The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Another Onion classic:

Drawn by a strange force they could neither resist nor describe, millions of Americans reportedly dropped what they were doing Tuesday and, acting as if by instinct alone, gathered into one massive nationwide breadline.

According to witnesses, citizens across the country exited their homes in near unison, leaving behind growing stacks of bills, empty kitchen cupboards, and what was once a life of comfort to form the spontaneous, 2,000-mile-long queue.

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Source:
Nation Instinctively Forms Breadline
FEBRUARY 24, 2009 | ISSUE 45•09

http://www.theonion.com/content/node/93430

Paul Krugman – Paul Krugman is an American economist, columnist, author and intellectual. He is a professor of economics and international affairs at Princeton University, a centenary professor at the London School of Economics, and an op-ed columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economic Sciences.

(Starts at 12:45 into the video)

1:34

World Affairs Council: Oregon

via Dilbert.com

KCET: The Trashout Squad

via Calculated Risk

Where are your tax dollars going, and how is the money being spent?

Well, it depends upon who you ask.

Go to Recovery.gov, and they focus on the economic impact:

The American Recovery and Reinvestment Act targets investments towards key areas that will save or create good jobs immediately, while also laying the groundwork for long-term economic growth. The charts and numbers below give you an idea of where the money is going.

Over the upcoming months, we will provide more information on the distribution of funding by Federal agencies. In order to give small businesses and Americans across the country a chance to apply for recovery dollars to create and save jobs, some funding may not be distributed until this summer.

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Go to right.org, and they focus on how much it is going to cost you:

Family earning $50k in salary

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Funny thing is, they both tell the same story — just different sides of it  . . .

Here is another good look at the earnings, via Political Calculations:

Is the Fannie-Freddie debacle the result of a backroom deal?

Edward Harrison is a banking and finance specialist at the economic consultancy Global Macro Advisors focusing on global economics and corporate strategy. Previously, he worked in various consulting, strategy and M&A roles at Deutsche Bank, Bain Consulting, the Corporate Executive Board and Yahoo. He publishes regularly at Credit Write Downs.

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Everyone should recall that Fannie Mae and Freddie Mac were forced to massively increase their already bloated balance sheet in the aftermath of the Bear Stearns collapse. It seems reasonable to me to assume that the two organizations did so only because they were given an implicit guarantee at the time by the government officials involved. Here is my train of thought.

In March, the Federal Government offered up this plan: If the GSEs offered (were coerced) to buy up massive amounts of mortgages even though it would bankrupt them, the Federal Government promised to nationalize the two companies, effectively guaranteeing all of the debt issued by the two and solving a nightmare problem.

Later, when the mortgages they owned had to be written down by hundreds of billions or trillions of dollars, it wouldn’t matter because the mortgages would be government-owned. The Treasury would simply issue more debt and the taxpayers would absorb these losses.

How it happened
In early March the markets were in such turmoil that the global monetary authorities were forced to inject massive liquidity into the market.

The U.S. Federal Reserve, the European Central Bank and central banks in the UK, Canada and Switzerland will inject billions of dollars into money markets.The news cheered investors and U.S. stocks surged more than 3% – their biggest one-day gain in five years.

The injection of more than $200bn is aimed at easing the credit crunch and its impact on the wider economy.
-BBC News, 11 Mar 2008

One of the problems creating the panic on Wall Street was Bear Stearns. Rumours were going around that Bear had liquidity problems. The money injections by the central banks were an attempt to dampen the volatility. Nevertheless, the rumours about Bear Stearns’ viability ultimately brought the investment bank down.

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players—Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers—in what some believe was the greatest financial scandal in history.
-Vanity Fair, August 2008

JP Morgan Chase was quickly brought in as a saviour and a deal was done and announced by the 14th.

Bear Stearns, facing a grave liquidity crisis, reached out to JPMorgan on Friday for a short-term financial lifeline and now faces the prospect of the end of its 85-year run as an independent investment bank.With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”
-New York Times, 14 Mar 2008

This is when the GSEs get involved. Out of nowhere, they announced that they had been given the authority to buy massive amounts more of mortgage paper — the same junky paper, I might add, that had already caused nearly $200 billion in credit losses.

The Office of Federal Housing Enterprise Oversight said it is reducing Fannie Mae’s and Freddie Mac’s capital-surplus requirement to 20% from 30% previously. The companies will be clear to invest the additional capital in mortgages and mortgage-backed securities.

The move is expected to add up to $200 billion of immediate liquidity to the market for mortgage-backed securities. Wednesday’s move by Ofheo, combined with other actions, should enable the two companies to buy or guarantee about $2 trillion in mortgages this year.

Ofheo is the federal regulator for the two companies. In response to accounting scandals at the two companies, Ofheo has been requiring that Fannie and Freddie hold 30% more capital than typically required.

“We believe they can play an even more positive role in providing the stability and liquidity the markets need right now,” said Ofheo Director James Lockhart in a statement.
-MarketWatch, 19 Mar 2008

Huh? Wait a minute, I thought Freddie had just written down $2.4 billion in December and was forced to raise $6 billion to increase its shaky capital base. An how in the world does a company like Fannie Mae with nearly $900 billion in assets (many of them junk mortgages) on only $44 billion in capital as of December 31st 2007, purchase hundreds of billions more to add to its bloated balance sheet?

I’ll tell you how. A bailout guarantee.

Look. The markets were in free fall in March. Bear went under just like that — in the blink of an eye. Rumours were spreading that Lehman was next. The central banks had already added massive liquidity. This was very frightening.

I imagine there was panic in the Treasury and in the White House and in the Fed and at OFHEO. Something had to be done. And what I believe was done was a bailout.

Remember what the Wall Street Journal said yesterday?

The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familiar with the matter, as the stock prices of both companies continue to fall sharply.These discussions have been going on for months and are part of normal contingency planning that the Treasury Department and other financial regulators regularly undertake. The talks have become more serious recently given the financial woes of the shareholder-owned, government-chartered companies, whose stability is vital to the functioning of the nation’s housing market, these people say.
-WSJ, 10 Jul 2008

“These discussions have been going on for months.”

hmmm……. I bet they have.

Very cool comparo of costs per miles travelled:

via Flowing Data

Call me Inga:

When I was in college, I worked at a local electronics store. Through a chain of corporate takeovers, they eventually wound up in the hands of the now defunct Circuit City. Sent to the company HQ in Richmond, Virginia for advanced training, I went out to dinner with a group of locals. When one of the white dudes at the table casually used what we used to call “the N word,” I — quite literally — ducked under the table.

Instead of gunshots, there were peals of laughter. The black guys thought it even more amusing than the white guys. Ain’t it funny, the NY Jew was stunned at the use of that word. I said something to the effect of “Where I come from, dems fightin words.”

No matter. We now have a new N word today, and its Nationalization.  Why the word is so fearful and loaded is beyond my comprehension. As Bloomberg’s David Reilly writes, “The nationalization debate is a smoke screen. We’ve already nationalized the big banks. Let’s just accept it and move on” — and I could not agree more.

OK, so how do we move beyond the N word?

Instead, why don’t we call it by a more accurate, precise, and less scary name: FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

That is an accurate description of what occurred with Washington Mutual (WAMU) now part of JPM Chase, and Wachovia, now part of Wells Fargo. The Feds step in, seamlessly transfer control of the assets to a new owner, while simultaneously wiping out the debt, the shareholders, and giving a huge haircut to the bondholders.

Let’s look at each of these in turn:

• FDIC mandated: What does that mean? Well, by law, the FDIC is required to handle the liquidation or reorgs of insolvent banking institutions. We have prevented that normal process thru the application of trillions of dollars in bailout monies;

• pre-packaged The entire process is mapped out in advance so as to make it fast and seamless. WAMU depositors did not notice a single change over the weekend their FDIC mandated, pre-packaged Chapter 11 workout, government funded reorganizatio occured. The only observable difference was that WAMU customers were no longer charged an ATM fee when they went to Chase ATMs, as it was now the same company;

• Chapter 11 The full bankruptcy protection applies — meaning employees still get paid, secured creditors do not suffer, and debtor in possession financing (DiP) is available to the bank;

• government funded The source of the DiP funding;

• reorganization Just what it sounds like — new board of directors, management transitions out to a new team, recaptalized, bad debt taken off of the books, toxic assets spun out.

What emerges is a clean bank, no debt, well capitalized, and free of deadly toxic assets. You can see why so many people would find this state of affairs utterly objectionable.

In all seriousness, I understand the objection by shareholders — already down 90% — who would be wiped out by this. I fail to see the merit in the save-the-banks-at-any-cost arguments so many are proferring and preferring.

If the choice is between going Swedish or turning Japanese, you can call me Inga . . .

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Previously:
Why Are Banks So Different From Autos? (December 9th, 2008)

http://www.ritholtz.com/blog/2008/12/why-are-banks-so-different-from-autos/

Time to Get Swedish (January 23rd, 2009)

http://www.ritholtz.com/blog/2009/01/time-to-get-swedish/

Favoring Nationalization Are . . . (February 20th, 2009)

http://www.ritholtz.com/blog/2009/02/favoring-nationalization-are/

See also:
Bank Investors Left to Read Entrails for Guidance
David Reilly
Bloomberg, Feb. 25 2009

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_reilly&sid=axsmjkDYWDsg

I was deeply saddened to learn that there will be no work-out process for Fortunoff’s, the 87 year old local jewelry and department store.

With no ready Buyer showing up, and unable to arrange fresh credit in this environment, the company is liquidating this week. They join an increasing list of stores that found themselves in the same unfortunate situation: Bombay & Co. Circuit City, Home Depot’s Expo Design Center, KB Toys, Steve and Barry’s, National Wholesale Liquidators, and Linens ‘n Things

When a big corporate chain goes belly up, one hardly thinks about it. With the family-owned Fortunoff’s as a local institution, I find it much sadder than the usual retail bankruptcy. One of my neighbors works (worked) there. When I was kid, my mother would work there during the Christmas season when Real Estate was slow.

Half of the stuff in our house — two area rugs, living room furniture, Weber grill, bedroom linens, glassware, coffeemaker, curtains, vacuum, lamps, and a slew of Mrs. BP’s jewelery are all from Fortunoff’s. Over a decade and a half of marriage I’ve bought pearl necklaces, diamond earrings, bracelets, etc. They were always reasonably priced, good selection, great sales help.

Its terribly sad.

I try to look at the economic data dispassionately; we tend to ignore the real world stories beneath much of the headlines. It never hurts to recall every now and again that there are real human tragedies occurring in the economic maelstrom . . .

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See Also:
Final sales at Fortunoff begins Thursday
ELLEN YAN AND EMI ENDO
Newsday, February 25, 2009

http://www.newsday.com/services/newspaper/printedition/wednesday/business/ny-bzfort256048594feb25,0,6599189.story

Judge OK’s Fortunoff sale, liquidations to begin
Emily Chasan and Phil Wahba
Reuters, Feb 24, 2009 7:22pm

http://www.reuters.com/article/mergersNews/idUSN2443854820090225

Fortunoff Bankruptcy Wipes Out Gift Cards
Jon Hood
ConsumerAffairs.com, February 24, 2009

http://www.consumeraffairs.com/news04/2009/02/fortunoff_bkprt.html