Washington declares war on debt crisis!

In the last few hours, in a desperate attempt to ward off a catastrophic Wall Street meltdown, the government has announced three unprecedented actions:

First, President Bush, Fed Chairman Bernanke and Treasury Secretary Paulson have called on leaders of both parties in Congress to work through the weekend to develop a plan to let the government buy up bad debts from banks.

Such a plan may buy some large banks some time. But like the bailouts of Freddie Mac, Fannie Mae and AIG, it does very little to change the reality on the ground.

Millions of Americans can still not pay their mortgages. The value of millions of homes is still falling. The nation's $47 trillion debt market is still in deep trouble, and so are the countless companies, consumers and governments that depend on it.

Second, The Securities and Exchange Commission has announced a temporary ban on short selling of 799 financial stocks — an attempt to reduce the massive downward pressure on their share values.

But short selling is a major vehicle that's widely used by prudent investors to reduce their risk and hedge their investments against the very dangers that we see all around us today.

By making it more difficult for investors to hedge in those stocks, the authorities are merely compounding the problem: If investors cannot sell short financial stocks, they will sell short something else as a proxy for financial stocks, including companies in other sectors that remain vulnerable to a credit crisis and a recession.

Alternatively, if investors feel those proxy hedges are not adequate, they will simply resort to outright liquidation of their securities, making the next stock market decline that much worse. Clearly, the SEC cannot repeal the law of gravity. And no matter what they do, the government cannot stop investors from selling.

Third, early this morning, Washington moved to guarantee money market funds that invest in high risk instruments like commercial paper. This supposedly protects money fund investors from the kind of "Breaking the Buck" crisis that arose this week at Reserve Primary Fund, buying some time for a $2 trillion industry in turmoil. But alas, this, too, is a disastrous and futile gesture.

The reason: To fund the Fannie Mae, Freddie Mac, AIG and new banking bailouts, it's estimated that the U.S. Treasury will need to borrow at least $1 trillion in new money from investors in the United States and abroad.

But by guaranteeing money funds that invest in high-risk, higher-yielding instruments, the authorities are actually encouraging investors not to invest in the lower-yielding U.S. Treasuries.

Result: With this step, the U.S. government is shooting its funding operation in the foot. It's merely making it that much more difficult for the U.S. Treasury itself to raise the money it will need for each and every one of its bailout efforts.

And sure enough ...

This morning, U.S. bond prices are collapsing, as the interest rate the U.S. Treasury has to pay on its 10-year bonds has surged by an unprecedented 39 basis points (.39 percentage points).

Bottom line: These three government bombshells do not end the credit crisis. They merely threaten to spread the plague to the one borrower who heretofore stood above the crowd of sinking debtors: The United States Government itself.

With each of these dramatic Wall Street disasters, unprecedented government counter-actions, and violent market reactions ...

http://www.moneyandmarkets.com/Issues.aspx?Washington-declares-war-on-debt-crisis-What-to-do-2283

Cheers!

Bailout plans seeks $700 billion to buy bad mortgage debt...

The Bush administration is asking Congress to let the government buy $700-billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.

The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would also raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue.

But the proposal does not specify what the government would get in return from financial companies for the federal assistance.

Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "People are beginning to doubt our system, people were losing confidence and I understand it's important to have confidence in our financial system," he added.

Senator Chuck Schumer (D-N.Y.) called the proposal "a good foundation," but raised concerns it "includes no visible protection for taxpayers or homeowners."

"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic legislators into rubber-stamping it.

"I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said.

"The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."


http://ca.news.finance.yahoo.com/s/20092008/2/biz-finance-bush-bailout-plans-seeks-700-billion-buy-bad.html

Lehman is the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy as the junk bond market cratered. Lehman listed $639 billion of assets as of the end of May in its bankruptcy filing, putting it well ahead of long-distance phone company WorldCom Inc, which listed $107 billion of assets when it filed for bankruptcy in 2002.

This was the Canary in the coal mine.. If they had waited a little longer, we would have seen the Domino Effect. US is tethering on the brink of Bankruptcy and the whole of the Wall Street would have crumbled like the cookies before X-mas.

Lucky for these Banks Santa came in with the goodies to bail them all. We will know the price tag and the other life lines that they will throw to the individual Mortgage defaulters.

What a shame that these Bankers have been made to bear. The blame squarely rests on the shoulders of the FEDS.

We will know the true costs in dollars in a few weeks. And they will have a few BEST SELLING books to read after that.

Also there is a Parallel economy that is sinking with it, which is offshore.

Now NO short selling is in effect, since Friday the 19th September 2008.

What Next?

Freddie.

More anxiety on Wall St.: Stocks dive, oil soars ...U.S. Stocks Blasted By Bailout

Elation in the financial markets over the $700 billion bank bailout plan evaporated Monday and was replaced by all-too-familiar anxiety, pummeling stocks and sending oil prices to their biggest one-day gain. Worries that the rescue package would cost too much, drive up inflation, swell the already-bloated deficit and hurt the ailing economy also led global investors to flee the U.S. dollar.

The Dow Jones industrials lost 372 points, wiping out the gains the index made Friday after administration officials and congressional leaders promised swift action to get bad debt off the books of banks and end the financial crisis.



"Investors had a weekend to look at the news that was streaming out, and they are now finding fault in it," said Joseph Battipaglia, market strategist in the private client group at the investment firm Stifel Nicholaus.



Oil prices briefly spiked more than $25 a barrel before falling back to settle at $120.92, up $16.37, on the New York Mercantile Exchange. That shattered the previous record for a one-day jump in crude oil, $10.75.



The Bush administration is already forecasting that the federal deficit will hit a record $482 billion next year. Analysts say the bailout costs mean a $1 trillion annual deficit is not out of the question.



When you try to print $1 trillion, that will kill your currency, lifting oil prices, which then in turn will not help the stock market," said Gary Kaltbaum, who runs the money management firm Kaltbaum and Associates in Orlando, Fla. "It is a vicious cycle, and we are seeing that right now."



Lacking specifics, many investors — especially foreigners — sold U.S. dollars on worries that paying for the plan would increase the federal deficit and exacerbate inflation. Over the past year, overall inflation is at 5.4 percent.



As Wall Street sold off, Washington was tinkering with the plan, trying to find a compromise that Congress and the Bush administration could present to American taxpayers who would be footing the bill.



Even assuming it passes, the bailout might not be a quick fix for the economy or financial markets.



According to research by economists at Merrill Lynch, after the Resolution Trust Corp. was established in 1989 to stop the savings and loan crisis, it took a year for the stock market to hit bottom, two years for the economy and three years for the housing market.



After Japan put a bailout plan in place, its stock market took another five years to recuperate, and by some measures, its economy still hasn't had a sustainable recovery, according to Merrill's chief North American economist, David Rosenberg.



"This is a complicated process that will encumber the economy for many years," Battipaglia said.

http://news.yahoo.com/s/ap/20080922/ap_on_bi_ge/meltdown_markets

Rants and mumblings of a naive layman.....

Why is the stock market considered a barometer for a country's financial health? Why are all governments so sensitive to stock market gloom? Why do you call it a depression when only the stock market falls consistently, not any other market? What about those countries whose stock markets are not featured so well in most news channels/media? Are they all permanently depressing countries?

I am not expecting any replies..unless someone wants to chip in. I am no economist or financial expert, these are obvious rumblings of an empty mind.

The price tag for bailing out Fannie Mae, Freddie Mac, Lehman Brothers and AIG is already in the $700 billion range and almost certain to rise after Washington Mutual join the list and others yet to be revealed join the list . By the time the rest of the anything-for-a-commission crowd comes clean with their financial sins, one would not be surprised if the government's bailout tab DOES EXCEED 1 TRILLION DOLLARS!

These are talking about real dollars that everyone and their children will be paying for decades. Instead of celebrating, everyone should believe that the bailouts are a reason to be even more worried about the state of US economy and the U.S. stock market.

“This acceptance of higher credit risk has also contributed in a major way to an overall deterioration in credit quality in corporate America,” S&P said.


Everyone will agree that No one will ever see the Chinese, Japanese, Indian, Taiwanese, South Korean, or Singaporean governments spending billions of taxpayer dollars to bail out a bunch of greedy and irresponsible corporations.


“Investors are skeptical about the bailout package,'' said Ajay Bodke, who helps manage the equivalent of $872 million in equities at IDFC Mutual Funds in Mumbai. ''You can't just pump- prime the economy and get out of the mess.''


The US financial crisis, which has sent tremors around the world, is likely to slow down FII investment in India's and other emerging equity markets, a top finance ministry aide said.

Think of the Great Depression, for instance. The fabulous bull market rally of the "Roaring 20s" ended with the "Great Crash" in 1929. After the crash, the Dow would not regain its 1929 level again for another 25 years!

Two days before New Year's Eve in 1989, the Nikkei 225 Index of Japanese stocks peaked at 38,915. Today, nearly 20-years later, and after several painful recessions in Japan, the Nikkei trades at just 13,334 — still nearly 70% below its peak value.

What makes secular bear markets so catastrophic for investors is that it's often difficult to recognize that you're in one until it's too late — until a good chunk of your wealth is destroyed.

Bust Follows Boom in Financial Markets,
Like Night Follows Day

This same boom followed by bust cycle repeats over and over again in financial market history. And right now it seems history is repeating itself.

The S&P 500 Index peaked in March 2000 at 1,527. Seven years later, in October 2007, it made only a marginal new high — just 38 points — at 1,565! Since then it has been all downhill — S&P index lost over 20% while some stockts lost much more than that of their value since October 2007.

USA is facing a massive financial implosion as a result of a huge debt bubble. Three times in modern history a major economy has faced this kind of situation. In America, 1929, and in Japan, 1989, the authorities failed to address the problem quickly and comprehensively. They tried to muddle through and get by using the old rules. The results? Japan has suffered 20 years of stagnation, including several recessions. Jobs and incomes suffered. Homes and shares are still down by maybe two-thirds. The U.S. economy in the 1930s fared even worse. Wall Street fell about 90%, from peak to trough, while the economy suffered a terrible depression lasting for several years.

No one won.


Cheers!

Credit Crunch Likely to Hit Consumers the Hardest

The credit freeze, which is shifting into overdrive heading into the holiday season, is expected to hit consumers harder than corporate America.

As banks continue to refuse credit even to qualified borrowers, business will feel the pinch but consumers will feel it even more. Companies have alternate ways to raise money, such as selling stock and bonds. But consumers have few options besides bank loans and credit cards, which are harder and more expensive to get.

So they will borrow less and thus spend less, setting up a potentially ugly fourth quarter not only for corporate earnings but the entire economy.

"The consumers just don't have anything to spend right now," says Rick Pendergraft, market analyst at Investor's Daily Edge newsletter. "As long as that's the case, we're not going to see any improvement in the economy."

Because consumer spending accounts for roughly two-thirds of economic growth, a sharp slowdown could push the US into a recession.

"If consumers can't spend and make acquisitions of goods," Pendergraft adds, "that's not going to help corporate earnings at this point in time.

The interbank loan rate, known as Libor, posted its biggest one-day gain ever overnight, roaring 4.30 percentage points, or 430 basis points, to 6.87 percent, the highest in seven and a half years.

That triggers a domino effect through the industry and makes it harder for consumers—who are at the end of the credit chain—to borrow money.

And even if Congress passes a revised financial rescue plan, as lawmakers pledged on Tuesday, the credit crunch is expected to continue for some time.

Not everyone, though, is convinced that a government bailout plan would have had a meaningful effect beyond propping up bank balance sheets, including institutions that eventually will fall anyway.

"I didn't think that bill they were voting on yesterday was going to do much good for anything," Bianco said. "Yes, it would have given a psychological boost--the problem is the banking system is too small. The banking system needs capital."

"It would have been a lot like all the other Paulson plans. None of them have worked so far," he continued. "This is just the sieve bailout, version 2008, which failed last year to get through."

In the meantime, retailers are bracing themselves for rough sledding ahead.

"The American consumer's in the retrenchment mode, building up savings as we go through this period where there's all this downside risk," Higgins said. "Consumer spending already looks very weak and we're expecting the fourth quarter to be no better. I think retailers are already thinking the same thing."

http://www.cnbc.com/id/26956466