What do we need for markets to work efficiently? Confidence in every part of the whole. What do we have in the US?
- No confidence in the companies since companies that where fine a week ago are now bankrupt
- Corollary: No confidence in the auditors and accountants such as KPMG, PWC, Ernst&Young etc which helped the previous companies to commit fraud thanks to the lack of transparency of GAAP
- Corollary: When the GAAP changes the accounting principles or the date some new rules must get effective to save CitiGroup, you cannot have any confidence in the GAAP body neither.
- No confidence can be held in the rating agencies, which first rated triple AAA all the toxic waste and now fail to downgrade insolvent companies in order to try to save them.
- No confidence in the SEC, which fails to apply any regulatory law. The US markets are the new wild wild west and there's no Sheriff in town!
- No confidence in the figures from the US Government (unemployment, inflation, growth...)
- No confidence in the Government in general (Paulson and Bush are proven blatant liars)
- No confidence in the Fed (that's not new, but it's truer than ever, Bernanke being an incompetent, dangerous, liar).
- [UPDATE 2008-09-16] No confidence in the FDIC: FDIC Chairwoman Blair said banks are safe and sound, according to Reuters. Blair added that insurance funds for deposits will be adequate to absorb any losses. (From Yahoo Finance).
One thing is for sure though, the Bernanke+Paulson PUT helped save the market from a collapse last week and this week. Why? Well, last week, Lehman, Wachovia, Washington Mutual, AIG, Merrill Lynch were all insolvent companies and well alive. The market still believed in a bail out in some form, and it looks like some are getting bailed out.
So last week, AIG which is the biggest insurance company in the world, dropped 46%. It is an insolvent company, as is probably Citigroup and General Motors. So the Dow Jones, which comprises only 30 companies, 3 of which are insolvent, one of which drops 46% in a week, the same week where Fannie & Freddie are bailed out with $200 billion of government injection and 4 to 5 trillion USD on the treasuries balance sheet, as well as Lehman's collapse, the Dow manages to rise 0.3%. And people talk about panic? This market is a joke, and everybody on the Street is simply waiting for Bernanke to lower the rates to 1% and Paulson to bail them out everybody.
During this week-end, the Fed decided that it had to inject far more money in the system and also took the liberty to allow the brokerage firm to get access to the funding (in violation of Federal Reserve Act Section 23A). They also decided that they would take anything on their balance sheet in order to provide liquidity to the banks. They normally have allowed to only take AAA rated bonds, but they are now taking any kind of insecure to toxic waste on their balance sheet in order to save their friends on Wall Street. This is the further the Fed has been since its creation, and they are now violating law.
Today, AIG is insolvent, but do you think that any rating agency will downgrade their rating (which would be fatal to AIG, but would be the right thing to do by the rating agencies)? No, they won't do it. [UPDATE: they finally did downgrade AIG. Let's see if they waited for the government to come up with a solution before doing so or not. Today is either the collapse or the bail out of AIG.] [UPDATE2: Mish on Fitch: AIG is flirting with bankruptcy and all Fitch was willing to do was downgrade it to "A". Fitch did not downgrade Lehman (LEH) from "A" until Lehman went bankrupt. The downgrade of AIG to "A" is further proof of just how useless Fitch's ratings are.]
Worse, Government is now intervening and begging the banks and the Fed to save AIG. On which grounds?
Here's a quote from the WSJ:
AIG has received permission from New York Gov. David Paterson to access as much as $20 billion in capital from its subsidiary companies to cover its day-to-day operating needs. (my note: this is illegal!)
"They can make a bridge loan to themselves," (my note: how does that sound?) Mr. Paterson said during a press conference Monday. He said the relaxation of insurance regulations came in response to a request from AIG. (my note: what AIG wants, AIG gets?)
Mr. Paterson said. "Hopefully we have cleared the way for the federal government" to provide assistance as well.
Now he wants the Federal Reserve, which doesn't have anything to do with the insurance companies and which is not allowed to lend them any money to lend them $40 billion, while AIG's market cap is $13 billion. They want to borrow 3 times their market cap! So the government is pushing the Fed to do an illegal and very dangerous act by lending so much money to an insolvent company.
But wait a second, the best is to come. AIG wants government/Fed funding while:
- AIG has rejected funding from 3 (not one, not two, three) private equity firms, because they would have got a controlling stake at the company (because the current board and CEO are doing such a good job that they want to stay where they are??)
- AIG has failed to get any funding from Berkshire Hathaway after meeting with Warren Buffet (why? because the company is so deep trouble that it's not worth pumping money it to it? Or because of the same reason as the private equity firms?)
- AIG paid a dividend in September (ex-date 3rd of September), of approximately $2.5 billion to his shareholders.
If you look at the action today on the market, you will find a lot of bullish attitude, the Dow and S&P rallying after market opened to approximately -1% while nothing but disastrous news hit the wires:
- Lehman fills for bankruptcy (This is the 4th biggest investment bank in the US)
- Merrill Lynch fails but managed to get bailed out by BofA (This is the 3rd largest investment bank in the US)
- AIG is insolvent and collapses (This is the largest insurance company in the world)
- WaMu and Wachovia collapse as well (These are major retail banks in the US)
- Capacity Utilization and NY Empire State Index collapse (and reach level far below market expectations)
When I read on the news that there's a panic, it makes me laugh!! Panic? Where?? The Bernanke+Paulson PUT is there.
Next step: interest rate cut to 1%. Probably this week or the following.