Contango

1929

November 1929 headlines

I found this amazing piece,  Reactions of the Wall Street Slump, published by The Economist on their November 23, 1929 edition.

I chose the following paragraph that was written days after the month long collapse of the stock market, because it's truly eerie:

How far this will extend must at present be a matter of conjecture. A great deal must in any case depend upon the situation of the banks. The one influence that could throne back the full brunt of the speculative collapse upon industry and produce a real depression throughout the country would be banking trouble. Certain Wall Street banks made some spasmodic efforts to check the slump, but were careful to dispose of their holdings at the first opportunity, and there is no reason to suppose that they have seriously handicapped themselves by efforts which never went the length of attempting to stop the rot by holding large blocks of stock off the market. There are, however, known to be large quantities of securities not yet absorbed by the public which for the time being have to be carried by banks and finance houses. Many banks will, moreover, have made very large bad debts, while others will have to finance customers for a long or short period. Some bank failures, no doubt, are also to be expected. In the circumstances will the banks have any margin left for financing commercial and industrial enterprises or will they not? The position of the banks is without doubt the key to the situation, and what this is going to be cannot be properly assessed until the dust has cleared away. On the whole, the experts are agreed that there mint be some setback, but there is not yet sufficient evidence to prove that it will be long or that it need go to the length of producing a general industrial depression.

The lack of liquidity, compounded with fear, and the underlying problems like CDS, CDOs, subprime MDS, over indebtness at all levels (from credit cards to companies and government) gives me a light stomach, like when I'm looking down from the edge of an abyss.

Sarah Palin

This is just comic relief. I know I need it.

From Saturday Night Live... Sarah and Hillary

A car crash

Car crash, or The House said No!

I don't know where I read it, but, it's the best description I've found to illustrate the fear which has been brought upon market players, they will all be a lot more cautious after today for quite some time -- just as you would after a car crash.

Outline of Congress draft

From a Reuters factbox, I thought it would be a good idea to include here where the house bailout draft stands so far.

Republican balls

Las Vegas
Courtesy of Iñigo Biain

Man, o'man, o'man, I've got to hand it to them, the some republicans have titanium balls, they started with a pretty large sum, $700 billion, but now, they're asking you and me to take out of these clowns' hands the potential risk of the whole $62 trillion insured debt (or credit default swaps).

As reported by Reuters:

On Thursday, a small group of conservative House Republicans -- including Texas' Jeb Hensarling and Virginia's Eric Cantor -- offered their own alternative to the Bush proposal. Focused on mortgage insurance, the one-page alternative plan was presented to reporters at a briefing.

The plan calls for the U.S. government to offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure. The Treasury Department would charge premiums to holders of the securities, under the plan.

Let me see,

• pay outright $700,000,000,000 or assume the risk of a debt default worth $62,000,000,000,000?
• or approximately $2,100, versus risking $186,000 for each one of the 300+ million US citizens.

Gee, when did Las Vegas take over the whole USA?

Of foxes and chicken coops

Explosion

As I read, and keep on reading --we are living through a historic event--, it does not cease to amaze me how well aligned is the book with the talk. And, it is a relevant discussion point because it would seem that we have the fox in charge of the chicken coop...

Don't I recall Mr. Paulson getting a compensation of Goldman Sach shares in the $100s of millions?
If GS fails he would stand to get a substantial haircut, or wouldnt he?

Update 09/29/2008: According to this article, Mr. Paulson sold the lion's share of his GS holdings, about $492 million, at about the date of his confirmation; keeping for himself:

• 494,054 restricted shares of common stock (worth $60 million roughly at this moment's $122.75 share price), all of which are vested and deliverable,
• plus, options to buy --at an unknown price-- 680,474 shares of common stock, all of which are exercisable.        

Bailouts and Lynching

30's Depression

I've been reading a little, here and there, to get a feel of what people think should be done with the proposed Paulson-Bernanke bailout. Its been very interesting, from professor Sheehan who does not see the bailout as a requirement imperative, Buffet's support with an advice to sell a few of the toxic papers to learn and pay market price, Krugman's leaning on a traditional approach which warrants buying the securities of troubled companies to privatize later on, to a flooding of mail and telephone calls to lawmakers from enfuriated taxpayers whose majority outright oppose any bailout and a minority agrees to a very restrictive one, with a healthy dose of wall street exec lynching.

So, will the elected lawmakers approve this necessary piece of legislation, with 99 out of 100 taxpayers opposing the bailout?

On mice

What to do with mice?

I thought this hilarious email from Hal was a good starting point for the (first moral hazard) question which is haunting us all: if the bailout is approved, will the mice get away with the cheese, or will the execs get away with a slap on the rolex and dozens of millions?

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

During 2007 broker execs earned $39 billion (see here and past history here)  in bonuses only. It doesn't sound right !

Of mice and mousetraps

Mouse on a mission!
Courtesy of bluegreen.blog

Mr. Paulson recalls this foretelling conversation with Ben Bernanke:

“Going back a long time, maybe a year ago, Ben, as a world-class economist, said to me, ‘When you look at the housing bubble and the correction, if the price decline was significant enough,’ ” the only solution might be a large-scale government intervention, Mr. Paulson said. “He talked about what had happened when there had been other situations historically.”

Mr. Paulson said he agreed but hoped it would not come to that. “I knew he was right theoretically,” he said. “But I also had, and we both did, some hope that, with all the liquidity out there from investors, that after a certain decline that we would reach a bottom.”

So, this odd couple, finally decided that holistic sweeping measures needed to be brought to the attention and approved by Congress in order to solve the financial crisis, --the one at a time institution approach was not working.

So, the $1 Trillion question is, are these measures the right ones?

China plays its Morgan card

Andy Xie. Economist
Courtesy of ICBI

Picked up this comment in the Washington Post:

Andy Xie, an independent economist who was formerly Morgan Stanley's chief Asia economist, said the United States needs to accept that a large amount of U.S. assets must be transferred to other countries' ownership. "If the U.S. is not willing to accept that," Xie said, "they will have to print money and the dollar will fall. And we will be headed toward a global financial meltdown."

Quite startling, if you ask me, Andy has a point there.