What is going on with the financial crisis is serious business. I think we all get that. But what has been happening is that we have been treated to a variety of reasons for the calamity and what needs to be done about it. The one thing lacking is the truth.
We were told all about the need for a solution for the problem. Whether we call that a bailout or a rescue plan is of little consequence as it seemingly doesn't matter. Congress passed a bill that the President signed into law to use to attack the problem. However, nothing at all has been done with the new powers and money. The only actions we have been seeing are those that the government had the power to do under existing law.
We are even seeing where they have taken to just making stuff up that they can do under that new law. The suggestion that the US Treasury can simply invest in banks without actually buying up the bad assets in exchange for equity is completely unfounded. But no one, not even the authors of the bill are calling them out on it. It is to the point that most people don't know what to make of it. I suspect experts would believe that there is something far worse that the government is hiding.
One thing that is for sure is that Monday - and this week - should be quite interesting.
With the bond markets closed it presents the problem to the investors if there is a sell-off. The only real avenue for them is commodities. But in that market there is also an unwinding going on.
Those that get talked into getting out of some stocks and moving their money to commodities will likely be helping another investor that is holding a bad position in a commodity and they are sure to lose their shirts.
The other thing is that Morgan Stanley's deal with Fujitsu is being renegotiated. The important thing is that the $9 billion dollar investment won't involve common stock. The Fed no doubt is insisting on this because if common stock were allowed it would dilute the existing shareholders and devalue the stock. This is the same thing the Fed did with the $7 billion dollar private equity investment in National City bank. Diluting common stock makes it more difficult for future opportunites to raise equity capital. Or so their argument goes.
What works against that theory is that the preferred shares are going to eat the lion's share of dividends. And Fujitsu is likely to demand an even higher return on their investment because they will have no influence in terms of voting stock and thus have little say in any direction the company takes. The other risk at play is that this infusion of capital indicates that there may be an issue with Morgan's Tier I and Tier II capital ratios. Without those being sufficient it puts the bank at risk for a Fed takeover.
This is also the same problem with the talk this weekend of Paulsen investing the bailout money in financial firms. Same approach - preferred shares. Same risk. And likely the same results. The investors that have been manipulating the financial stocks will likely be unloading. They aren't in those stocks for the long haul. The low stock prices put the long term investors and those that are just riding out the storm hoping for better times in a bad spot. At low market capitalization it becomes very cheap to buy up a bank and at a disadvantage to existing shareholders.
The other big thing that came out of this weekend's meetings of the financial heads of the G7 and G20 - Nothing. Nada. Zip. It appears that everyone is going to go their own way. Some may work together regionally or run similar plans but there isn't any coordinated effort or plan that should give anyone confidence that these people no what they are doing. One thing is for certain is that the U.S. economy is being isolated as toxic. There is no group stepping up expressing their confidence in a turn-around in the form of investing their money here.
Paulsen actually used the terms isolationism and protectionism in comments reported today. That suggests to me that the meetings are not going well at all. Those terms came out of the blue. Which makes it look like the rest of the world is going to force the U.S. to eat its mess. Something the U.S. has been desperately trying to avoid. We so want to get other nations to eat up the mess with the theory they could make it back later. But those nations have an obligation to their own citizens and that is where their concern lies. We have very little leverage in this regard except to manipulate currencies. That would lead to public rebukes of the United States and greater troubles.
Which leads to the other thing that occurred this weekend. The increase in the number of countries that are covering all deposits no matter what the amount. One thing that has been happening is that some money has been flowing out of US bank accounts to these countries. That flight of deposits can force the Fed to seize banks in this country. Already there has been a run on banks in this country. Not by large numbers of people but smaller numbers of people with large sums of money in various accounts. That was what caused the final nail in the coffin for both Washington Mutual and Wachovia. It may be what brings down the next big bank.
This has been a huge problem for the federal government. For if they were to say that people need to remain calm and their is no need to pull their money people would be lined up around the block to pull their money and there would be pandemonium if people couldn't get to that money. On the other hand if they don't talk about it then they are not getting to what the source of the problem is with the financial institutions over the past few weeks.
The reason why the banks aren't lending is that they are running up against reserve limits as the rest of the money is tied up in cash flows from loans and not available to them. The reason why the government is pumping money into the overnite settlement arena is because the banks don't have the money to settle accounts overnite. People have been reporting that payments have been taking longer to clear. What happens when the people you pay refuse the payment because they don't know if your bank will be able to honor the payment? This is serious business. This is also the reason that banks are reluctant to lend money overnite to other banks - they are already seeing settlement issues.
The US government's last big hope, their hail mary, was to get the rest of the world to step in and help. That seems to have been an incomplete pass. What we don't know is what down it is or how much time there is left in the game. It seems that punting is going to be out the question. George Bush was forced to state that the problem started in the United States. He was allowed to temper it but he wouldn't have said it unless the rest of the G7 went along with holding the US fully to blame. That didn't happen.
This financial crisis is way beyond subprime mortgages. It is way beyond bogus junk assets. We are sitting on a system that is broken. And the fix is likely to make things worse for a decade or more. If student loans and college loans for parents are curbed we could see a huge education gap for a whole generation of Americans. This is serious business.
The talk that is coming out of Democrats that we need to get the congress back in session for a new stimulus package and more money for food stamps and unemployment should be indicative of a tough slog ahead. That the Republicans aren't out there attacking the Democrats for that - that I have seen as of this writing - speaks volumes. I, for one, believe that they are preparing to pave the way for the American public to accept the downturn and tighten their belts and help the country through it. Out patriotic duty, if you will. This is despite the fact that 95 percent of us had nothing to do with it. This is despite the fact that the Republicans will ultimately want to make sure that the wealthy get to keep every last cent and contribute nothing towards getting through this.
If it goes too far and hurts too many of the people on Main Street we could be looking at politically based economic "solutions" that are out of the third world. Things like simply wiping off debts as unpaid. Things like revaluing our currency domestically and trying to exchange it under a different valuation externally.
We could be looking at wage and price freezes. We could be looking at nationalization of the industries and businesses that make up the vast majority of people's expenses such as food, shelter, utilities, transporation, and communications. All of which are essential regadless of the state of the economy. In fact, they are central to the national security.
I am convinced we need to blow up the junk asset markets and let those investors take that beating they have earned. I am convinced that we need to use all legal means to retrieve ill-gotten gains. I am convinced we need to guarantee that the wealthy do their patriotic duty and contribute to shoring up the economy through confiscatory taxation with incentives for them to invest in American factories and businesses so that they might not lose it all. I am convinced that we need to dismantle some of the devices of the new capitalists and their failed theories. The sheer number of things that they have done over the last 40 years to get us to this point leaves me dumb-founded. That is another diary in and of itself. Which I may write but you can find throughout my commentary on this subject.
I would hope that the rest of my fellow Americans would tell our elected leaders that: No we are not going to resign ourselves to shit sandwiches for the next decade while the ones that caused this devour their filet mignon. That is a metaphor: We are the cattle and the best part of us is the filet mignon they are devouring.