Buffett Says Goldman Deal Was no Bet: the Government had to take their responsibilities and bail them out by socializing the losses

I have already posted many times during the past 3 years about the complete lack of integrity and ethics that Warren Buffett has been showing since the beginning of the financial crisis.

The "Oracle of Omaha", Warren Buffett, known for the stellar performance of his Berkshire Hathaway stock price, has already admitted many times officially: when he makes money, it's for himself, and it's thanks to his talent, but when he's losing money, he expects the government and the government and the people to come to the rescue and bear the burden of the losses, without ever seeing any of the profits. So the talent might be in some other area than "investment management" and might be more located in the "friend making in government entities".

I'm never surprised by corruption at the state level as any Government is always the breading ground for corruption and wealth transfer from the people to the well-connected few. But I am revulsed that Warren Buffett is still enjoying the image of a white knight / angel / savior or someone whose opinion should be sought after in matters of politics or public policies.

Feb. 10 (Bloomberg) — Billionaire Warren Buffett said his $5 billion investment in Goldman Sachs Group Inc. at the depths of the financial crisis was a wager that Federal Reserve Chairman Ben S. Bernanke and then-Treasury Department Secretary Henry Paulson would take on debt to prop up the economy.

“It was a bet essentially on the fact that the government would not really shirk its responsibility at a time like that to leverage up at a time when the rest of the world was trying to deleverage,” Buffett said in an interview released today by the Financial Crisis Inquiry Commission.

Buffett’s Berkshire Hathaway Inc. bought preferred stock in New York-based Goldman Sachs in 2008 after the collapse of rival securities firm Lehman Brothers Holdings Inc. Paulson had left the chairmanship of Goldman Sachs in 2006 to join the administration of President George W. Bush. Bernanke had been an economist at Princeton University.

“I made the fundamental decision that we had the right people, in Bernanke and Paulson, in there with a president that would back them,” Buffett said.

Berkshire gets a 10 percent annual dividend on the investment and received warrants to buy $5 billion in common stock with a strike price of $115 per share. Goldman Sachs traded for more than $165 a share today on the New York Stock Exchange, compared with $84.39 at the end of 2008.

Buffett had said in 2008, when Omaha, Nebraska-based Berkshire announced the investment, that he was betting on an “exceptional institution.”
[...]

On the Goldman Sachs fraud

I don't have time to write about the the Goldman Sachs story, and a lot of people have been following and written analysis very well worth reading. So I'll just provide a list of links, all of them worth following:

• SEC Charges Goldman Sachs With Fraud, John Paulson Implicated - ZeroHedge
• The full Abacus pitchbook - ZeroHedge
• What will Buffett say, now that GS ethics are exposed? - YouTube
• Jim Cramer had to be long GS, of course, and his ridiculed by CNBC guest - YouTube/ZeroHedge
• "Rotten to the core" - Yahoo TechTicker (see embedded video below)
• Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed

Hank Paulson: "Russia forced me to bail out Fannie & Freddie"

For those who still want to hear from Henry Paulson, he now came up with a new reason why Fannie and Freddie had to be bailed out. Believe it or not, the Russians made him do it!

Jan. 29 (Bloomberg) -- Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.

Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics, according to his memoir, “On The Brink.”

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

[...]

“The report was deeply troubling -- heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets,” Paulson wrote. “I waited till I was back home and in a secure environment to inform the president.”

Russia never approached China about dumping U.S. bonds, Peskov said today. “This is not the case,” he said by phone.

Russia sold all of its Fannie and Freddie debt in 2008, after holding $65.6 billion of the notes at the start of that year, according to central bank data. Fannie and Freddie were seized by regulators on Sept. 6, 2008, amid the worst U.S. housing slump since the Great Depression.

The Russians did the right thing: sell the junk assets at inflated prices back to the US government. But can we say that Paulson restored confidence in Freddie and Fannie? The masquarade has been going on for too long. It's time to arrest both him and Geithner, and all the persons having any responsibility in the diverting trillions of dollars of wealth from the people to the happy few.

Hank Paulson exposed by the New York Times

This is not from today, but I just ran into this report from the NYTimes and I think it's a very good job and seriously worth reading.
Here are some quotes:

Before he became President George W. Bush’s Treasury secretary in 2006, Henry M. Paulson Jr. agreed to hold himself to a higher ethical standard than his predecessors. He not only sold all his holdings in Goldman Sachs, the investment bank he had run, but also specifically said that he would avoid any substantive interaction with Goldman executives for his entire term unless he first obtained an ethics waiver from the government.

But today, seven months after Mr. Paulson left office, questions are still being asked about his part in decisions last fall to prop up the teetering financial system with tens of billions of taxpayer dollars, including aid that directly benefited his former firm. [...]

Mr. Paulson did not say when he received a waiver, but copies of two waivers he received — from the White House counsel’s office and the Treasury Department — show they were issued on the afternoon of Sept. 17, 2008.
[...]
While Mr. Paulson spoke to many Wall Street executives during that period, he was in very frequent contact with Lloyd C. Blankfein, Goldman’s chief executive, according to a copy of Mr. Paulson’s calendars acquired by The New York Times through a Freedom of Information Act request.

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.

On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted.
[...]
Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.

And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling.

“I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly,” said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin.

He went on: “If it can happen on a phone call and can happen without public scrutiny, it destroys the standard because then anything can happen in that fashion and any waiver can happen.”
[...]
Mr. Paulson helped decide the fates of a variety of financial companies, including two longtime Goldman rivals, Bear Stearns and Lehman Brothers, before his ethics waivers were granted. Ad hoc actions taken by Mr. Paulson and officials at the Federal Reserve, like letting Lehman fail and compensating A.I.G.’s trading partners, continue to confound some market participants and members of Congress.

“I think it’s clear he had a conflict of interest,” Mr. Stearns, the congressman, said in an interview. “He was covering himself with this waiver because he knew he had a conflict of interest with his telephone calls and with his actions. Even though he had no money in Goldman, he had a vested interest in Goldman’s success, in terms of his own reputation and historical perspective.”
[...]
Adding to questions about Mr. Paulson’s role, critics say, is the fact that Goldman Sachs was among a group of banks that received substantial government assistance during the turmoil. Goldman not only received $13 billion in taxpayer money as a result of the A.I.G. bailout, but also was given permission at the height of the crisis to convert from an investment firm to a national bank, giving it easier access to federal financing in the event it came under greater financial pressure.

Goldman also won federal debt guarantees and received $10 billion under the Troubled Asset Relief Program. It benefited further when the Securities and Exchange Commission suddenly changed its rules governing stock trading, barring investors from being able to bet against Goldman’s shares by selling them short.

Now that the company’s crisis has passed, Goldman has rebounded more markedly than its rivals. It has paid back the $10 billion in government assistance, with interest, and exited the federal debt guarantee program. It recently reported second-quarter profit of $3.44 billion, putting its employees on track to earn record bonuses this year: about $700,000 each, on average.
[...]
But according to two senior government officials involved in the discussions about an A.I.G. bailout and several other people who attended those meetings and requested anonymity because of confidentiality agreements [...] Mr. Paulson played a major role in the A.I.G. rescue discussions over that weekend and that it was well known among the participants that a loan to A.I.G. would be used to pay Goldman and the insurer’s other trading partners.

On Sept. 16, 2008, the day that the government agreed to inject billions into A.I.G., Mr. Paulson personally called Robert B. Willumstad, A.I.G.’s chief executive, and dismissed him. Mr. Paulson’s involvement in the decision to rescue A.I.G. is also supported by an e-mail message sent by Scott G. Alvarez, general counsel at the Federal Reserve Board, to Robert Hoyt, a Treasury legal counsel, that same day.

The subject of the message, acquired under the Freedom of Information Act, is “AIG Letter,” and it contains a reference to a document called “AIG.Paulson.Letter.draft2.09.16.2008.doc.” The letter itself was not released.
[...]
Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver.
[...]
On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again.

When the Treasury secretary reached his office the next day, on Sept. 18, his first call, at 6:55 a.m., went to Mr. Blankfein. That was followed by a call from Mr. Blankfein. All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr. Blankfein spoke 24 times.

At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars.
[...]
Moreover, because the schedules include only phone calls made through Mr. Paulson’s office at Treasury, they provide only a partial picture of his communications. They do not reflect calls he made on his cellphone or from his home telephone.

According to the schedules, Mr. Paulson’s contacts with Mr. Blankfein began even before the height of the crisis last fall. During August 2007, for example, when the market for asset-backed commercial paper was seizing up, Mr. Paulson spoke with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.

By contrast, Mr. Paulson spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch.

Conclusion: Hank Paulson belongs to jail.

Still no actions against Henry Paulson's illegal actions

I am still catching up with the news and the blog, so apologies because this is old news. I just never had a chance to post about it and have also several other posts in queue... Mish also wrote about this, and you should read his long post as well (I am using some of his links here).

Basically, Paulson admitted that he unlawfully forced Ken Lewis to acquire Merrill Lynch, but he also wants us to believe that saving his $700,000,000 stake in Goldman, and stealing the USD-holder blind to bailout his friends "saved this nation from a great peril". There should limits to lies and perjure... And also, he believes that we should thank him for his unlawful actions. As if a $700,000,000 for himself and $870,000,000,000 for his friends were not a good enough reward already.

July 15, 2009 (AP) -- Defending the government's handling of the economic crisis last year, former Treasury Secretary Henry Paulson said Wednesday that the Bush administration's responses were not perfect but "saved this nation from great peril."
[...]
"Our responses were not perfect ... But, having had the benefit of some time to reflect, and to consider views expressed by others, I am confident that our responses were substantially correct and they saved this nation from great peril," Paulson wrote.

Paulson also defended himself against allegations that he and Federal Reserve Chairman Ben Bernanke pressured Bank of America Corp. into acquiring Merrill Lynch, despite mounting financial losses at Merrill that were ultimately absorbed by Bank of America stockholders.

Bernanke has denied threatening to oust Bank of America CEO Kenneth Lewis if he abandoned the takeover.

Paulson said he told Lewis that reneging on the promise to purchase Merrill would show "a colossal lack of judgment." He then pointed out to Lewis that the Fed could remove management at the bank if it saw fit, he said.

"By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America's regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment," Paulson said.

Paulson said he believed his remarks to Lewis were "appropriate."

Here's another report:

On Thursday July 16 WASHINGTON (AP) Paulson, testifying for the first time since leaving office in January after putting in place a $700 billion bank bailout program, was defiant in his response and admitted no wrongdoing.

"No one was tougher than I was in trying to protect the American taxpayer," he told the House Oversight and Government Reform Committee.
[...]
"I know how terrible it is, I'm telling you it would have been worse" had the government not intervened, Paulson said.

Kaptur, who voted against the bailout program, responded: "If that's your best argument, that's not good enough."
[...]
Paulson said he believes his handling of the crisis, including the Merrill Lynch deal, was appropriate and saved the nation from "great peril." He told the panel that had the government not intervened and promised the cash cushion to banks, the economy would be much worse.

On the Bank of America bailout, Paulson said he would be "very optimistic that the taxpayer would get all that money back with a profit."

I suggest watching this 6min video clip of John Paulson's hearing (Dennis Kucinich questioning). Hank Paulson, who was CEO of Goldman Sachs and Secretary of the Treasury Department of the US is unable to answer simple questions (keeps on blablablablabla but he's not making any sense) and also doesn't know what is lawful and what isn't. He is obviously avoiding to answer the questions and keeps on lying when pushed. The blablablabla finishes at 4min45 where he states that he doesn't know what is legal and what isn't...

The US have become the most corrupt country on the planet. At least, in Iran, China or Russia, you know that free speech and rule of law do not exist whereas most people in the world do not know that it is the same in the US. That's what makes it even worse for the US citizens, who have been robbed blind in the past 20 years.

BofA's Lewis Threatened Over Merrill By Bernanke And Paulson

What was already obvious back in October 2008 when I wrote in BofA Merrill Lynch - The creature of Bernankenstein is now being confirmed true by the WSJ (Thank you Mr Denninger):

Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. -- a deal that later triggered a government bailout of BofA -- according to testimony by Kenneth Lewis, the bank's chief executive.
[...]
Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren't normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill -- which eventually totaled $15.84 billion for the fourth quarter -- could have given BofA's shareholders an opportunity to stop the deal and let Merrill collapse instead.
"Isn't that something that any shareholder at Bank of America...would want to know?" Mr. Lewis was asked by a representative of New York's attorney general, Andrew Cuomo, according to the transcript.
"It wasn't up to me," Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would "impose a big risk to the financial system" of the U.S. as a whole.

Obviously, hoping that these criminals will ever be brought to justice is just wishful thinking...

Nothing but lies from Bernanke, Paulson, and Geithner

I have seen the news and cannot put in a better way than Mish, so I'll just use his phrasing and share completely his opinion.

This is a follow up of the three following posts:

• Bloomberg Sued the Fed Reserve
• Fed Refuses to Disclose Recipients of $2 Trillion
• Fox Business sues Fed

Fed Refuses to Release Bank Lending Data, Insists on Secrecy

The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg sued Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs.

On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It sued Nov. 7.

In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

Mish: In plain English: Bernanke Lied.

Pressure to reveal major AIG counterparties grows

Calls increased Tuesday to reveal the financial institutions that got almost $40 billion in collateral from American International Group shortly after the government first bailed out the insurer last year.

AIG almost collapsed in September after ratings agency downgrades triggered demands for billions of dollars in extra collateral from firms that had bought derivative-based protection from the insurer on complex mortgage-related products known as collateralized debt obligations, or CDOs.

AIG didn't have that much money and faced bankruptcy. But it was saved by an $85 billion emergency loan facility from the Federal Reserve.

By Nov. 5, the insurer had paid out $37.3 billion of that money to counterparties who had purchased a certain type of derivative-based protection from AIG called multi-sector credit-default swaps, according to the company's third-quarter regulatory filing.

"AIG has given the counterparties $20 billion. Those people could be just about anybody in the world. Why won't the Fed disclose who those are?" Sen. Ron Wyden, D-Ore., asked Fed Chairman Ben Bernanke during congressional testimony on Tuesday.

Bernanke said the counterparties made "legal, legitimate, financial transactions" with AIG and presumed at the time that the contracts would remain private. "That is a consideration we have to take into account," he added.

Sen. Mark Warner, D-Va., suggested that AIG's counterparties should have to take a "haircut," rather than be made whole, because some of them probably didn't do enough due diligence on whether the insurer was financially strong enough to be selling such protection.

"In effect, what we're saying is, consequently, folks who bought these instruments and that, at some point in their process, should have been doing some level of credit analysis of what AIG was selling who didn't do that credit analysis are going to still come out whole for their lack of appropriate due diligence or responsible behavior," he said.

"I'm as unhappy as you are about that, senator," Bernanke replied. "I just don't know what to do about it."

Mish:

There are many problems with the handling of AIG but it all starts with the initial decision to do something as opposed to nothing. Government has no business bailing out anyone and the decision is made all the more galling by making everything a secret.

Note that the Fed is picking winners and losers. There are other creditors of AIG who might have a better claim on its assets than who the Fed is picking. Remember that the Fed promised transparency. Instead, we have gotten noting but lies and secrecy from Bernanke, Paulson, and Geithner every step of the way.

Words cannot begin to express my disgust of the lies and secret shenanigans of the Fed and Treasury.

Bloomberg exposes Hank Paulson

It's refreshing to see that Bloomberg, despite having the banking industry as its main source of revenue, is capable of suing the Fed, and also exposing the corruption at the Federal level in the US by exposing what Paulson is doing (emphasis mine).

Paulson should be judged for treason against the Nation and sentensed to remain in a 3m2 cell for the rest of his pathetic life of destruction and robery.

Jan. 9 (Bloomberg) -- [...]

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
[...]
The transactions are “just egregious,” said Johnson, a fellow at the Peterson Institute for International Economics in Washington. “You want to do it the way Warren does it.”
[...]
Giving Money Away

“Paulson said he had to make it attractive to banks, which is code for ‘I’m going to give money away,’” said Joseph Stiglitz, who won a Nobel Prize in 2001 for his work on the economic value of information.

“The worst aspect of this is that they were designed not to do what they were supposed to do,” he said in a telephone interview from Paris Jan. 7. “In many ways, it’s not only a giveaway, but a giveaway that was designed not to work.”

The Treasury would have held warrants for 116 million shares of Goldman Sachs under Buffett’s terms, which would be equivalent to a 21 percent stake when added to those currently outstanding. Instead, the dilution is 2.7 percent under the Treasury plan. Blankfein is the company’s biggest individual investor, with 2.08 million shares worth about $178 million today, according to Bloomberg data. His 0.47 percent interest would have declined to 0.36 percent under Buffett’s terms and would be 0.44 percent if the Treasury’s warrants were exercised.
[...]
Stiglitz said finance professionals at Treasury possessed expertise on warrant pricing that members of Congress didn’t. As a result, Paulson gave lip service to the lawmakers’ intent on TARP without gaining much value for taxpayers, said Stiglitz, a Columbia University professor who described the pricing mechanism as “a gimmick to make sure that they were giving away something worth nothing.”

“If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired,” he said.
[...]
A $5 billion U.S. loan last week to GMAC LLC, the Detroit- based finance affiliate of General Motors Corp., was made under the Treasury program and was part of $6 billion advanced to keep the automaker afloat.

In advancing the $5 billion, Paulson accepted warrants that reward taxpayers with an additional $250 million, or 5 percent of the stake. That compares with 15 percent on the 174 completed bank rescues as well as the 100 percent Berkshire Hathaway Inc. Chairman Buffett obtained on an investment in Goldman Sachs in September, Bloomberg data show. A warrant is a company-issued certificate that represents an option to buy a certain number of shares at a specific price by a predetermined date.
[...]
The government has received warrants valued at $13.8 billion in the 25 biggest capital injections from TARP, according to Bloomberg data. Under the terms Buffett negotiated for his $5 billion stake in Goldman Sachs, the TARP certificates would have been worth $130.8 billion.

Buffett received 43.5 million Goldman Sachs warrants valued at $82.18 apiece on the date of the transaction, or $3.6 billion, Bloomberg analytics show. Paulson, who served as the New York- based bank’s chief executive officer until 2006, injected twice as much taxpayer money into Goldman Sachs a month later and got 12.2 million warrants worth $72.33 each, or $882 million.

No Confidence

If the Treasury had received the same terms as Buffett, taxpayers would have become the biggest investors in most of the bailed-out banks and existing stakes would have been diluted, Bloomberg data show.

[...]
Congress left it to Paulson and his staff to decide how warrants would be priced and how many the U.S. would receive under the TARP, according to Caleb Weaver, a spokesman for the program’s oversight board. Treasury imposed identical terms for 140 capital injections. Thirty-four closely held lenders issued certificates to the government for preferred stock instead of common shares and one community development institution wasn’t required to issue warrants, according to the Jan. 6 Treasury report on TARP.
[...]
Paulson left money on the table in three ways, according to economist Johnson: accepting fewer warrants than Buffett did; setting the certificates’ price trigger, or strike, above market values; and receiving an annual yield on the preferred shares that is half of what Buffett will get for the first five years.

The government will forgo almost $48 billion over the next five years in preferred stock dividend payments from the 25 biggest TARP infusions, as compared with Buffett, according to the terms of the deals.

The taxpayers’ certificates were set at the 20-day trailing average of the share price, which for Goldman Sachs was $122.90 on Oct. 28, when the company closed almost $30 cheaper at $93.57. The trailing average ensured a higher strike price, and lower value for the warrants, because bank stocks were plummeting.

By contrast, Buffett received an 8 percent discount to the market price at $115 a share on Sept. 23, when the stock closed at $125.05.

Taxpayers also acquired preferred shares as part of the bailout. These securities, which can’t vote unless the issue at hand is the creation of a more senior preferred stake, carry an interest payment of 5 percent that increases to 9 percent in five years. Buffett’s preferred shares in Goldman Sachs pay a 10 percent yield.

If Goldman Sachs rises to its five-year average price of $147, Buffett will be able to profit by $1.4 billion from exercising his warrants. The government warrants will be in the money for $294 million, or about a fifth as much for twice the investment.
[...]
Under Buffett’s terms, the Treasury’s investment in Citigroup would also have brought greater potential for profit to taxpayers. The two cash infusions totaling $45 billion would have resulted in warrants for about 5.6 billion shares, which would more than double the 5.4 billion of existing shares. The Treasury’s warrants call for 464 million shares, or 8 percent of the number under Buffett’s terms.
[...]
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net .

Losing My Integrity - Warren Buffet's Next Book?

Losing my Virginity is Richard Branson's (auto?)biography... for those who didn't understand where the title of this post was coming from.

I have been seriously questioning (and asking myself) the reasoning of Warren Buffett for the past several weeks as I believe that he is making less and less sense. I have respected Warren Buffett and as many, consider him as being the voice of wisdom and have read everything I can about him and watched all his interviews. But he simply doesn't make sense anymore. What has happened? I still don't know. I questioned his statements and thought that I had found the light from London Banker, with whom I exchanged a couple of messages.

So what's going on?

• First, Warren Buffet publicly states that the Paulson (non-)Plan is a great one and is necessary, while ALL the people (investors/economists) who foresaw the crisis coming think this is madness, and a strategic error. Warren Buffet is no idiot, so why does he backs this? Of course, it does help his own purpose, but... would he put his personal gain above the US one? He said in 2003 that "Derivatives are financial weapons of mass destruction " but he then wrote PUTs for a notional value in billions of USD on the market. So he is probably now in deep trouble and is wishing for the market to rally up?
• He invests $5 billion in Goldman Sachs on the 24th of September while the smart money knows that GS is not going to survive in its current state. He manages to get preferred shares yielding 10% and warrants for more equity. These shares are not available to the general public or common investors. But he nonetheless knows that his actions will lead a "sucker's rally" on the market by sending the wrong signal. I am sure he is clever enough to have obtained protection for his money by the Fed or the Treasury on top of that, meaning that the US Citizens will pay in case something goes wrong. Finally, sending wrong signals to the market is the best way to lead to a crash further down the road (the crash already occurred, just a couple of weeks further down the road!).
• He does it again with General Electric: $3 billion on the 1st of October. Again, the smart money knows that GE is in deep deep trouble... but he uses his reputation to send the wrong signal to the lemmings.
• Finally, on the 18th of October, he tells the American people that it is the time to buy American stocks and sends the lemmings against the wall at full speed. He does this while perfectly knowing that the market is still (very) expensive, that the earnings forecast are way too optimist and the deleveraging that is currently going on will be pushing the stocks down a lot further. Indeed, the stock market is already down 6-10% just the week following his statement!

So what is going on here? Has Warren Buffet lost his integrity? Does he have his arms twisted by someone? Should you have more information/opinion/ideas, please email me or comment on this post.

Paulson - the John Law of the 21st century?

Question: Will Paulson's (and his puppy dog Bernanke) reckless actions lead to a run on the US Dollar and Tresuries? And lead to a revolution in the US?

Question: Who is John Law?

Answer: From the HISTORY OF ECONOMIC THOUGHT:

Law's "Real Bills Doctrine" of money applied the "reflux principle" to the money supply. Money, Law argued, was credit and credit was determined by the "needs of trade". Consequently, the amount of money in existence is determined not by the imports of gold or trade balances (as the Mercantilists argued), but rather on the supply of credit in the economy. And money supply (in opposition to the Quantity Theory) is endogenous, determined by the "needs of trade".

Law's schemes were launched on the basis of this logic. Exiled in Europe because of a duel, Law ingratiated himself into the French court through patronage and friendship of the Regent, the Duke of Orleans. The state of French finances after Louis XIV's death in 1715 was so dismal that the Duke turned to Law for assistance. Law proposed the establishment of a state-chartered bank with the power to issue unbacked paper currency, the Banque Générale, which was established in 1716. Around the same time, Law also established the Mississippi Company, an enterprise designed to develop the then-French colony of Louisiana in North America.
Law's note-issuing bank was a spectacular success -- until it collapsed after a bank run in 1720, plunging France and Europe into a severe economic crisis, which had an important role in setting the stage for the later French Revolution.

Answer: From WikiPedia:

The wars waged by Louis XIV left the country completely wasted, both economically and financially. [...] It was in this context that the regent, Philippe d'Orléans, appointed John Law, as Controller General of Finances.
[...]
In May 1716 the Banque Générale Privée ("General Private Bank"), which developed the use of paper money was set up by Law. It was a private bank, but three quarters of the capital consisted of government bills and government accepted notes.
[...]
The Banque Royale was created by default as a result of Law attaining the majority of the government issued notes (debt). It effectively became the Central bank of France. In 1720 the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was extremely successful until it collapsed and caused an economic crisis in France and across Europe.
[...]
Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company in 1719. In February 1720 it was valued for a very high future cash flow at 10,000 livres. Shares rose from 500 livres in 1719 to as much as 15,000 livres in the first half of 1720, but by the summer of 1720, there was a sudden decline in confidence, leading to a 97 per cent decline in market capitalization by 1721. Predictably, the 'bubble' burst at the end of 1720, when opponents of the financier attempted en masse to convert their notes into specie. By the end of 1720 Philippe II dismissed Law, who then fled from France.
[...]
Law initially moved to Brussels in impoverished circumstances. He spent the next few years gambling in Rome, Copenhagen and Venice but never regained his former prosperity. Law realised he would never return to France when Phillipe II died suddenly in 1723 and was granted permission to return to London having received a pardon in 1719. He lived in London for four years and then moved to Venice where he contracted pneumonia and died a poor man in 1729.

Paulson+Bernanke PUT - The Sequel

On Monday, the market declined big time (about 8% on average on the US indices) on the news that the Congress didn't pass one of the most abject rescue plan ever created and that was a big victory for liberals and libertarians (which seem to be an endangered species now, while they constituted 95% of the US citizens just 12 months ago) and also for the 300,000,000 American citizens and the billion of other people who own valueless paper from the Fed (Federal Notes, aka US Dollars).

The Market didn't crash though, this was merely the pricing of the rejection of the bailout. As Paulson and Bernanke used to say just a couple of months ago, the markets are efficient and adapt automatically to any new piece of information.

But this was just enough for the US government to be scared to death, and push for the bailout plan to be resurrected from the ashes, like the Phoenix. And the market got hysterical again on Tuesday, gaining 4 to 5% on average on the US indices. The Paulson+Bernanke PUT was back on track: all the bad news got discarded straight to the bin both Tuesday and Wednesday (today).

So what happened during the last two days? Here's a brief summary:

• Yesterday, President Bush signed a bill into law that gave U.S. automakers a $25 billion low interest loan. Yet another bail-out.
  
• Consumer spending is at best stable, more likely decreasing
• Auto sales are collapsing as the sales of Ford showed a decline of 35% YoY, 24% for Honda, 32% for Toyota 37% at Nissan.
  
• Unemployment is still rising
• The ISM Index is collapsing
• Crude Inventories are increasing (which might be confirming the declining consumer spending and slowing down of the economy)
  
• CNBC reported that the SEC staffers say the commission is heavily leaning toward extending the short-selling ban
• General Electric is in deep deep trouble and will be raising $15 billion USD through a $12 billion of common shares sales and $3 billion of preferred stock yielding 10% to Berkshire Hathaway. (Somehow, the market manages to consider this as good news!).
• The US National Dept reached above the $10 trillion dollars

After all this, it easy to see that the Market keep on repeating the same pattern over and over again for the past 12 months:

• Every time there is no news, the market rallies. No news is good news!
  
• 50% of the time, when there is real bad news, the market rallies. That's because we hit the bottom, of course.
  
• Every time there is pure speculation but no tangible news, the market rallies.

What does this mean? That the market is overly bullish still and that the day there will be a real readjustment of the risk and the fact that we are in a severe recession, we will have a real crash. Real like -20% or -30%.

You can still see contradictory and irrational behavior on the various assets such as:

• The USD rallying while the market rallies on the bailout package.
• Gold and Oil declining while the bailout package is considered as being passed.
• Bank and financial rallying while the bailout package is only a drop in the ocean of the bad dept.
• Bankrupt companies - Fannie, Freddie, AIG, Wachovia - rallying.

And have you noticed that:

• JPMorgan is only at 2-3% from a multi-year high?
• Citigroup is up +100% in two weeks or so?
• The Euro is falling against the USD because the European countries bailed out several banks with about 10 billion € while the US have spent about 100 times this amount in the past 2 weeks? (actually, this is not totally right as Ireland has gone crazy and created its own Paulson-flavoured bailout package as you can see on this Reuters news).

As predicted just a few months ago by several bright minds (like Jim Rogers or Peter Schiff), the US government has now totally nationalized the mortgage industry, a big slice of the insurance industry, the 3 major automobile companies (3 times $25 billion = $75 billion in loans for a total market cap of these companies of about $20 billion) and the financial industry is about to get nationalized as well. Soon will follow credit cards, then auto-loans and students loans, as they predicted?

If the bailout passes and then if the market rallies (this is likely, even though the bailout package is supposedly already priced in the markets), it is probably going to be one of the best shorting opportunity in the bear market. Provided that the SEC doesn't ban short selling on the remaining stocks or even worse: ban any selling at all. Wouldn't that be just great!

Decyphering the Paulson Plan

John Needham is explaining the Paulson Plan in his article on Financial Sense. Here are the most meaningful excerpts (emphasis mine):
[...]

Paulson believes that if he sprinkles enough fairy dust (taxpayers’ money) on the lame and the halt of Wall Street, they too can fly again. Bernanke has been reduced to irrelevance as the Fed has shot its ammo and he now wanders around looking like Hank’s lap dog. Just like the dying fairies, the Wall Street icons can only survive if the people believe. Aping the children at the famous play, the cast of Wall Street is now shouting “I believe in fairies” but the unanswered question as the sleight of hand continues virtually unquestioned in main street media and on Capitol Hill today is “Believe in what”?

As the party heads to Capitol hill today with the administration parroting Chicken Little’s cry “The sky is falling”, it has more than a whiff of panic to accompany it. The urgency I suspect is tied to the notion that Hank can stampede Congress into giving him the unlimited powers he seeks so that he can “work it out” as he goes. The “work it out” part relates to Bernanke and Paulson’s assertion that a failure to rapidly approve their $700 billion plan to remove “illiquid” assets from the banking system will imperil the global financial system and harm ordinary Americans.

That is pure spin. Paulson and Bernanke wouldn’t know an ordinary American if they fell over one. Neither have lifted a finger to help beleaguered citizens stuffed into predatory mortgages. Their concern is only the restoration of order in the US banking system and that means capital.

The problem

You see, these “illiquid” assets are not illiquid at all. They, like all impaired assets are sellable at a price, but the asset holders, mainly the shadow banking community of banks, investment banks, hedge funds, monoline insurers, structured investment vehicles (SIVs), conduits, money market funds and thrift institutions won’t take what the market is prepared to pay for these assets. Indeed based on NAB’s total write off of its US mortgage backed CDOs and Merrill’s write down of its mortgage paper we have a fair idea that the broad brush value of the lower tranches of these horrors is between 25% of face value and zero.

And that is only the first part of the problem. The second is that in the push to gear up the profits flowing from these mortgage backed securities, banks and others added leverage to make the model work at the required rates of return. That leverage is generally about 10 times for regulated banks, thirty times for investment banks and more for others. So, if they take a 10% hit on the face value of the security and they have, let’s say 12 times leverage (modest by today’s standards) they effectively take a 120% write down on the value of that asset. Do the sums at a 50%-75% write down and you can see why these guys are staring into the abyss.

In short, if the wider banking system is forced to hold these assets because they can’t accept the market price for them, and if they are finally forced to value them at true market value (and one suspects even the clueless auditors have an inkling by now of what their clients are facing), they will effectively be insolvent or so capital impaired that they will not be able to undertake their proper functions. Indeed many are insolvent now, but nobody is prepared to shout the obvious, that the Emperor has no clothes. With insolvency comes dangerous secrets. UK regulators are just discovering that Lehman’s UK pension fund is light about $200 million. Many major US pension funds were also light on the necessary. And as most like to stuff the pension funds with their own shares, the problem of failing companies and lower stock prices compounds the staff and punters’ risks dramatically.

Paulson’s real job is to restore Capital

Thus Paulson’s brief in making these institutions whole is not just to relieve them of the impaired assets as his public statements assert, but to do so in a manner that leaves the holders’ capital and balance sheets intact, and here is the great lie.

My father once told me in simpler days before CDO squared and other fiscal junk that there were only two ways to make a quid (dollar). Either you bought oranges for less than they were worth and sold them for what they were truly worth or you bought oranges for what they were worth and sold them for more than they were worth.

Paulson has found a third way. He is going to buy this toxic paper for many times what it is worth and sell it to the taxpayer for even more!

Unless he pays the banks somewhere near face value, less a haircut for these securities, the plan is useless. The real plan is to restore capital. And that is precisely what he and Bernanke are plotting. Talk of illiquid assets is just the smokescreen.

In the process he is asking for immunity from judicial review, a very good idea as otherwise he can plan on spending the rest of his natural days in various courtrooms explaining the unexplainable.

The boys are bailing out Wall Street and you are paying the bill for all those multi million dollar bonuses. You are also paying for the negligence or incompetence (it must be one or the other) of all those regulators who knew what was happening but acquiesced to keep the game going. When asked if he thought that executives of companies taking the handout should have some restrictions on their salaries and bonuses, Paulson replied that such action would be punitive. Clearly that is not on his agenda. No accountability and now no consequences.

So the game is to pass the parcel to an entity that can disguise the losses for many years and whose balance sheet is not really up for scrutiny-the US Treasury. Then the boys can get on with their wonderful lives without this undoubted inconvenience.

You might also want to read this post from Mish.

The conmen take over the US

Bloomberg Magazine's cover is Hank Paulson with the big title of "The Persuader" and subtitled "Treasury Secretary Hank Paulson brings crisis management to Washington".

What happened to free markets since the beginning of the crisis?

• The CFTC is closely monitoring the commodities market to make sure that 'speculators' do not make the prices go up. They are warning again today.
  
• The SEC (and almost all the other regulators worldwide) banned the short selling on several hundreds of financial stocks in order to avoid 'speculators' driving the prices too low.
• The Fed has created its 'alphabet soup' in order to pump liquidity into the markets but that's just a fancy way of saying: lending hundreds of billions of dollars to the banks. Borrowing facilities from the Fed now include: TSLF, PDCF, TAF, Single Tranche OMO, Term Discount Window Program (see here).
• The Fed and the Treasury (each being a single person decision making process: Bernanke and Paulson, none of which are elected) took over Fannie Mae and Freddie Mac and AIG, adding more than 5 trillion dollars of liabilities to the balance sheet of the US and facilitated the take over of Bear Stearns and Merrill Lynch.
• Paulson is now asking to have a check of at least 700 billion USD with which he will spend with now approval process and more importantly without being accountable for it (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.)
• The Fed is changing the rules overnight without any justification or legal foundations in order to bail out Goldman Sachs and Morgan Stanley.

This whole scheme is probably the biggest con in the history of mankind and is currently being estimated to have cost the US citizens about $1.8 trillion USD and not only Paulson is acting as a Reverse Robin Hood, stealing from the people to give to the establishment, but he somehow managed to convince people that this is a great plan and people are actually thanking him now. He is now working on convincing other nations to follow his path!

There is just so much to say, but I would like to keep it short.

• Investors have lost confidence in the USD, the markets and Paulson/Bernanke. Bank stocks are collapsing because the banks refuse to come clean with their balance sheets and keep on lying on their reports. The financials index plunged 10% yesterday, while short selling is prohibited. So short sellers driving the markets down was just proven to be just another lie. If you refuse to show your balance sheet, it means that you have something to hide.
  
• Paulson seeks immunity. When you do that, it's very likely because you know that you are doing something you will be prosecuted for.

You are either with us or against us

So who is being punished here?

• The Citizens of the United States because their currency and their democracy is being destroyed and their constitution is being shredded
  
• Those who have been saving money are being punished through inflation produced by the Fed with the blessing of the Treasury.
• Those who have refused to get a mortgage because house prices where in bubble are being punished because the government is doing its best to keep the prices high instead of letting the free market decide.
• Those who saw all this coming and shorted the markets.
• Those who are trying to save their money buy buying commodities, because you cannot find any more gold on the markets (the US Mint has stopped minting gold and silver coins, all the retailers are basically out of stock of individual investor friendly products).
• Are the US Citizens going to receive a single dollar of this multi-trillion plan? No.

Who are they trying to save?

• The companies, establishment and happy few that made billions by cashing in on the credit binge.
• People who have been spending more than they earn and hence are in dept (this is just a side effect of the inflation they are creating, they don't care about the people!).

How do you escape?
Get out of most of your paper currency, buy Gold and Silver and store them in your home, don't buy paper gold like GLD, GBS or future contracts. Make sure that you have the physical with you in order to avoid confiscation or scams. Precious metals will free you from the fiat currencies which are backed only by the government dept. They have no value and their current price is going to pluge exponentially to zero.

Recommended links (MUST READ):
Senator Dunning Declares the Free Market Dead
Mish: Contact your Senator
Ron Paul:
London Banker: "The problem with financial institution balance sheets is that on the left hand side nothing is right and on the right hand side nothing is left."
(more to come)
The Zero Currency, Tom Cash draws the same conclusion as I did and it's definitely worth the read.

"You're so far past the line that you can't even see the line! The line is a dot to you!"

The New York Times has published a draft of the Paulson plan. Interestingly, he plans to steal $700,000,000,000 from the people to give it to the happy few in the banking establishment.

Please note that democracy and the Constitution don't mean anything to these people. They are not trying to hide the fact that they are fascists anymore:

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.

Chandler: You're right. I have no excuses. I was totally over the line.
Joey: Over the line? You... you.. you're so far past the line that you can't even see the line! The line is a dot to you!
(Friends, Episode 7, Season 4)

Remember what Jefferson said in 1802?

I don't think anything more needs to be said.

Reactions on the blogosphere (updated):

• London Banker: Distatorship
• Mish: Bush Administration Seeks "Dictatorial Power"
• Denninger: The Mother of all Frauds
• Paul Krugman
• Bad
• Mish: Lies from Paulson Contact your Senator before it's too late!
  

Markets Alchemy and Greed Stupidity

So Paulson announced his big plan to nationalize all the toxic waste from the financial industry at the expense of the US citizens and the markets rally like heroin addicts getting a relief shot after a few days of missing their dope. He announced that he will put about $1.2 trillion USD ($400 billion to save money market funds and $800 billion to buy the toxic waste).

Now, look at the chemical reaction that happens:
The world total market cap by the end of 2007 was about $60 trillion USD
supposing that the overall market fell by 25% until by the 18-09-2009, we are at about $45 trillion USD
No, Paulson, probably the biggest fool in the history of humanity, exceeding easily Bush, Greenspan and Bernanke, comes in, a thow in about $1.2 trillion USD. So basically, he's throwing in an amount approximately equal to 2.5% of the world total market cap. This figure really seems amazingly high. And hearing the news, the world markets rally by approx. 8% (!!!) in 24 hours, or about $3.6 trillion USD. Any rationality here? I call this alchemy: 1.2 trillion in = 3.6 trillion out. So this just cannot work...

But wait there's worse. Many important questions are raised by this Forbes article:

Wachovia is said to be considering a "bad bank" for toxic assets, including some portion of a potentially lethal $122 billion portfolio of alt-A mortgages on its books. Citigroup is trying to work off $500 billion of its "legacy" assets. Paulson hasn't said what limits would be set for contributions from individual banks, if any. Does that mean a bank could unload absolutely everything, or would they be required to retain a portion for their own books?

So, if Wachovia and Citigroup, just by themselves have more than 600 billion USD of toxic waste to dump in, the 800 billion USD provisioned by Paulson looks a ridiculously small amount.

Please also keep in mind the following (Source: U.S. Global Investors):

• Total US Money supply is $15 trillion (Paulson is going to increase it by 10%!!)
• World GDP: $54 trillion USD in 2007 (source: CIA)
  
• Total amount of derivatives: $516 trillion
• According to the Bank for International Settlements reported the notional amount on outstanding OTC credit default swaps to be $42.6 trillion in June 2007 (Wikipedia).
• In the US, the Office of the Comptroller of the Currency reported the notional amount on outstanding credit derivatives from 882 reporting banks to be $5.472 trillion at the end of March, 2006 (Wikipedia).

The conclusion is that even if the 1.2 trillion USD of the plan are a gigantic amount of money that will sink the US Treasuries balance sheet for decades, it remains a meaningless drop in the ocean of potential losses.

So, who will be able to dump toxic junk in this pool? Up to wich amount? How will these junk be priced? You can be sure that Paulson will keep everything as secret as possible to not hurt the banks because if you disclose these informations, the banks will slump and we are back to square one within 24 hours.

So, it is almost certain that this last final bullet will be dodged and that things will get worse: how much will the USD fall? How much will the treasuries fall and how high will the rates get? These are all very bearish for the US.




Jim Sainclair's blog:

The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION.

This appears to be Bank of International Settlement Spin to announce the largest gain in derivatives outstanding since they started to report. As of the last report it appeared that both listed and OTC derivatives was under $600 trillion. Now listed credit derivatives alone stood at $548 Trillion. The OTC derivatives are shown as $596 trillion notional value, as of December 2007. One can only imagine what number they are at now.

Well we hit a QUADRILLION. We have more than $1000 trillion dollars in all derivatives outstanding. That is simply NUTS because notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. $548 trillion plus $596 trillion means $1.144 quadrillion.

It would be an interesting piece of research to see what the breakdown is of listed derivatives according to exchange to see if it adds up to the reported number. Spin is now everywhere.

This means that no OTC derivative house can be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided.

Keep this economic law in mind. Monetary inflation proceeds price inflation and is its primary cause in economic history from Rome to present.

Nothing can stop the juggernaut of price inflation heading towards every nation like a runaway freight train down a mountain.

Gold is going to at least $1650. I am probably way too low with that estimate.

The BigPicture quote:

Here is tonite's theater of the absurd SEC headline:

SEC intends to temporarily ban short selling, but it's not clear if the commission has approved the move. Cox is briefing congressional leaders. Separately, the government is seeking congressional authority to buy distressed assets.

This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.

This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections -- especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility -- upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.

Bloomberg:

``It sounds like there's going to be a giant dumpster for illiquid assets,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. ``It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative'' to the size of the American economy, he said.

Free market is a joke in the corrupt United Socialist States of America [Updated2]

So, here we are, the comrades Paulson, Bernanke and Bush have made it again. Free market doesn't exist anymore in the US... And here's why.

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).
  

The $50 billion question is: Why would Bank of America buy Merrill Lynch for $50 billion and with a 70% permium over the last closing price, while is sure that today, the stock would have get crushed by 70%? BofA could have paid about $5 billion instead of 50. This is a total rip off of the share holders. BofA did the same with Countrywide Financial a few months ago. Does Bernanke keep in a vault at the Fed some very dirty material on Lewis? And hence for him to do stupid and dangerous buy-outs?? [UPDATE: The market doesn't seem to believe that this merger is going to happen as is, as shows the stock price of Merrill remained on the unchanged mark at $17. The Merger Arb funds are either out of the game because they are running out of fund or they simply don't believe in this announce.] [UPDATE2: Mish has a long article abou this deal]

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)

With all this, the market manages to get a little -1.5% down 1 hour after opening?
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.