of the ways to restore trust is to stop lying, show your cards, take the losses, and then move forward with an honest game.

The government would be doing the markets a favor if they forced the banks and especially the newly formed bank holding companies to show their positions, open their books, to stop allowing them to game the system and make profits through practicing deception and the manipulation of markets and information.

Paulson Debt Plan May Benefit Mostly Goldman, Morgan
By Jody Shenn

Sept. 22 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.

''Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment,'' Jeffrey Rosenberg, Bank of America's head of credit strategy research, wrote in a report today, without identifying particular investment banks.

Many banks may not participate in the Troubled Asset Relief Program because they haven't had to write down many assets under accounting rules, meaning decisions to sell into the program would cause them to lose capital, Rosenberg wrote. Investment banks operate ''under a mark-to-market accounting model while commercial banks hold assets at cost until realizing a loss (or until they reasonably expect one),'' he wrote.

Rosenberg assumed the government will use a reverse auction in which banks submit the lowest prices they are willing to sell certain types of assets for and then the government buys the cheapest ones, with the goal of ''protecting the taxpayers,'' the report said.

Treasury Secretary Henry Paulson's push for the program, which is being now considered by lawmakers, is designed to remove ''illiquid assets'' clogging the financial system, reverse declining asset values and prevent the freezing of lending for U.S. financial firms, companies and consumers. The intervention into the financial markets would be the broadest since at least the Great Depression.

Japan's Failure

In the 1990s, a Japanese government effort to buy troubled assets from banks to free up lending failed because sellers weren't willing to accept the prices offered, said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. He said that wasn't a problem he had as chairman of the Resolution Trust Corp. in the U.S., which sold off failed lenders' assets after the savings-and-loan crisis of the 1980s.

''If you're talking about institutions that haven't failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital,'' Seidman said in a telephone interview today.

''In Japan, we did all kinds of things, trying to have a mediator who would set a price and other kinds of methods to get around that,'' he added. ''It never really got done, so it was not successful, but here we probably have a more urgent need for more institutions to do something.''

'Hasten the Pace'

While Goldman and Morgan Stanley, both based in New York, were yesterday granted permission to transform themselves into bank holding companies, the companies so far have operated mostly under investment-bank accounting rules, logging almost $21 billion of asset writedowns and credit losses. Paulson is a former chairman and chief executive officer of Goldman.

Charlotte, North Carolina-based Bank of America, which has reported $21 billion of losses, is seeking to buy New York-based Merrill Lynch & Co., which has had $52.2 billion in losses.

Even without sales by commercial banks and savings-and-loans under the program, the companies may be harmed as the disclosure of prices paid in the troubled-debt auctions force them to ''hasten the pace'' of their own losses, Rosenberg wrote in his report. Banks and insurers mark down certain securities and derivatives to market prices in their earnings reports, avoiding losses on others unless they deem the declines to not be temporary and provisioning against loans as they go bad.

Fair Value

Bank lobbying groups today asked Congress and the U.S. Securities and Exchange Commission to suspend a rule that forces companies to put a price on difficult-to-value assets such as subprime mortgages.

''We are suggesting that the SEC issue a temporary order to negate the negative impact'' of the so-called fair-value rule when the economy slumps, Scott Talbott, senior vice president of government affairs at the Washington-based Financial Services Roundtable, said in an e-mail.

Companies including American International Group Inc., the insurer that accepted $85 billion in a U.S. takeover, have said the rule by the Financial Accounting Standards Board requires them to record losses they don't expect to incur. The world's largest banks and brokers have reported more than $520 billion in asset writedowns and credit losses since last year.

G7 Vows to Do What It Takes to Support the 'International Financial System'

The Economic Times
G7 vows to guard financial system
23 Sep, 2008, 0000 hrs IST, REUTERS

WASHINGTON: The Group of Seven finance ministers and central bank governors are maintaining ‘heightened close co-operation’ and pledged on Monday to take necessary actions to safeguard the international financial system. (And what is the international financial system exactly? - Jesse)

The G7 finance ministers and central bank governors said they held a conference call to discuss global financial markets and welcomed ‘extraordinary’ US actions to take illiquid assets off of bank balance sheets.

“We pledge to enhance international cooperation and to address the ongoing challenges in the global economy and world markets and maintain heightened close co-operation between finance ministries, central banks and regulators,” the G7 said.

“We are ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system.”

While the G7 welcomed the $700-billion US asset purchase plan, it stopped short of saying other countries would implement similar actions to mop up bad loans and securities choking the financial system.

Separately, German finance minister Peer Steinbrueck said that the G7 countries apart from the United States, Canada, Britain, France, Germany, Italy and Japan, do not plan any measures comparable to the US package to support the banking sector.

Meanwhile, Britain’s finance minister Alistair Darling said that the government would introduce a bill to reform the banking sector in two weeks' time.