The Federal Government is seizing private companies – Hurrah!
Really, I don't know whether to laugh or cry. Anyone who owns a business should be shaking in their boots if we're setting a precident that anyone can take a snapshot of your business during a rough patch and determine that it's time to shut it down or kick out management, screw over shareholders and restructure debt. Gosh it seems like only last quarter when I warned that Paulson's push for more Treasury power that was rammed through Congress while they hyenas destroyed Bear Stearns (who, it turns out were never insolvent) would only be used to grab more banks and more land by Paulson, GS et al. Actually, it was last quarter and here we are, with the MSM celebrating the fact that the US government just took over the deeds on almost every home in America and now has absolute control of the money flow that allows people to get mortgages.
The Washington Post said at the time: "Any new formal regulatory powers for the Fed would have to be passed by Congress. Paulson's recommendations go beyond those contained in a blueprint for financial regulation that he unveiled shortly after the Bear Stearns rescue. That document, which had been in the works for more than a year, proposed an enhanced role for the Fed in preempting financial crises but offered few details. Today's speech will elaborate, calling for the Fed to be given explicit power to step in whenever a firm poses risks to the system and the authority to demand information from financial institutions so it can better anticipate emerging threats. Paulson's argument, which is shared by leaders of the Fed, is that even when the emergency Fed lending program for investment banks goes away — it is scheduled to expire in September, though the central bank could choose to extend it — financial players will assume they would be bailed out again in a crisis. That means they may be more willing to take risks that could threaten the financial system and thus require greater policing."
So a crisis is fomented, unusual emergency powers are granted and they are, not surprisingly, used ahead of the deadline to transfer $5Tn worth of mortgages to Federal control to bail out bond speculators (who I am sure, the administration will say, are mainly widows and orphans). Man, you REALLY have to trust in Big Government not to be a little queasy about this one (and Jefferson sure didn't).
Whle the Treasury refuses to put a price tag on this plan, Bill Gross has already said we're talking $500 Billion or more added to the National Debt in one fell swoop. The CBO said earlier this year is would be $25Bn but, if it was only $25Bn, couldn't Freddie and Fannie, who made over $10Bn in net profits in 2005 and $7Bn in '06, have simply gotten a loan to take them through a rough patch?
What Bush/Paulson have effectively engineered here is a massive tax, up to $500Bn, on the American people in order to bail out Trillions of dollars in bondholders, mainly foreign Sovereign Wealth Funds and massive bond speculators like PIMCO (where Greenspan now hangs his very expensive hat after fostering this "crisis") and Paulson's alma mater at GS, who have been the major instigators in destroying confidence in the financials through a series of statements and downgrades that have bought the markets to their knees.
I've been railing against this situation for so long I'm starting to bore myself so I'll just enjoy one massive I TOLD YOU SO and move on, because we've got money to make now. It's been a very painful couple of weeks as I steadfastly refused to capitulate and refused to cover because we expected just such an event to cause a massive reversal in the markets that would have buried us had we covered up our positions. Certainly this Federal bail-out will give the financials a short-term boost, which should pump up the whole market for a day or two but then what?
What will FRE and FNM look like, how will it affect global liquidity, how will it affect home values in America? Effectively what we have here is a giant $500Bn stimulus package disguised as a necessary bail-out that saddles US taxpayers with all the risk that was already being borne by the private sector. This will be fantastic for our bullish positions on the financials but I'm going to be wary of riding what's looking to be a massive relief rally too far. Let's enjoy it while we can though – we're sure paying for it in the form of a lifetime of future debt!
