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Bailouts - Throwing good money after bad.


The recent House vote on the Bailout Plan was the seminal example of pouring good money after bad in to a bottomless pit.The Dow and Nasdaq plunged straight after the announcement and Americans finally realised just how blatantly they had just been royally screwed by a Government that has been royally screwing their citizens ever since that Black Day they entered Pennsylvania Avenue.

After the House first time around, rejected the Bill the Document went from the initial 3 pages to over 450, trumped full of "Sweeteners" which included Tax Breaks, Savings guarantees etc etc. (1)

You will notice however that for the average American Family struggling to pay a mortgage or already on the street eating out of dumpsters or applying for Food Stamps  (the number of applicants over the last month has gone up by 1 million (4)) they receive only the following.
"The Treasury Department is authorized to "guarantee" home mortgages, essentially becoming a kind of co-signer, to reduce the number of foreclosures. If the home owner stops paying his or her mortgage,
taxpayers would be on the hook (Emphasis mine) . The Treasury Department can also eliminate a "reasonable" amount of a home owner's mortgage debt, under section 109 of the new law, which would likely delay the process of house prices falling."

Now, just think about that for a moment. House prices are falling because..
a) Potential house buyers are losing their jobs hand over fist.
b) Banks are not lending cash to borrowers because they are vastly undercapitalized.
c) The Housing inventory is at an all time high due to foreclosures and unbought houses.

These 3 factors form the Trifecta of the Financial Storm and the Bailout Bill will do virtually nothing to address the fundamentals of the problem.

Firstly, US unemployment ..U.S. jobs
fell by 159,000, a decline of 760,000 this year (5) and Corporations like Dell and HP have lain off a huge amount of their workforce and plan to lay off more. American AND European jobs are being outsourced to Asia as we all know. This is due to operating costs but what you rarely hear is the fact that the Bush Administration encouraged this by granting tax breaks to companies who did it (7). If this does not seem part of a well executed plan to impoverish the American people, along with the Sub-Prime loans, the Credit Cards for anyone who could just about spell their name, all under the watchful eye of Federal regulators (i.e. Financial Industry employees) then can someone tell me what would be ? So to conclude US Unemployment is on an accelerating rise and thus the amount of potential buyers is decreasing. Nothing in this bill is designed to halt the unemployment rise or address the issues which helped to create it.

Second. Banks are not lending cash because the covers have been pulled back on their Balance Sheets to reveal exactly what they love to call "Assets". Toxic Mortgage backed Credit default Swaps, overvalued company stock etc etc. But the one catastrophic element that has not been revealed so far is the Derivatives exposure that permeates practically every bank in the World.
Derivatives are defined as..

"In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage" (2)

The important element to remember here is the fact that the value depends on the Underlying Asset. Derivatives have been running for several years now and are generated by computer programs in Real Time using complex financial algorithms. The estimated volume in the Global Banking system right now is conservatively estimated at 516 TRILLION dollars (6). Yep, that's approx 500 times the value of the possible cost of the Bailout Plan which, in Real terms, would come towards 1.8 trillion plus..see below. (3)

Bailout type

Cost to taxpayers (Source: Reuters)

Financial bailout package approved this week

up to or more than $700 billion

Bear Stearns financing

$29 billion

Fannie Mae and Freddie Mac nationalization

$200 billion

AIG loan and nationalization

$85 billion

Federal Housing Administration housing rescue bill

$300 billion

Mortgage community grants

$4 billion

JPMorgan Chase repayments

$87 billion

Loans to banks via Fed's Term Auction Facility

$200 billion+

Loans from Depression-era Exchange Stabilization Fund

$50 billion

Purchases of mortgage securities by Fannie Mae and Freddie Mac

$144 billion

POSSIBLE TOTAL

$1.8 trillion+

NUMBER OF HOUSEHOLDS PER U.S. CENSUS

105,480,101

POSSIBLE COST PER HOUSEHOLD

$17,064+


So here we have a time bomb that has to explode that makes the initial cost of bailing out the first phase of Bank write downs seem like small change. When that particular prodigal son comes home, there won't be any Lamb for him .
But, for the moment let's just stay with the Tip of the Iceberg..What will Banks do once the Government has given tax-payer money to prop up their Balance sheet on the credit side or to be more correct, to reduce the size of their true Debit side  ?
If they lend that money out to potential house buyers, the number of which has been steadily reducing, they will just be adding to their Debit side as their capitalization will not have increased because they have not generated any real income. So they raise Interest rates on the loan to try and make some profit out of the loan...this automatically starts to put the loan out of reach for the vast majority of Americans.

Third..The intention and supposed purpose of the Bill is to help people in the US keep their homes, revitalize the housing industry, generate credit more easily so that everyone can get back to normal again. Remember it was easy credit combined with destruction of the American Industrial base and suicidally low Fed Interest rates that caused the problem in the first place so where's the upside for Joe Average or Ms Hockey Mom ? There is none because the fundamentals have not changed. Unemployment will keep on rising, house prices will follow market conditions of supply and demand..A Huge inventory already at fire sale prices and a small market can only lead to even further reductions in house prices which, as noted earlier, form the basis of CDO's and Derivatives, thus exposing gigantic cross party risks in the banking world, the truth of which is now well revealed by the meltdown in the banking sector.

Considering the above , is it not reasonable to assume that the intention of the Bailout was just Highway robbery of the American Public ?
There is not one single measure to stimulate real industry, no tax breaks for companies to take jobs back in to the US, no regulation passed to bring in to the open air and Congressional oversight the chicanery, greed for profit and downright irresponsibility of the Banking / Investment Management industry which brought the rest of the world to its knees and has now poised the World on the edge of a cliff, the likes of which, has never been seen since 1929 . But this time the sums involved and the intricate connectivity of the Global Economic model make the consequences truly catastrophic. FDR's New Deal was a brave move to bring a broken country back together again, but FDR is long dead and the current occupants of the White House and the Senate and the House have no intention of replacing Greed with Altruism this time around.

So hold on to your seats, take no notice of what is said on CNN or SKY News, as these are direct beneficiaries of the bailout plan..IF you follow the money (Take a look of who has investments in what company). Research for yourselves and keep your eyes wide open .This is no time to have blinkers on and your future is now 100% in your hands as it should seem really obvious at this stage that Government will never have YOUR interest at heart. 

Sources
1
http://news.cnet.com/8301-13578_3-10057618-38.html
2
http://www.investopedia.com/terms/d/derivative.asp
3
http://www.cnbc.com/id/26808715
4 http://www.usatoday.com/news/washington/2006-03-13-federal-entitlements_x.htm
5 http://www.bloomberg.com/apps/news?pid=20601103&sid=aX1tatc5xslM&refer=us
6 http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7D
7 http://encarta.msn.com/encyclopedia_701702628_3/outsourcing.html


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Comments

( 2 comments — Leave a comment )
donnalee_kiss
Oct. 6th, 2008 02:28 am (UTC)
I'm excited at your layout of this particular hairy situation....found you on Bart's journal.
meltdown101
Oct. 6th, 2008 12:29 pm (UTC)
Nice to have you aboard :)
Will be updating daily as things progress / dissappear / vanish / Melt / or otherwise ;)
( 2 comments — Leave a comment )
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