After the house vote, financials slumped 1.5% and led the decliners among the S&P 500 industry groups.  Analyst Meredith Whitney noted the biggest U.S. banks may face declining values on home-loan bonds with government backing as the Fed moves towards ending its $1.25 trillion purchase program.  Whitney said bank earnings are far from approaching "normalcy," and will reflect regulatory changes for an extended period.  JPMorgan (NYSE:JPM) fell 1.2% to $42.21 and Wells Fargo (NYSE:WFC) retreated 3.1% to $26.82.  Citigroup (NYSE:C) slipped 1.7% to $3.97.

On Wednesday, the 30-stock Dow Jones industrial average closed up 30.23 points, or 0.31%, at 9,802.14.  The broad Standard & Poor's 500-stock index edged was up 1.09 points, or 0.10%, at 1,046.50.  The tech-heavy Nasdaq ended the day almost unchanged.  On the New York Stock Exchange, eight stocks advanced for every seven that declined as volume slowed to 1.35 billion shares.

Meanwhile, gold prices continues their upward run and hit an intraday record high of $1098.50, before giving up most of that gain to settle at $1087.30.  The US dollar retreated 0.5% against a basket of currencies.

Yesterday, investors breathed a sigh of relief after the Fed’s announcement to keep interest rates near historically low levels for an extended period.  The Fed, in its policy assessment, noted the economic activity was likely to remain weak for some time and ruled out any plans of a premature exit.  As it continued with its highly accommodative monetary stance, the Fed offered a reminder that the current recovery still lacks strength to be self-supportive.

Healthcare shares Wednesday rose 1% and led the gainers within the S&P500 industry sectors as Republican gubernatorial wins were seen as votes against President Obama's healthcare initiative, likely to result in further delays to changes to the healthcare program. The Senate unanimously voted to extend jobless benefits and broaden homebuyer tax breaks, with the Congress expected to vote before week's end. Helped by the news housing shares finished higher, with Pulte Homes (NYSE:PHM) up 3.5%, Lennar (NYSE:LEN) up 3.4%, and DR Horton (NYSE:DHI) adding 3.2%.

It's such a promising concept, harnessing volatility as a hedge, but it may not be there when you need it.

Matt - first of all, let me say, I LOVE VIX.  It is such a telling pulse on the market, and it's got such a cool name.  Conceptually, it is genius, because it has GREAT correlation benefit in times of stress...SPOT VIX that is.  And THAT, again, is what many people don't get about futures markets and futures-based products based on many conversations I've had.

If you were to get into this hypothetical new VIX ETN when VIX was at 20 and overnight VIX shot up to 80, you would almost certainly NOT quadruple your money. In fact you might have the same 20 bucks (if that was your investment) that you started with.  Probably you're up, but nowhere near the move on vol. 

And that is a shame, because if you looked at VIX in the fall, it directly reflected distress in the markets, and if you're intuition tells you that extreme volatility is not a good indicator of upward-moving markets, you're right.  Things are STILL too volatile for my taste to convince me the market is headed anywhere by sideways or down. When 200 on the Dow - even if it's up - is still a ho hum day, you've got problems.

So again - you have this great concept of VIX as a perfect hedge (it was pretty much the only thing going up in October) but because of the smoothing-out effect of the futures markets, it's a really dulled tool for that purpose. And Srikant Dash at S&P is calling it a straight trading tool.  I guess they don't like to use that word "hedge" over there these days.

All that said, I STILL think VIX is cool, and I STILL think that the concept of a VIX ETN is extremely interesting.  But Murray was all over the issues in his piece from a couple days ago.

Speaking of the Dow being up 200, how about the Obama administration ramming that $800 plus billion (so easy to say nowadays...it's like nothing) stimulus plan through the House of Representatives WITHOUT A SINGLE REPUBLICAN VOTE (so much for the end of partisanship)? Big things, big money. Mostly I'm there on both what the late Bush administration did and what Obama is doing, but the scope and magnitude of all this intervention is just stunning.

6.5% unemployment in October — worst since early Clintontime.  Worse still were the revisions of the August and September numbers.  And as Karl Denninger noticed, the number of unemployed plus the number of people working part-time who’d like to work full-time now tops 11%.  (And who knows what the real figure would turn out to be once John Williams applies Carter-era standards to the numbers.)

As I write, the president-elect is meeting with his “Transition Economic Advisory Board,” his temporary brain trust as it…

This from The Daily Reckoning Australia:

Global share markets don't look very convinced the U.S. Senate's passage of a bailout bill will purge the financial sector of the bad debts which are killing it. Perhaps it's because the Senate bill was such a joke.

If you haven't had a chance to go through the bailout bill the Senate passed, don't cheat yourself. You can find it here.

Those with advanced knowledge of American government will know that the spending bills cannot originate in the Senate. Article 1, Section Seven of that useless piece of paper (the U.S. Constitution) says: "All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills."

This is why the Senate lobotomized a bill already passed by the House. The Senate took a spending bill which had already cleared the House, gutted it as clean as you'd like, and stuffed it full of new spending and tax provisions which the house will vote on tomorrow.

One of the funnier provisions of the Senate bailout bill is Section 503, an "Exemption from excise tax for certain wooden arrows designed for use by children."

Hooray! Everyone gets the shaft! And it's tax free!

According to Bloomberg, "Senators attached a provision repealing a 39-cent excise tax on wooden arrows designed for children..The provision...will save manufacturers such as Rose City Archery in Myrtle Point, Oregon, about $200,000 a year."

And we're supposed to take the Congress seriously? These are the people in charge of America? They're the same people who also just lifted the Statutory Debt limit to US$11.3 trillion.

The Law as a concept is worthy of respect. But when bad lawmakers make bad laws, they undermine the whole institution of the Law. That's what Congress and the President are doing.

It would be funny if it weren't so serious. The plan, or FrankenTARP as we are now calling it includes restriction on judicial review, a suspension of the normal rules for drafting and debating legislation in front of Congress, and allows for the President and Treasury Secretary to come back as many times as they'd like to get up to US$700 billion "at any one time."

It's effectively a down payment on the recapitalisation of the banking system. Once you've committed nearly a trillion dollars to a project, it's a little hard to walk away from isn't it? And with the other provisions about increasing deposit insurance, renegotiating mortgages, and providing relief to renters, you can see many version of this plan being resubmitted to Congress by President Obama and passing (without debate).

So what do you say? Are you ready for some massive, State-sponsored inflation? It will be very different from what Treasury Secretary Andrew Mellon told Herbert Hoover in 1931. Mellon told Hoover:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

The response of the Paulson Treasury Department on the Bernanke Fed is not "liquidate" but "monetize." They won't say that of, course. The expansion in Fed credit and the Treasury plan are supposed to be "loans." We'll see how that goes. Meanwhile, take a look at the Fed's latest statistical release.

Source: Federal Reserve

Source: Bailout Bill Leaves Markets in Deep Freeze

In fact, whatever Congress does is unlikely to stop the drumbeat of grim news.

One example from yesterday was a Commerce Department report showing that demand for factory goods plummeted in August. Factory orders fell 4%, the biggest decline in two years, and a far worse result than the 3% drop expected by economists.

Orders for durable goods fell 4.8%, orders for nondurable goods 3.3%. Shipments of factory goods fell 3.5% in August, also the biggest drop in two years. Shipments of durable goods fell 3.8%, the most since February 2000.

Separately, the Labor Department reported jobless claims remained at seven-year highs, ahead of today’s monthly jobs reports. Economists are pessimistic, projecting a decline of more than 100,000 jobs.

Across the pond, the European Central Bank held interest rates steady at 4.25%, as expected. That put further pressure on the euro, as many are now calling for the ECB to ease rates in light of a faltering European economy.

“I guess the European Central Bank is tired. After pumping tens of billions of euros and dollars into its financial system over just the last two weeks, the ECB couldn't muster up enough energy to cut rates today," said Jack Crooks, president of Black Swan Capital.

Source: Dollar beats euro senseless - But factory orders very weak. ECB fails to lower interest rates

This question becomes even more crucial now that, under the proposed banking-sector rescue legislation that was passed by the Senate Wednesday night, the individual cap on the level of government-guaranteed deposits would be raised from the current $100,000 to the new level of $250,000.

Let’s take a look at what the FDIC is and does, and outline how it’s supposed to function. There are also two steps folks can take to ensure the safety of their deposits.

The 4-1-1 on the FDIC

The FDIC is an independent government agency formed by Glass-Steagall Act of 1933, as a response to the runs on banks that took place during the Great Depression.

In 2005, the Federal Deposit Insurance Reform Act increased the amount of insurance coverage for an Individual Retirement Account (IRA).

Ostensibly, federal deposit insurance was created to protect depositors from the loss of deposits at FDIC-insured banks and savings associations. And the good news is that the FDIC has done so remarkably well over the last 75 years, that no depositor has lost a single penny of insured deposited assets.

FDIC insurance covers checking accounts, savings accounts, money market deposit accounts and certificates of deposit.

It does not, however, cover so-called "non-deposit products," such as stocks, bonds, mutual funds or life insurance, even though many of those products are offered through FDIC-insured banks.

As you might suspect, there are limits as to what is insured at any given institution. In general, deposit insurance covers:

• Single accounts owned by a single owner: $100,000
• Joint accounts with two or more owners: $100,000 per owner
• Revocable trusts: $100,000 per owner per qualifying beneficiary subject to specific limitations (check with your tax advisor or accountant)
• IRAs and select retirement accounts: $250,000

It’s important to note that the FDIC individual limit applies separately to different banks. That means if you have $100,000 in each of two separate accounts at different banks - one at each bank - you’re actually insured for the full $200,000.

Credit Crisis Safety Plays

As we mentioned, under the proposed banking-sector rescue legislation that was passed by the Senate Wednesday night, and which is supposed to head to the House of Representatives for a review and possible vote sometime today (Friday), the individual cap on the level of government-guaranteed deposits would be raised from the current $100,000 to the new level of $250,000. But that new coverage will not take effect until the bill passes the House and is then signed into law by U.S. President George W. Bush.

Until that happens, there are still a couple of "action items" worth pursuing to protect and help yourself. They are:

1. Call your bank and make sure it’s FDIC-insured. If it isn’t, consider switching to a bank that is.
2. If you’re unsure about your own assets, and whether or not they are covered, check out the FDIC’s electronic insurance estimator.

But do it sooner rather than later. There are a record 117 banks on the FDIC’s troubled list and our own estimates suggest that at present rates we could easily see that number rising to more than 200 in the next six months. That means the agency could be dumping dollars in the near term, so it’s only logical to make sure your money is covered.

[The first installment in an ongoing series detailing strategies that investors can use to insulate themselves and their finances from the ongoing credit crisis.]

Source: Credit Crisis Safety Plays: How to Make Sure That Your Bank Deposits are FDIC Insured

-- US stock futures reflect the brighter mood on Capitol Hill. "S&P 500 futures rose 9 points to 1,133.40 and Nasdaq 100 futures climbed 10.25 points to 1,520.75. Dow industrial futures rose 73 points," according to MarketWatch.

-- Also adding to the positivity is news that Wells Fargo (NYSE:WFC) is to buy Wachovia (NYSE:WB)in a $15.4 billion takeover. The deal requires no government backing and scraps the previous Fed-back backed deal with Citigroup (NYSE:C).

-- Oil traders pushed up the black goo to $95 a barrel, on expectations that the bailout deal was likely to pass in the House.

-- Of course, it ain't over til the fat lady sings. There are signs that the credit crisis is worsening. Bloomberg reports that "commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze."

-- And according to the WSJ, "In both the U.S. and Europe, uncertainty about the ability of governments to push through comprehensive financial-system rescue plans continued to weigh on bond and stock markets. On Thursday, the rate on government debt maturing in three months fell to just 0.6% -- indicating investors are willing to accept low returns simply to avoid the risk of losing their principal."

-- Meanwhile, interest rates on three-month dollar loans have risen to a nine-month high, according to a report on Bloomber, "and short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world."

-- LIBOR rates -- the rates that banks charge each other for loans -- also signal a severe contraction of credit, rising a fourth day in a row.

--

The federal funds rate target, as you all know, is 2%. There is a lot of talk about how the Fed may (MAY) do an emergency rate cut soon. Fed funds futures market is actually pricing in a 90%+ chance of a 50-point cut by the end of October (Fed next meets on 10/29). But look at this chart below. The ACTUAL fed funds rate is much lower than 2% and has been for most of the past several days. Last I checked, it was 0.625%, down 19 bps on the day. It’s so low, in fact, that it has taken out its absolute low from the 2003 deflation scare period, when the official target was 1%. Five-year inflation breakeven rates (5-year nominal treasury yield – 5-year TIPS yield) have plunged to 103 bps from around 270 bps this summer. The absolute low was 82 bps way back in 2001 at the bottom of the last bear market.

In other words, the credit markets are rapidly shifting to deflation fears and the Fed is doing everything it can to fight that … but losing.

The Dow gained back more than half its record Monday loss, climbing 485.21 points, or 4.68%, to close at 10,850.66. The broad Standard & Poor’s 500 Index gained 58.35 points (5.27%), to hit 1,164.74. And the tech-heavy Nasdaq Composite Index zoomed 98.60 points (4.97%), to close at 2,082.33.

"There are at least some hints of optimism that something will still happen soon with regards to the [bailout] bill," Jim Dunigan, managing executive of investments at PNC Wealth Management (PNC) in Philadelphia, told Reuters. "It’s not surprising with the washout [Monday] that you’d get some bounce-back [yesterday], both due to bargain hunters and some prospects of a resolution. All eyes are still on Washington."

In related developments yesterday:

• U.S. Senate leaders announced late Tuesday that their chamber plans to vote on a Wall Street bailout package tonight (Wednesday).  Any plan will include souped-up deposit coverage, which is already being sought by the Federal Deposit Insurance Corp. (FDIC).
• Earlier in the day, President George W. Bush and Senate leaders of both parties publicly vowed to push for a quick approval of a new financial bailout plan, despite the surprise Monday move by the House of Representatives to reject the pact that the Bush administration had negotiated with both parties in Congress. In a speech broadcast from the White House, President Bush urged lawmakers to avoid a potential economic crash, stating that "we are at a critical moment for our economy. Congress must act," the International Herald Tribune reported.
• Indeed, the Federal Deposit Insurance Corp. (FDIC) said it will ask Congress for permission to at least temporarily insure greater amounts of deposits for each depositor at member banks. The FDIC right now insurances individuals’ deposits of up to $100,000 and retirement accounts up to $250,000.
• The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, sources familiar with the issue reported. Although the SEC and the Financial Accounting Standards Board (FASB) yesterday issued “clarifications” on how banks should interpret existing rules requiring them to review assets each quarter and report losses if values decline, an actual moratorium isn’t being considered.
• Presidential candidates John McCain and Barack Obama called upon Congress to keep working on a financial-markets rescue plan and also pushed for an increase in FDIC deposit insurance as a short-term step to restore consumer confidence in the U.S. financial markets.

Foreign Market Reaction

Although the House rejection of the bailout legislation led to the crash-like 777-point drop in the blue-chip Dow index on Monday, reactions in the global markets were mixed yesterday.

In Asia, Japan’s Nikkei 225 Index plunged more than 4% to a new three-year closing low after shedding 483.75 points to close at 11,259.90. But Hong Kong’s blue-chip Hang Seng Index inched up 0.8% as it gained 135.53 points, to close at 18,016.20. Even with the slight gain, yesterday marked the end of the worst quarter for Hong Kong shares since 2001.

"It looks like Congress is going to be up in arms about this for a while but there are hopes that there may be other moves from authorities such as a rate cut from the Fed," Yutaka Miura, deputy manager at Shinko Securities, told Reuters.

In Europe, bourses gained on the revived U.S. markets and government interventions into failing banks. The FTSEurofirst 300 index gained 1.6%, fueled by the strong early-morning gains in the United States. The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted gains on hopes of a new bailout plan.

The London Interbank Offered Rate, or LIBOR, surged to a record high of 6.88% yesterday, the British Bankers’ Association said. LIBOR is the rate banks charge each other for overnight lending. Such a high rate - well above the Federal Funds rate of 2.0% - demonstrates the high level of risk-aversion currently in the market.

Central banks flooded the markets with short-term liquidity yesterday, but could do little to restore financial firms’ faith in lending.

"Come Thursday, when the package is presented again to the U.S. House, many of the same people who voted against it earlier today will change their minds because of the pressure coming from the markets," Stephen Roach, chairman of Morgan Stanley Asia Ltd. (MS) said at a seminar in Hong Kong Monday, Bloomberg News reported.

Continued Bailout Hopes

Both the U.S. House and Senate were adjourned yesterday for the Jewish New Year holiday. The Senate will reconvene today - with members intending to actually vote on a new package tonight - while the House will gather again tomorrow (Thursday).

Despite the legislative holiday break, the executive branch continued its full-court press to get the bailout legislation passed.

"I realize this is a difficult vote for members of Congress," President Bush said the White House address yesterday. "But the reality is that we’re in an urgent situation and the consequences will grow worse each day if we do not act."

U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. also tried to underscore the benefit to the average American, and not just Wall Street bankers, as he lobbied politicians to move forward with the proposed bailout, Bloomberg reported.

"Markets around the world are under stress, and that reduces the availability of credit that businesses across America use to meet payroll and to purchase inventories," Paulson said to reporters gathered outside the White House. "Families, too, feel the credit crunch as it becomes more difficult to get car loans or student loans."

More Bank Bailouts

European governments stepped in again to aid more ailing financial institutions yesterday. In a united effort, Belgium, France and Luxemburg earmarked $9.2 billion (6.4 billion euros) in emergency cash for Dexia SA (PINK: DXBGF).

"Due to the significant deterioration in the business and market environment and the financial distress of a number of financial services companies, Dexia made a careful assessment of its situation and decided to take decisive action," the bank said in a statement, MarketWatch reported.

In Ireland yesterday, in a bid to stabilize sinking bank shares, the Irish Finance Ministry pledged to back deposits for two years with taxpayer funds if necessary. The move pushed Irish financial stocks higher.

Iceland nationalized its third-largest bank, Glitnir, on Monday, which sent the Icelandic crown diving to a new low against the euro. Also on Monday, banks in Belgium, Germany and Britain received government aid.

In the United States, Citigroup Inc. (C) purchased the retail banking assets of Wachovia Corp. (WB). The shares of both domestic banks enjoyed major gains yesterday, with Citi’s stock climbing 15.6% to close at $20.51, and Wachovia’s shares advancing 90.22% to close at $3.50.

Source: Credit Crisis Update: U.S. Stocks Notch Record Gains on Investor Hopes for a New Bailout Plan

Breitbart reports:

The US Senate Saturday approved 25 billion dollars in loan guarantees for the financially strapped US auto industry, intended to spark a wave of automotive innovation. The loan guarantees were included in a continuing resolution that included funding for the US government and the wars in Iraq and Afghanistan. President George W. Bush has indicated that he intends to sign the bill....

The bill, which was approved by the House of Representatives on Wednesday, are the first loan guarantees for U.S. carmakers since Congress approved a similar 675 million dollar measure for Chrysler Corp. in 1980. Chrysler Chairman Robert Nardelli, however, said this week the loan guarantees should not be considered a rescue package for struggling carmakers. "This is not a bailout," he said.

Well, if the loans are repaid, you might argue that it's not a bailout because no federal outlays were involved. And you might argue the same for the $1.7 trillion in Fannie and Freddie's debt that the U.S. Treasury now seems to be guaranteeing, and for the $3.1 trillion in guarantees on agency MBS, and for the $600 billion or so in loans that the Federal Reserve seems to have extended. Not to mention the $700 billion Treasury plan still under debate.

Now, there may be a wee bit of a correlation among those sundry and staggeringly large exposures-- the state of the world in which the auto loans don't get repaid is likely the same state of the world in which significant chunks of the other items also turn in to a bill due for Uncle Sam.

On the other hand, what's another measly $25 billion among friends?

Technorati Tags: macroeconomics, autos, auto bailout

Breitbart reports:

The US Senate Saturday approved 25 billion dollars in loan guarantees for the financially strapped US auto industry, intended to spark a wave of automotive innovation. The loan guarantees were included in a continuing resolution that included funding for the US government and the wars in Iraq and Afghanistan. President George W. Bush has indicated that he intends to sign the bill....

The bill, which was approved by the House of Representatives on Wednesday, are the first loan guarantees for U.S. carmakers since Congress approved a similar 675 million dollar measure for Chrysler Corp. in 1980. Chrysler Chairman Robert Nardelli, however, said this week the loan guarantees should not be considered a rescue package for struggling carmakers. "This is not a bailout," he said.

Well, if the loans are repaid, you might argue that it's not a bailout because no federal outlays were involved. And you might argue the same for the $1.7 trillion in Fannie and Freddie's debt that the U.S. Treasury now seems to be guaranteeing, and for the $3.1 trillion in guarantees on agency MBS, and for the $600 billion or so in loans that the Federal Reserve seems to have extended. Not to mention the $700 billion Treasury plan still under debate.

Now, there may be a wee bit of a correlation among those sundry and staggeringly large exposures-- the state of the world in which the auto loans don't get repaid is likely the same state of the world in which significant chunks of the other items also turn in to a bill due for Uncle Sam.

On the other hand, what's another measly $25 billion among friends?

Technorati Tags: macroeconomics, autos, auto bailout

It’s not only Wall Street that is being bailed out by the US taxpayer. They’re going to have to find another $25bn to save Detroit too.

This is another nail in the dollar’s coffin. And it will be fantastic for gold.

The House of Representatives is in the final stages of agreeing a $25bn package of low-cost loans to carmakers. It’s virtually a done deal.
This loan is separate from $700bn bailout for the banking sector, which is still being debated in Congress. The bailout plan is growing bigger by the day.

This is another industry that has brought about its own demise. It failed to invest in fuel efficient cars – and now people can’t afford to drive their gas guzzlers. Corporate America screws up. US taxpayers pick up the pieces. It spells doom for the dollar.

The recent revival in the dollar’s fortunes appears to be over. Once the fall starts, it’s going to gather significant momentum.

In an interview with Bloomberg yesterday, Barrick Gold founder and Chairman Peter Munk said he now expects a move away from the dollar and into gold. I agree.

He was talking about what he called “major, major” holders of dollars. By this he means foreign governments and sovereign wealth funds.

Gold has added around 20% since the collapse of Lehman Brothers (NYSE:LEHMQ). As governments holding dollars all over the world see the scale of structural problems in the US economy, they will seek to diversify. They are likely to become strong buyers of gold.

It is now more likely that the Fed will have to cut interest rates at its October meeting. US interest rate futures show that traders now see an 80% chance that the Fed will cut rates. On 23 September, futures contracts were implying a 58% chance of a rate cut.

The banking bailout plan will erode the appeal of US Treasuries for foreigners. Government figures show that investors outside the US own 56% of the $4.8 trillion in marketable Treasuries outstanding, up from 42% of the $3.4 trillion five years ago.

The countries holding the most US debt are Japan, China, the UK and all the oil exporting nations.

Both China and Japan hold more than $500bn of US debt. With the Fed printing money to bailout out Wall Street and Detroit, US bond holders will be nervous.

Expect a rush of capital out of US Treasuries and a rotation into gold. To discover more ways to profit from natural resources click here.

Source: The Dollar is Being Destroyed – Buy Gold

Discussions over the government bailout of the financial markets stalled late Thursday, when House Republicans said they would not participate in the passage of Paulson’s deal.

"At the end of the day, it’s a $700 billion bailout," Rep. Scott Garrett (R-NJ) told USA Today. "It puts the taxpayers on the hook."

A bipartisan group of negotiators Thursday expressed hope that a deal would pass sooner rather than later after discussions with Secretary Paulson led to an agreement in principle. That framework included $250 billion in immediate relief with another $100 billion available without congressional approval. The remaining $350 billion would be made available later with approval from congress.

The plan also included caps on compensation for company executives, which Paulson initially opposed. Rep. Frank on Sunday referred to lavish executive salaries and bonuses as a "perverse incentive" that encourages executives to take inappropriate or excessive risks in exchange for multi-million-dollar payouts, and therefore, part of the problem.

Paulson finally agreed yesterday, stating that “the American people are angry about executive compensation and rightfully so. We must find a way to address this in the legislation.”

Stock warrants, which would provide the Treasury with equity stakes in participating companies, were also included in the agreement.

“Right now the price of admission [to the proposed Treasury program] is zero,” Sen. Jack Reed, D-RI, said Tuesday. “It’s not inappropriate to demand that if they benefit from this transaction in the future … that they will share that benefit with the taxpayers who made the benefits possible."

After a late night meeting on Capitol Hill, however, it became apparent that House Republicans would not support Paulson’s plan, regardless of the stipulations.

House Financial Services Committee Chairman Barney Frank said no House Republican took part in negotiations, but that Rep. Spencer Bachus (R-Alabama) made a brief appearance to deliver a one-page statement that outlined the House GOP plan.

The GOP plan involves the creation of a mortgage-backed securities insurance fund, Bloomberg News reported. The holders of mortgage-backed securities would be charged premiums to finance this insurance. According to the plan’s outline, Wall Street participants would be forced to fund their own bailout by injecting private capital, which could be raised, in part, by suspending dividends. Measures such as these would be facilitated, the Republicans said, by the removal of “regulatory and tax barriers that are currently blocking private capital formation.”

The Republican plan also requires participating firms to disclose the value of mortgage-related assets currently on their books, a review of credit rating agencies, and an audit of failed companies to ensure their financial position was accurately portrayed.

After being confronted with stiff opposition from members of his own party, President Bush said in a speech Friday morning that he was optimistic a rescue package would be passed soon.

“There is no disagreement that something substantial should be done,” he said. “We are going to get a package passed. We will rise to the occasion.”

While Democrats hold a majority in the House of Representatives, Speaker of the House Nancy Pelosi has made it clear that she will not agree to a bill without the full support of Congress.

After talks at the White House crumbled Thursday night, Treasury Secretary Paulson reportedly knelt down in front of Pelosi and pleaded with the house speaker to not “blow up” the deal by withdrawing her party’s support.

“I didn’t know you were Catholic,” Rep. Pelosi reportedly retorted in reference to Paulson’s kneeling. She went on: “It’s not me blowing this up, it’s the Republicans.”

A comment, to which Paulson responded with a sigh saying: “I know. I know.”

Source: Republican Opposition to Paulson’s Bailout Plan Stalls Talks

Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

Comment: This has since been expanded to "any institution doing substantial business in the U.S."  In other words, we could be bailing out just about every major financial institution in the world.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

Comment: Can we say "raw power grab"? We developed a Constitution with checks and balances.

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

Comment: These people will be extraordinarily powerful, yet will not be subject to Senate confirmation.

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

Comments: "No-bid" contracts will be OK and the Secretary can favor whomever he wants.

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

Comment: Sounds like we will be giving lots of power to any institution so designated.

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Comment: The provisions down below give me very little hope that objective number (2) here is anything more than window dressing.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this
Act.

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Comment: The government can be buying this stuff for up to two years, but we could be holding onto it forever.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

Comment: Note that it says $700 billion "outstanding at any one time," thus if the Government sells off some of the assets acquired, it can plow the proceeds back into the fund to buy up more of this crap paper.

Thus, while if we bought up $700 billion we would not suffer a $700 billion loss, sonce we would get something from each sale of the paper. However, if we (a.k.a. taxpayers), say, lose 30% on the first batch, and then plough the proceeds back into more paper, and lose 30% on that, we very well could see the total tab hit the $700 billion mark.

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Comment: I'm not enough of an expert on the U.S. Code to say what Chapter 31 is all about; might have to look into it and post about it in a later blog.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Comment: This one is a doozy -- all decisions are final, and if you don't like what the Treasury Secretary does, then go jump in a lake. This is just plain unconstitutional. You can not pass a law that is not reviewable by the courts. It shows utter and complete contempt for the idea of the rule of law.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Comment: OK, we are raising the debt ceiling to $11.3 Trillion; it was about $5 Trillion when Bush came into office. Just who are we going to borrow all this money from? Is there any limit to the amount of T-Notes that the Arab and Chinese central banks will buy?

Yes, right now in a flight-to-safety move, everyone is buying up T-Bills, but this is a sudden and massive increase in the supply of T-notes and Bills, and I have my doubts about where the demand will come from. There is a very good chance that much of this will end up being monetized, leading to very high rates of inflation down the road.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.--The term "mortgage-related assets" means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

Comment: Created up until 9/17/08! In other words, if they were creating bad paper even after all the warnings of disaster we have had all year long, the paper can still be part of the program. You have got to be kidding me!

(2) Secretary.--The term "Secretary" means the Secretary of the Treasury.

(3) United States.--The term "United States" means the States, territories, and possessions of the United States and the District of Columbia.

Final thoughts: Note that there is no mention of how the price of these assets will be determined, other than the discretion of the Treasury Secretary. There are investors who are willing to buy these assets, they just don't want to pay the price that the Banks and I-Banks want (and need).

I am personally willing to buy $1 billion face value of these troubled Mortgage Backed Securities for the princely sum of $10. There, proof that there are willing buyers out there.

If the paper is currently trading for say $0.25 on the dollar (which is probably generous; Merrill Lynch (MER) sold a big slug of this paper for $0.22 on the dollar and had to engage in seller financing to do it), and the Government pays $0.25 on the dollar, then the taxpayer is generally well protected, but it does not solve the problem. The banks would have to recognize the loss when they sold the paper, and their capital would take the hit.

At this point, when we say "take the hit," it is in the full Mafiosa sense of the term. Yes, it would provide more transparency as to what is on the books of the bank, but that's about it.

Now, to the extent that the Government is going to pay more than the $0.25, then the difference between that price and the $0.25 is a pure giveaway to the banks. It is the same as if you bought a stock at $100 a share and it plunged to $25 a share. If the government comes along and says it will pay you $75 a share, it is giving you $50.

The plan attacks the problem of excessive leverage (Assets/Equity) from the asset side. We buy up all the bad assets so leverage comes down. It would be far better to attack this from the equity side. This could be done by the Government buying a large amount of preferred stock in each firm at current market prices. Yes, current shareholders would be severely diluted, but the banks would then be in a strong enough position financially to continue to make more loans. We need banks to continue lending -- if they stop, that's where the very real threat of financial Armageddon comes from.

This is VERY different than the original RTC. In the original case, the Government already had the assets. It acquired them by virtue of paying off the depositors of failed S&L's; it was simply a consolidated way to dispose of those assets (and provide more funds to the FDIC). The shareholders of the S&L's, both common and preferred, were wiped out in the process, and most of the time the creditors of the bank also took a haircut.

Here we are talking about buying up the crap paper of existing institutions, most likely at inflated prices. If we were talking about this being limited to handling the assets and liabilities of already failed firms like Lehman Brothers (LEH), then the analogy to the RTC would hold, and the plan would make sense.

Do the taxpayers get any upside? None that I see in this proposal. At least in the FNM/FRE and AIG situations, the taxpayers wind up with 80% of the equity on the institution and the existing shareholders took a huge hit, and the managements of those institutions were replaced.

I was giving Paulson and Bernanke very high marks for their creativity in navigating very treacherous waters with these plans. They will cost the taxpayer a bundle, at least in the short term, but with those there is a very real possibility of the taxpayer making money in the long run. Anyone claiming that this new plan will make the taxpayer money in the long run is either a political hack or an idiot.

Let's see: ignore a growing problem until it causes a disaster, then use the threat of an even bigger problem to rush through a massive legislative proposal -- one giving the people who ignored the problem even more power and the ability to shower resources on their friends. I'm sure that soon anyone opposing this proposal, or even trying to slow down and see what we are doing will be labeled a "financial terrorist" and in favor of a worldwide economic meltdown. I think we have seen this movie before.