Oil Surges a Record $25 a Barrel on $700 Billion Wall Street Bailout Plan

The $700 Billion Paulson bailout plan is not going over too well with the markets. Oil surged today a record $25 a Barrel to $130 for October delivery closing at $120.92 up $16.47. November oil closed at $108.69, up $5.94. AP

Now according the the New York Times the big Wall Street firms want a piece of the 700 Billion Bailout. Big Financiers Start Lobbying for Wider Aid

Goldman Sachs and Morgan Stanley to become Bank Holding Companies

Goldman Sachs and Morgan Stanley the last two large independent investments banks in the United States petitioned the Federal Reserve on Sunday to become bank holding companies. The Federal Reserve not only approved of the conversion it waived the five day waiting period and made the conversion effective immediately! Now, Goldman Sachs and Morgan Stanley in their new forms can borrow directly from the Federal Reserve.
Forbes

My comment: The fact that Henry Paulson U.S. Treasury Secretary is the former CEO of Goldman Sachs certainly did not hurt this instantaneous rescue by the Federal Reserve.

Oil at $93.18 a Barral

Can you say Deflation?

With all the attention focused today on Lehman, Merrill, AIG, WaMu, the 504 point drop in the Dow and virtually everything else in the financial sector, a significant fact that does not seem to be getting any attention is that oil is now down to $93.13 a barrel, it closed last Friday over a $100 a barrel. That is a 7% drop in one day!

AIG Worlds Largest Insurer on the Ropes

What is noteworthy here is that AIG is not an Investment bank but an Insurance company. The largest Insurance company in the world. AIG has written more credit default swaps then Lehman did. A while back Warren Buffet called credit default swaps "Financial weapons of mass destruction".

From Mish's Global Economic Analysis: AIG Struggling To Stay Alive, Begs Fed For Cash

From Naked Capitalism: WSJ: Fed Asks Goldman, JP Morgan to Lend $75 Billion to AIG (But Financial Times Disagrees)

Pimco, Vanguard, Franklin lose $86 Billion on Lehman Bankruptcy

From Bloomberg: Pimco, Vanguard Are Biggest Lehman Bond Fund Losers

"The losses look set to be widespread, hurting the public through their mutual and pension funds," said Ciaran O'Hagan, a credit strategist at Societe Generale SA in Paris. "It's clearly a disaster for public confidence."

Lehman Bankrupt, Dow drops 504 points for the day

Wow, what a day. Lehman Brothers files for bankruptcy, over $613,000,000,000.00 in debt, making it by far the largest bankruptcy ever. Lehman's closing price last Friday was $3.65, when it traded today at 29 cents per share that was a one day drop of 92%. From Bloomberg: Lehman Files Biggest Bankruptcy Case as Suitors Balk

"Lehman bondholders may get about 60 cents on the dollar if the investment bank is forced into liquidation"

Fed and Wall Street in High Stakes Game of Chicken over Lehman Bailout

The U.S. Treasury Secretary, SEC Chairman and Timothy F. Geithner president of the New York Federal Reserve met Friday evening with the chief executives of Goldman Sachs, JP Morgan Chase, Morgan Stanley, Citigroup and Merril Lynch in an effort to force Wall Street to take the lead in saving Lehman Brothers. U.S. Gives Banks Urgent Warning to Solve Crisis


"Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.

Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next."

My comments: Things are really getting ugly and they are running out of both options and money. The Fed had to act to save Bear Stearns they really had no choice. But they can't keep taking garbage as collateral and back stopping the risk on all these Wall Street sweetheart deals. Yet, most of the major Wall Street firms have their own problems to deal with and are not in any shape to take on more problems.

This is the end result of Free Market Orthodoxy running wild and effectively unregulated for decades. In simpler terms not only was the fox guarding the hen house, the fox was also running the hen house, selecting and feeding the chickens and lobbying the farmer for more chickens, a bigger hen house and complete autonomy from the farmer. The fox has become the Viceroy of the hen house (with accountability to no one).

"Mr. Geithner, who led the session, firmly stood his ground. He told the banks that this was about fixing the system and preventing the crisis from worsening."

My comments:

The Good - Geithner standing his ground.

The Bad - "preventing the crisis from worsening" does not sound good!

The Fed completely off track - The fox (Banks & Wall Street) are not going to
fix the system. The Fed and the regulators have to fix the system!
Thus, while the Fed is waiting for the financial industry to fix itself the
crisis is definitely going to get worse.

Inflation or Deflation?

Paul Krugman of the NYT weighs in on the Inflation or Deflation debate, and he predicts Deflation.

Deflation is worse than Inflation because it is more difficult to counteract. The more deflation takes hold the less effective monetary policy is (You can lead a horse to water but you can't make him drink).

Paulson "adamant" no goverment funds for Lehman: source

Reuters

Is all the talk about "Socialism for the Rich" having an impact on Paulson? Or is he bluffing?

A New Focus for the Domino Theory

In 1954 President Eishenhower defined the Domino Theory during a press conference - "Finally, you have broader considerations that might follow what you would call the "falling domino" principle. You have a row of dominoes set up, you knock over the first one, and what will happen to the last one is the certainty that it will go over very quickly. So you could have a beginning of a disintegration that would have the most profound influence ”

When Eisenhower said that during the press conference his focus of the Domino Theory was on Asia, now Pension Pulse applies it to the financial markets in Is Counterparty risk set to explode?

Ultimately the Domino Theory proved to be wrong about Asia, but financial institutions today are much more explicitly tied togeather by loans and more exotic financial contracts such as credit default swaps and collateralized debt obligations.

The Significance of Lehman Brothers Decline

While following the decline and fall of Lehman it is important to note two significant aspects:

1. Bear Stearns which was the first to fall was hated by many for it's in your face attitude, for being a maverick and an outsider. Therefore, Bear was the most likely to be tossed from the life boat when the going got rough. Lehman Brothers is well connected and a member of the Wall Street in crowd, no one in the Wall Steet fraternaty want's to see it fail.

2. The credit crisis has been going on for over a year now. Bear Stearns was the line in the sand. An enormous rescue effort was mounted to halt the financial decline from spreading to other firms - and it failed. Fannie Mae and Freddie Mac were the second and third to be rescued - and the financial decline was once again not contained. Now Lehman is struggling for its life.

The difference between Business and the Economy

Hennry C.K. Liu

" Business exists to make profit for the businessman and there is nothing wrong with that as long as ethical rules are observed. Unlike business, the economy exists to enhance progress in civilization. The former is artificial, the latter is actual. The key problem of the recent decades of Friedman monetarism has not been that money matters but that it matters too much."

My Comment: Ethical Rules? - The multi faceted economic/financial/political problem we are ALL in today is the result of NO RULES! We went way beyond deregulation, even the regulations that were left were not enforced!

The Oracle of Omaha stops insuring bank deposits above the $100,000 FDIC Limit

Warren Buffet the legendary investor and head of Berkshire Hathaway (which has one of the crappiest web pages I have ever seen! Did Warren do it himself? If he did, he should stick to investing.) has instructed one of his companies to halt the practice of providing private insurance on bank deposits above the $100,000 FDIC limit.

According to the WSJ
"The subsidiary, Kansas Bankers Surety Co., is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds." KBS is an 18-employee subsidiary of Berkshire Hathaway, according to the parent firm's 2007 annual report."

My comment: If Warren Buffet is pulling out of a cash cow business, there is a good reason for it - banks in the U.S. are in an unstable condition in an unstable economy under unprecedented circumstances. Where there is smoke there is fire.

Socialism for the Rich

Straight from the lips (well finger tips) of Dr. Doom!" The ideologue “regulators” who literally held a chain saw at a public event to smash “unnecessary regulations” are now communists nationalizing private firms and socializing their losses: the bailout of the Bear Stearns creditors, the bailout of Fannie and Freddie, the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities)"

Yea - Go Dr. Roubini!

9.3 Million and 14.1 Million for the CEO's of Fannie and Freddie

Daniel H. Mudd (son of Roger Mudd) CEO of Fannie Mae will walk away with 9.3 million and Richard F. Syron CEO of Freddie Mac will walk away with 14.1 million according to the New York Times.

Link

Bonfire for Fannie Mae and Freddie Mac common shareholders

Now that we are in the second day of the largest government bailout in history, common shareholders of both Fannie Mae and Freddie Mac have a new use for their shares - a bonfire!

I must admit I am not buying into the whole "Moral Hazard" argument that the common shareholders should be wiped out! Yes, these people did invest their money. But they invested their money based upon the analysis "pushed" by the major brokerage and investment firms. And those who stayed invested up until the very end relied upon the positive public statements of government officials such as Treasury secretary Paulson.