Finance Trends Letter

As we noted in an update to yesterday's post , the US House rejected a Treasury-sponsored $700 billion bailout bill that would have would have given Treasury Secretary Hank Paulson "broad authority" to purchase mortgage-backed junk paper from financial companies. Part of the reason the bill failed in the House was the overwhelming response from Americans incensed at the proposed deal. Voters flooded their congressmen with mail, faxes, and phone calls, with many voicing their strong disapproval of the proposed bailout. As a result, the tide surprisingly turned against congressional planners and unelected officials who had pushed for the bailout, some of whom shamelessly paraded the plan as a "rescue of Main Street", when in fact it is anything but that, especially when one examines the longer-term costs of such a rescue. Unfortunately, the bailout proposal will not die so easily. The stock market is enjoying a rebound today, as news of a hoped-for salvaging ...

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Stock markets are falling worldwide Monday, as market participants react nervously to the US Treasury's proposed bailout bill and fears of global bank failures. Bloomberg has more in, "Stocks worldwide tumble most since 1997, bonds rise on bailouts" : " Stocks around the world fell the most since October 1997, the euro and the pound sank and bonds rose as governments raced to prop up banks infected by growing U.S. mortgage losses. The Standard & Poor's 500 Index fell 3.8 percent after Wachovia Corp. required a takeover by Citigroup Inc. and lawmakers predicted a close vote on the Bush administration's $700 billion bank bailout. The British pound dropped the most against the dollar in 15 years after European governments stepped in to save Bradford & Bingley Plc, Fortis and Hypo Real Estate Holding AG. Commodities fell. The cost of borrowing in euros for three months soared to a record as banks hoarded cash. ``People are wondering if $700 billion ...

Treasury Secretary Paulson's $700 billion bailout bill heads to the House on Monday. Details from Marketwatch : "Democratic congressional leaders announced their agreement Sunday on details of a massive financial rescue plan proposed by the Bush administration, releasing a draft text trumpeting taxpayer guarantees and caps on executive compensation. The draft bill, titled the "Emergency Economic Stabilization Act of 2008," follows days of legislative wrangling over a $700 billion plan proposed by Treasury Secretary Henry Paulson as U.S. financial markets teetered on the edge of a collapse triggered by the U.S. mortgage crisis. The bill will be introduced in the House of Representatives Monday morning and then head to the Senate, said Senate Majority Leader Harry Reid, D-Nev." Despite overwhelming disapproval from the American public, this bill may be voted on by the Senate as early as Wednesday . Commentary on the bailout proposal has been pouring forth from all...

Many of us in present day America have been taught to look for a government solution to any crisis (including those brought about because of earlier government interventions). Today we explan why government "solutions" may only serve to deepen the problems or prolong these crises, with the hope that this post may serve as a useful antidote to the "save us" mindset. I recently began reading Thomas E. Woods' recent book, 33 Questions About American History You're Not Supposed to Ask , which details and rebuts many of the popularly held notions concerning our country's political and economic development (see our post featuring author Woods' interview with the Mises Institute's Jeffrey Tucker , in which the two discuss some of the book's main ideas). Yesterday, while reading Thomas E. Woods' explanation of how government intervention in the economy actually prolonged and deepened the Great Depression, it struck me how much of what was writte...

Swiss investor and frequent Barron's Roundtable participant Felix Zulauf was featured in the lastest Barron's interview, a piece entitled, "The Pain of Deleveraging Will Be Deep and Wide" . Here's an excerpt in case you missed it: " Barron's : It's been an unprecedented time in the financial markets, with Lehman filing for bankruptcy protection, Merrill Lynch being bought by Bank of America and AIG getting rescued by the U.S. government. What's the fallout going to be? Zulauf : The leveraging-up in this cycle is reversing, and we are now deleveraging. When a huge system -- that is, the global credit system dominated by the investment-bank giants that have been the major creators of credit in the last cycle -- turns down, the fallout is going to be terrible. Deleveraging is a very painful process, and will run longer and deeper than anybody can imagine. I've been fearful of this. So far, what we're seeing is the pain in the financial syste...

Central Planning chairman Ben Bernanke has discovered an efficient new way to set prices in the securities market: by government edict. Quote from, "Avoiding fire sale price is key to Paulson plan: Bernanke" : "Federal Reserve Board chairman Ben Bernanke said that criticism of the $700 billion plan proposed by Treasury Secretary Henry Paulson overlooked a key ingredient: it is designed to avoid forcing banks to sell or value their mortgage assets at a "fire-sale" price. In a harsher tone than he has ever used in testimony, Bernanke spelled out the benefits that would accrue when the government can buy these mortgage assets at close to "hold to maturity" prices instead of the fire-sale price. Banks would have a basis for valuing the assets and won't have to use fire-sale prices and their capital won't be unreasonably marked down, he said." No, we get it, Ben. The point you think we've "overlooked", this plan's attempt to ...

Last night's surprise announcement that investment banks Goldman Sachs and Morgan Stanley were changing their status to bank holding companies marks the end of an era for big Wall Street investment banks. As mentioned last week in, "The end of the broker-dealers?" , Goldman and Morgan were, at that time, the last two survivors of the "big five" independent Wall Street investment banks. Even before Lehman Brothers had filed for bankruptcy and Merrill Lynch was swooped up by Bank of America, some, like Nouriel Roubini , had said that the broker/dealer business model was flawed and doomed to failure. Now that the last two major independent investment banks have restructured themselves as Fed-regulated banks, it seems that the end of the independent broker dealers has come about quicker than many of us might have imagined. More on this from Bloomberg : "The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group I...

A looney, volatile week in the markets fueled by government intervention and artificial supports for financial firms and stock prices. We scan the globe for signs of intelligent life in our, "Features of the week" . 1. US drafts sweeping plan to fight crisis . Treasury announces plan to buy worthless mortgage paper. 2. SEC issues temporary ban on short-selling of 799 financial stocks. Just following the FSA's lead , I guess. Note: Once again, we bring you Doug Kass' comments on the short-seller blame game . Plus, BMB's comments on "Kill Shorty" . 3. Buffett's derivatives "time bomb" goes off on Wall Street. 4. Strong push for an RTC-type solution to the credit crisis. Note: Jim Puplava and others at Financial Sense Online saw this type of Resolution Trust solution to the mortgage debt crisis coming. 5. Stocks soar worldwide following bank bailouts, short-sale restrictions. 6. "Is Capitalism Dead?" , asks Minyanville's To...

What a manic-depressive market we have. Stocks soared today in US trading, erasing most of yesterday's losses in the Dow Industrials and S&P 500 index. What was the inspiration for this turnaround? Increased corporate profits? Surprising news of economic strength? Heavy fund buying of bargain shares? No. It was a government plan to make things "all better". Bloomberg has the story: "U.S. stocks rallied the most in six years on prospects the government will formulate a ``permanent'' plan to shore up financial markets, while regulators and pension funds took steps to curb bets against banks and brokerages. Traders erupted into cheers on the floor of the New York Stock Exchange as the Dow Jones Industrial Average jumped 617 points from its low of the day after Senator Charles Schumer proposed a new agency to pump capital into financial companies. The Standard & Poor's 500 Index climbed 4.3 percent as 68 companies in the gauge rose more than 10...

We bring you two recent video clips from the CNBC-TV18 channel in India, featuring investors Jim Rogers and Marc Faber. In the first clip, Jim Rogers tells CNBC-TV18 that he is still bullish on gold and agricultural commodities, despite the recent sharp correction in most commodity markets. Jim thinks commodity prices will be higher in the next decade. For now, he says we are in a recession and will likely see lower commodity prices for the near-term. Rogers is still bearish on the dollar's long-term prospects, and he hopes to use the recent rally as an opportunity to sell the dollar in the near future. He is bullish on the yen, renminbi, and Swiss francs, which he has been buying. Marc Faber also spoke with CNBC-TV18 last week. He offered the view that contracting liquidity worldwide had a varied effect on the timing of asset price declines, with all major asset classes (stocks, commodities, currencies) eventually tumbling in a domino effect. While he sees the possibility for co...

Not a good day for US shares. As we head into the close of Wednesday's US trading session, the Dow Industrials are down around 400 points (-3.7 percent), and the S&P 500 index is down around 50 points, or -4.2 percent. North American stocks suffered today , while gold rallied sharply , despite the government's $85 billion bailout loan to troubled insurer and financial-engineering firm AIG . Meanwhile, Bloomberg reports that bank lending has seized up , treasury bill yields plunged to a 54-year low on a rush to perceived safety, and global shares have lost about $2.8 trillion in market value this week. Major share indexes in Russia , Hong Kong , and the US have fallen to new multi-year lows. But the main focus of the markets has been on AIG, which leads a basket of 13 "unlucky" US stocks that have lost $1 trillion in market value this year. The Wall Street Journal reported today that the US will take over AIG in an $85 billion bailout . In a quick turnaround of...

First it was Bear Stearns that went under, sold at the last moment in a fire-sale deal to JPMorgan Chase back in March. Then it was Lehman Brothers, who filed for bankruptcy early Monday after unsuccessfully attempting to strike a quick takeover/rescue deal this past weekend. Now Merrill Lynch has announced it will be taken over by Bank of America in an all stock deal valuing Merrill at $50 billion. The deal was arranged quickly over the weekend, as fears of a possible Lehman failure were starting to spread to other major investment banks. Bloomberg reports on the "'Tectonic' shift on Wall Street as Lehman Fails, Merrill Sold" : "In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co . and Lehman Brothers Holdings Inc., headed toward extinction. New York-based Lehman, founded 158 years ago, said early today that it plans to file for Chapter 11 bankruptcy protection aft...

"The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups ." - Henry Hazlitt. Economics in One Lesson . We bring you our, "Features of the week" . 1. Troubled Lehman Brothers races to find a buyer . See also: "A Bailout for Lehman? Not Likely" ; and a "bad bank" for Lehman's toxic assets . 2. US crude oil futures dip below $100 , despite Hurricane Ike threat. 3. Fannie Mae and Freddie Mac accounting created a "house of cards" . 4. Fannie/Freddie bailout wins Pimco $1.7 billion . 5. Government bailouts are likely to prolong economic downturns . See also: Jim Rogers on America's "lost decade" ; FT, "Cost of US loans bailout emerging" ; Mark Thorn...

On the bailouts of Fannie Mae and Freddie Mac, investors Jim Rogers and Warren Buffett cannot agree. Rogers feels the US government takeover of Fannie and Freddie is a disaster that signals the US' shift to socialism, while Buffett has called it a "sensible deal" and the best option available at the time. Excerpts from the Money Morning piece, "Jim Rogers and Warren Buffett at odds on Fannie/Freddie bailout" : " Few analysts have abstained from voicing an opinion about the U.S. government’s plan to seize control of Fannie Mae ( FNM ) and Freddie Mac ( FRE ), the nation’s embattled mortgage behemoths, and that include such eminent investors as Jim Rogers and Warren Buffett. Of course, two of the world’s greatest financial analysts have very two very different perspectives. " It is socialism for the rich ," Rogers said yesterday (Monday) during an interview with CNBC Europe, "It’s just bailing out financial institutions."... ...Of course, ...

The US stock market was pretty green across the board , as most major market averages (with the exception of the Nasdaq 100) enjoyed gains Monday. The positive action in the markets was spurred on by the weekend's news of a US government takeover of failed mortgage giants Fannie Mae ( FNM ) and Freddie Mac ( FRE ). Both Fannie and Freddie closed down over 80 percent on the day, as investors reacted to news of the dilution looming over common shareholders as a result of the Treasury's nationalization of the GSEs. In contrast to Fannie and Freddie's plunging share prices, many of the other financial shares enjoyed a rally today , as did the US home builders. More on that from Bloomberg : "U.S. stocks climbed, adding to a rally across Europe and Asia, on speculation the government takeover of Fannie Mae and Freddie Mac will stabilize the global financial system battered by $507 billion in credit losses. Citigroup Inc. , Wachovia Corp. and Bank of America Corp. added at...

Well, it looks like the "crybaby capitalists" will get their way. Fannie Mae and Freddie Mac have been taken over by the US Treasury Department , and the much-anticipated bailout of the "quasi-public" mortgage lending giants is now underway. A quick overview of the government conservatorship : "The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market... The FHFA will take over Fannie and Freddie under a so-called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market." Unintentionally h...