PIN The Blame On The SEC ?

OK, I admit it - the Blame Game is often petty, annoying and almost always Unbecoming. But that's only when insignificant people assign it to inconsequential events. The current Credit Crisis can be a lot of things but its definitely not inconsequential. Former FDIC Chairmen can certainly be a lot of things but they're also most definitely not insignificant. Quite to the contrary + due to their banking system 'powers', they're in fact perhaps the most influential and important officials in the WORLD. With that said, former U.S. FDIC Chairman William Isaac believes that the SEC deserves the most blame for the banking system's recent meltdown. He also has very strong feelings on the SEC's 2006 decision that required banks to value their assets using the ' Mark To Market ' accounting method vs. the previous practice of ' Fair Value ' accounting. Check out the below link which contains the CNBC video interview...some quoted excerpts below:


http://www.cnbc.com/id/27100454

"...The SEC has destroyed $500 billion of bank capital by its senseless marking to market of these assets for which there is no marking to market, and that has destroyed $5 trillion of bank lending...That’s a major issue in the credit crunch we’re in right now. The banks just don’t have the capital to start lending right now, because of these horrendous markdowns that the SEC’s approach required...Once they declare that there’s a 'systemic risk', the FDIC at that point can say that we’re going to protect all general creditors when a bank fails. If they do that, then I think the banks will start lending to each other again...It’s just a lack of confidence, because we don’t know which banks are going to go next. And banks we never thought would go, have gone, and we don’t know how the government’s going to handle them..."

Data Courtesy: CNBC

Heebner - Largest Margin Call Since 1929

During an interview today with CNBC's Larry Kudlow, Ken Heebner, a widely respected hedge fund manager for Capital Growth Management, offered the following interesting 'Hedge Fund INSIDER' perspective behind the Dow's recent 7 day, 2,300 point CRASH :


" I think one of the things that's happening here is that the Fed and Treasury are doing all the right things and the market is (still) dropping at an accelerating rate. What is NOT being recognized is that there is a major MARGIN CALL on the HEDGE FUNDS. They were Levered a year ago at 4.5 to 1 on average for equity funds. It's (the leverage ratio) been coming down and now there's pressure to reduce the leverage considerably because the prime brokers are all owned by banks regulated by the Federal Reserve..and their pulling back their loans. There's PANIC Selling. This is the biggest MARGIN CALL since 1929. And what's sad about this is that the market collapses as the Fed and Treasury do all the right things and it creates the impression that there's something wrong and all these great moves that the Fed and Treasury are making aren't going to solve the problem. "

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Anecdotally thinking...of course current market fundamentals are TERRIBLE (please refer to my 10/08/08 ' The Holy Economic Trinity - C, J and H ' post for more background on this), but are they terrible enough to warrant a massive index loss of 18% over the past 5 days ?? Perhaps so but Mr. Heebner's explanation should at least provide some semblance of comfort to individual stock owners (I guess I believe in silver linings). If this horrid action is truly being driven by an event of UNPRECEDENTED proportions ('The Largest Hedge Fund Margin Call since 1929') as Heebner suggests, then the likelihood of seeing this type of watershed event repeating should become MUCH Less probable (...OF COURSE only After this Once in an Lifetime period of Hedge Fund DE-Leveraging is finally over...could take weeks/months to play out !).



Data Courtesy: CNBC + Ken Heebner

Understanding CREDIT And The TED Spread

The DIFFERENCE ('spread') between what commercial banks and the U.S. Treasury pay to borrow money for 3 months widened TODAY to 423 basis points (4.23%), the most since Bloomberg began tracking the data in 1984. For some perspective, the 3 month spread averaged 41 basis points (0.41%) in the 17 years leading to July 2007 (the approx beginning of the subprime-related 'credit crisis').


The U.S. TED spread represents the difference in Interest Rates banks charge on loans to other banks vs. the interest rates offered by U.S. government short-term debt ('T-bills')..more specifically, it is the actual numerical difference in interest rates between the 3 month Treasury bill and the 3 month LIBOR. The spread is regarded as a valueable Credit market Indicator because it reflects perceptions of how RISKY it is for banks to lend their money to other commerical banks. When the TED spread increases, that is a sign that lenders believe the risk of default on inter-bank loans (also known as counterparty risk) is increasing. When the risk of bank defaults is considered to be decreasing, the TED spread decreases. According to Wiki, a rising TED spread often foretells a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.

* By comparison, on Oct. 20, 1987, when stocks collapsed globally on what became known as Black Monday, the spread was at 300 basis points (3.0%).

* By comparison, the TED spread peaked at 160 basis points (1.6%) in 1998 during the collapse of hedge fund Long Term Capital Management.

bloomberg.com/apps/news?pid=20601109&sid=a6.wGKIe.RGg

Data Courtesy: Bloomberg + Wikipedia

CHART - U.S. Debt % Of GDP

Welcome to the TRUMAN Show ? ?




Data Courtesy: Zfacts + Whitehouse.gov

The UNDERWATER Mortgage Rate

According to today's Wall Street Journal, about 1 out of every 6 U.S. homeowners now owe MORE money on his/her Mortgage THAN the current Market Value of his/her home.

There are about 75.5 million homeowners in the United States (approx 25% of the country's population)...12 million or 16% of these homeowners are now 'underwater' on their mortgages. About 33% of total homeowners (24 million homeowners) own their homes outright or without debt.

In 2006, the underwater mortgage rate was 4%.

In 2007, the underwater mortgage rate was 6%.


* According to the First American Index, U.S. home prices peaked in mid-2006, after rising 86% since January 2000. Since peaking, the index has fallen 13%.


http://www.msnbc.msn.com/id/27089919/


Data Courtesy: The Wall Street Journal

The HOLY Economic Trinity - C, J and H

If you've been monitoring the performance of your heavily stock-weighted 401K and/or IRA plan at all this year then it should be of no surprise to you that the Stock Market is currently mired in a cruel and unusual DownTREND. Below are some 'Random Thoughts of BLOGiance' (RTOB) on why this occurred and, more importantly, what Variables/Indicators (Credit...Jobs...Housing) we need to see Flash 'GREEN' before we can be confident of seeing a fundamental REVERSAL of the DownTREND:

* WHAT?
Today's stock market is tied to Housing. Make no mistake about it, the United States' Stock Market Bull Run of 2003-2007 was fueled by an ARTIFICIALLY inflated domestic housing market (a Housing BUBBLE). FYI + If you're not a regular reader of this blog then please click on keyword 'recession' in the 'ETB Archive Keyword REF' on the right to find some posts related to the topic.


* What caused the housing market to be ARTIFICIALLY inflated?
The 'demand' side of the housing price equation (Economics 101 - prices are determined by both supply and demand). Demand for housing was artificially pumped up during the bubble primarily because of the UNPRECEDENTED, Loose lending standards of banks. Exotic loan types including Subprime, Interest Only, Option ARMs, Alt A mortgages, etc. were created by institutional lenders at an UNPRECEDENTED rate and deemed affordable even though their terms were incredibly MISUNDERSTOOD. Many banks approved mortgages for customers without accepting down payments and also without even VERIFYING the INCOMES of homebuyers. Would you ever give $100,000+ to someone whose income you cannot verify?? Would you ever give $100,000+ to someone whose JOB you cannot verify?? STUPIDITY at its finest and most greediest degree.


* Why were banks irresponsibly creating risky mortgage products?
In a hands-OFF Regulatory Environment (thank you good for nothing SEC...thank you ignorant Federal Reserve...thank you incompetent WHITE HOUSE), banks were allowed the room to give into GREED via engaging in absolutely reckless risk (mis)management. From 2003 to 2007, financial institutions were making ridiculous amounts of money from this less than honest practice. Not only were banks making money off of selling the suspect mortgage to a homebuyer, they were also passionately involved in a now nefarious process of 'repackaging' these same mortgages into complex assets/derivatives commonly referred to as 'mortgage-backed assets' (FYI - It is these types of shoddy assets that the U.S. Treasury is now scrambling around to purchase from the country's biggest banks with the recently approved $700 Billion TARP deal). During the boom, 'mortgage backed assets' were produced in UNPRECEDENTED numbers for both residential and commercial loans and became a phenomenal investment for banks and brokers as long as housing prices kept going UP. While the risk is now readily apparent, before the collapse in U.S. real estate prices, these once incorrectly perceived low risk assets were a favorite of banks, hedge funds and institutions of all types as they were yielding as much as 8-12% a year. Banks and brokers alike (including Countrywide Financial, Bear Sterns, Lehman Brothers, Wachovia, Bank of America, Citigroup, etc.) were loading up on these now crippling assets because it provided them a 'sure-fire' way to prop up/inflate their company earnings (profits). Hedge funds loaded up on these assets because their delicious double-digit yields provided them a 'sure-fire' way to outperform the annual returns of their stock market 'benchmarks' (i.e: indices like the S+P 500, Nasdaq, Dow Jones 30, etc.). Enough with the background..


* What needs to happen for the stock market to REVERSE?

TIME

CREDIT needs to stabilize.

TIME

JOBS need to stabilize.

TIME

HOUSING prices need to stabilize.

As mentioned above, the HOUSING boom from 2003-2007 was fueled by incredibly LAX (and sometimes fraudulent) lending standards resulting from the illegitimate, greedy, reckless decision-making of virtually unsupervised banks. During the boom, Joe 'six pack' could get a mortgage without having his income verified and without paying any money down. Those days are OVER. As a result of this subprime-induced mess, the easy credit days are gone. For emphasis' sake, please humor me and allow me to say this again (let it resonAte) - the easy credit days are GONE.

Besides just affecting the ability of Joe to get a mortgage, the now 'polluted' CREDIT markets (polluted because they're clogged with 'bad' assets including the aforementioned mortgage-backed assets) have become FROZEN and are adversely impacting the ability of even LARGE businesses to borrow from banks. Forget the consumer (because that's what banks now appear to be doing re consumer loans for autos, mortgages, tuitions, etc.), banks are also FRIGHTENED to lend these days to other banks and businesses due to the very real fear of 'counter-party risk'. We are still in a perilous time and today's 'Here Today, Gone Tomorrow' business environment (witness the rapid dissolution of former business GIANTS including AIG, Merrill Lynch, Bear Sterns, Lehman Brothers, Wachovia, Fannie Mae, Freddie Mac, etc.), are 'forcing' banks to keep their money to themselves. The White House and Federal Reserve need to do all that they can to diminish counter-party risk and restore confidence back to the financial system and more specifically, the practice of lending.


Once the credit markets are repaired and business activity has at least the CHANCE to resume, we should hopefully see some stability in the jobs market. Why are jobs and job losses CRUCIAL for our stock market ? It's quite simple really...as previously stated in this post, the stock market is currently tied to the performance of the housing market. Unless you're rich, if you want to buy a home then besides needing good credit you also need to have a stable JOB in order to afford the monthly mortgage payments. If the economy keeps losing jobs each month (according to the U.S. Labor Department, the economy has lost over 760,000 jobs thus far in 2008...including a loss of 135,000 in September alone), then the pool of potential homebuyers will continue to shrink. If the homebuyer pool shrinks then so does DEMAND for housing. If Demand for housing continues to fall then so will housing prices. If housing prices continue to fall then so will the STOCK MARKET.

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Lastly, I know I'm omitting some significant details re the ongoing recession (I, much like many others, could write a full blown-out THESIS on this subject including a bunch of great colorful statistics PROVING how dire the situation really is)...but the main purpose of this post is to simplify the explanation and catch people up to speed on the FACT that there are REAL factors driving down the stock market. Most stocks are down dramatically from their highs at the beginning of 2008 but that fact alone IS NOT A REASON TO BUY. The mentality of an opportunistic long term investor during this time should be to allow the downtrend to run its course while waiting patiently with some cash (at least 20-50% CASH makes sense) on the sidelines until the fragile situation with Credit, Jobs and Housing stabilizes.


Without a backdrop of all 3 occurring, stocks will NOT be able to act rationally and more importantly, the market will NOT be able to Reverse its DownTREND.


Be patient as these issues could take months and even YEARS (yes, YEARS) to resolve, depending basically on both 1.) LUCK and 2.) the Effectiveness of our country's Leadership (The President, The Federal Reserve, The dopes at the SEC, Congress, etc). The stock market will ultimately become investible again but the $60 TRILLION question is, how LONG will that take ? ?


While NO ONE including yours truly can tell you with confidence HOW LONG it'll take for the stock market to bottom, the purpose of this post is to inform you about WHAT INDICATORS you need to look out for (CREDIT...JOBS...HOUSING) so that you can identify when the fundamental bottom has occurred + invest accordingly/opportunistically.

CRAMER - Less Than 5 Yr Horizon, Get OUT

Per the below MSNBC article and video, CNBC market commentator Jim Cramer is advising ALL investors to CASH OUT of the STOCK MARKET if their investment time horizons are Shorter than 5 Years :





Cramer excerpts per the above video interview:
* “I thought about this all weekend...I do not want to say these things on TV...Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”


* “I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market."


* “I’m worried about UNEMPLOYMENT, I’m worried about purchases that you may need. I can’t have you risk that in the stock market in the next 5 years.”


* "I believe we may have as much of a 20% decline in the stock market. If you can withstand that, most people can't, then you'll have to ride it out."



http://www.msnbc.msn.com/id/27045699/



Data Courtesy: MSNBC

A $700 Billion DROP In The Market BUCKET ?

Will the Bush Administration's recently proposed $700 Billion 'RTC 2' Financial Rescue Plan prove to be just a DROP in the proverbial Market BUCKET ??? THAT becomes the $60 TRILLION financial system question after digesting the below insightful data courtesy of Douglas Cliggot, the Chief Investment Officer of Dover Management Group:

* According to 2008 data made available from the Federal Reserve, The U.S. financial sector began the year with approx $62.7 TRILLION worth of banking assets ($700 Billion is about 1.1% of this)

* About 20% or $5 TRILLION of this $62.7 TRILLION was effectively transferred earlier this year from the private sector to the public sector with the nationalization of Freddie Mac (FRE) and Fannie Mae (FNM)...leaving U.S. banks with approx $57 TRILLION of outstanding assets ($700 Billion is about 1.2% of this)

* Of the $55 TRILLION in public U.S. banking assets, the face value of outstanding U.S. mortgages currently represent approx 25% or $14 TRILLION of this amount

* Applying a 10% DEFAULT RATE (probably a fair assumption given the current morose state of the U.S. economy) to U.S. banking assets (including loans of all types - residential, commercial, consumer including auto, etc.), would result in about $5.5 TRILLION of U.S. assets being wiped out...a somewhat TERRIFYING amount of wealth destruction considering the fact that the U.S. financial sector entered 2008 with only $4.6 TRILLION in total equity capital (equity capital: the sum of money raised from owners of a company via the issuance of stock + retained earnings) !


Data Courtesy: Douglas Cliggot + CNBC

Top 10 Hardest Hit 'Wall Street Towns'

Make no mistake about it, Wall Street's epic slowdown will have a severe economic impact to individuals living both INside and OUTside of New York City. For my reference, a Businessweek-created List of the Top 10 Towns that will most likely be hit the hardest as a result of Wall Street's recent collapse:

Businessweek's List of Top 10 Hardest Hit Towns

1. Darien, Connecticut
Share population in finance and real estate: 27.23%
Nearest large city: New York
Population: 20,666
Median salary: $168,687

2. Bloomington, Illinois
Share population in finance and real estate: 26.31%
Nearest large city: Chicago
Population: 70,395
Median salary: $54,971

3. Hoboken, New Jersey
Share population in finance and real estate: 23.33%
Nearest large city: New York
Population: 40,002
Median salary: $81,356

4. West Des Moines, Iowa
Share population in finance and real estate: 22.15%
Nearest large city: Des Moines
Population: 54,627
Median salary: $61,303

5. Garden City, New York
Share population in finance and real estate: 20.22%
Nearest large city: New York
Population: 21,671
Median salary: $121,831

6. Summit, New Jersey
Share population in finance and real estate: 19.74%
Nearest large city: New York
Population: 20,618
Median salary: $111,497

7. Westport, Connecticut
Share population in finance and real estate: 19.39%
Nearest large city: New York
Population: 26,822
Median salary: $137,133

8. University Park, Texas
Share population in finance and real estate: 18.83%
Nearest large city: Dallas
Population: 24,582
Median salary: $110,976

9. Wethersfield, Connecticut
Share population in finance and real estate: 18.73%
Nearest large city: Hartford
Population: 26,146
Median salary: $63,359

10. Mountain Brook, Alabama
Share population in finance and real estate: 18.66%
Nearest large city: Birmingham
Population: 20,654
Median salary: $115,148

Towns-That-Could-Be-Hit-Hardest-by-the-Financial-Crisis

Data Courtesy: Businessweek

Wall Street's 2003-07 Housing BOOM Exces$

During the 5 year U.S. Housing 'BOOM' from 2003 to 2007, Wall Street's 5 Largest firms (Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Sterns and Lehman Brothers) paid their Top 5 Executives a total of more than $3 Billion in compensation!


Three BILLION dollars is of course a stunning amount of money in ANY context but especially so when considering the rather DIRE solvency/financial challenges these same firms have faced over the course of the past 6 months...NAMELY:

* Bear Sterns (the artist formerly known as BSC) was forced into bankruptcy in March

* Lehman Brothers (the artist formerly known as LEH) was forced to declare bankruptcy in September

* Merrill Lynch (MER), in order to avoid being forced into bankruptcy, was forced to sell itself to Bank of America (BAC) in September

* OH yeah, don't forget about that little $700 BILLION Wall Street 'Bailout/Rescue Plan' that was just approved by Congress this weekend !

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According to the informative Bloomberg article linked below:

* The 5 Wall Street firms had combined Net Income (profits) of $93 Billion during the five years through 2007

* Of the $3.1 Billion paid to the top five executives at the firms between 2003 and 2007, Goldman Sachs (GS) paid the highest total with $859 million, followed by Bear Stearns at $609 million...CEO pay at the five firms increased each year, doubling to $253 million in 2007, according to data compiled from company filings

* Merrill Lynch (MER) paid its chief executives the most, with former CEO Stanley O'Neal taking in $172 million from 2003 to 2007 and John Thain receiving $86 million, including a signing bonus, after beginning work in December 2007

* Bear Stearns CEO James Cayne made $161 million before the company collapsed in March and was sold to JPMorgan (JPM) with monetary backing provided by the U.S. Federal Reserve

* Hank Paulson, the current U.S. Treasury Secretary and former CEO of Goldman Sachs, made about $111 million from 2003-2006...current Goldman Chief Executive Officer Lloyd Blankfein received $57.6 million in 2007

* Morgan Stanley's (MS) current and former chief executives, John Mack and Philip Purcell, were paid about $194 million over the last five years.

* Lehman's Chief Executive Officer Richard Fuld made $165 million between 2003 and 2007

* Lastly, it should be noted that Excessive compensation was NOT limited to Wall Street's top executives as Wall Street firms have paid employees a greater share of revenue than any other industry, about 50%...The five Largest firms paid their 185,687 employees $66 Billion in 2007, including about $39 Billion in bonuses...That amounts to an average pay of $353,089 per employee, including an average bonus of $211,849.

bloomberg.com/apps/news?pid=20601109&sid=aGL5l6

Data Courtesy: Bloomberg

Full Disclosure: I own shares of GS.

Warren BUFFETT Ch-Ch-Chooses GOLDMAN

Warren BUFFETT, the uber-BILLIONAIRE and CEO of Berkshire Hathaway (BRK.A or BRK.B), must be an avid reader of this blog. How else can you explain his recent purchase of 'bank-holding' company Goldman Sachs (GS)?? I (wrongfully but still gleefully) credit my 8/27/08 post titled 'RTOB: Six Reasons to BANK on Goldman' for showing the 'Oracle of Omaha' the light. UNwarranted and completely nonsensical boasting aside, here are some of the intriguing details behind Warren's newly acquired 10% stake in Goldman Sachs :


* Berkshire Hathaway Inc. agreed yesterday to a $5 Billion preferred stock investment in Goldman...this will immediately provide Berkshire a 10% interest in GS (effectively valuing GS at $50 Billion...fyi, at $129/share the current marketcap of GS is $51 Billion)


* Buffett also reserves to the right to buy an additional $5 Billion in GS common stock sometime during the next five years at $115 a share.(anecdotally thinking...looks like he is getting an Amazing deal here)

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* FYI + During these turbulent times, Buffett's been pretty busy in terms of putting his $40 Billion of CASH into the markets as Berkshire has announced 9 acquisitions since October 2007, compared with 6 in the prior 12 months, when his largest deal was $350 million to buy VF Corp. (VFC), an underwear and pajama maker


* By mid-2008 (note, not 'through' 2008), Buffet's cash holdings have officially declined to $31.2 Billion from $44.3 Billion at the end of 2007.


* This year, Buffetts' Largest Deals include:
1.) $4.5 Billion purchase of Marmon Holdings Inc., the Pritzker family's collection of 125 companies, in March
2.) $4.7 Billion bid this month for Constellation Energy Group (CEG), the largest U.S. power seller
3.) Buffett also provided $6.5 Billion in April to help Mars Inc. buy Wrigley (WWY), giving Berkshire a stake in the chewing gum maker.
4.) Buffett also pledged $3 Billion in July to Dow Chemical Co.'s (DOW) $15.4 Billion takeover of Rohm & Haas Co. (ROH)


* Buffett's other $IGNIFICANT FINANCIAL stakes include:
1.) Wells Fargo (WFC - 9% stake)
2.) US Bancorp (USB - 4% stake)
3.) American Express (AXP - 13% stake)
4.) Wesco Financial (WSC - 80% stake)
5.) Moody's Corp. (MCO - 20% stake...even the greatest get it wrong sometimes)
* Buffett's Berkshire Hathaway is the Largest Shareholder for these 5 companies


* Buffett also owns less significant stakes in other financials including: Bank of America (BAC - 0.2% stake), M&T Bank Corp. (MTB - 6% stake) and Suntrust Bank (STI - 1% stake)

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Random
Thoughts
Of Brilliance: In this chaotic market the PSYCHOLOGY of shareholders matters perhaps more than anything else. Even though Goldman is giving Berkshire a bargain on its shares (I'm referring to the follow-up $5 Billion stake at $115/share), you CANNOT underestimate the psychological importance of being able to tell the investing public that Warren Buffett, arguably the world's $aviest investor of ALL TIME, is firmly behind your company and stock. I think this is a GREAT move for shareholders of both Goldman and Berkshire. Lastly, it will also be interesting to see how shares of GS react in the next 6 months to a year...wonder if this move by Buffet will end up marking the bottom in GS shares.


bloomberg.com/apps/news?pid=conewsstory&refer=conews&tk

http://www.cnbc.com/id/22130601/


Data Courtesy: Bloomberg + CNBC.com
Full Disclosure: I own shares of GS.

CHART - % Of Delinquent U.S. Mortgages

Per the below August 04, 2008 Chart from the New York Times...a somewhat sobering look into the SHARE (%) of DELINQUENT Subprime, Prime and Alt-A Residential Mortgages (click on the chart for a LARGER image) :




Data Courtesy: New York Times

U.S. 'New' Home Prices Off 12% From Peak

According to the U.S. Commerce Department, the MEDIAN Price of a NEW home in the United States has fallen 12% from the housing bubble-induced peak in March 2007.

bloomberg.com/apps/news?pid=20601109&sid=aSW356GUarw4&refer=home




Data Courtesy: Bloomberg

Washington's $700 Billion 'RTC' Rescue Plan

In order to avert an all out CRISIS in the U.S. financial system, the Bush administration is seeking UNPRECEDENTED authority to step in as a 'Buyer of Last Resort' for up to $700 Billion worth of U.S. mortgage-related assets. Per the below Bloomberg link, DETAILS of the $700 Billion RTC-type rescue plan :


* The plan seeks 'unchecked' power from Congress (the bill would prevent courts from reviewing actions taken under its authority) to buy $700 Billion in bad mortgage investments...for some perspective, this sum is roughly equivalent to the combined annual budgets of the Departments of Defense, Education and Health and Human Services

* The proposal would raise the United States' national debt to $11.315 TRILLION from $10.615 TRILLION and require the U.S. Treasury secretary Hank Paulson to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that

* Types of 'Assets' covered under the plan include: home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve Chairman, Ben Bernanke, "other assets, as deemed necessary to effectively stabilize financial markets''...Treasury may buy only assets issued or originated on or before September 17th, 2008

* Hank Paulson is also asking for the power to hire asset managers and award contracts to private companies...The Treasury may hire managers to purchase the assets through 'reverse auctions', seeking the lowest prices

* The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program

* Most provisions of the proposal will expire 2 years following the date of enactment

* The plan will include curbs on executive pay for the companies whose assets the government will be buying

* The proposal will also most likely include a plan to stem mortgage foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration (The FHA), the Federal Deposit Insurance Corp. (The FDIC), Freddie Mac (FRE) and Fannie Mae (FNM)

bloomberg.com/apps/news?pid=20601087&sid

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FYI, This is NOT the first time a MASSIVE 'bad asset purchase' plan similar to one above has been proposed + ultimately implemented by the U.S. Government to avert crisis in the financial system:


* According to Wiki, "The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision, as a consequence of the 1980s-90's U.S. Savings and Loan Crisis... In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation. Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 Billion."


http://en.wikipedia.org/wiki/Resolution_Trust_Corporation


Data Courtesy: Bloomberg + Wikipedia

Fitz On Housing + Wall $treet's Impact On NY

Per RealMoney.com contributor Dan Fitzpatrick, behold some somewhat obvious but nonetheless poignant words I believe are worth noting related to what's needed for a BOTTOM + Sustainable Recovery in U.S. Housing/Real Estate prices:

The Order of Economic Recovery

By Dan Fitzpatrick
9/19/08 11:30 AM EDT

"Just a quick note this morning. Those who are eagerly looking at the real estate market with optimism that the worst is over are looking the wrong way. Houses are the ultimate Big Ticket Item. They are generally not bought until the consumer feels confident in his earning capacity by way of a steady JOB with upside potential. We need an economic recovery BEFORE real estate moves higher...not the other way around. It has always been that way, and will always be that way. Not my opinion -- it is a fact."

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* Anecdotally thinking and speaking of real estate, one of the select FEW pockets of strength for the post-2005 U.S. real estate market was Manhattan, New York. This will most certainly NOT be the case moving forward for at least the next 5-10 years following the EPIC collapses of former WALL STREET giants Bear Sterns (the artist formerly known as BSC), Lehman Brothers (the artist formerly known as LEH), Merrill Lynch (MER...soon to become a piece of Bank of America/BAC), American Insurance Group (AIG...now 80% owned by the Federal Government), etc.

In attempting to quickly assess the potential Ramifications of a WOUNDED Wall Street to NEW YORK's economy (and therefore to New York's real estate market), it should be noted that per August 2008 comments from Thomas DiNapoli (the 'Comptroller of the State of New York'...also commonly referred to as the 'Chief Fiscal Officer of New York State') :

* Wall Street firms make up approximately 20% of New York STATE's total tax revenues

* Wall Street contributes about 9% of New York CITY's total tax revenues.


bloomberg.com/apps/news?pid=20601087&sid=aYhqIluVHh7U&refer=home


Data Courtesy: Realmoney.com (subscription only) + Bloomberg

EA Tells Take Two 'Game Over'...For Now

Due to a disagreement over PRICE, Electronic Arts (ERTS) announced yesterday that they are formally halting TAKEOVER negotiations with Take Two Interactive (TTWO). As a result of the news, shares of Take Two fell back to their pre-EA bid levels of about $17.00/share as investors reacted negatively to EA's bid of $25.74/share being taken off the table (think 'PRICE FLOOR').


http://www.bloomberg.com/apps/news?pid=20601213&sid=aprL_MNHg9ns&refer=home


Anecdotally reacting + per previous blogs posted on this subject (FYI, you can refer to them by clicking on 'Take Two Interactive' in the Archive Keyword Reference section on the right), while Take Two's volatile price action can OFTEN test one's resolve, I am still a firm believer in TTWO's fundamental growth story..whether the company remains independent or not. While my investing thesis related to the company being acquired may take a while longer to be realized, I am still quite confident that Take Two will eventually receive another TAKEOVER bid for its proprietary content in the rapidly growing and consolidating video game industry.


BOTTOM LINE - I view the ERTS related sell-off as an OPPORTUNITY similar in SCOPE to the one that was presented to investors of Take Two around this time just LAST YEAR (the company's shares OVERreacted to GTA 4's delay last July and declined violently in a 3 week stretch from $20.05 a share on 7/27/07 to $12.25 a share on 8/17/07...a 40% drop in 3 weeks!). I plan to add to my small-ish position once the stock and broader market shows signs of stabilizing (in VOLATILE times like these PATIENCE is most certainly an investing virtue).


Data Courtesy: Bloomberg
Full Disclosure: I own shares of TTWO.

CHART - U.S. CNG 'Gas Stations' By State

As the T. Boone Pickens 'Natural Gas fuel for vehicles' Plan continues to gain traction (California will be voting in November on a new $5 Billion natural gas vehicle SUBSIDY bill), check out the below U.S. Department of Energy CHART detailing the approximate amount of Compressed Natural Gas Fuel-Filling Station locations by STATE (FYI + as hinted above, CNG or Compressed Natural Gas is a fossil fuel substitute for crude oil-derived gasoline) :

* Anecdotally thinking, looks like the country has a ways to go in terms of achieving MASS ADOPTION of Natural Gas Fuel Stations...smells like a HUGE opportunity for SOMEONE including T. Boone Pickens and his speculative natural gas fuel service company Clean Energy Fuels Corp. (CLNE)...Makes sense that California leads the country in natty gas fueling stations when considering its $5 Billion subsidy proposal...Interesting to see that New York, Utah and Oklahoma make up the next largest group of Natural Gas 'gas station' states


http://www.eere.energy.gov/afdc/fuels/natural_gas_locations.html


Data Courtesy: U.S. Department of Energy
Full Disclosure: I own shares of CLNE.

CONOCO Goes Long L-N-G For $8 Billion

In a possible sign of things to come for the still emerging L N G energy industry, Conoco Phillips (COP), the U.S.'s 2nd largest Natural Gas producer and Crude Oil Refiner, is investing $8 Billion in a Liquefied Natural Gas joint venture with Australia's Origin Energy Ltd. The business will focus on converting Coal-seam gas into Liquefied Natural Gas for sale/export to Asia. Conoco's 50% stake in the J-V will entitle the company to a 50% ownership interest in Origin's 'Gross Resource' (think 'Reserves') of 42 Trillion cubic feet of Coal-Seam Gas.

As power producers switch to cleaner fuels, Citigroup's research arm forecasts LNG demand will increase by 10% a year through 2015...more than 5 times the projected demand growth of Crude Oil (RTOB: makes sense as Crude Oil has such a HUGE existing 'demand base' relative to LNG...given current demand levels, it would take something extraordinary for global crude oil usage to spike 10% a year...production capacity constraints would never allow supply to accommodate 10% growth anyways). FYI + According to Bloomberg, LNG is Natural Gas that has been chilled to liquid form, reducing it to 1/600th (one six-hundredth) of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit), for transportation by ship to destinations not connected by pipeline. The gas is odorless, colorless, non-toxic and non-corrosive. On arrival, it's turned back into gas for distribution to power plants, factories and households.


http://www.bloomberg.com/apps/news?pid=20601087&sid=a0aFYl4uRBO4&refer=home


Additional points per the link above:
* At a marketcap of $15 Billion, Origin Energy Ltd is Australia's Largest Producer of Gas from Coal seams...coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced (usually after water is removed)


* The companies plan initially to build 2 LNG 'Production Units' (plants), each with a capacity of 3.5 million metric tons a year, with deliveries scheduled to start by 2014


* Origin Energy will operate the coal-seam gas production part of the venture, while Conoco Phillips, which already operates an LNG plant in northern Australia, will operate the LNG output.



Data Courtesy: Bloomberg
Full Disclosure: I own shares of COP.