Monday, October 27, 2008

Rep. Pelosi comments on the Bailout

October 27, 2008
Dear Mr. Dravis:

Thank you for contacting me to express your views on H.R. 1424, the Emergency Economic Stabilization Plan and Tax Extender Package. I appreciate hearing from you.

The Senate passed H.R. 1424 by a vote of 74-25 on October 1, 2008. On October 3, 2008, the House passed the bill by a vote of 263-171. Later that day, President Bush signed the bill into law.

The economic stabilization bill is intended to stabilize financial markets, and was substantially improved from the Administration's original proposal. The original bill proposed by the Bush Administration was unacceptable. It asked us to commit $700 billion in taxpayers' money without any meaningful safeguards; we rejected that proposal. In our bipartisan negotiations between the White House and Congress, we stood up for American taxpayers and demanded tough changes to the bill.

Restoring Stability to our Financial Markets
The plan is intended to help stabilize our financial markets by providing the Department of Treasury with the authority to acquire $700 billion worth of troubled assets from financial institutions. This investment in our financial institutions is intended to remove impediments to the flow of credit in our financial markets, and to provide financial institutions with the ability to raise the capital they need to return to the financial markets as active participants. If the plan works, small businesses will be able to borrow the necessary capital to grow, and the routine flow of credit can be restored to our community so that parents can send their children to college and families can purchase homes.

Reimburse Taxpayer Investments
The bill will protect hardworking American taxpayers who are being asked to invest in the future of our nation's economic health. The legislation requires that taxpayers benefit from the government's investments in the purchased assets by providing them with a share of the profits from participating companies, and ensuring that any costs incurred by the program are incurred by the financial industry.

Reform Wall Street Practices and Strong Government Oversight
This legislation imposes strict limits on excessive compensation for CEOs and executives of companies that participate in the asset purchase program, and provides for four separate layers of oversight to ensure that the government runs the program in a transparent manner and that taxpayers are protected.

Relief for Middle Class Americans
The plan will provide relief to millions of homeowners and thousands of small businesses. The legislation provides tax relief for 30 million homeowners and assists small businesses that need credit from small community banks to survive and grow. Importantly, the bill increases the amount of bank and credit union deposits insured by the government from $100,000 to $250,000, ensuring that Americans have confidence in the safety of their deposits in our nation's banks and credit unions.

Reinvigorate the American Economy
To strengthen the economy, the measure includes over $100 billion in tax cuts that will create over 500,000 American green jobs; provide tax relief to middle-class families struggling to make ends meet in the face of the rising energy, health care and grocery costs; and spur business investment and innovation. The legislation also provides tax relief for 25 million middle-class families, and extends tax cuts for American businesses and families.

This legislation is just the beginning of our efforts to address this financial crisis. Chairman Henry Waxman of the Oversight and Government Reform Committee, Chairman Collin Peterson of the Agriculture Committee and Chairman Barney Frank of the Financial Services Committee will hold a series of hearings to determine the origins of the crisis, how regulators and business leaders failed to protect the public interest, and the common sense, reasonable regulations needed to provide security and stability in the future. I have also asked them to review the economic impact of a larger recovery package and, because of the Congress' commitment to fiscal responsibility, the effect on the budget.

On October 13th, I held a forum with some of America's leading economists to help Congress develop a stimulus that focuses on creating jobs and strengthening our economy. Just as we worked in recent weeks on an economic rescue plan to help bring stability to our financial markets, we must now take additional action and pass a jobs creation and economic recovery plan. The legislation would boost the broader economy. It will include an extension of unemployment benefits, increased money for food stamps and the states, and more federal funds for bridges and other transportation projects.

Democrats have made fiscal responsibility a top priority, reinstating pay-as-you-go budget rules on the first day we took control of Congress in 2007. In keeping with these principles, each component of our recovery package will be justified in terms of creating good-paying jobs, stimulating our economy and returning revenue to the Treasury. When Americans are worried about losing their jobs, their savings, their homes and their chance at the American Dream, Congress and the president must work together to lift our economy and restore hope. That is the course the New Direction Congress will continue in the days and weeks ahead.

Our nation is at a critical point in our history, and we must continue to act to restore confidence in our financial markets and to reinvigorate our economy. The vote on H.R. 1424 was a vote with real consequence, and a vote that will shape the financial stability of our country, and the economic security of our people.

Thank you again for contacting me on this important issue. I hope you will continue to communicate with me on matters of concern to you. For more information on this or other issues affecting our city and our nation, please visit my website at www.house.gov/pelosi or sign up to receive e-mail updates at www.house.gov/pelosi/IMA/subscription.html.

Sincerely,

Nancy Pelosi
Member of Congress

Sunday, October 19, 2008

The Equity Markets - a glass half full, or half empty?

Equity markets remain very tricky and many of the indicators, which I believe are important are still trending down.
The S&P 500, KBW banking and Baltic Dry indexes all traded below their 10 day moving average.

Some positive points for consideration from the the past week:
  • The TED spread is coming down, but it remains at a ridiculously high level
  • The Volatility index (VIX) spiked to new high and then started to drop.
  • The US equity market has not dropped below its lows recorded on Oct. 10.
  • Morgan Stanley CEO admits that banks need better regulation – I think he is the first industry guy to admit any mistakes, although trusting bankers is very challenging in this environment!
  • Jim Cramer (Mad Money) said that for the first time in 23 years he can't say "there is always a bull market somewhere". Capitulation is always a good thing in a bear market.
  • Too many hedge funds are saying they are heavily in cash.
  • Warren Buffet wrote an op-ed in the NY Times stating that it is times to buy US equities. Note his time horizon is likely different than most and he has a lot of cash in the bank. If you like his strategy, buy his stock - ticker is BRK/A.

Trading will continue to be sloppy leading into the election... but we could get a short term rally.

If your strategy is buy and hold than look at TIPS.

I am taking nibbles, but will exit on any sense of weakness (set stop-loss limits if you are getting involved) - commodities, energy and utilities are areas that seem to make sense - hard assets.

Wednesday, October 8, 2008

The Credit Crisis - “Understanding the problem is part of the cure"

The following is provided in the spirit of "understanding the problem is part of the cure".

As with most big problems – the credit crisis has many contributing dynamics.
At a high level – it was stupidly, greed, leverage, derivatives and securitization - these attributes were not exclusive to the US.
Villains include members of both political parties and participation from a broad spectrum of industries.

A negative saving rate in the US has not been helpful. Joseph Stiglitz (Nobel prize - Economics - 2001) is making the case that spending in Iraq has been a significant contributing factor (I am not up to speed on that thought process).

The notes below present some of the significant milestones on the way to driving the economy into the ditch.

Early 1990s:
Government Sponsored Enterprises bills expanded the power and influence of Fannie Mae and Freddie Mac. With the mantra of "fair lending", a mix of positive sentiment and greed (especially among banks and former government officials), a toxic mess was created.

November 1999:
The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act which regulated the financial services industry. Gramm later became a lobbyist for UBS, collecting over $750,000 in fees and than became a Chairman of UBS. UBS issued over $18 billion in subprime mortgages. Recently, Gramm was senior economic advisor to John McCain.After 9/11, Fed Chairman Alan Greenspan started a process that led to a series of interest rate cuts meant to stabilize the economy. Over time, the US was hooked on cheap credit and Greenspan was in charge of the "punchbowl".

During 2004:
The SEC granted 5 investment banks an exemption to a 30 year old rule which limited broker debt-to-net capital ratio to 12:1 (this is the amount of leverage they could apply to investment/speculation activities). The exemption allowed them to increase their leverage to 40:1 (this could have been dramatically higher in some situations – was it high-octane, toxic or just insanity)

So, who are the FAB FIVE and where are they today: Lehman (bankrupt), Bear Stearns (bankrupt) Merrill Lynch (almost dead)- purchased by Bank of America, Goldman Sachs and Morgan Stanley – both struggling and have changed their status to commercial banks to get "back stopped" by the US government.

Monday, October 6, 2008

Commenting on the market downturn.....

The following thoughts were shared today with a friend about the current market environment:

1) Be cautious of what is presented by the talking heads on TV. Their job is to generate viewers – don’t forget that.

2) The velocity of this equity market decline appears to be worse than the initial stages of the 1929 crash. I think the removal of the uptick rule for shorting, the unwinding of leverage (which has been taking place since July 2007) and computerized trading are among the contributing factors.

3) There is money on the sidelines waiting for the “deleveraging process” to stop. However, there could be 10-15% more downside in the S&P.

4) Patience is a critical – but scarce commodity – so don’t rush in to the market.
5) The average guy on the street thinks they understand the stock market. Most of humanity does not have a clue about the credit market (credit is more important). This market downturn is all about credit. One indicator of how well the credit markets are functioning is the TED spread (which is related to the rates banks lend money to each other). In good times, the TED spread is between 0.10% and 0.50%. Currently, it is in uncharted territory – 3.8%. The chart above presents the TED spread 1984 – present.

6) If you are heavily in the equity market – lighten up.

7) Is this going to be a depression? I having never been in one, so I don’t know. Will this be the worst economic downturn in a generation – Yes.