Burning Down the Markets

The stock market on Tuesday after the announcement of the revised bank bailout plan by the Great Tax Evader was pretty much the worst case of deja vu I can recall in quite some time. Either there is a serious glitch in the Matrix going on, or I have already lived through our leaders botching press announcements and sending the stock market in a historic tailspin enough times in the past six months to last me for sixty years. Tim Geithner's bank bailout announcement was excuted about as badly as is humanly possible. Somebody please tell me, why would Barack Obama spend all last week talking very publicly about the new bank bailout that was going to be announced on Monday morning? Why publicize this thing with your PR machine so hard, for several days, only to have to put the announcement off on a Monday morning even after an entire weekend to work out the details? And then on top of that, why send your new head of Treasury out there on Tuesday, still without any real details?

Ask yourself this, President Obama and Secretary Geithner, how would you expect the market to react to this turn of events? You tell us all week that Monday is the day when we will all get to find out your administration's plan to save the nation's banking system from critical insolvency, that just the minor details are still being worked out. You broadcast it everywhere and make sure we know to look for the new bank bailout news on Monday. Then early on Monday the announcement gets postponed to Tuesday, for a reason that is actually completely unrelated to any bank bailouts and makes no sense to anyone who hears it. Then on Tuesday you come out with basically four general points of strategy for the revised bank bailout -- now called the Financial Stability Plan instead of the now-tarnished TARP moniker -- and essentially no real details of how the strategies would be carried out.

Particularly troubling was the lack of detail surrounding the "bad bank" concept that Secretary Geithner described as a sharing between public and private funds to invest in purchasing the troubled assets off the books of this country's banks. But the plan as Geithner announced on Tuesday provides almost no detail on how the assets would be priced -- the major stumbling block with the whole "bad bank" concept from the beginning, even back in the Henry Paulson days -- offering up only that pricing of the assets would be left to the private sector to determine. Huh? Right now there is no market in the private sector for these kinds of derivatives and mortgage-backed securities. People see these things and run the other way. Pricing the bad assets is and always has been the key challenge with an aggregator bank concept, because pricing them at current market rates would force banks to take hunreds of billions of dollars more in crushing writedowns, while pricing them too high would put over a trillion dollars of taxpayers' funds at risk of never regaining their value.

Plus, in addition to the problem of valuing the banks' crap assets, or perhaps partially as a result of that problem, it is very hard to know how readily private sector buyers will even be able to be found for all these trillions of dollars of shit on the books of America's big banks, even with federal loan backing to support such purchases. Right now, the last thing almost any hedge fund or mutual fund in the world wants to buy is distressed bank assets. I mean, sure you're going to be able to find someone to buy some percentage of the assets, if the price is right, but there is real concern that it may not be nearly as easy as the government seems to perceive to sell all of these troubled and securitized assets into the private sector.

One other particularly frowned-upon provision of the revised bank bailout plan that Geithner mentioned was his plan to put all banks with more than $100 billion in assets through a "stress test" to determine whether they can handle the losses that could come from an extended economic downturn, and are thus worthy of receiving additional cash infusions from the Treasury to be used specifically for lending. As with the "bad bank" concept, there is real potential with this notion of stress testing American's banks to find out which are the long-term players and which cannot surive in the current environment, but as with the former example, Secretary Geithner's Tuesday announcement was almost completely devoid of any details around how the stress tests would work, or why this hasn't been done already by the nation's banking regulators. What exactly would be tested with these banks? No answers. When would these tests occur? No answers. What would happen if a bank fails the test? They are not eligiable for government bailout funds, but will they be closed down or taken over by the government? Who knows. Could they get a retest at some later date? Nothing. What if one or more of the major U.S. banks fails a stress test? What happens then? Your guess is as good as mine. If a bank fails a stress test, aren't people going to want to withdraw their money in a big ol' hurry? One never knows. What if a bank disputes a negative result in a stress test? It is just question after question after question with this thing, and simply none of it appears to have been thought through at all yet by the new president or Treasury Secretary.

I am still trying to figure out where the hell the lesson went awry and got un-learned by our executives that the market hates fear, and the market hates uncertainty more than anything else. Until eight or nine years ago, that was just an understood fact of life, by everyone, certainly everyone at the high end of our government. But our last president and our most recent Treasury Secretary treated us to a number of enjoyable television appearances and official speeches proclaiming that the sky was falling and talking about how this brilliant idea to give $350 billion cash money to the heads of the banks of this country with little to no strings attached or restrictions for how the money be used was going to work, how it was going to save our country from the economic abyss. How totally and completely screwed we all were if we did not get that bailout working right away. I prayed for months for that man's presidency to end so we could get someone else in here who understands the way that the fragile psyche of the investing public needs to be taken care of. How you need to nurture it. How it needs to be caressed, coddled. Now we have a new president in town, and he's doing the exact same stuff, talking daily including on prime time television about the urgent need for his redonkulously costly stimulus plan and the dire irreversible spiral of hell our country will surely slip in to if he does not get what he wants. His Treasury Secretary is coming to the public with more doomsday talk if his plan is not enacted, plus some vague rhetoric and almost no details and really no clue how to re-seed American banks' totally depleted coffers. Am I the only one that this sounds familiar to?

And I ask again: how would you expect the market to react to this turn of events? When it is made obvious right in all of our faces that our government, the new administration Promising A Change, hasn't got even the first clue how to solve the crisis facing the banks of our country right now. That they had to delay a meeting even after a weekend to work through, and then the announcement they finally came up with contained almost no new or novel ideas and next to no details about how the new bailout plan would all work. What message do you think that sends to investors in this country? That you are unprepared, that you needed extra time and are still unprepared, that you spent all week hyping this thing, took extra time and are still unprepared? That you clearly haven't a clue how to fix the problem?

Right now, the U.S. stock market is at a serious crossroads. Right now. As you're reading this. Tuesday's close marks the lowest close for the major indices since November 20 of last year, and sitting just some 4% or so above the recent closing low of around 7500 on the Dow. Either the administration figures out a way to shape things up with this totally botched bank rescue, or we're going to retest the November 27 lows. Many would be in favor of a re-test of those levels (Dow 7500, S&P 750 or so) so we can bounce back up and provide further confirmation that those were indeed the lowest the indices will reach. But if Barack Obama and his leadership team aren't careful, they might learn the bad lesson about stock market re-tests: sometimes, the lows fail to hold.