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The CIT Group woes show that the financial crisis is not over and more writeoffs are on the way, Stephen Roach, chairman at Morgan Stanley Asia, told CNBC Thursday

Airtime: Thurs. Jul. 16 2009 | 4:30 AM ET

Federal Reserve Chairman Ben Bernanke delivers his semiannual report to Congress this week. WSJ’s Sudeep Reddy says he’ll face questions about the economy, transparency and the central bank’s expanding regulatory power.

Wow, how is that for insane?

This is post # 10,001.

Who woulda thunked it?

If the front page article of today’s WSJ is any indication, Bernanke’s testimony on the economy and monetary policy will be anything but boring. Bernanke lays the groundwork for some of what he’ll say in an editorial that lays out “The Fed’s Exit Strategy.” It sounds great but if the Fed gets the timing wrong, his best laid plans will be all for naught. Also, when the time comes, how will the US economy handle a normalized fed funds rate up from essentially zero and normalize I define as a fed funds rate two points above the CPI which is about the average going back 30 years. For now, it’s just an academic discussion as Ben said “accommodative policies will likely be warranted for an extended period.” Earnings season continues on a solid track but Revenue season remains weak as CAT, UTX, DD, BJS, PNR, LXK and KO all missed revenue estimates. Big earnings leverage though will be evident in the 2nd half IF revenue picks up.

“The total potential federal government support could reach up to $23.7 trillion.”
-Neil Barofsky

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Yesterday, we noted that the 23 Trillion dollar bailout was a “WTF number.”

The statement above really turns on your definition of the word “Support” — this is not the actual costs, but more of a measure of the total guarantees, loans, indemnifications and credit extended in all of the bailouts.

Floyd Norris takes it apart — in detail — and reveals more hyberbole than actual expense, noting that number given in Congressional testimony “was vastly overblown.”

Key factors to getting to 23 trillion:

• It includes estimates of the maximum cost of programs that have already been canceled or that never got under way.

• It assumes that every home mortgage backed by Fannie Mae or Freddie Mac goes into default, and all the homes turn out to be worthless.

• It assumes that every bank in America fails, with not a single asset worth even a penny.

• And it assumes that all of the assets held by money market mutual funds, including Treasury bills, turn out to be worthless.

• It would also require the Treasury itself to default on securities purchased by the Federal Reserve system.

• Every dollar invested by the government in banks would have to become worthless

• The banks would have to default on securities guaranteed by the F.D.I.C.

• All the collateral posted by the banks to get loans from the Fed would also have to become worthless.

Bottom line: In reality, we are unlikely to get anywhere near that number . . .

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Source:
Big Estimate, Worth Little, on Bailout
FLOYD NORRIS
NYT, July 20, 2009

http://www.nytimes.com/2009/07/21/business/economy/21bailout.html

Pimm Fox Bloomberg’s Taking Stock with Mark Sunshine of First Capital

click for video

This week I offer two short essays for your reading pleasure in Outside the Box. The first is from Ambrose Evans-Pritchard writing in the London Telegraph. He gives some more specifics about the situation in Europe I wrote about this weekend.

He ends with the following sober quote: “My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.” This is a must read.

And the second piece? Last week in Outside the Box we looked at an “Austrian” (economic) view of the inflation/deflation debate from my friends at Hoisington. This week we look at the 180 degree opposite with Keynesian aficionado Paul McCulley, who argues that the Fed should be Responsibly Irresponsible and target higher inflation. This essay has brought some rather heated arguments in print and from some of the people who will be with Paul and me at the annual Maine fishing trip. And you can bet I will put them all together with a little wine to see how the argument ensues. I will report back.

And Paul ends with a great and what is a quite controversial line, “Yes, as Bernanke intoned, there are no free lunches. But no lunch doesn’t work for me. Or the American people. While it is true, as Keynes intoned, that we are all dead in the long run, I see no reason to die young from orthodoxy-imposed anorexia.”

And finally, this one last note on European banks: “European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves.” (Bloomberg). Want to think about the US taxpayer paying to bail out Europeans banks? Think that might be a tad controversial? This could be explosive.

John Mauldin, Editor
Outside the Box

Fiscal ruin of the Western world beckons
By Ambrose Evans-Pritchard

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go….Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc….

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

Read the rest of this entry »

Good Evening: U.S. stocks stretched their recent winning streak to six straight today, as some good economic news and some potential help for CIT combined to lift share prices. With more investors becoming convinced the worst is over for our economy, the major averages all tacked on gains of 1% or more. The S&P 500 posted its highest close of 2009 on Monday, and though we haven’t exactly seen a buying panic yet, those who are either short or underinvested are getting increasingly uncomfortable. The swelling ardor for equities should remind bulls and bears alike of the need to be patient and flexible in this unprecedented environment, but I wonder if we would even be in this fix if financial professionals at all levels were more like Tom Watson.

Stock markets overseas were on the firm side overnight, as were our stock index futures this morning. Much of the credit for this early rise went to a pending capital infusion by CIT’s current bondholders (see below). This privately financed rescue package would be a costly one for CIT (indications are LIBOR +1000 bps), but it’s good news in that 1) hundreds of small and medium sized businesses will see less disruption to their operations, and 2) the U.S. government is not involved. With $2 billion out of a total of $3 billion already committed, a CIT rescue is not exactly a done deal, but word that Seth Klarman’s Baupost Group is on board will probably give other bondholders the comfort (and cover) they need to participate.

Adding to the warm and fuzzy feelings before the bell was a stronger than expected print for the leading economic indicators. Up 0.7% versus consensus estimates of 0.5%, the leading indicators figures have now been strongly positive for three straight months — a streak usually associated with the end of recessions in the post WWII period. This post-bubble recession may be a different animal than ones populating econometric models, but the strength in the LEI was enough to cause BAC-MER to once again opine that the worst is most assuredly over for the U.S. economy (see report at bottom). Other firms offered similar sentiments, and stocks wasted little time in rallying 1% once trading commenced in New York.

When the S&P was unable to surmount the 950 level, a quick bout of profit taking took the major averages back toward unchanged. That was it for the downside, though, and equities spent the balance of the session marching higher. By day’s end the S&P did manage to close above 950, and the rest of the averages closed with gains ranging from 1.1% (S&P, Dow) to 2.1% (Dow Transports). Treasurys for once didn’t suffer at the hands of a strong equity tape, and yields fell between 2 and 5 basis points. Dollar holders had their pockets picked by approximately 1%, while commodities continued their confident run to the upside. Recently acting more like a tech-laden ETF than a basket of tradable goods, the CRB index levitated a further 1.2% today.

It was nerves, pure and simple. I refer not to yesterday’s British Open, but to the time 13 years ago when I stood on the first tee of the 445 yard first hole at Cog Hill Golf Club. Through a series of fortunate events, I had the honor of playing in the Pro-Am of the Western Open, one of the PGA tour’s oldest tournaments. Before I could even swing my driver on that opening hole, I had warmed up on the range with household names; I had my photo taken with a future member of golf’s Hall of Fame; and my brother/caddie was sporting a bib with my name on it. Greg Norman’s group had just teed off ahead of us, and the group including Tiger Woods, then an amateur, was set to tee off in the group behind us. The fairways were lined with people on both sides, the loudspeaker had called my name, and I suddenly realized this was a very big deal.

I barely made contact, and the ball skittered just far enough along the ground for me to escape the indignity of not getting past the ladies’ tee box. As my group headed toward the fairway, I asked our pro for advice. “Tom, how can I deal with nerves on the golf course?” The legendary Tom Watson turned to me and smiled, saying, “just take a deep breath, finish your backswing, and then fire. You’ll be fine”. And he was right; it worked.

Though he was trying to prepare for the tournament that would start the next day, Tom Watson spent the entire afternoon engaging everyone in our group. Want golf advice? He gave it. Prefer to figure it out for yourself? Tom let you play. Ask him a question, and he’d look you in the eye before giving you a straight answer. He told golf stories, a couple of jokes, and was not above playing a practical joke on one of his playing partners. Coming off the 18th green, our whole group agreed that Watson was a consummate gentleman from the old school, the type of man who understood it is the fans, volunteers, and pro-am donors who transform the game he loves into a great way to make a living. He tried very hard to make everyone — including the marshals and sign holders — feel special. He was a class act, a man of character.

I relate this vignette not because I’m a golf fanatic (though I am). Nor is it some ode to Tom Watson, though it would be fitting after watching him almost beat the world in the Open Championship this past weekend at the ripe age of 59. I write not to say how much I feel for a man who gave it his all against long odds in an attempt to make sports history. No, I write to say that I wish there were more Tom Watsons on this planet. Had the executive suites in Wall Street been populated by men with his character, and had policy makers in Washington (e.g. in the corner office of the Eccles building) possessed even a fraction of his values, then we might have avoided the worst of the financial crisis.

It’s been said, and I agree, that you learn a lot about a person during a round of golf. Honor, grace, dignity, and a penchant for doing what’s right because it’s the right thing to do — those were the things I learned about Tom Watson that day in 1996. That he couldn’t win a record sixth British Open when almost eligible for Social Security is a shame, but it’s not a tragedy. As Mr. Watson himself said in mock admonishment to the press after letting the title slip away in a playoff yesterday, “C’mon, this isn’t a funeral!” No, the tragic loss I bemoan is that there aren’t more people like him, and not just on the PGA tour. Whether in high places in Wall Street or in high office in Washington, we need more role models like Tom Watson.

– Jack McHugh

U.S. Stocks Gain, S&P 500 Jumps to Highest Level Since November
CIT Said to Get $3 Billion Rescue Financing From Bondholders
Leading Index Shows U.S. Economy Nearing Slump’s End
Tom Watson Not Ready to Mourn After British Open Loss to Cink
LEI suggest economy passed the bottom.pdf

Dont walk run to read Liz McDonald’s overview, The Case Against Larry Summers

“Although Bernanke is winning kudos and praise for making brilliant moves to save the US economy, chatter on the cocktail party circuit in Washington, DC is that Bernanke may not get asked back as the world’s most powerful central banker when his term expires in January 2010, due to a variety of reasons…

Word is that instead President Barack Obama may tap Lawrence Summers, director of the National Economic Council and former Treasury Secretary, as the next Federal Reserve chairman. Besides Summers, other potential options include San Francisco Fed president Janet Yellen, and former Fed vice chairmen Roger Ferguson and Alan Blinder.

But would Summers be the best choice to replace Bernanke as chairman of the US Federal Reserve?

Dig deeper into Summers’ background, and you’ll not only see that Summers is potentially so radioactive that the White House may not decide to put him up as a replacement for Bernanke, but why it did not even deign to choose him to be US Treasury secretary, picking Timothy Geithner instead, as Summers may not have survived a Congressional confirmation hearing.

About time some else noticed how unqualified Summers is for the job . . .

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Source:
The Case Against Larry Summers
Elizabeth MacDonald
EMAC’s Stock Watch, July 20, 2009 12:43PM

http://emac.blogs.foxbusiness.com/2009/07/20/the-case-against-larry-summers/

Previously:
Dear Lord, Anyone but Lawrence Summers . . .  (July 8th, 2009)  

http://www.ritholtz.com/blog/2009/07/dear-lord-anyone-but-lawrence-summers/

Volcker: We Need Radical Regulatory Reforms (June 25, 2009)

http://www.ritholtz.com/blog/2009/06/volcker-we-need-radical-regulatory-reforms/

Obama Reform Plan Fails to Fix Whats Broken (June 18th, 2009)

http://www.ritholtz.com/blog/2009/06/obama-reform-plan-fails-to-fix-whats-broken/

It was 40 years ago today . . .

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click for interactive Google Moon

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Other Sources:

First Moon Landing 1969

Nice overview of the anniversary at the Merc

A 17th century mission to the Moon