MOODY’S ISSUES WARNING ON US CREDIT RATING

SPECIAL BULLETIN:

I never really issue follow ups to my blog but something just happened that warrants it.  Moody’s, the recently reawakened ratings agency who was asleep at the switch during the entire bubble/burst debacle, just issued a warning that all of you REALLY need to understand.

Report by Joe Weisnethal with Business Insider:

DEBT CEILING: MOODY’S WARNS ON THE US CREDIT RATING

Finally, a logical warning on US credit.

Moody’s is out with a comment saying that if there’s no IMMINENT progress on the debt ceiling fight, the US credit rating WILL BE CUT.

This makes total sense, and we applaud Moody’s for doing their job: Identifying an imminent (real) issue, and sensibly advising (ahead of time) about what could be a threat to US debt holders.

This should help put an end to this idea that a technical default would be just fine, and that somehow all this brinksmanship would be good for US credit.

From me:  I have talked about this before but it’s very important that people understand.  The debt ceiling has nothing to do with spending. It has to do with being able to pay interest on our already existing debt, some of which already existed since the Reagan administration, much more of which has been building since the Bush administration, when 7 trillion of new spending was thrust upon us.  The Obama admin added about 1.5 trillion in new spending on top of that.  

Think of it as your credit card, if you barely made the minimum payment each month.  What you owe would continue to mushroom out of control, month after month.  If the bank all of a sudden blocked access to your checking account and you could not make even the minimum payment, things would go very badly for you.  That is what we are facing now.  In order to prevent that, the debt ceiling is traditionally raised; more than 70 times in recent decades alone.

The debt ceiling has NOTHING WHATSOEVER to do with spending but it is often used to scare people by unethical politicians who know better.  Spending cuts need to be discussed during budget negotiations. This warning from Moody’s is real and you should be VERY scared.  It is telling you that the markets are growing tired of this political foolishness.  Any politician who is telling you that we won’t be in trouble if we don’t raise the debt ceiling is either an idiot or is deliberately lying to you.  Think carefully about that.  

If the markets start to really believe that politicians won’t raise the debt ceiling, they will collapse and we will end up in the Great Depression II. Politicians tried this before, when they tried playing politics with TARP, another distasteful thing that had to be done.  The market went into free-fall and didn’t stop until pols rushed its passage through.

Hopefully, that won’t be necessary this time.

AIG SAYS GOODBYE GEITHNER, HELLO FREEDOM

Politics is not the art of the possible.  It consists of choosing between the disastrous and the unpalatable – John Kenneth Galbraith

 

More on the chart above later on… First, some quick news of the day!  RealtyTrac reported a significant decline in foreclosures.  It’s not over and will probably increase again as this whole mess works it way through.

Unemployment claims rose this week, as expected.  It typically drops over Christmas and picks up again right about now.  The important news is that continuing claims fell.

Anthony Scaramucci, aka ‘the Hedge’ says da boyz are buying UNH which they feel fell too much during all the healthcare hoopla.  Doug Kass expects a leg down in the market, as does pretty much everyone once earnings season is over.  Dennis Gartman says food shortages are going to become critical due to global weather problems and crop failures.  He says buy MOO (Ag companies) and DAG or RJA (the commodites themselves).

Now, on to the chart above.  These represent the largest stock sales the gov’t has ever had to do.  All but one fell to Geithner and he has made everyone not only successful but also profitable to the taxpayer – something few taxpayers are even aware of.  Obama has completely failed at socialism!  By the end of this year, he won’t have taken over ANYTHING.  What a failure…

As I told you a while back, AIG and Treasury have been in talks to figure out how and what AIG would be able to pay back out of all they were given by Paulson at the height of the crash.  Turns out it will be all of it plus about a 30 billion profit when all is said and done.

No one, including me, thought this would ever happen; maybe some billions but all?  No, no one thought that.  Geithner employed the same successful strategy that he did in dealing with all the TARP funds.  By converting the debt into stock we (the taxpayers) were able to be paid dividends and interest while waiting to cash in our stock.  The banks have paid all of theirs back, with tens of billions in profit.  GM is in process, now that it is once again public.  These sales, like the Citi one have to be done a little at a time so as to not unbalance the whole process and hurt the taxpayers investment.

Now, on to AIG… The government is currently by far the majority owner in the form of preferred stock.  That is now being converted to common stock, warrants are being issued to current shareholders to allow them to buy additional stock for a lower price.  When this part is all done, we will be holders of about 91% of AIG in common stock.

Then… CEOs of all the major banks were in meetings with Treasury today to decide who and how many of them will get to handle the unwinding of this 91%.  It will begin either in March or May, following an earnings announcement.  It has to be done in blocks so as not to cause a nosedive in the stock price and hurt our investment.

In total, AIG received 182.3 billion to prop it up.  Someday, remind me to explain to you why saving an insurance company was at the heart of the whole global collapse… fascinating, horrifying stuff.  Paulson did the right thing because he had no choice at that moment.  He didn’t cause it, he did what he could to keep his finger in the dyke until Geithner arrived.  Geithner fixed the patch and made the US a bunch of profit on the side.

Obviously, another failed socialist…

I’ll let you know what I hear!

 

 

TO TARP OR NOT TO TARP – WHAT HAPPENED?

I often get requests for the story of September 18, 2008, the day the financial world collapsed and TARP first came into out lives.  I have a lot of new readers who have never heard about it so for those of you who have already seen it – you’re excused!  This is the original email from the Monday following the crash, which occurred on September 18, 2008.

SEPTEMBER 22, 2008

TIMELINE OF A DISASTER

Before everyone was silenced last week, some truly horrifying things happened. There was talk of ‘financial terrorism’; no one really knows, but it was definitely well-orchestrated.  Well-placed, well-timed ‘rumors’ were hitting one target after another for a solid week.  So, at your request, the following is a replay of the past week’s events: 

• On the weekend of Sept. 6 the government was forced to seize Fannie Mae and Freddie Mac. 
• Followed very quickly by Lehman going belly up, Merrill Lynch also collapsed and was forced to sell itself to Bank of America, who may or may not also collapse.
• Followed quickly by the total collapse of AIG (the financial black hole) with a quick bailout designed only to hold off impending disaster.
• Washington Mutual and Wachovia are in the process of imploding. 
• Then a concerted attack began on Morgan Stanley and Goldman Sachs, the only two of the big, publicly traded investment banks left now that Bear Stearns, Lehman Brothers and Merrill Lynch have all bit the dust. 

Thursday Morning, September 18, 2008 

•  Morgan and Goldman are openly screaming for help.  Word leaks out that they have sent people to Treasury, the Fed, the White House and Congress to inform them all that they are within no more than a day or two of total collapse.  There is a terrifying run on both their stocks happening.
• Word comes out then that for the first time EVER a major money market fund’s shares are going to drop below 1.00.  Panic begins building in earnest.  Everyone knows this is an unthinkable turn of events.
• Word begins to leak out a little later in the morning that more than 180 billion dollars have already been pulled out of money market funds in less than two hours following the announcement. The public doesn’t even know about it yet.  This is the big investors and hedge funds pulling out – FAST.
• State Street Bank, always considered to be the safest of the safe (but they do provide money market funds) is then attacked by false rumors that they are about to collapse.  Their stock drops from almost 70.00 per share to the low teens IN LESS THAN AN HOUR. Ashen-faced traders are now standing in stunned silence.  Some are crying openly. 
• Morgan Stanley lets it be known that they are going under – NOW!!!  They beg the government to stop the short-selling, halt all trading, DO SOMETHING TO MAKE IT STOP!!!   PLEASE DO SOMETHING!!!!
• Although almost no one knows it yet, word begins to leak out that all lending and credit lines have now been frozen.  Banks have realized that they could ALL be within hours of possibly going under and they are refusing to let one dime out of their doors.  They are trying to maintain an outward appearance of normalcy but things are far from normal.
• Companies begin receiving calls from banks saying that their lines of credit have been severed until further notice.  They begin realizing that they are not going to be able to pay their workers and some actually start telling employees to leave immediately and put chains and padlocks on their doors.  I personally get two calls from people in two different states in the middle of the afternoon saying that this just happened to them, they are scared and asking me to tell them what is going on.  I don’t know what to say.
• Our biggest banks are also the WORLD’S biggest banks.  Around noon other governments begin letting it be known PUBLICLY that WE HAD BETTER GET THIS STOPPED – NOW!!!  
• Bernanke and Paulson realize that if this can’t be stopped by early afternoon then they won’t be able to stop it at all.  The amount that will have been pulled out of financial institutions globally, plus the fact that it will be the lead story on the evening news, is going to lead to a total collapse of ALL BANKS.
• Bernanke and Paulson know that this will lead to a total panic, not seen since the Great Depression, maybe never in this country.  There will be mobs in front of banks, which will all be locked.  No money in ATM machines, no banks open, no paychecks come payday.
• Fear starts to build that this will surely lead to mass rioting in the streets and the National Guard (quietly) is put on full alert.  Traders say they are hearing this from friends and relatives in the Guard, as am I.  They want to know what is going on.  No one knows what to tell them. Everyone is now scared of what will happen if this gets out.
• The White House is informed of the pending collapse of the entire world economy.  They basically cede full control to Paulson who announces to the markets that whatever needs to be done, will be done & it will be done immediately.  WHATEVER IT COSTS, WHATEVER IT TAKES, WE WILL DO IT. 
• The panic begins to slow, but the Volatility Index barely falls indicating that fear has not gone down whatsoever.  Everyone is now terrified but frozen in place.
• Bernanke and Paulson meet with leaders of Congress late Thursday afternoon and inform them in no uncertain terms of the situation.  We know this is true because they were all gray when they came out and announced that Paulson will have whatever he needs.  He needs 700 billion just to slow it down.

All of the above came out during the day on Thursday but almost nothing has been spoken about it since that day because of the fear that the truth could still cause a panic.  Since most people, and apparently most of those in the news media, have no idea how close we came to total collapse on Thursday they seem to have very little understanding as to why we would need to do a bailout on such a huge scale.  It is possible that this will work and it is also possible that the crap the government is being forced to buy may be worth something, someday.  The government had to do this on a smaller scale during the Savings & Loan collapse caused by the Reagan administration and it did make its money back but don’t hold your breath. 

 

Did Paulson have to do what he did?  ABSOLUTELY.  Did any of this have to happen?  ABSOLUTELY NOT.  As Casey Stengel said, “It’s like déjà vu all over again.”

 Don’t sell now, it’s too late and you’d only lock in your losses.  Take a big position in Prudent Bear Fund (BEAR) if you haven’t already and add a treasury fund.  Buy shares of SKF, the short financial ETF (this isn’t over) and SZK, the short retail ETF (consumption is over) and buckle up, it’s going to be a bumpy ride.  We haven’t seen the end of this; we’ve barely seen the beginning.

 So, now the market is waiting for the details of this bailout. There is no good way out of this.  We have already had to expand this to cover buying back slime we sold to foreign markets because they are all in equal danger of collapse.