The Biggest Money Grab in History

Jaws must be rolling over in his watery grave. Congress is about to work out a "deal" with the Great Whites of Wall Street's Sea of Dreams - and hand our toothy marauders their biggest "rags to riches" gift ever. Just a week ago they were on the ropes, choking on bad mortgage debt, wrapped tight with de-leveraging and sinking share prices. Today: bonanza is on the way.

Here's how the deal's shaping up. On Thursday morning some recalcitrant Republican congressmen balked at Treasury Secretary Paulson's plan and embarrassed the president in the process. So that night the Feds put a gun to their head. They seized the largest savings and loan in the U.S. and handed its $220BL in deposits to JP Morgan Chase (JPM) for a penny on the dollar. The congressmen then decided to reconsider. Who's next?

So now the bailout is going "forward" and as it does, it only gets better for the biggest of the big banks. JP Morgan will off load WaMu's gargantuan mortgage portfolio to the Treasury for a song ("value to maturity"). Ditto with Bank of America (BAC) and their billions ($) in toxic MBS portfolios from Merrill and Countrywide; and Citibank (C), Barclays (BCS), and Wells-Fargo (WFC) will do the same. All of a sudden the worst balance sheets in the world will look like they left Mr. Clean's Laundromat.

Clearly, these are not your everyday sharks. Great Whites think alike and because of their size, they all think BIG. The Feds know this and are going to loan them (indefinitely) any amount of money they want - whenever they want it - at 2% or less so they can turn around and loan this money to you and I and every business in America at newly restrictive but higher "credit rates". How did the Feds solve the world's biggest credit crunch? They gave its perpetrators an offer they couldn't refuse. And this is euphemistically called re-liquefying.

Now, the crew who's angry about all this can ask themselves the alternative. What else could have been done? Wall Street could have sold the American financial industry to the Arabs for $1 trillion, a fee about equal to ARAMCO's 1H2008 oil profits. Or they could have sold it to Singapore, or China, or some of the fat cats in India or Japan. Instead, the U.S. Treasury bought it, rotten fish heads and all.

And here's where the taxpayer has one glimmer of hope. Who's gonna run this bailout fund? Is there a patriot out there willing to put these sharks on a diet and make them pay up for the rescue they're getting, and make the deal just that, a deal for the American people? I've heard that Bill Gross of Pimco has stepped forward and offered his services to administer this - I hope the Feds take him up on it. Buffett's name has been mentioned too. Exceptional times sometimes call forth exceptional men to deal with them. Let's hope this is one of them.

What will all this mean for the markets? I think immediately there will be a sense of calm, and an eerie change in the earnings outlooks for the SPX 500. Ex-financials, or rather, ex-this horrible MBS situation, the rest of the market has been growing profits handily year over year. Even AIG's insurance divisions have been doing fine. When the gaping holes caused by the financials are "taken off the books" the direction should be up.

Where will this leave us going forward? Wall Street usually mirrors Main Street about 6 months in advance. 2009 could be a difficult year. As I mentioned in a previous article, we are entering a time of systematic deleveraging across our society. Contraction is the essence of deleveraging - contraction in asset values, in P/Es, in leveraging at the margins, in how finance is approached. There's still too much stock available, too much real estate for sale, and not enough willing (or able) buyers. The price is going to have to come down to attract them. Our domestic investment banking industry was wiped out in September, 2008, and gone with it the high leverage they once employed. The decade ahead will be completely different from the one behind us. Expansion drives drives everything in a bull market: P/Es, leverage, risk-taking, asset values. Those times are GONE.

Several years ago I marveled at Richard Russell's comment (Dow Theory Letter) that we were in a secular bear market that would last for more than a decade. Now I get it. The bull market rally of 2003-05 was really an OPM (other people's money) rally, leveraging up on borrowed money and pretending it was cash at hand.

Disclosure: I have no stock positions in the companies mentioned in this article.
 

Comments

[M-P:]

This is a good piece. I think John hits some of major issues - too much of X and too little buyers ... will take some time to find the equilibrium. With unemployement likely to go up (finserve alone), I don't see a happy picture for the next 9-12 months. The other point that hit home was the '03 to '05 "bull" market, which was built on unsustainable risk and, at times, malfeasance. The real tradgedy is that the US comes off as a big hypocrit. Our bailout plan is not what we tell other countries to do when they have a financial crisis, etc. I always struggle with people who can't take their own advice. Add-in that Paulson and Co. have been spinning a fairy tale over the last year - it's all contained and getting better - and the credibility of the key players is dubious at best.

2008 Sep 29 11:14 AM

[TinyTim:]

agreed. we ought to invite the IMF in and follow their suggestions.

2008 Sep 30 10:05 PM