2009: More Naughtiness


In 2008 we witnessed too many economic one-hundred-year events to rank them in order of importance. Was Bear Stearns’ demise more of a shock than Lehman Bros.’? Most would say no. And what of Bernie Madoff who will be a $50 billion footnote when all is said and done.

No other six-month period has ever seen the amount of intervention by central banks and governments into the public markets. Over two trillion of dollars by the fed and Treasury have been pledged to prop up credit and derivative markets just in the US.
And yet we sit here today with Detroit, Wall Street and nearly half the state capital’s budgets in tatters over this crisis with all benchmarks referencing 1930’s depression.

2009 — the end of the naught decade — has all the earmarks of another horrendous economic year. On so many economic fronts it appears to be in a downward spiral, which global finance ministers have no tools — beside their country’s balance sheet — to curtail the idea of their pushing on a string.

Growth is not in the projections of leading economists. The best of the outlooks for 2009 calls for flat to modest declines, with the anticipation being that the second half will be better than the first. I believe that thought only comes about because year-over-year comparisons will make the data appear as if it is improving.

Nowhere in these projections do economists see government spending being reigned in. Most economists are seeing large government inputs of capital to relieve the pressures of credit-derived recession. The incoming Obama administration is floating a $1 trillion stimulus plan on top of trillions already pledged as well as massive funds being released by China and EU countries.

When I exclusively wrote of “Almost Armageddon” on Sept. 21 reporting how Treasury stepped into the pre-market with a $105 billion liquidity injection to quell a money market sell off on the opening bell. Many thought that was other shoe to drop over the Lehman Bros.’ bankruptcy days earlier.

As we know now Lehman was a centipede with so many shoes dropping that 2009 will be looked upon as a lost year from an economic standpoint.

The stock and bond markets will more than likely run up higher in the beginning of the year on Inaugural Day anticipation and inflows from 401(k)s. If you hear the tune “Happy Days Are Here Again,” then head for the hills since it took President Franklin D. Roosevelt almost 10 years and a world war to pull America out of its last hundred-year event – The Great Depression.

This anticipated market run up may end on the first Friday in Feb. when undiluted January unemployment numbers hit. The Bureau of Labor Statistics does not add phantom jobs under its Birth/Death model the jobs it thinks were created in its January number. The weekly unemployment numbers will continue to wrack the markets on each Thursday for the 1st half of the year.
Warren Buffett comes out of hibernation after being publicly flogged for the first time in his career on his bad investments in taking capital stakes in Citigroup and Goldman Sachs and the bad press he received when news came out that he was involved in the derivatives market, after stating earlier he would not invest in a market that he did not understand.
In early Feb. Buffett will emerge from his Omaha, Neb. cave and see his shadow declaring there will be six more weeks of recession.

The Federal Reserve and incoming Treasury chief-designate Tim Geitner will have so many irons in the fire — some left over from Hank Paulson –– to combat this recession even though there is no economic model either from the Chicago or the London schools of economic to predict how this all plays out. Stimulus plans and further capital injections in large banks deemed too big to fail will more than likely be Geitner’s modus operandi.

The public row between Geitner and FDIC head Shelia Bair has already leaked out, with the Treasury chief questioning whether Bair is a team player.

The different tacks the two monetary chiefs see as the path to recovery really boils down to Bair wanting to help mortgage holders and Geitner helping Wall Street institutions holding the paper and derivatives based on that paper.

Although Treasury Secretary Henry Paulson was seen as flip-flopping on his rescue plan, I believe history will show that so much changed between mid-September and November of last year that no one could have laid out a comprehensive plan and stayed true to it.

The original Treasury plan was three pages long. I believe one of the sentences written in September stated that the Federal Reserve and Treasury would do everything in its power and then some to keep the ATMs in the US functioning. That is how close we were to the brink in the third week in September.

Geitner was at the table during this period, so a smoother transition should be in the cards. A real concern by certain analysts and economists is that Geitner will stay with Paulson’s idea of only bailing out Wall Street banks.

Many see a better use of federal rescue funds being deployed to regional banks, which can put the funds to work as loans instead of propping up beleaguered balance sheets of insolvent banks.

With federal banking officials pouring over Citigroup’s trading and banking books as well as its balance sheet for the last two months, some see a determination will be made in the middle of the first quarter, by perhaps FDIC chief Bair, that Citigroup should be “officially” nationalized and its pieces unwound.

Fed Chairman Ben Bernanke has overseen the huge expansion of the Federal Reserves’ balance sheet. Although many critics have questioned what firms are receiving the $2 trillion in loans, Bernanke’s plan of keeping these funds out of circulation by offering Wall Street banks interest on these excess reserves only increases the credit crunch by rewarding banks for taking less risk.

Bernanke’s plan is an attempt to heal crippled balance sheets while at the same time keeping the money supply steady to battle the threat of inflation should the funds be put to work and hit the general money supply.

Total Fed lending exceeded $2 trillion for the first time on Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Lehman Bros.’ demise, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.
Globally since last January the total losses in the equity markets are estimated to be in excess of $31 trillion according to the International Monetary Fund. This figure does not take into account global losses in real estate or defaulted loans, which could take that figure up to $75 trillion for 2008. Global GDP for 2007 was $54.3 trillion, according to the World Bank.

The European Union and the euro will be challenged like never before as recessionary forces pull its member states apart. Riots in Greece – although initiated by a police shooting – have escalated over bad economic news and unemployment. Other EU member states are lining up for IMF money at record pace. Riots have also been reported in China, where farmers brought into the cities to work in factories find themselves with out work or land. Iceland and Nordic countries are also experiencing unrest as their socialist governments strain to fund government programs with diminished resources.

The European Central Bank is facing problems with the euro as weaker states such as Spain, Italy and newer Eastern European countries need further financial and credit rescues while Europe’s largest economy, Germany, looks more nationalistically toward the mark as a way to prop up its economy and control deflation, which the EU central bankers do not see as a concern.

The ECB’s mandate is to control inflation and is signaling to member states it does not see any benefits to lowering its lending rates any further. When the Bank of England cuts its prime lending rate later this month, that rate will be at a 300-year low.
The exploration of the globe for colonization, the American Revolutionary War or the rebuilding of London after World War II’s Blitzkrieg bombing never took the rate below two percent. This action demonstrates how extensive and pervasive the credit crash is.

Belgium’s government has collapsed for the third time in the last year with the most recent overhaul blamed on the attempted bailout of Fortis —- the banking, insurance, and investment management giant based in Brussels, which sustained huge derivative losses on mortgages.

Is it a coincidence that the Posse Comitatus Act, a 130-year-old federal statue, which restricts the military’s role in domestic law enforcement is being undermined under the premise of homeland security to fight domestic unrest.

Dollar strength will continue until Obama’s honeymoon runs his course. The length of the honeymoon will be determined by his actions on the stimulus. If the president-elect moves forward with an infrastructure rebuild, then it will be a short and not so sweet period because the stimuli needs so much more.

The US economy needs to build products and services, which can be resold to generate capital. Infrastructure rebuilds do not generate capital or profits. Uncle Sam needs more trucks rolling on existing roads than new thoroughfares.

I’ve never been one to change the rules in the middle of the game, because I’m losing, but I think in the first quarter the new SEC-designate Mary Schapiro will suspend the mark-to-market accounting rule in an attempt to free up bank capital for lending.

Although Uncle Sam decided not to chastise China last month for devaluing the yuan, thereby cheapening Chinese goods, trade barriers such as these will become a larger issue in 2009.

Despite G8 and G20 assurances, free trade will be curtailed sharply as nations attempt to buoy their internal industries by undercutting their currencies or enacting tariffs. This could create beggar-thy-neighbor policies globally leading to a deflationary downturn.

US housing prices will decrease an additional 18 percent as homes for sale reaches 12-month inventory and foreclosures and reworked-mortgage foreclosures continue rise, according to industry projections.

Restructuring mortgages through reducing interest rates or increasing the length of the loan does not work. Almost 60 percent of the reworked loans returned to default in just eight months, a federal regulator said.

JPMorgan CEO Jamie Dimon said that reducing interest rates on loans is the best way to help borrowers avoid foreclosure. One of the best ways to reduce the housing slide would be to lower mortgage rates to 4.5 percent, Dimon said.
Lowering rates without touching the principle allows the banks to workout the loan without undermining the toxic paper derived from the original loan. This is why the principle is untouched.

A reworked loan or modification can result in a higher payment if lenders roll back into the note items such as: unpaid principal, interest and escrowed taxes, according to Faith Schwartz, executive director of Hope Now, a private sector alliance of mortgage servicers, counselors and investors that is coordinating some loan modifications.

Stated unemployment may rise to 9 percent with total job losses during the recession expected to reach 3.5 million to 4 million, depending on stimulus package, according to a private employment firm estimates. White-collar unemployment could move higher with an infrastructure stimulus being focused on blue-collar workers. Not many Wall Street bankers know what the business end of a shovel is used for.

Corporate rating downgrades by S&P, Moody’s and Fitch will rise as firms can no longer fund operations in credit-deprived environment meaning the corporate debt costs will be rising. Bankruptcies will climb as companies cannot refinance costs, thus leading to a longer recovery due to restricted credit availability.

Should the credit markets continue to limp through 2009, corporate dividends will be slashed despite the protestations of CEOs about protecting the payout for 2009 late last year.

Gerald Corrigan, former NY Federal Reserve president, who is leading Goldman Sachs bank holding company will perhaps takeover the firm sometime this year as it seeks to find its way on the new Wall Street. Current CEO Lloyd Blankfein will probably take the underground tunnel that links the company’s headquarters with Washington.

So looking ahead 2009 may be a very difficult year to see profits and growth. Wall Street needs to find a new revenue model.
The Obama administration needs someone other than itself to be the buyer, the selling and the lender of last resort.
When Citi’s Vikram Pandit and Merrill Lynch’s John Thain took over the firms, everyone asked for a “kitchen-sink quarter” to rid the balance sheets of all the mess with large writedowns.

Well let’s hope the President-elect can do what these men could not and rid the US of “zombie” companies in order to move forward. If not the naughts will continue well into 2010 and beyond.

Check back on Tuesdays and Thursdays for additional posts.


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