Naturally I need to weigh on what is being called the biggest “bailout in history”. I do not believe that is what is going down at all. Instead the US Government is facilitating the greatest asset grab of securities since Alexander Hamilton’s agents and cronies picked off the Continentals from the Rubes back in 1790. Hamilton’s associates (friends of Hamilton) did not pay anything close to par either, instead these Continentals went for enormous discounts. And Paulson’s new Leviathan hedge fund (the US Treasury) will end up paying deeply distressed prices as well. Therefore it is most important to follow the real bouncing ball on this, and not be fooled. This post is going to be my primary framework over the next several months, so any discussion with me or use of my ideas is meaningless unless you are aware of my thinking.
Tucked away in the hyperbole of this story is the following key element. These are competitive capitulations, and will hardly result in higher security prices, at least not yet. Initially they will simply reinforce low prices. Because these are government transactions there will be higher public transparency to them for all to see, and I doubt if the early response will be necessarily bullish either, but just more conformation as to how much fictitious capital has already evaporated. The use of the word “request” is poor confusing writing style, as I think the operative word is “offer”.
The Treasury would hold several rounds of buying, first purchasing securities from the banks that request the lowest prices, in order to limit the cost to taxpayers. The plan could be broadened to include securities based on other kinds of loans, such as student loans and commercial real estate.
Instead it suggests that the first rounds of Government bids will be mostly stinky or low ball bids. I am convinced this will be done in tandem with a series of bank closures and seizures accompanied by fresh rounds of panic and crisis. This will have the effect of forcing liquidations into the Tar Pit where the stinky bid awaits.√Ç¬† Here are the bullet points of how this plays out.
-The friends of Hank (FOH) have already been hard at work picking up the modern day Continentals right and left, and this will continue, but there has to be a mechanism to force the sale, otherwise the carrion hold out.√Ç¬† If I had to hazard a guess, securities that might be worth 60-70 of par at the end of the day are being scarfed at 20-40. When these are marked up later, you are left with well capitalized financial institutions, even new ones. As for the losers, well they deserved it anyway will be the refrain. It will not even matter what is fair either. If you want to know who the winners are from all this, FOH is it, and who they are really should be included as the basis of any investment decision.
-Also keep in mind that this process will go on in the productive or non-financial side of the US economy too, and that might be the safer option to play. The elimination of shorting on financials may have the “unintended consequence” (?) of pushing the Berserkers and other short selling criminal rackets into looking for non-financial squeeze targets instead.
-A list of carrion has been drawn up. There is also another list of FOH (visualize Saber-toothed Tigers).√Ç¬† A very high percentage of FOH will be the new foreign masters and their front men, who will need to redeploy Dollars into distressed US assets. I have read people making remarks such as, “where does this money come from?”, to which I say, “are you serious? Take a look at Treasury prices, the last great Bubble. That is your answer. Treasuries will sold and utilized to buy these distressed, bargain US assets. Creditor status gets converted into equity status as part of a large scale defacto foreclosure and wealth transfer.√Ç¬† And to ensure that Treasury yields don’t back up too much, the Fed is there to do occasional monetizations. Just how much is an open question, but if this operation goes as quickly as I think (the last four months of the Bush administration) it might not be that much.
The operational concept, repeated for clarity.
-The operational plan therefore is to work closely with the FOH on the Tar Pit scarfs, and also pressure and push the carrion off the cliff into the Tar Pit. What you have to remember about this, is that when a carrion go to the Pit, that institution absorbs (officially takes the loss) on a portion of the fictitious capital (FC) that had been on the books. FC goes to money heaven, is wiped out or cleaned (nao existe).
-Questions have been raised about all the derivative exposure out there. This was covered superbly in our last podcast starting at 12:30 by “Trader Joe” (you can hear the lead in to this starting at 6:30 of the free preview portion of the cast). Derivatives (mostly fictitious anyway just like the AAA ratings were) will be subject to novation, effectively renegotiated or even eliminated. Therefore billions in derivatives will go to money heaven also, and of course that will push more uninsured financial institutions into the Tar Pit. This will be conducted at run rate that can be effectively devoured by FOH, with Leviathan controlling the bleed rate.
-The Government already has Paulsenstein usury creditor loan hooks into a number of these carrion. These institutions may just as well have gone to see Vito and Guito’s “pawn shop” to cover their gambling debts. This is not a bailout at all, this is THE Tar Pit.√Ç¬†√Ç¬† Indeed, Leviathan (Hank’s hedge fund) already controls a couple king mastodons out right such as Fannie and Freddie.√Ç¬† AIG is the prime example right now of another. AIG has given up control, and is about to be liquidated quickly in a “national emergency”. Of course this will be allowed to pass because no one wants to see a situation where Aunt Millie’s annuity or insurance policy has little backing.
-Finally for this operation to have legs the monster Leviathan hedge fund has to show positive returns for taxpayers. So the the initial results will imply favorable outcomes. The MSM media well suddenly herald how Leviathan got a big loan paid back with a nice return.√Ç¬† Watch for this to happen within weeks, and then the Tar Pit machine can really get turned loose.