Monday, February 9, 2009

What a Difference a Day Makes? 12 Little Hours . . .

Last night, on our post Weekend Wrap-up, we suggested that the delay in Treas. Sec'y Geithner's speech was not really because of the stimulus bill but because his boss had not made up his mind yet. Today we find this appears to be true, as reported by in "U.S. Delays Finance Plan as Officials Debate Debt":

Treasury Secretary Timothy Geithner delayed the announcement of the Obama administration’s financial-recovery plan as officials debated proposals aimed at addressing the toxic debt clogging banks’ balance sheets.

Political-economic-financial commentary on the leaked version of the current thinking within Team Obama is found in Naked Capitalism in Yves Smith's post today, "Now It's Semi-Official: MLEC to Rise From the Dead":

This is so far from being a plan I cannot believe the Obama administration is putting it forward. This is well short of the sort of term sheet or agreement in principle that then gets hashed out in deal land to close a transaction. The basic structure of the New Entity is up in the air, subject to negotiation with a variety of investors who likely have differing perceptions of risk and investment time horizons (how does this work for a hedge fund that has to report its net asset value to investors monthly, for instance? That is one of a host of considerations on the investor side). Expect a rerun of the Paulson MLEC saga, weeks of floundering as the Treasury tries to herd cats.

Ms. Smith concludes without mincing words:

To put it more simply, this deal works only if the government is the bagholder, big time. This elaborate structure is merely designed to put lipstick on a pig by dignifying the fiction that there might be some upside to the taxpayer and using guarantees to disguise what the ultimate cost might be.

As is said over bagels and lox from time to time, oy!

An alternative proposal is well described by Willem Buiter ("woolly boots" in Dutch, I am told) in his weekend blog posting titled "Good Bank/New Bank vs. Bad Bank: a rare example of a no-brainer". He argues concisely that a "good bank" should be created from the valuable assets of the existing insolvent banks.

The financial institutions are active on a related front, which is to eliminate mark-to-market accounting. Yves Smith skewers this today in Mark-to-Market, RIP? It includes the opinion from a formed FDIC examiner that fraud in valuation is at Enron levels, expresses her opinion that "the idea that this move (from MTM) will mke matters better is delusional, and predicts that this idea will come to pass.

Moving on, more evidence of deflation is found in a WSJ article, "Saks Upends Luxury Market With Strategy to Slash Prices". The article details how price-slashing well before Christmas Day put small stores out of business and has made shoppers wary of buying at full price. Another scary part of the article is the quote from Saks' CEO that: "These herculean things" were done to "make sure that the company survives". We're talking one shopping season. How on the edge are how many companies?

On the deflation front, despite the turmoil and apparent political indecision in D.C., gold is down 1%. Over the past year, major down-moves in stocks sucked down all assets, even gold, which has been the strongest major commodity. Let us see if gold and McDonald's break down. If they both break down, a deflationary deluge could be upon us. If so, it's easy to avoid the news by heading south to spend the rest of their summer in Tierra del Fuego.

Copright (C) Long Lake LLC 2009

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