Stock Market Redux

Wow, it has been a looooooong time since I spent an entire end-of-day commute listening to the financial news like the old days. Except back then it was Bloomberg 1130am in New York, the only option available for full-time financial coverage on the radio in my area. Nowadays, it's the live feed of CNBC -- on the sexy and versatile Sirius Satellite radio of course -- but the point is still the same -- even on the way in to work on Friday, there I was again willingly choosing to forego my usual a.m. platoon between Mike & Mike in the morning and Jason & the GM (both of whom I really like in that format btw) on Mad Dog Radio, in favor of CNBC, listening to people talk about the market, opine about what's next, and speculate all over the place about the key July jobs market data. It's amazing how much the stock market can just grip an entire city like always seems to happen, in New York City for I think obvious reasons moreso than any of the other major northeastern cities where I have lived.

I think pretty much everyone who pays attention to such things could tell by early this week that the market was sick. By Thursday it finally just boiled over with a 500+ point drop in the Dow, and it seems to me that a lot of things might have finally sunk in yesterday for the first time for a lot of people who actually pay a little bit of attention to economic and financial matters. For starters, it is becoming increasingly clear that growth not only will be, but already is truly anemic right now. Last week when the government released a paltry 1.3% growth number for the Q2 U.S. GDP reading -- not nearly sufficient to even really call meaningful "growth" in most economists' views -- the at least equally meaningful but less reported part of the story is that the Q1 GDP reading was revised way down to just 0.4% growth. For those of who you haven't followed GDP over time, take it from me: first-half of 2011 growth of 0.4% in Q1 and 1.3% in Q2 isn't close to satisfactory to the markets. I think it's fair to say that an economy at this state that isn't generating at least consistent 2% growth over time will be viewed generally by the market as downright sick, and that's exactly what people have finally been figuring out pretty much ever since those numbers were released last Friday.

As much as I have fought the urge to turn this blog into a financial blog, making this place a forum for political argument sounds even worse. That said, another thing that is just increasingly clear from the past couple of weeks in Washington, DC is that this country really has no leadership at all right now. The American people are literally starting to figure out this very week that President Obama has done nothing on the economic front but kick the can down the road for the past 2 1/2 years. First it was continued massive bailouts and payouts to Wall Street risk-takers to artificially keep them alive. Then it was the silly, huge stimulus plan that really began the acceleration to this whole debt-ceiling mess we've found ourselves in this year, a stimulus plan which amounted essentially to a bunch of printed money, "creating" short-term demand of hundreds of billions of dollars and flooding the system with money that had to be spent in our economy over the past couple of years. But such provisions hardly ever work over history to actually generate "real" demand -- rather, it is common knowledge that the end result of such programs is generally just a big hole when those funds are removed. Sound familiar here, now two years past the stimulus bill's passage? And don't even get me started on the Obama / Bernanke QE1, QE2 and likely QE3 plans, which amount to -- get ready for it -- essentially to a bunch of printed money, "creating" short-term demand of hundreds of billions of dollars of U.S. government obligations and flooding the system with "fake money". Sound familiar again?

Anyways, I'm not here today to debate whether you think this is the Obama administration's legacy thus far. What I'm saying is that yesterday was I think the day that the people of this country generally really did first begin to realize that what I just said is true about our can-kicking policy, and that now maybe is going to be the time where we actually take our medicine like good boys and girls. Even if you don't believe that yet, American finally started figuring it out yesterday. We have no leadership right now. Not the President -- who has consistently chosen short-term fake gains over longer-term initiatives to actually stimulate investment, create hiring, etc. and has stood playing his fiddle while unemployment has soared -- and not Congress with all the ridiculous infighting, political motivations, pork barreling even in times of national crisis, and total inability to effect much of anything, and let's not forget these are mostly all the same assholes who voted to bail out the Wall Street banks back in 2008 over the objection of the very people of America who these asshats are elected to serve.

Things changed since the 2008 financial crisis. There is going to be less government spending. Much, much less, because these entities simply will have to suffer cuts of funding, many of the cuts massive. Hundreds of billions of dollars worth. Cities and states all across America are technically bankrupt, and we've all seen how close the U.S. federal government came to a possible debt default just within the past couple of days. And we're the most secure, stable government in the world -- just look at this mess over in Europe, where we've already had at least two near-sovereign defaults this year leading to last-minute bailouts, and Greece is looking increasingly like it's heading right back to the abyss once again in the true style of AIG. Those governments will be forced, like America will as well, eventually to enact higher taxation, to help balance out the tremendous loss of revenues the governments will receive due to the slowdown, which will also inevitably take a bite out of economic growth. And make no mistake, there will be a slowdown -- a global one -- as the governments of most of the developed nations in the world decrease government funding for programs, decrease government spending, increase austerity programs, raise taxes, and see their domestic economies shrink somewhat as a direct result, which is by definition a several-year process. The generation-long housing boom and all the little industries whose growth was spawned by it -- from building, to materials and heavy machinery, to retail, and on down the line all the way to the huge boom on Wall Street from all the derivatives and securitization -- also led to what was most likely "over-employment", in that it is entirely likely that some portion of the 17% true unemployment in this country right now are people who may be facing very long-term (or permanent) unemployment, because there probably will not anytime soon be the same number of people employed in America as there were in the midst of all that bubblage, say five years ago.

So like it or not, things changed back after the blowups in 2008. Only, in America -- and in Europe, to a lesser extent -- the Obama policy has been to pretend that these structural changes just didn't happen. Very weak domestic demand because the value of investments plummeted 60% and housing that people already couldn't afford suddenly dropped 30%? No problem -- we'll just print 2 trillion dollars and spend it on the American economy for the next two years. Yeah, that will likely weaken the dollar and cause inflation to rise. So yeah, people might be paying $4.00 for gasoline in a couple of years, and $12 to see a movie, and $4 for a gallon of milk. Then we'll just lower short-term interest rates to zero for a prolonged period, and we'll buy up hundreds of billions of Treasuries over the next couple of years to flood the system with even more printed money to replace all the money that isn't in the system because our economy is really weak. What will happen in two years when all the fake money has worked its way through the system, and we're left with that huge gaping hole caused by all those structural changes that still happened, whether our people like to admit or not?

My sense is that now we are about to find out.

I'm not about making financial predictions here on the blog, but I'm going to leave you with a chart that I think is very interesting in what it suggests we could be looking at here:



This is from Doug Short of advisorperspectives.com, and it is a comparison of the multi-year performance of three major indices after pretty much the three biggest market tops and longest bear markets in modern financial history -- the Great Depression, starting with the market crash of 1929, the Japanese Nikkei collapse, starting from its tumble from near 40,000 in the late 1980s and still going today, and the U.S. bear market that Short describes as starting back in 2000. These are inflation-adjusted ("real") charts though, not the nominal highs and performance of each index. It is each index's performance in percentage terms below the top, plotted on the horizontal axis over 22 years following the initial top of each cycle, in each case adjusted for inflation over those 22 years to produce a "real" graph that bakes in the varying effects of inflation over the three 22-year-periods in question.

What astounds me from that chart is just how similar all three of those graphs look. Not exact, mind you, but just downright similar. Like, they all took almost exactly three years after the top until they finally bottomed from the initial precipitous shock. Isn't it uncanny how closely all three indices made their bottoms, in all three cases it looks like between about 32 months and 35 months following the top of the market? And then after that 3-year top-to-bottom shock, all three of the indices rallied solidly -- albeit with a few ups and downs along the way -- for just about four years, or maybe closer to five years with the current market (in blue), once again in an uncannily similar pattern, don't you think? But then look what happened between years 6-9 (7-9 in the current market's case) -- another huge down period, in our case what we think of as the financial crisis, but look at the Great Depression grey line there, which saw the market lose another half of its total value over the ensuing three years after a ferocious four-year almost unstoppable rally following the big crash in 1929. And Japan in the red, once again losing about 40% of its value over those three years between 6 and 9 years following the market top.

Now, if you look at all three charts starting right around year 9 after the market top, you will see that all three put in very sharp bottoms, almost identically again right at that same point, within just months of each other it would seem. Crazy, huh? In the case of both the Nikkei and the Great Depression, it was an incredible 66% surge in the markets over just two years from years 9-11 that must have felt, I imagine, an awful lot like the past few years in the U.S., where we have undergone a ferocious rally to recover over 70% from the March 2009 bottoms by a month or two ago.

And then I look at what's next after years 10-11 following the stock market top like we are at now on the blue line, if those other two greatest bear markets of all time are any guide. And remember, this past week on the chart above only further confirms the consistency of the pattern so far.

Hmmmm.

Newsflash: Banks to Participate in Revised Bailout Plan

Man I had so many other posts half written and waiting to go today. Jay Cutler, Curt Schilling, the Final Four, major league baseball and the title defense of Your World Champion Philadelphia Phillies, lots of stuff.

But then I saw this story.

If you have any interest, outrage, or just plain rage related to this whole bank bailout mess, and especially how some of these financial firms have been ready and willing to game the system and take advantage even despite receiving mass injections of taxpayer funds to keep them afloat, then I suggest you read that article, a report out of the Financial Times today. It's short and it's just preliminary at this point, but the essential gist of the link for those of you too lazy to read or just very bad at summing things up to main ideas, is that the largest U.S. banks, including Citigroup, JPMorgan Chase, Goldman Sachs and Morgan Stanley among others, are considering participating in the Obama administration's revised bank bailout plan. Not news, right? Well, there's a catch. Those banks, and others according to the report, are considering participating as buyers in addition to as sellers.

Why is that bad, you may ask? Well, for starters, check out this line from the article:

"This week, John Mack, Morgan Stanley's chief executive, told staff the bank was considering how to become "one of the firms that can buy these assets and package them where your clients will have access to them," according to the paper."

Hmmmmmmmmmmmmmmmm. Let's see. An investment bank. Using taxpayer funds to buy troubled assets, packaging them and making them available in little slices to its clients? Now gosh durn it if that doesn't ring a bell from somewhere, doesn't it? Does that remind you all of anything that's maybe happened before? I'm gonna have to skip some space here to give that quote a minute to really sink in -- Morgan Stanley's CEO wants to be "one of the firms that can buy these assets and package them where your clients will have access to them".



















My hat blew clear off my head there when I read that again, so I had to go chase it down, sorry. Ok so, these banks are going to be permitted to take advantage of government lending unavailable anywhere else in the world, as well as the incredible leverage of the government providing almost all of the capital and taking on almost all of the risk involved in buying up these troubled asset pools from the revised TARP plan that they've now renamed so no one remembers this was the TARP plan, and all of this will be taxpayer-financed out of the new TARP. In other words, the very banks that contributed so greatly to the proliferation of risk and speculation that lie at the heart of the current crisis, are now planning to use taxpayer funds to buy each other's distressed assets at cheap prices that should reap significant rewards over time. The possibility of securitizing those crappy assets all over again and selling them to clients is just a bonus I suppose, I guess for the taxpayers who bear the largest burden under our tax system. My favorite quote of the article comes from Spencer Bachus, the top Republican on the House financial services committee, who vowed to fight against such ridonkery. Apparently Bachus told the Financial Times that it would mark "a new level of absurdity" if financial institutions were "colluding to swap assets at inflated prices using taxpayers' dollars". Ay-men to that.

So far, President Obama honestly does seem to feel our pain and our rage towards these meshuginas in the banks, and the bravado with which they continue to try to take advantage of the system and of the taxpayers of this country in the race for the Almighty Dollar, doesn't he? I can't wait to see his reaction to this one. Stay strong man, stay strong.

Oh and before I forget, don't forget the big blonkament on Sunday. No, not that one, I said the big one, the one I am actually going to be playing in. That's right, it's back -- Julius Goat's Bad Bankroll Management Tournament (BBmT). This will be the second run at the quarterly festival dedicated to those who know how to fritter away their bankroll in true bloggeresque fashion on tournaments with a clear negative expectation. The second BBmT goes down this coming Sunday, April 5, at 9pm ET on full tilt. Password is, appropriately, "busto". The buyin is a far-too-steep-for-your-bankroll $50 + $5, and, as the Goat himself puts it, the tournament wil feature both "Superstacks" and "Superdonks", as well as absolutely no BBT points at all. So come and check it out on Sunday evening -- in fact, be like me and go register now so you don't forget. There's some serious coin to be won lost in this thing for sure.

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.

Breakdown

Breakdown. It's the best word to describe what happened on Thursday in the stock market. On Tuesday, I might have mentioned here that we happened to close on the Dow at precisely the previous 6-year closing low which was reached in late November of last year, and how key Wednesday's trading action was going to be in terms of whether the previous low holds, or breaks down just like the September lows did all through October, and like the October lows did in November. Wednesday ended up surprising everyone by finishing almost exactly where we started the day, the Dow gaining just 3 points and change, still sitting essentially right on top of the November 21 low of 7552.20, and basically setting up Thursday as the next real test of that level. Heading into the action on Thursday, after finishing modestly higher on Wednesday in the face of that major market retest, I hoped there might be some optimism out there for another successful retest, being that this is the same week as the Obama administration announced its revamped and expanded bank bailout program, and a nearly $800 billion economic stimulus package was signed by the president, a bill that received exactly three republican votes in the Congress. Yum.

Well so much for that theory.

Instead, on Thursday the Dow went and dropped nearly 90 points or 1.2%, making a fresh 6-year closing low, and now we're kind of in no-mans land until probably the 7250 range, which is where the Dow bottomed during the mini-recession that followed the terrorist attacks of 2001. The broader S&P 500 index has yet to confirm the breakthrough of its late November lows, but as of Friday morning's open the S&P sits just 26 points -- around 3.5% -- above its closing low level of 752 and change, which if you recall already marked a more than 51% decline from its highs in October of 2007.

The reason I bring this up today is that it's a pretty good bet what happens in the market on Friday given the recent action on Wall Street. After a breakdown like that on Thursday, from a purely technical and psychological perspective here on a Friday, with options expiring as well, there is a strong likelihood of increased selling throughout the day. The market making new lows here not even a month into the Obama administration is a literal nightmare for the new administration and for all of us who were hoping that a change in President would bring new fortunes for the American people. It is wayyyyyy too early to fairly judge any new president's term -- especially one with as little political experience as this one -- but so far the first month has not started off nearly the way mostly all of our country wanted, that is for sure. Now it is highly likely that we will have to sit and watch the market probe for new lows, a new bottom from which to hopefully find support and start the long climb back.

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.

Say It Ain't So, Barack

Can someone please tell me how we are still even talking about nominating Barack Obama's choice for Treasury Secretary Tim Geithner, the current head of the New York Fed, and a key player in the financial bailouts in this country? Let's review.

First, despite what you will hear from the Obama camp, Geithner is the man who is widely blamed as the biggest proponent of the decision to let Lehman Brothers fail last fall, setting off a chain of events that very quickly turned 2008 into the worst bloodbath for the U.S. stock markets since the Great Depression, and leading directly to the failure (or essential failure) of several other key U.S. banks, including Washington Mutual, Wachovia, Citigroup and Bank of America. It was Geithner who is said to have been vocal in letting Lehman go, and instead working with Treasury Secretary Hank Paulson to arrange the hasty marriage between Bank of America and Lehman rival Merrill Lynch in mid-September, which now is blamed by Bank of America for nearly $20 billion in then-unknown losses and ultimately led that bank needing an additional $25 billion from the federal government this month in addition to over $180 billion in loan loss guarantees. Geithner arranged the meetings among the largest investment banks in New York, he led many of the talks along with Treasury Secretary Hank Paulson, and overall he took a leadership role in the discussions regarding the future of Lehman Brothers, and again, it is he who is said to have been the one man in the room supporting most strongly allowing Lehman to go under.

Moreover, this whole bank bailout bill has been pretty much an unmitigated disaster since the moment it was first (ill-) conceived. People do not argue this. Why then do I keep hearing President Obama proclaim the importance of having someone like Geithner, who has been heavily involved in TARP from the beginning, stay on as the new Treasury Secretary? If this were up to me, I would sure as hell want to see an outsider come in who is without ties to the bailout and to anyone who was involved with its inception, to oversee Treasury heading into the new administration. Frankly, bringing in someone intimately involved with TARP sounds like just about the worst possible idea to me. And don't get me wrong, I'm not advocating bringing in some nobody with no experience in banking or finance to run Treasury going forward. But there are literally hundreds of well-qualified candidates out there, even friends of the Obama camp like Larry Summers, Warren Buffett, etc. who are not already tied emotionally and personally to the TARP plan. Bringing in Timothy Geithner to lead Treasury for the next four years at least does not at all give me the confidence that the bailout will be handled or addressed properly from here, or that the many, many problems with the implementation of TARP will be adequately fixed.

But all this is just the appetizer when it comes to the problem with Tim Geithner serving as Treasury Secretary. One of the many duties of the Treasury Secretary is to function as the main oversight for the Internal Revenue Service, the organization we all know and love for administering the federal tax program in this country. Tim Geithner, meanwhile, failed to pay his fucking Social Security and Medicaid taxes, for four years from 2001-2005 while he was working for the IMF! Geithner for his part claims he "did not know" that the IMF was not withholding Social Security and Medicaid from the checks they sent him during those four years of his employment there, and to that let me ask you this: how many of you out there do not know whether Social Security and Medicaid taxes are being deducted from your paycheck at work? Seriously now. The two biggest slices of non-income tax that there are, and this guy, a finance professional working for the IMF, just never realized that these major deductions were absent from his checks for four years?

Come the fuck on! The guy lied on his taxes and failed to pay amounts he knew he was obligated by law to pay, and he did so for four fucking years, until just very recently. Although Geithner had previously paid the back taxes for two of those four years, anybody wanna guess when he paid the last two years' worth of unpaid back taxes to the IRS? Try just days before Barack Obama nominated Geithner for Treasury Secretary late in 2008.

This is the guy we want overseeing the IRS? This is the best fucking candidate Mr. Obama can come up with for Treasury Secretary? A guy who is known within finance circles in New York for being one of the primary butchers of the extreme situation facing the investment banks last September, and a guy who elected not to pay Social Security and Medicaid taxes for four of the last seven years, only paid some of them once he got caught, and only paid the rest when he knew that the incoming president wanted him to serve on his Cabinet.

Either Timothy Geithner is so stupid that he does not understand the way the most basic of taxes work in this country, or he knew he owed those taxes but simply refused to pay them. You can choose. Either way, by continuing to push for the nomination of this man for Treasury Secretary, Barack Obama is setting a damn sad example of a continuation of the hypocrisy and sleaziness of the prior administration in this country. For a man who spent his inauguration arguing for a new era of "personal responsibility", putting Geithner in charge of the IRS is just about the greatest abomination imaginable.

What's next? Bernie Madoff in charge of overhauling hedge fund accounting?

The New Era of Hope

One guilty pleasure of mine that I've written about here often is my penchant for listening to sports talk radio. I love it. Especially here in New York. The New York sports fan is a special breed, feeling utterly deserving of winning every single championship in every single sport every single year, accustomed to always having the very best talent in whatever league is under discussion, and yet at the same time tending towards the whiny and blinded type of fan that is so prevalent in the Northeast. It makes for a great mix of callers and topics for any sports station in New York City.

That said, as I got in my daily dose on the way back from the gym on Tuesday night, it was very interesting to hear the topics being discussed, which centered primarily, surprisingly enough, on Barack Obama and the state of the country, highly unusual for sports talk radio. Probably about 75% of the callers were optimistic, talking about the plane crash last week that many of us saw right from our offices here in Midtown and how it was a turning point for the country, with one guy even claiming that the Cardinals making the Superbowl was something we could all rally around as a country along with the presidential changeover and the miraculous plane crash a few days ago. The other 25% of callers were more pessimistic, expressing hope for the incoming administration but pointing out that of course the problems our country currently faces cannot possibly be cured overnight, and that when Obama wakes up on Wednesday morning, he will still be facing a horrible stock market, a completely destroyed banking system, a sagging economy and a very uncertain global outlook.

At this point, one caller said something I found very interesting. At the end of whatever point he was making, this caller says that it seems like right now Barack Obama could get 70% of the country to do pretty much whatever he says. Whatever he wants, anything, 70% of the American people would do right now, given the fragile state of things we have been left with from the Bush administration. Anyways he says that it reminds him of just after 9-11, when this caller estimates that 90% of Americans would have done whatever George Bush wanted, also due to uncertainty and the extreme fragility of the situation at that time.

That shit's fucked up isn't it?

Because I think he is right. 90% of us, myself very much included, were so dam scared, and I mean seriously fucked up immediately following 9-11 that we were basically willing to go along with whatever George Bush said. We allowed ourselves to buy in to his thing, to go along with what he said we needed to do to protect ourselves as a country. We trusted him, more or less blindly, to always serve our best interests as a country and as a planet, and in a nutshell, President Bush betrayed that trust. Bush's policies strained the bounds of human rights in many areas, most notably in wiretaps and other invasions of our personal freedoms, and in the torturing of POWs that went on as a rule in our terror detainee facility at Guantanamo. 90% of us put our trust in George W. Bush 7 1/2 years ago, and Bush told us he would take care of everything. He told us to put 9-11 behind us, and to party hard, economically speaking. Interest rates were literally at historic lows, banks were running amok handing out money to anybody, some of that actually mandated by Barney Frank in the House and Chris Dodd in the Senate's respective finance committees, but otherwise nobody was watching over interest rates, or over the quality of loans being made by banks in the U.S. and all around the world, in particular loans to purchase houses. Regulation on the Private Client businesses of the major investment banks, serving hedge funds and super-rich clients, had been decreased to long-time lows by the repeal of the Depression-era Glass-Steagall Act by the Clinton administration a few years earlier. As the Bush term wore on, those investment bank business came under increasing pressure to divert their wealthy clients' money into complex financial instruments, created by the investment banks themselves, and often backed by various types and ranges of mortgages and other loans. More client funds were diverted into hedge funds, which were also not being regulated by anyone even as they too exploded under the Bush administration (Bernie Madoff, anyone?). Many hedge funds actively invested in various types of public and private debt, including mortgages, student loans and other bank assets, in addition to other complex financial instruments like credit default swaps, another creation of the finance wizards on Wall Street that proliferated over just the past ten years or so, yet another entire part of the finance markets -- estimated to be a $4 trillion industry -- that was more or less entirely unregulated under the Bush Administration (AIG, anyone?).

President Bush told us to trust him after 9-11, while he ultimately oversaw the relaxation of regulation on the entire supply of money in this country, and the 90% of us that were willing to do whatever our leader told us to do in a time of historical national crisis partied hard at his behest. And now, we have a hangover. It's that simple, really. You can't party like we did with money over the past ten years or so, and not eventually run out of steam in a big way. It's like its own giant Ponzi scheme, where as a country we continued to "get" more and more money, taking out massive mortgages that many of us as a nation really could not afford, taking loans for more than we needed, refinancing again and again as interest rates dropped to multigenerational lows, taking out home equity lines of credit, borrowing directly against the equity we did have in our homes, and running up ever-increasingly historic credit card debt along the way. Eventually, when one part of the system finally caves in -- in this case it started as the sudden inability to continue accessing money in general at the rate we had been for the past few years, and that quickly turned into increasing defaults on the riskier side of the borrower spectrum where the supply of additional money was always going to be needed to pay off current debt levels -- that becomes the hangover that inevitably must follow since a hard session of partying down. That's just the way of the world, even with respect to the economy.

So there it is. Right now 70% of us would do whatever Barack Obama tells us to do. The last time we put our faith in our leader in a time of extreme crisis, we were taken advantage of, repeatedly lied to, and ultimately led down the path that directly created the economic and financial disaster of the past 18 months or so. Let's hope that Mr. Obama will act with more integrity with respect to the trust he has in his corner from an emotionally fragile base of citizens in our country today.

A Week of Change

Well, it's finally here. This is the week that everything begins anew. After what seems like decades, change is finally here. We finally get to move on to the next phase of our lives, to a series of new decisions that will take our story to new and surely uncharted paths.

That's right folks. Lost returns with new episodes this Wednesday evening.

It's been a long time coming, and to mark the occasion ABC will be taking over all of our television programming with three grueling hours of Lost from 8-11pm ET. First is a one-hour recap of what has happened in the first four seasons, for those who are fool enough to never have watched the greatest show of this millennium, and in particular to remind all of us what happened at the end of Season 4, which I believe was originally aired some time in the early 1970s. I got lucky and channel-surfed my way right into a four-hour Lost marathon on SciFi on Monday evening, and they were smart enough to be showing the final four episodes of Season 4, so I got myself all caught up, but I still will be watching that first hour of Lost programming on Wednesday just to catch any new tidbits they are sure to throw our way, based on previous years' recap episodes. Following that are the first two episodes of Season 5, billed as a two-hour season premiere, running from 9 to 11pm ET. Personally, I can't wait. Even though from interviews done by the show's co-producers during the offseason it does seem like Season 5 is likely to bring more questions than answers, and we will have to wait until the final season to really find out what the hike is really going on with the island, I am still looking forward to finding out the answers to some of our less central and more immediate questions. Questions like Why is it so important that everyone go back to the island? and Who are these people from the freighter, Dr. Faraday, Charlotte, Miles, etc.? Of course another season of Lost will mean another few months of weekly frustration and total confusion. But along with it will be without a doubt the most entertaining hour of every week, the most talked-about show at the virtual water cooler, and, of course, a weekly dose of Goat's fabulous Lost recaps. How's that for pressuring the guy to bring back one of my favorite parts of Lost every week?

Moving on to the other, lesser story of this week, Barack Obama takes office midday Tuesday, putting an end to the tenure of George W. Bush as the leader of the United States of America. As with most inauguration days since I have grown up, I find myself looking back today on the man's legacy after eight years at the helm of our country.

First and foremost, no review of the Bush presidency can be started or finished without talking about 9-11. The worst terrorist attack on our nation's soil went down just nine months into Bush's first term in office, and it really ended up defining the first several years of his presidency, until the economic turmoil of the past couple of years found a way to even supplant that. To be honest, the Bush response to 9-11 has got to be the highlight of his time in office in my view. Maybe some of this has to do with being a New Yorker at the time that 9-11 happened (though I doubt that), but I don't know how one can not give Bush tremendous props for managing to help the country recover from those devastating attacks, and for preventing further violence within our borders. Honestly, if you had told me a few weeks after 9-11 that there would not be another terror attack on our soil for the next eight years, I am positive I would have signed up for that right then and there, regardless of whatever else happened. That was far and away the biggest and most pressing goal of the Bush presidency less than a year after it began, and it turns out that our president delivered on that goal with flying colors. Although there have been some alleged threats, they have all been thwarted and the result has been a totally terrorism-free America ever since the day the towers fell. Bush and his team deserve a massive amount of credit for that, and they surely get it from me. As much of an abject failure as the whole Iraq debacle has been, the mere presence of the war in that country has so successfully diverted the attention of Al-Qaeda and those who wish harm on the U.S. that there has been nary a mention of a serious threat to our security here at home. I'll never know if this was the actual planned strategy all along, but Al-Qaeda has spent their time over the past several years planning attacks on U.S. and U.S.-led forces over there, while having no time or inclination to plan more missives on U.S. soil. A tradeoff which has proven to be brilliant in its simplicity and in its results. As the new president looks to shrink our presence in Iraq, we may come back to this thought time and again as the years go by.

Unfortunately, Bush's stunning success in preventing further attacks in the U.S. stands alone in my eyes among his positive achievements over eight years in office. And things ended up getting so bad on the finance and economic front that it's enough to make me second-guess my feeling eight years ago that I would have signed up for no further terror attacks regardless of what else happened during these eight years. Iraq, other than its general effect of diverting the attention and violent efforts of terrorists away from the United States, has of course been a failure. Attacking a country surrounded by our bitter enemies and full of subversive, violent sects which hate us as well, with absolutely no exit plan or no way of even knowing if we've won or lost at all, was a disaster from the moment of its inception. Thousands of Americans and others have died in Iraq for, in my opinion, no good reason at all while we have insisted on remaining there to "keep the peace" and "promote democracy" in a country whose people seem to have little interest in either.

The worst part about the whole Iraq thing to me is not even the execution so much but how we got there to begin with. In what would prove to be just the beginning of a disturbing trend with George W. Bush, the man went before Congress and before the American people on prime time television and lied to us all. Lied through his fucking teeth about weapons of mass destruction being rampant all through Iraq, and how dire of an emergency it therefore was for us to send troops over there to die in the name of saving America from imminent disaster. In doing so, Bush lost much of his effectiveness with the Congress, while winning a feeling of betrayal from mostly every American. It's always hard to me, and I think for millions of my fellow Americans, to have our own president bald-faced lie to us, making things sound worse than they are just to advance his own personal agenda. I think back to that scumbag Bill Clinton looking right in the camera, proclaiming "I did not have sexual relations with that woman" and then having the audacity to explain during his deposition that "it depends on what the meaning of the word "is" is". What a bunch of lowlifes. And these presidents will never seem to realize how damaging it is when they tell bald-faced lies in front of 250 million Americans, 100 million or so of which are young, impressionable children and teenagers. How the F am I supposed to teach my children to tell the truth when our own president blatantly lies to everyone in the world just to get what he wants? How can people raise their sons not to be womanizing scumbags when our own president ten years ago was more concerned with chasing blowjobs than stamping out a rising Osama Bin Laden in the Sudan? From this perspective alone, I find George Bush's actions to be as unforgivable as those of his predecessor, and surely not befitting of someone worthy of leading this great country.

Although I am a big fan of Bush's sticking to his promise (unlike his daddy) not to raise taxes during his time in office, and I especially favor his support in passing a bill to phase out the baseless and (in my view) unfair estate tax -- a phase-out which Mr. Obama is set to reverse as one of his first steps in office -- Bush also spent the next several years of his time as president focusing far too much on Iraq and far too little on issues threatening to wreak havoc right here in the U.S. When Hurricane Katrina devastated New Orleans and the Gulf Coast area, the response by federal emergency management personnel was far too slow and led to significant unnecessary damage, death and destruction, all while Bush refused to do the right thing and personally visit the area. When we took prisoners in our war against terror, America's historic focus on human rights went right out the window, along with the dignity of our leader, as we tortured our prisoners of war just like any other indecent, lowlife country would (and Bush lied about it, of course). When the last of the major oil companies wanted to merge, where was the Bush administration to stop it in the name of protection of U.S. consumers? What about releasing our strategic oil reserves as necessary in times of big crude shortages in the U.S.? Cue the record-high energy, oil and gasoline prices that occurred during Bush's second term, and which are sure to return as soon as the global economy rebounds. What about the fiscal responsibility that used to be such a lynchpin of the American Republican party platform? Even Ronald Reagan would be rolling over in his grave at the way the Bush administration has nearly tripled our national debt to over $ 8 trillion at last count. And when Bill Clinton's grand strategy to de-regulate the entire banking industry combined with the House and Senate finance committees' blind insistence on banks loaning far too much money to people unable to pay those debts to slowly but surely create a massive bubble in the finance and credit sector at large, where was our current president to step in, recognize the problem and start solving it before the whole house of cards came crashing down? Who knows.

And as I mentioned, this business about lying to the Congress and the public to get whatever he wants proved to be the norm, not an aberration, for Mr. Bush. As the economy worsened all through 2007, Bush was repeatedly one of those clowns who publicly stated that the economy was fine, its fundamentals were sound, and that it was just people talking about a recession all the time that actually created a recession. In reality, this is an abominably stupid position for anyone to take, as recessions are 100% real and 100% regular and in fact as American as apple pie, and yet the Bush camp spent the all of 2007 and the better part of early 2008 making just this argument, even as credit markets around the world seized up in the summer of 2007 amid what has now officially been defined as a recession starting more than 14 months ago. And it all came to a head for me when Bush went on tv last September, in the wake of the failure of Lehman Brothers and the near collapse of insurance giant AIG, and told Americans that we needed to pass the TARP bill to bail out the banks of this country immediately, that the bailout would work to solve the banks' problems, and that if we didn't immediately pass this bill, our country would slip into an economic abyss. Well I got news for ya buddy, we did pass TARP, it ain't done shit for any bank, all of which are once again making new multi-year lows as I type this, and even despite TARP's passage and the expenditure of $750 billion of taxpayer funds to "save the economy", we are still totally, utterly and completely in the tank, economically speaking.

George Bush's legacy as president of the United States is I think very clear at this point. Despite his efforts late in his term to redefine his legacy through silly speeches and disingenuous claims, Bush will go down in history not only as an ineffective leader, but as a dishonest, untrustworthy man who allowed his one-track mind to focus too hard to his own personal agendas and could not see the forest for the trees, someone whose blatant and public dishonesty won him the disrespect of not only the American people at large, but of his partners in the legislative branch of government as well, including even his own party who by the end of his term could barely stand to listen to a word he had to say. As Bush leaves office with a record-low 22% approval rating (and who the F are those 22% btw?!), I find myself hoping that if nothing else, Barack Obama will prove to be true to his word as president. The sad truth is, it's been a looooong time since we've had anyone as president who anybody could call honest without a little bit of a chuckle. I know all politicians are scum when it comes right down to it, but let's get someone in here who can be trusted generally to do what he says he will do, and to always be on the lookout for the American people in all facets of our lives, instead of someone whose primary agenda is getting laid, or getting revenge on the people who tried to kill their daddy a generation earlier. It's time America got someone into office who really is governing "for the people" in every sense of the word.

And On to the Auto Industry

It turns out the investment banks were just the first companies to feel the brunt of the massive economic dislocation that all started from the credit crisis now some 18 months ago. Bear Stearns' sudden collapse last spring turned out to be just the beginning of the woes for the independent investment bank model, with Lehman Brothers declaring the largest bankruptcy in U.S. history in September, and Merrill Lynch turning itself over in a firesale to larger Bank of America. The rest of the regional and money center banks soon followed suit, with their stocks all suffering huge declines over the past couple of months, the primary driver behind the major U.S. indices' runs to several fresh multi-year lows this fall, including as of Monday's close where the Nasdaq is at a fresh 5 1/2-year low and the S&P 500 sits just 2 points above it own early November nadir. Since then, most sectors of the market have taken massive lumps, with scares especially focusing on homebuilders, insurers, and lately retail as well as the consumer appears to have finally rolled over after years (decades, really) of spending far more than we make, as a country overall.

Now the latest victims are the automakers, with GM and Ford shares both sitting at or just above multi-decade lows, and the business of these once-proud American institutions severely broken. And naturally, we've got the short-sighted pro-spending clowns in Congress -- this time it happens to be the Democrats, but we all should know that over the balance of this year it's been as much the Republicans as anyone -- pushing to "bail out" the automakers by simply throwing money at them. The Democrats' proposal, championed by House Majority Leader Harry Reid of Nevada, involves emergency loans of some $25 billion to the Big Three, in the hopes that this can tide these companies over until the economy recovers enough to repair their ailing businesses.

As bailouts have become all the rage during a truly ridiculous 2008 in America, the simple solution so supported by the current administration has just been to throw money at our problems. And not just thousands, or even millions or hundreds of millions. Billions of dollars. Just throw it at the problem, and it will go away. We can see how well that seems to be helping the banks, mostly all of which are right up against fresh multi-year lows of their own even after Treasury has spent now some $270 billion of taxpayer money under the TARP program to prop up their balance sheets with capital infusions. And you know what? This would be an even stupider approach for the car companies in this country.

These bozos in Congress fail to understand even the most basic precept of economics and finance. Throwing money at a problem to make it go away carries with it an implicit assumption, without which simply donating cash to an enterprise or an industry cannot possibly be expected to do anything but delay the inevitable. For capital infusions alone to work to save a company or a sector of the economy, the underlying business models need to be strong and viable. Throwing money at a problem can work when the only issue is a short-term cash flow problem, where the cash infusion will help a company bridge the time until the economy or other external factors will stabilize and allow their underlying successful businesses to recover on their own. But if you take a business that has been slowly dying for, say, 30 or 40 years like GM and Ford, and simply give them money, that's not a bridge loan. That's like emptying your wallet down the garbage disposal, and turning it on high. To use a better example, it's like pouring more and more water into a bucket with a huge, gaping hole at the bottom. Give GM and Ford and Chrysler $8 billion each without requiring massive changes among those three companies -- not just requiring them to submit a plan for change like the Harry Reid proposal would -- and you might as well circle the date, sometime in late 2009 / early 2010, where we'll be right back here having these exact same discussions, only all of our wallets will be $25 billion lighter.

The U.S. auto industry is so horribly run, it's seriously laughable to hear about it even if you don't have any understanding whatsoever about the industry as a whole. You don't need one to get just how funked up these companies' business models are. GM's market share in the United States sat at a whopping 53% back in 1966. Now it sits at 20%. And it's still dropping. And yet GM has done nothing to right itself, to reorganize, in all those years, longer than many of us reading this today have even been alive. Ford is in a very similar situation. The leadership of these companies, weighed down by one of the strongest unions in the world today, has remained paralyzed since the friggin 1960's, and as a result, these companies have been literally dying a slow death for more than four decades.

Everyone knows that Japanese automakers Honda and Toyota came onto the scene in America in the 1980's and basically took over. The Accord and the Camry became the gold standard of efficient cars driven in the U.S., and have led this country in sales for well more than a decade among car purchases. It is well known that one of the keys to Honda and Toyota's success in this country has been their focus, both marketing-wise and cost-wise, as Toyota has just three car brands in America, and Honda has just two. GM, meanwhile, continues to push on with eight brands -- GMC, Pontiac, Buick, Cadillac, Saab, Saturn, Chevrolet and Hummer -- many of them purchased during the past decade or so as it is. It's not that some of these are bad cars per se, but the inability to focus on fewer brands definitely hurts the company's ability to drive market share, in the U.S. and abroad. Not to mention that each of one these brands carries its own cost structure, from a General Manager and his or her management chain, down to brand managers and marketing folks, its own finance group, its own chain of dealers, distributors, etc. This is incredibly costly, and while their Japanese counterparts have whittled these cost lines down to just a few, GM continues to this day to have to pay eight sets of each of these lines of employees, contributing greatly to the massive problems with the company's cost structure. And here we are today.

And let's talk about those dealers for a minute. The Wall Street Journal reported the other day that GM has around 7000 car dealers in the U.S. Seven thousand dealerships. In contrast, Toyota has just over 1400, and Honda close to 1000. Is it any wonder which company's sales model works the best? And yet, GM has done nothing to change this bloated dealership structure. A system with fewer, more centralized dealers is well known and understood to be more efficient, again from a marketing, inventory and maintenance perspective, a premise with which GM management does not argue. But it would be a very expensive and politically unpopular process for GM to eliminate nearly 80-85% of their dealerships, so they just haven't done it. For nearly 30 years now. Toyota and Honda have been eating GM and Ford's lunch, and these companies simply refuse to take the admittedly painful steps needed in order to align these companies with their competitors, and with efficient business practice. And here we are today.

And now let's look at employee costs, which is perhaps the biggest bugaboo of all for companies like GM. Honda and Toyota pay their American workers more or less the same as GM and Ford do. But in its ultimate wisdom in the 1980's, GM pushed for the creation of the Jobs Bank program with the United Auto Workers Union, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. GM originally pushed for the Jobs Bank to help prop up workers' productivity as it looked to automate certain manufacturing functions in its plants, but today the Jobs Bank saddles the company with massive employment and benefits costs for people who aren't even working, yet another significant competitive disadvantage compared to its foreign company peers operating in the U.S. And here we are today.

Moreover, it's a well-known fact that the U.S. automakers, and GM in particular, spend massive amounts on healthcare and other employee benefits as compared to almost all other industries in the country. A lot of this is again due to the significant presence and power of unions in the automaking space, but the companies themselves can be blamed to a large extent for allowing themselves to be negotiated into positions where they are simply losing money hand over fist as a result of employee costs. GM currently pays benefits for more retirees than it does current workers. Is that even believable? After many plant closures over the past few years, GM still owns or leases many properties currently not in use, and yet it is contractually obligated to pay interest on bonds that were issued by municipalities to build these facilities, even though no revenues are currently being derived from the properties. And here we are today.

And let's not forget the companies' manufacturing focus over the past few years as trends have been shifting in the consumer marketplace. While Ford and GM have remained focused on the production of heavy trucks and SUVs that were so popular during the 1990s and earlier part of this decade, consumers have clearly begun shifting to smaller, more cost-effective and fuel-efficient vehicles over the past few years. So while cars like the Toyota Prius and other hybrids produced in growing numbers in this country by Honda have grown in popularity and sales, GM and Ford's factories remain tooled for production of larger vehicles, contributing greatly to the slowdown in sales in the Big Three U.S. automakers. And here we are today.

So there you go. GM and its competitors are not in any way, shape or form experiencing just a short-term cash flow problem. This is a long-term, systemic weakness in the very infrastructure of these companies, leading GM and Ford to be habitual moneylosers. If we just blindly throw $25 billion -- or a hundred billion dollars, for that matter -- at these firms, we are simply putting off the inevitable. And I'm not interested in having my money go towards that, like I assume you out there reading this aren't either. And don't get me wrong -- I actually am not in favor of telling the U.S. auto industry to go screw. Although of course indsutry lobbyists are overblowing this as they attempt to secure a bailout package for the American car companies, there is no doubt in my mind that the economic fallout from allowing Ford, GM and Chrysler to go bankrupt -- which is exactly what will happen within a year at most if nothing is done -- would be huge, and unnecessarily so. Much like I've said time and time again here about Barack Obama's planned tax hikes for those making over $250,000 a year, this is simply not the time or the place to be allowing one of the largest industries in the country to completely go to pot.

Instead of viewing the automakers crisis as yet another huge problem for the current or incoming administration to have to deal with, I view this as a tremendous opportunity for someone to take charge, fix a long-term problem, and help to lead this country into the next generation in terms of dependence on foreign oil. I don't have any problem providing emergency funds to a key industry in this country. But I wouldn't even consider giving it to them under their current cost structures and with their current business models, like Harry Reid's recent push in Congress would do. What we need to do is have someone take charge of this situation, and tell GM, Ford and Chrysler that they can have their $25 billion apiece, but only once they make the massive, sweeping changes in their models that will enable them to survive as ongoing concerns after this money is paid. So they can have $25 billion apiece, money they desperately need to fund their operations right now, but only if they start by completely overhauling their cost structures, aligning the benefits they pay more closely with those of the rest of the country, regardless of how they have done things in the past or what the over-powerful union leaders claim to be willing to agree to. If he or she has to, the person to take charge of fixing this industry will likely need to tell the unions to kiss his or her ass, something which the incoming administration has not shown a willingness to do previously given its generally pro-union stance. We also need to condition the money on these companies' totally reducing their distribution / dealership structures, again to more closely align them with what a company would do if they actually wanted to be profitable in this space.

I don't know if we specifically need to require a company like GM to reduce its number of brands, but the fact of the matter is that reducing their cost structures like these firms all need to probably would require some siginificant reduction from a brand perspective. Such a reduction would also clearly help increase demand for its vehicles over the long-run, using the model of the foreign car companies in the U.S., and the dealership and branding changes would also greatly increase these companies' ability to provide excellent service on the vehicles they do sell in this country, also long thought to be a problem for U.S. cars relative to their foreign company counterparts. And while we're on the topic of branding, one of the key moves we should make as far as conditions for GM, Ford and Chrysler to access the money they need to survive this downturn is an absolute requirement for production of large numbers of significantly more fuel-efficient / hybrid vehicles. If I were in charge, I would literally tell these companies that in order to get their money, they need to not only overhaul their cost and distribution infrastructures, but also that, within a short period of time -- say a couple of years max -- 50% of the vehicles they produce need to get at least 50 miles per gallon. Period. It's a tall order, I am well aware, but it's doable. Many of the most popular hybrid-type vehicles out there today in this country already run their first 40 miles on pure battery power, using no gasoline at all for what amounts to 90% of the trips made in these cars. The long-term effect on the environment and on our country's abundance of natural resources, as well as our dependence on foreign oil and our ability to have our fortunes controlled by countries whose interests are often directly opposed to our own, is probably the single greatest benefit of this entire plan.

With any luck, this ill-informed push by the House Democrats will fall flat on its face as far as simply throwing money at the U.S. automakers without flat-out requiring them first to make all the hard decisions and necessary changes to align their companies with other similar entities in the U.S. that are actually designed to make a profit and give a good return on the taxpayers' investment of any bailout funds. This would amount to an irresponsible and really downright wasteful attempt to spend our own hard-earned money in a time when such money is increasingly scarce, and supporters of this bill in Congress ought to be ashamed of themselves. As I said above, I don't view this as a massive crisis so much as a tremendous opportunity for a leader to step up, to insist on fixing the massive problems plaguing one of the key industries in American manufacturing for the past several decades, and most of all, to help the environment and to help keep oil prices down for the rest of time. Normally one simply does not have the practical ability to force these kinds of changes down the throats of any companies, especially in our "capitalist" system, but the current crisis in the automaking industry presents a literal once-in-a-lifetime opportunity to make a massive difference and a massive change for the better for every American. Throwing that opportunity away by simply handing over cash with no strings attached to these firms, thereby all but ensuring they will run out of money again in the near future, would be in my opinion a far worse error than the car companies' refusal to fix their own business models over the past several decades.