Stockholders vs. Bondholders and Autos vs Banks

So by now hopefully you've heard that somebody in Washington finally grew a pair, as President Obama officially rejected the restructuring plans submitted last month by the nation's #1 and #3 auto companies GM and Chrysler. In doing so, Obama pushed longtime GM CEO Rick Wagoner out of the company over the weekend, and has essentially given Chrysler 30 days to finalize its partnership with Fiat in order to receive another $6 billion in funding, and GM 60 days of restructuring financing while both companies must make the "painful changes" required to leave them as viable, growable businesses going forward. Both companies presumably face some sort of organized bankruptcy unless dramatic action is soon taken to align these companies' cost structures with those of their more profitable competitors, and with GM it may not be possible to avoid that restructuring at this point no matter what they do. There are several hundred thousand jobs of hard-working Americans directly in the balance of this industry, and another several hundred thousand in ancillary industries like auto service, parts and distribution, and other things like satellite radio to name a few, so it's a very fine line the President has to walk to be sure. And yet, it seems like this AIG disaster -- more likely the political fallout from it -- has left the President feeling far less generous than he once was when it comes to doling out federal bailout money.

It's interesting to take a look at the different approaches being taken here by the Obama administration with respect to the automakers as compared to the financial firms at the center of the global credit crisis. In December, Citigroup more or less "failed" in that it required some $50 billion in total of emergency taxpayer funds and another $280 billion in emergency government guarantees on bad assets to prevent its impending collapse, with Bank of America coming very close to the same fate and requiring less on both counts, but still requiring a government injection of liquidity in the tens of billions just to prevent the market from swallowing the firm whole. In agreeing to spend all those billions of dollars for the two struggling banks, did President Obama and his team require the leadership of the banks to step down? Somehow, no. Somehow, Vikram Pandit is still the CEO of Citi, and Ken Lewis is still the CEO at Bank of America, despite both clearly failing as leaders, overspending on things like corporate junkets, jet fleets, office renovations and god knows what else, and overseeing the firm's decisions to take on -- clearly -- far more risks than they could comfortably cover should the economy slow even a little bit.

And yet these guys still lead their companies. It's something the Obama administration has taken heat for already since the end of last year at least, despite numerous public mistakes made by each CEO in the general strategy and direction of their firms over several years, both resulting in the need for more taxpayer cash than the combination of GM, Ford and Chrysler so far over the past several months. And now, in an interesting twist, GM CEO Rick Wagoner is pushed out over the weekend, and there still isn't even a plan to save the company at all. Chrysler was allowed to keep its CEO, who unlike Wagoner at GM was only installed a few years ago as part of a private equity buyout of the firm. But Chrysler, too, still has no plan for long-term survival, and still needs to hash out the final details of a proposed partnership with Italy's Fiat in order to get $6 billion more in emergency funding from the U.S. government, and even then we can all imagine how long the $6 billion is going to last Chrysler if the situation does not improve dramatically from the Fiat deal.

So Obama threw out the longtime CEO at GM this weekend, even though absolute public clowns like Vik Pandit at Citi and Ken Lewis at Bank of America have been allowed to keep their jobs despite needing more money than the automakers have received so far. That's an interesting change in policy, and is emblematic of what I am hoping is a key change to representing a much more hard-line approach to the government intervening to save failing companies going forward.

The most significant aspect of President Obama's new harder line with the automakers reagrding government bailouts, however, is something that has bugged the shit out of me ever since these bank bailouts first started, actually since a week or so before the government took over Fannie Mae and Freddie Mac last symmer, and that is the different treatment of the bondholders vs. the stockholders in these failing institutions by the Obama, Geithner et al. As you probably know, the stockholders in failed financial institutions like Bear Stearns, Fannie Mae, Freddie Mac, AIG, Wachovia, Washington Mutual, Citigroup and Bank of America all saw their stocks drop to at least the $2 level, mostly down 95% or more from their recent highs, and many of the above have seen their shares denominated in cents, not in dollars. The stockholders of the truly failed firms like WaMu, Fannie and Freddie, and of course Lehman Brothers, literally lost almost their entire investment as their shares traded at just a handful pennies before all was said and done. Those who invested in the stocks of these companies took an absolute bath, losing in most cases between 95 and 100% of their entire investment, almost without regard to where they bought in anytime in the recent past.

Such has not been the case with holders of bonds in these firms. Other than Lehman Brothers, whose abrupt weekend bankruptcy last September caused bondholders to lose an estimated $110 billion in bonds due to be paid out over the next several years by the failed investment bank, those who invested in bonds issued by the other companies mentioned above have all continued to be paid in full and on schedule. Bonds are by their nature senior to stocks in that, in the case of a threat to a company's viability, its bondholders get paid out first before any stockholders. As a result of this lesser risk involved with investing in corporate bonds as opposed to stock in the same company, bond investors also get lesser returns, but more consistent, secure ones. As a result, bond investors tend to be large asset managers and other funds with a need for solid, steady, if a bit understated, but consistent, secure growth. A bond fund might return only 3% a year right now, but a comparable stock fund returning an average of 10% per year might lose 40% this year (for reals). In theory, the bond fund should not suffer such losses because its income is backed by bonds of companies and other institutions that offer it a steady and secure stream of income that is senior to what is owed to the stockholders of the companies issuing the bonds.

As a result of this, and of constant propaganda from piglets people like Bill Gross, co-CEO of PIMCO, the world's largest bond fund, the bondholders in all those financial companies above that failed last year if not for massive government intervention amounting to more than a trillion dollars system-wide, have yet to lose a dime. Even though the underlying firms would never have been able to continue making their bond payments without the massive injections of taxpayer aid and government guarantees, that taxpayer money has been used in part to continue to make regular payments to all the bondholders of those firms, on schedule and in full. It's almost as if the powers that be in both the Bush and Obama administrations are afraid that "haircutting" the bondholders even one time with one of these companies it has to prop up could lead to some kind of systemic panic as a result of all the large pension and other funds and asset managers who rely on investments in these companies' bonds to pay their steady, secure income streams forever. We let guys like Bill Gross take ridiculous advantage of the system, too. This guy manages the largest bond fund in the world, remember. As Fannie and Freddie spiraled towards armageddon last summer, Gross took a look at the situation, and on July 28, 2008, it was reported: “We like it,” said Bill Gross, who oversees the $128 billion Total Return Fund, the largest bond fund in the world, for Newport Beach, California-based Pimco. “This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we’re close to that point.” As a result of this feeling that the government would not dare haircut the bondholders in these failing firms, Gross sold most of his treasury and other government bonds, buying up instead agency mortgage bonds from -- you guessed it -- Fannie Mae and Freddie Mac. By the time early September came around, this guy was so sure the government wouldn't let the bondholders in Fannie and Freddie fail that he actually had some $80 billion of his $132 billion bond fund invested in Fannie and Freddie bonds. And as Gross bought up all the Fannie and Freddie bonds he could find, he took to the airwaves, going on CNBC and saying the government had to put up $40 billion to bail out Fannie Mae and Freddie Mac, to protect the companies' bondholders from taking any kind of a haircut at all which he claimed would threaten the entire U.S. and global financial system.

And Bill Gross wasn't done. After making more than $1.7 billion on the Fannie and Freddie bailout where the bondholders' investments weren't touched while the stockholders got essentially wiped out, he then started buying up bonds of the other troubled financial institutions, all those companies I mentioned above, thinking once again that the government would be too afraid of the systemic risk following from any major corporate bond failure like what happened with Lehman Brothers last fall to haircut these other financial firms' bondholders, picking those bonds up at distressed prices fueled by fear, uncertainty and doubt. And once again, the propaganda mill began -- in his monthly newsletter released on February 24, Bill Gross said, "Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite." (emphasis added)

So once again, here is this clown arguing that the bondholders' investments in the bonds of these struggling companies cannot be touched. Essentially, he seeks a guarantee from the government that his fund's income cannot be stripped or lessened, and he invokes the fear from the Lehman Brothers collapse as the end-all be-all reason why haircutting the senior debtholders must never be considered.

Well I got news for ya, Billy. What are you, anyways? You're a bond investor. Say it with me. Bond. Investor. These are investments. They're not guarantees. If they were guaranteed, they would be what we call interest, on FDIC deposits in federally-insured banks under the insurance maximum. Which, by the way, would be paying you what, half a percent a year right now? Less? But no, Bill Gross isn't satisfied with a half a percent a year, guaranteed. He chooses instead to invest in corporate bonds of very weak companies, which may return something more like 3-5% a year, and on occasion will enable him to make billions of dollars in a year like he did in 2008, a several times greater return than he could ever expect from a truly guaranteed investment. Yet he will try to scare the pants off of everybody who will listen about how the government simply has no choice but to protect the bond investors in these firms, and so far the government has listened and obeyed. Why? Because of the fear that, if they don't, then pension funds, income funds relied on by retired people to live on, IRAs, 401(k)s, annuities, insurance companies, banks, credit unions, etc. will all suffer a huge panic due to the realization that their income is not really guaranteed. But this income never was guaranteed! It's an investment. Bonds do have risk, bank savings deposits under the federally insured limit do not. Treating the bondholders like their investments are as untouchable as my savings account in the bank is dangerous, and sets up all the wrong incentives in the world. Why on earth have taxpayers provided $180 billion to keep AIG afloat, its stockholders saw their investment drop as low as 30-some cents earlier this year, and yet those who invested in bonds to be paid over a long period of time regularly by AIG not suffered a penny of loss? How can that be? Why? AIG failed, plain and simple. It's not even arguable. Why did Bill Gross, who bought up $80 billion of Fannie and Freddie debt when he knew the companies were going to fail get to make $1.7 billion when the government forced the total wipeout of those firms' shareholders but protected the bonds 100% of each company? Why?

With GM as well as Chrysler, the Obama administration is now, finally, triumphantly, making it known that holders of bonds -- investors in bonds -- in these companies are likely to suffer along with investors in these companies' stocks. GM alone has over $27 billion of outstanding unsecured debt, with Chrysler adding another significant chunk to that total, so the prospect of a Lehman-esque bankruptcy for GM and Chrysler is likely to result in a very noticeable $50 billion-plus "event" in the credit markets as a whole. Although this is going to be painful for the markets, and for all kinds of investors and in particular those who invest in corporate bonds as a measure of security, I cannot escape the conclusion that it is the right answer nonetheless. Nobody made these funds and asset managers invest in bonds, corporate bonds, or auto sector corporate bonds, right? Especially knowing and seeing what's been going on for the past several months, clearly there has been ample time to exit these positions prior to this week's rejection of the automaker restructuring plans. No, if you have continued to invest in auto company bonds, at this point my position is that you deserve to take a massive haircut in light of their imminent failures. You bought in or held on and greatly diminished prices, taking a gamble -- a risk -- that you could use that beaten-down price to create an opportunity for a big profit if things broke your way. But things didn't break your way, and now you should pay the piper. Investing in bonds is still called investing for a reason, and those investments still carry risk that they will not be repaid in full.

My best hope right now is that a GM and/or Chrysler forced bankruptcy and restructuring will serve as a model for the government to eventually use with all the financial firms it has bailed out over the past few months or will need to continue bailing out in the future. Keeping the bondholders 100% whole, while forcing the stockholders to bear all the brunt of the losses at these flagging financial firms was never fair, and it was never right. It's time we make investors pay for the risks they took in buying all these bonds issued by deeply struggling companies. Remember, they got a greatly decreased price to buy in as a result of the higher risk associated with those struggles; not making them suffer the direct result of that known higher risk puts the entire financial system at unnecessary and unfair strain. It's time that bondholders -- generally large, megabillion-dollar asset managers, hedge funds and the like -- step up to the plate and take on their fair share of risk from their investments in failing financial institutions, especially where the risk of investing in such entities' bonds was fully known at the time of the investment. For a new president publicly espousing this whole "era of responsibility" motif, the move to punish the bondholders of GM, who took a chance on the company's long-term survival right along with the shareholders, is a clear step in the right direction, and one can only hope this move helps him to see the right way to deal with the major banks of this country as well going forward.

The New Geithner Bank Bailout

So Monday saw embattled Treasury Secretary Tim Geithner reveal to the public the details of his public-private investment plan designed to rid the large U.S. banks of the troubled assets on their books, threatening to make the entire system insolvent in their wake, and the market reacted in a majorly positive way, rising 7-8% across the board on the day as Geithner finally won the approval of investors around the world after several attempts. I spent much of the day reviewing the details provided by Geithner, and I think I have come to my conclusion.

I like it. I really, really like it.

I mean, let's take a step back for a minute. I have made no secret here of my lack of fandom for throwing all this money at the banks. There is little doubt that the administrations of our current and last president were staunchly in favor of gifting funds to the banks it deems "too big to fail" for risk of them damaging our entire financial system beyond easy repair. This is something which President Obama has not even tried to deny, stating repeatedly that despite personal and public feelings around the essential fairness of bailout out Wall Street fat cats, it is common knowledge that the economy simply cannot and will not enjoy meaningful growth again unless and until the banks start easing up on credit. So the thinking is that, even though we all kinda hate it, we simply will have to hold our noses and print money for these banks to replace the capital eaten away by losses on all the troubled assets, bad mortgage-backed debts and other crap sitting on banks' balance sheets after the last ten year or so of irresponsible consumption and investments. Personally, I think given how far the market fell, it is likely that allowing the Citi's, the AIG's and some other financial institutions to fail on their own would likely have resulted in no worse declines in the stock market and probably no worse systemic shock to the financial system either, so these moves have probably not been necessary in actuality, nor did they prevent much of anything in the end result. I think it would probably be ok to continue to let the most struggling banks die out even now, and I am willing to suck up the near term pain, including further market losses, more economic deterioration and likely significantly more job losses in the near future, in an attempt to simply stop printing more and more money and rewarding the bad acts of these Wall Street jackasses who can't even stop paying themselves million-dollar bonuses and buying six-figure area rugs for their offices, even when on the dole from the public.

But putting all that aside, once we accept the Obama plan to shore up his own legacy by speeding up that process by actively taking those bad assets off the books of the biggest banks, I have to say that I think the Geithner plan is a good one, at least in theory. And if you read here with any frequency then you know I have not been a big fan of Geithner so far, but in this case I think he's hit the mark with this public-private investment idea. The whole reason the first attempt at such a plan to buy banks' bad assets by former Treasury Secretary Hank Paulson was scrapped in favor of direct equity investments in the banks is that the government could not figure out how to properly value those assets when making the purchases. Value them at their values as currently marked on the banks' books, and we would be grossly overpaying for those bad loans, thereby ensuring that the government, and therefore we taxpayers, take a huge bath on the deal. Value them at their current market values, however, and most of the banks in the country would instantly be insolvent because the losses recognized on those sales to the government would have completely wiped out the already weakened capital position these banks are currently faced with.

Hank Paulson and his team quickly decided that they simply did not feel like dealing with this whole issue of valuation of banks' bad assets, so they decided instead late in 2008 to invest directly in preferred stock of the banks in exchange for billions of dollars of cash from the original tranche of last year's TARP plan. The problem with this, it turns out, was that the banks did not use those extra billions to ease up the credit markets at all. Instead, they used it to finance acquisitions of other healthy banks, to pay dividends, to pay bonuses to their employees, and most of all, to hoard the cash. They hoarded it because they are still sitting there, looking at the many many billions of dollars of crappy loans on their books, and knowing that there is the potential for still many tens of billions, and in some cases hundreds of billions, of dollars in writedowns coming on those asset portfolios. I mean, even $25 - $50 billion in direct investments in companies like Citigroup and Bank of America did very little to offset the potentially $200-$300 billion of bad assets held by the country's largest banks. And that is where we cue Mr. Geithner's new plan.

So the purchase of direct stakes in the banks in exchange for cash was not nearly sufficient to get credit flowing again through these financial institutions, in no small part due to the massive amounts of troubled assets still sitting on the banks' books. Geithner's new plan is a bold, innovative assault launched directly at the root of that problem. Geithner is tackling the valuation issue head-on, proposing that the government partner with private sector entities -- large asset managers, hedge funds, pension funds and other similar private enterprises -- in purchasing pools of loans from banks and prices determined by the market for those private enterprises. So no longer will the government be forced to decide what value to pay to take the bad loans off of the banks' books; now, the most accurate and fair system we know of here in America -- the free market -- will determine that value. The hedge funds and asset managers simply will not participate in any deal that involves overpaying for the assets, because they are in it to make a buck after all, and the government will simply go along with whatever price is established by the free market negotiations between the parties. Geithner shrewdly has included as a key part of his plan that the government itself will provide the financing for the purchases, in addition to participating itself as a co-investor with its own new funds, which also eliminates perhaps the other biggest problem with banks liquidating these assets themselves -- with credit so frozen right now, no one has been willing to finance purchases of risky, unknown loan pools from crumbling financial giants. Now, with the government stepping in to not only provide its own money to invest in these assets, but also loaning the required funds to the private sector to entice them to be involved, the two main barriers to the process of actually purchasing our banks' troubled assets should be eliminated.

I think it is a foregone conclusion that the Geithner plan will create a market for banks' bad assets, something that basically has not existed for almost two years since the credit crisis first took hold after a wave of defaults in the subprime mortgage market. Although there is always the possibility that private equity will not be interested in buying this distressed debt from banks, in reality the availability of funds from the government at reasonable interest rates should combine with the significantly cheap valuations for such debt in the current conditions to create real interest from several interested parties. Involving the private sector is in my view a stroke of genius that can really act to create a market -- and potentially an active one -- for an entire class of assets that have been more or less unsellable for the past couple of years, and getting those assets moving off of our banks' books should eliminate one more big impediment to getting the banks loaning again to help the economy to grow.

There are two issues I see with the revised bank bailout plan, either or both of which could prove to be significant. The first is the simple fact that, even with much of their bad assets removed from their books, banks are still not likely to resume lending at a pace anywhere near what was being done previously. The bottom line is, banks got absolutely burned by loaning to and investing in many, many assets which were too risky for what the banks should have been doing at the time. Mortgages were made to people who could never reasonably expect to afford the payments unless the values of their homes increased linearly literally for ever. Loans were securitized and sold in packages without the seller, or more importantly even the buyer, really knowing what was in them and how likely the component loans were to be repaid. This behavior has been significantly reeled in by the banks over the past year or more, and there is not appetite right now to revert back to that way going forward, which I think is a good thing. But the bottom line is that in the current economy, with housing prices still dropping well into the double-digits in percentage terms annually, and with economic growth prospects dubious at best, the banks are not going to start throwing money around again anytime soon, even if the risk they face from writedowns of troubled assets is significantly diminished by the new Geithner bailout plan.

The other issue I have is potentially more serious, and it's something that I fully expect we will be seeing soon, probably more likely sooner rather than later. The Geithner plan does nothing to guarantee any particular level of pricing for purchases of bank assets, nor should it. It simply guarantees that financing will be available at reasonable interest rates -- a rare commodity right now to be sure -- and works to create a market at whatever price the market will bear for such assets. Whatever the difference is between the price of an actual sale of a pool of loans, and the price that pool of loans is currently held at on the bank's books, will be a loss and will have to be recorded as such and charged against the bank's existing excess capital. The problem we are going to see, and again my guess is very soon, is that it won't be long before one of these big banks comes to Geithner and says "Mr. Secretary, at the price the private investors are willing to pay me for my assets, I can only sell them $40 billion of my $200 billion loan pool before I am wiped out and will need substantial additional equity in order to continue to survive." This I think is likely to happen with most of the large banks in this country today, as a matter of fact. So I think it is highly likely that Secretary Geithner will soon be grappling with whether or not to contribute significantly more capital to the nation's biggest, and most injured, banks' current capital reserves, a move that is likely to be politically difficult to secure and even more unpopular with the public. It is likely that the size of the revised Obama-Geithner bank bailout will swell to well over a trillion dollars before all of these extra capital infusions are going to be fully worked out.

The Bumbling of the Crisis

What a nice man huh? The champion of the little guy. Going on late-night TV in the midst of the AIG crisis and ragging on the Special Olympics, out of nowhere.

Now everyone go back to your little blogs and write the post you would have written if this was George W. Bush and not Barack Obama doing the talking.

We're coming up on two months in office, and in two months President Obama has presided over a continually shrinking economy, the largest spending package in history and the most unbalanced budget of all time (for any country), a stock market that dropped some 25% in his first six weeks in office, and a response to the financial crisis -- at AIG, the major investment banks and around the world -- that has been as bad as anything I saw happen during the previous administration's (lack of) reaction to the massive problems going on all around them. Pretty soon we're going to be at those crucial "first 100 days" of his term, when people are going to start taking an unabashed look at the state of the union today as compared to three months earlier, and there is little doubt that things are worse today than in mid-January.

What concerns me most about Obama, Geithner, Summers and Bernanke is the totally mixed messages they send almost daily with their words and often strangely and counterproductively inconsistent actions in response to the still growing financial turmoil around the globe. The President talks so much about "the age of irresponsibility" that prevailed during the previous administration -- he is very much correct in that assessment btw -- so one would expect and hope for policies that truly encourage Americans to stop spending beyond their means, running up massive debts, taking on obligations they could never reasonably hope to afford, and just generally changing our attitudes about saving vs. spending over the long run. Instead, the President steps in with his $850 billion "financial stimulus" package, in effect becoming the "consumer of last resort" by committing to spend all that money since it is money that the people of this country won't be spending due to the slowdown in the economy, job losses, increased foreclosures, plunging housing prices, and the list goes on and on. Then it's $50 billion or more to bail out people who purchased homes that they can't afford. Now the Obama Fed announces this week that it will buy $300 billion of U.S. treasury bonds over the next six months -- printing money, this is, make no mistake about it, and Bernanke and Obama would not deny that if asked -- printing $300 billion of new money to flood the system with. It is once again an attempt not to wane Americans from the ultra-consumerist high-money-flow habit that led to all of this in the first place during the very "age of irresponsibility" that the President talks about so much in his public speeches, but rather to artificially extend that very practice, at the direct cost of us, our children and our children's children.

And Treasury Secretary and public tax avoider Tim Geithner is right at the heart of all the inconsistency in the new administration as well. All the furor you're hearing about this week regarding former insurance titan AIG, it all goes directly back to Geithner and everyone knows it. AIG paying $165 million of their bailout money in bonuses to AIG's Financial Products division execs that caused all the troubles with the mortgage-backed securities and credit default swaps in the first place? Tim Geithner knew about it, and he specifically approved it, despite his attempts this week to express mild outrage at the news. As head of the New York Fed prior to finally paying the back taxes he's owed since 2000 and becoming Treasury Secretary, Geithner oversaw the decision to let Lehman Brothers fail in mid-September 2008, and was a primary architect of the AIG bailout(s) later that same month and into this year, and he understood fully the bonuses issue and specifically approved them being paid before all the recent anger and disbelief over them started to build.

Geithner was also very much involved with his predecessor and former Goldman Sachs CEO Hank Paulson in the decision to hand over $180 billion of taxpayer cash to AIG over a four-month period to keep the company afloat, knowing full well that over $100 billion of that money was going directly to the largest investment banks in the world today, many of them outside of the U.S. By far the largest beneficiary of this gift cash from the government, using AIG as a conduit? Goldman Sachs, who got more than $12 billion of cash from AIG, directly after the government provided that cash to AIG expressly for the purpose of making whole its counterparties. The combination of Merrill Lynch and Bank of America received 12 billion in government cash from AIG, Citigroup $2.3 billion and Wachovia $1.5 billion. This, my friends, is what I like to call a "stealth bailout", just as the Obama-Geithner plan has become to "stealth nationalize" the largest financial institutions like Citi which is now proposed to be 36% owned by the government. Geither and former Treasury Secretary Hank Paulson worked out a plan to give $10 billion cash to Goldman, Merrill, Citi and many other large banks like them, and then they knowingly used AIG to pump several billion dollars more of bailout cash into those very same coffers, yet by using AIG as a conduit, they could hide their true intentions from the American people. Not to mention the $8 billion of U.S. taxpayer money that went directly through AIG to U.K.-based Barclays, or $6.4 billion to Germany's Deutsche Bank, or over $5 billion to France's BNP Paribas. Did you know we were bailing out out other countries' banks too?! Of course you didn't, that was exactly Geithner and Paulson's point. Way to effing go, guys.

On top of all that, there is a major, and very worrisome in my view, inconsistency with the Obama/Geither/Bernanke approach to the entire financial crisis at this point in time. It is an undisputed fact that right now the financial institutions in this country are weak, at least by historical terms. Some of them have failed (Lehman, Indymac and several others), many have essentially failed but then been bailed out by the government for pennies on the dollar at the last minute (Bear Stearns, Fannie, Freddie, AIG, Merrill, WaMu, Wachovia, Citi, Bank of America and, again, many many others), and others are simply teetering with their stocks at multi-year lows and waiting for some direction (basically everyone else). Many well-known scholars and economic participants have stated openly their belief that the entire financial system in our country is insolvent, and that basically every bank in the country is under water due to exposure to mortgage-backed and other complex financial instruments in illiquid markets. Our banks need excess capital, which Treasury Secretary Geithner himself estimated at over $1 trillion in needs just last month, and we want to help them to get it by using Geithner's no-details revised bank bailout plan to use public and private funds to purchase the bad assets off of the banks' books in exchange for cold, hard cash.

And yet, through all this, Geithner, Bernanke and especially President Obama insist that the banks must increase their lending. The President has repeatedly expressed outrage that the banks are taking government (taxpayer) funds and then hoarding it, using it to pay bonuses that the bankers who created the original TARP plan did not prevent them from doing, instead of lending it out and making funds available to spur economic expansion and innovation. Now part of the new Geithner plan is that they are "stress-testing" all the nation's major banks as part of the new bailout process. Think about what that means for a minute. It's not like stress-testing the banks means we put the company on a treadmill and attach diodes to its head and abdomen and check it out when its heartrate gets moving. Instead, they are reviewing all of the bank's capital and asset ratios, and subjecting them to models predicting further financial deterioration and prolonged economic weakness, and seeing where those ratios go, how safe the banks will be under circumstances of economic duress. These are mathematical ratios, nothing more, generally relating to how much capital or assets the bank has on its books, compared to its liabilities. The issue I have is what message are Obama and Geithner trying to send to the banks, when they push push push on them to lend, and at the same time impose ratio-based stress tests on them as a part of the process to ensure all the banks get access to the capital they need to be effectively shored up? Forcing the banks to undergo stress tests will undoubtedly influence -- and has already influenced -- the banks to hoard their cash, to try to make the numerators of those asset and capital ratios being tested look as strong as possible, because one of the very few details we have gotten out of Geithner on his new bank bailout plan is that he only plans to provide more free taxpayer money to the banks that are strong enough to survive if they get it.

So on the one hand you're telling these banks to lend lend lend, get the economy going, we can't have real economic recovery in this country until the banks loosen up the money supply again (a very true statement by the way). But with all the losses still slated to come down the pike for the banks in terms of writedowns and bad assets, the banks desperately need to hold on to what capital they have and in fact have to increase that capital, and we should not be encouraging anything other than that. What's more, just the specter of the bank stress tests, let alone the reality of them, very clearly incentivizes these banks to hold on to their cash. A big bank like Citi, Wells Fargo, US Bancorp, these guys would be crazy to be lending out money right now, if they're afraid that lack of capital on their books would cause them to fail a totally not-defined stress test being conducted by Treasury over the coming months to see if they are healthy enough to be kept afloat or instead should be shut down. Think about it -- if you're the CEO of one of those banks, what are you doing right now? Loaning money out of your historically-depleted capital reserves to any shlub who comes in the door with a business idea? Financing the short-term operations of a longtime corporate client of yours experiencing major financial distress due to the shrinking global economy? Or hoarding your cash, making those financial ratios look as strong as possible for when Geithner and his tax-avoiding friends come along to review your bank's financial numbers?

Me too. And that's exactly my problem with the whole mess. You want to know why the markets are languishing so much that we have to be content with a 15% rally up to Dow 7500? Because the people who understand this stuff know. They know that the current administration is all backwards with the entire financial bailout concept. They don't have a clue what started it, and they don't have any more a clue how to finish it. So far, the best plan they've come up with -- providing very little details at that -- has been to create incentives for banks to hoard their cash while proclaiming that they should be lending it out, and all the while just printing billions and billions and billions -- hundreds and hundreds and hundreds of billions -- of freshly minted dollars into the economy to artificially make it seem like there is far more economic activity than there would otherwise naturally be. And the thing is...that idea simply won't work from an economic perspective. The banks won't lend (they're not), and the real economy won't pick up (it's not). You can artificially stimulate the economy and stem the bleeding for a while, but that's all you're doing, and it's all artificial. You force the banks not to lend, and you increase taxes on the wealthy, and on small business, and you fail to promote more sensible spending and saving practices in our country when you have the perfect opportunity to do so, and it sounds to me like a recipe for a longer-lasting downturn that might otherwise be necessary.

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.