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Why the Paulson Plan Won't Work
By Dan Denning, Editor of the Australian Daily Reckoning
Agora Financial's Rude Awakening
Thursday, October 02, 2008 10:14 PM
"$700 billion will flush through the U.S. banking system faster than [insert preferred metaphor here: WebMasters: Crap Through A Goose]. In other words; the bailout won't work.
"The crux of the bailout is that it's designed to keep banks from failing by recapitalizing them. It's like a massive financial organ donor program where the Treasury, like a live organ donor, replaces the malignant guts of the current system with its own, healthy ones. But of course, live organ donors don't usually swap their healthy organs for failing ones. The Treasury is breaking new ground here.
"Even if Paulson can come up with $700 billion from Congress, many of the banks are going to fail anyway. They borrowed money short term to buy long-term assets (mortgage backed securities and collateralized debt obligations). Now, the money must be paid back but no one wants to lend short term. Why? The assets are falling in value.
"When the assets fall in value, it wipes out equity capital. You have a small amount of capital controlling a large amount of assets. If you take a write off on the assets, it wipes out your capital. You're insolvent.
"Here's the thing...$700 billion is not going to be enough to remove the troubled assets from bank balance sheets. But then, Paulson must know that. He's hoping that the Treasury's buying kick starts the market by establishing a price for the stuff.
"Then, he's hoping, private equity, hedge funds, and others with cash come in from the sidelines to make deals with the banks and get the assets off the balance sheet so the banks don't fail. Trouble is, the price Paulson wants to pay for the assets seems likely to be higher than what the market is willing to pay. Kick-starting the banking system won't work if the first bidder (the government) comes in and pays a price the market has already said no to.
"The financial markets may believe, for a day or two, that the passage of Paulson's bailout plan fundamentally alters the dynamics of the U.S. financial system. But it does not. Not one jot.
"Borrowed money has to be paid back. Assets that were bought with that borrowed money are falling. That is how all credit bubbles end. This one is no different.
"The new Senate version of the bailout bill has some new bells and whistles not included in the version that failed to pass the House. Two of the main measures added seem aimed more at shoring up political support for the bill, rather than improving the chances that the plan will actually work. But let's take a look at them anyway.
"First, the Senate wants to temporarily increase Federal insurance on deposits in U.S. commercial banks from US$100,000 to US$250,000. You might wonder what an increase in Federal deposit insurance does to improve the quality of assets on bank balance sheets.
"The answer is, 'It doesn't.'
"But the increase in what the FDIC can offer is designed to make the Paulson plan more difficult to oppose in the House. Who is against providing ordinary savers more insurance for their life savings? Anyone? There is also the question of confidence.
"By increasing FDIC insurance to $250k, you reassure (hopefully) people that there's no need to remove their money from the bank. Here the Feds aim to prevent a run on banks by depositors that leads the bank to fail. This is what happened first at Indy Mac in July and at Washington Mutual earlier this week.
"Depositors took out a whopping $16.5 billion from WaMu between September 15th and the end of the month. That kind of run is a serious drain on a bank's capital. It's a scenario the Congress wants to avoid by increasing FDIC insurance. It does nothing to improve bank balance sheets, unless, by restoring confidence, it prevents a huge drawdown in a bank's assets (its deposits).
"Meanwhile, to address the value of those damaged assets that Henry Paulson can't wait to get his hands on, the SEC (Securities & Exchange Commission) clarified its stance on Tuesday with regard to mark-to-market accounting rules. This move is designed to give banks some wiggle room when it comes to valuing their damaged assets. The higher the banks can value the assets, the less likely the banks are to have to take losses on those assets, or to sell them to meet capital requirements. They can stay in the game.
"In essence, the new SEC dispensation permits the management's of financial institutions to legally inflate the real-world values of many balance sheet assets. The new ruling provides a delicious array of valuation metrics that will enable financial firms to elevate the stated value of their troubled mortgage-backed securities far above what any actual human being would pay.
"Granting these new powers of deception is good, we are told, because telling the truth would be too darn painful and would put many banks out of business. This process is a little bit like providing a trophy from Little League as collateral for a $1 million loan. No one actually believes that the trophy is worth $1 million, but since the borrower may legally assert that the 'fair value' of his trophy is $1 million, the lender cannot foreclose. Everyone is happy, right?
"No bailout plan in the world is going to convert a Little League trophy into a $1 million asset…or a defaulted mortgage into a AAA security. And no bailout plan in the world is going to reverse the fall in American house prices (or even arrest in). Therefore, no bailout plan in the world is going to force banks to lend, if the assets on their balance sheets are both overvalued AND falling in value. Until someone comes along with a plan that severs the connection between residential American real estate and the banking system, the system itself remains on the edge of crisis."
Commentary By WebMasters:
The "Bailout Plan" is nothing more than a "mumbo–jumbo" plan to save the banks who made deals because of Greed!
They gave credit to people, businesses, corporations, lending institutions, etc. who have bad or risky credit; or, were too overloaded with debt. This greedy practice was packaged up in a fancy name and was called Sub–Prime Lending—this was a new set of banking instruments such as ARMS, Option ARMS and so forth. Notice the high sounding words (Subprime Lending, New banking instrument(s)) for a shady practice. Then, there were Liars Loans whereby you did not have to be honest on the form...and nobody checked it. And then there were those who helped you lie on the loans and actually told you or changed you total income to reflect a more agreeable higher income so the loan would definitely go through and this would generate a fee for the lending houses' agent who secured the loan from the buyer.
Also, let us not forget the Derivatives market, the Tranches, the Collateral Debt Obligations, and more. All crap! The Derivatives market, which insurances companies are/or in, have invested in; your retirement funds, and others are sitting on a deck of cards that's about to go. Think of the public servants' retirement funds—they are going to have little to no money when the Derivatives market comes down. There is nothing solid there.
The school pension plans and retirement university plans that are in derivatives are going to be bankrupt when the Derivatives Market goes soon.
Oh...you don't know what a Derivatives Market is? Well, a Derivative is a bet! Nothing more than a bet. A gamble. But it extends itself and not even the experts know it because it is thrown into computer programs and no one can unravel it once it gets going. This is a bet on a bet on a bet.
For instance, a Derivative, and some exists on this that follow and then it is extended into other derviatives that a bet is made on the weather in India (are you confused yet, that's how bad it is); from here another bet on the other side of the world that ties its derivatives into the Indian weather derivative and others on the commodities market, and from there more get computerized and it expands.
Are you getting the idea how bad this is and why no expert truly understands the extantness of the Indian weather derivative? A derivative can be made on, and is made on, the direction of interest rates. This goes on and on and the banks polish this crap up, give it a fancy new name and called it a new banking instrument. Pure crap! And you want to bail out the banks? Reread Dan Denning above and you will see why the "Bailout Plan" is not going to work.
When the Derivatives' Markets goes, there is not enough money in the world to bail out the world.
World Economy Slowing:
Gary North's Reality Check
The Sky is Falling
Thursday, October 02, 2008 10:14 PM
"Copper has collapsed. So has shipping. Both are tellings us that the world's economy is slowing down. Housing prices are falling faster. Job cuts are accelerating. Local governments are getting hit by lower revenues—they're having to cut back. Households are cutting back too. Wal–Mart says it's cutting prices for Christmas toys. Newspapers and magazines are cutting paqes.
"The sky is falling and anyone with any sense is running for cover...and protecting their portfolio at the same time. The meltdown is far from over...."
Whiskey & Gunpowder
Dirt Cheap Done
2008 Wednesday, October 01, 2008 1:25 PM
By Chris Mayer
Gaithersburg, Maryland, U.S.A.
“Taking The Long View, We Are Running Out of Dirt.”— David R. Montgomery, geologist
"Over the summer, Iran bought a large amount — more than ONE million tons — of wheat from the U.S.
"That’s something we’ve not seen in 27 summers. In Iran’s case, a tough drought cut the wheat harvest by a third, forcing the country to look abroad. But still, the fact that Iran had to come to the U.S. is telling. It’s like Lee asking Grant for rations in the summer of 1863. As one analyst put it: 'Do you think Iran would come to the U.S. if they had any place else they could buy it… They’re searching the world for wheat. They’re buying the U.S. because it’s the only thing they can buy.'
"Markets, like great unscripted dramas, develop their own plotlines as time rolls on. Now unfolding is a new plotline in the agriculture boom. It begins with the fact that there are fewer and fewer options these days for importers looking for large quantities of high-quality grains. But it speaks more to a deeper issue: an emerging shortage in fertile soil. Yes, we’re running out of good dirt.
"In fact, fertile soil — good dirt — may become more important to land values than oil or minerals in the ground. Some say it is already a strategic asset on par with oil. As Lennart Bage, president of a U.N. fund for agricultural development says, 'Now fertile land with access to water has become a strategic asset.'
"Doubtful? Consider rising export restrictions around the globe, which act as a sort of fence keeping the goods within borders. India curbs exports on rice. The Ukraine halts wheat shipments altogether. The number of grain-exporting regions has dwindled, like the vanishing buffalo herds. Before World War II, only Europe imported grain. South America, as recently as the 1930s, produced twice as much grain as North America. The old Soviet Union, for all its faults, exported grain. Africa was self-sufficient. Today, only three major grain exporters remain: North America, Australia and New Zealand.
"No surprise, then, to find faith in the global food supply at generational lows. So begins the scramble to secure farmland. Saudi Arabia, for example, is particularly at the mercy of the winds of global agriculture. It has little ability to produce its own food. The kingdom, reports the Financial Times, “is scouring the globe for fertile lands in a search that has taken Saudi officials to Sudan, Ukraine, Pakistan and Thailand.” Saudi Arabia’s quest is not one it pursues alone. There are many hunters.
"The UAE has also been looking to lock down acreage in Sudan and Kazakhstan. Libya is looking to lease farms in the Ukraine. South Korea has been poking around in Mongolia. Even China is exploring investing in farmland in Southeast Asia. While China has plenty of cultivable land, it does not have a lot of water.
“'This is a new trend within the global food crisis,' says Joachim von Braun, the director of the International Food Policy Research Institute. 'The dominant force today is security of food supplies.' Food prices reflect this crimp in supply.
"The mainstream press focuses on issues such as population, dietary shifts and the impact of biofuels. One thing that doesn’t get talked about much may be the most important thing of all: A growing shortage of quality topsoil. Call it the topsoil crisis.
"Quality soil is loose, clumpy, filled with air pockets and teeming with life. It’s a complex microecosystem all its own. On average, the planet has little more than THREE feet of topsoil spread over its surface. The Seattle Post-Intelligencer calls it 'the shallow skin of nutrient-rich matter that sustains most of our food.'”
"The problem is that we’re losing it faster than we can replace it. And replacing it isn’t easy. It grows back an inch or two over hundreds of years.
"This is not lost on certain far-seeing investors. Jeremy Grantham, the curmudgeonly head of the money manager GMO, wrote about soil depletion in his last quarterly letter. 'Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite.' For every bushel of wheat produced, we lose two bushels of topsoil.
"Until the final decades of the 20th century, the amount of new farm acreage added to the mix by clearing land offset the losses on a global basis. In the 1980s, the amount of land under cultivation began to fall for the first time since humble early humanity began to farm the rich land around the Tigris and Euphrates. It continues to fall today.
"We lose topsoil to development, erosion and desertification. 'Globally, it’s clear we are eroding soils at a rate much faster than they can form,' notes John Reganold, a soils scientist at Washington State University.
"Estimates vary. In the U.S., the National Academy of Sciences says we’re losing it 10 times faster than it’s being replaced. The U.N. says that on a global basis, the rate of loss is 10-100 times faster than that of replacement.
"In any case, it seems safe to say that good dirt is in short supply. The obvious investment conclusion: Buy farmland. That’s hard to do as an individual investor, although there are at least a few options.
"More investment ideas will surely surface as time goes by. The topsoil crisis has a long way to go. It’s not going to resolve itself anytime soon. In the meantime, though, investors may want to rethink the phrase 'cheap as dirt.'”
"From now on, Folks, it's gonna get pretty rough! In fact, downright cussed.
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