House of Reps Email Swamped

While trying to send a piece of my mind (a resource in short supply, I assure you) to the House of Representatives, I found that their servers are in meltdown mode today.

The message is clear: Congress can't even be counted on to maintain email for itself. Why on earth would we trust it to bail out Wall Street?

Dude! Where's my meltdown?

I was promised a historic meltdown. Buffett himself promised me one. Where is my historic friggin meltdown?!

With congress rejecting the Paulson bailout plan, the dow dropped by 777 points. We were treated to headlines about "Biggest Point Drop Ever!" Naturally, anybody who has more than a dollar in the market knows that percentage drops are all that matter. A drop 777 points does not make even the top 10 list of all-time point drops; it barely makes the top 20 list at number 18.

Hey congress! Don't you have elections coming up? If I were you, I'd go home and try to get reelected before this legislative fiasco does any more damage to your careers. And stop the fear mongering game. That hasn't been fashionable since Saddam was in power.

Lest I leave you with the wrong idea, I do think that Federal intervention will be necessary to clean up the mess that investment banks have left us with over the past decade. However, the Paulson plan was probably the worst way to approach the problem. Fundamentally, the crisis of confidence stems from the insolvency of the financials. Their balance sheets would have negative net worth if the tsunami of foreclosures were properly discounted, so the Paulson plan did everything it could to prop up the banks with money as well as hide the securities tied to mortgages.

As an investor, why on earth would I return to the market and buy shares in a company that I know was insolvent yesterday, but is solvent today because congress changed the definition of solvency? Furthermore, the companies got themselves into major trouble because of colossal mismanagement of their investments. Having proved themselves to be terrible investors of their own money, why would the Treasury reward them with a $700B investment and think that they have suddenly become great investors?

There is a very straightforward way to deal with these insolvencies. The prescription? The companies should be forced into receivership (the alphabet soup of aid from the Fed is keeping them alive at the moment), then wipe out the shareholders, haircut the bonds, fire the board and CEO, recapitalize, and reboot.

Naturally, the process is painful, but the sooner we get started, the sooner we get back to health.

Finally, I don't agree with everything Ron Paul says, but he delivers a good description of the problem from his testimony yesterday:

Clear, Concise, and a Laugh

Denniger seems to have captured the essence of what folks are trying to communicate to congress here (pdf warning.)

And you might as well watch this video, because you need a laugh while the empire is being destroyed in DC.



Good luck today.

Politics and the Bailout

The Rasmussen Survey tells us that politicians have not quite made their case to the American public:

Only 30% of U.S. voters think the federal government should step in to rescue the country’s troubled financial markets, according to a new Rasmussen Reports national telephone survey.

A sizable majority (63%), in fact, are worried that the federal government will do too much to respond to the current woes. The survey was taken Wednesday night, even as President Bush was making a nationally televised address urging Congress to pass the $700-billion taxpayer-backed bailout plan proposed by his administration.

This result is similar to anecdotal reports of phone calls and emails into the congressional offices:

Asked about the types of responses he's hearing, Rep. Rush Holt, D-Hopewell Township, said Thursday: "I would say they are 50-50 - between 'no' and 'hell no.'"

So with public sentiment running against Wall Street and an election in 6 weeks, what politician is going to vote for a $700B giveaway to Wall Street?

I think the answer is: Only those no chance of being either reelected or unelected. Currently, only 25 House Republicans (of 199) look set to vote with the Democrats, and I can't get solid figures as to how many House Democrats will vote against.

As near as I can tell, there is a dilemma in front of the folks up for reelection. They would love to vote against the bailout, because that is the clear election-vote winner. On the other hand, if Hank's doomsday scenario unfolds, they don't want to be blamed. They also have advisors telling them that a stock-market crash may happen even if the $700B check is written, which would be the worst result possible for their reelection.

Of those up for reelection, the House Republicans have found their out: They say the current incarnations of the bill simply do not adhere to any principles of the Republican platform, and since the Democrats control the House and Senate, they can vote to stop Armageddon if that is truly what is at stake.

Currently, the best out for the House Democrats is: We will not push through legislation of this size without consensus. It is a weak argument, but seems to be the best one available.

The leadership (Bush, Pelosi, Dodd, Frank) seems hellbent on spending $700B on the way out the door. They have stuck their neck out and decreed, It will pass. Should it fail and the market crashes, they will point fingers at Congress (from the executive branch) or at Republicans (from the Congressional Democrats.)

I have no idea how the current lockup is fixed. Monday will be interesting.

Washington Mutual Reeducates Investors On Failure

There are now all sorts of articles on Washington Mutual's failure. Something that is missing from the discussion is: Why the stock was trading for more than pennies before today. Most folks will point to the SEC regulations that forbid shorting. In a normal market, people who think the bank is insolvent would have shorted WM. So all those folks that bought yesterday would have been saved from the opportunity to lose $1.99/share, because the stock would have already been trading at pennies.

However, I think those regulations are only part of the story. The real question is: Who was still holding the stock?

I can only conclude is that it was mostly held by folks who do not understand the basic capital structure of businesses. The arguments for holding the stock seem to run along the lines of "$1.99 per share?! The furniture is worth more than that!" Now would be a good time to relearn about capital structure, because the common shareholders don't see any of the money from the sale of furniture.

When a company wants to raise money, it has several options. For simplicity, we will look at only bonds, preferred stock, and common stock.

Common stock: An investor puts up money, and will see the promise of share appreciation and/or dividends as the business grows.

Preferred stock: Perhaps the company has already issued common stock and sees a clear business opportunity that requires capital to pursue. They make an offer to investors that they will take money in exchange for preferred stock, which carries a specified dividend, and they guarantee that the investors will get their money before common stockholders if the company fails.

Bonds: The company has some asset (like a building and furniture), and it borrows from a bond investor by offering the asset as collateral. If the company fails, the bond investor sells the asset to recover the debt.

So what happened in the Washington Mutual failure? The banking part of the company was taken over by the FDIC. Since the FDIC is going to take a loss on the banking part of the biz, it sold off the deposits to JPM for $2B. There are other items that need selling.

The remaining part of WaMu (the holding company) will sell off everything that remains, which is not much. The bondholders might see a few pennies, but there are back salaries (for example) to need to be paid first.

After the few pennies go to the bond holders, there is no money left for the preferred stockholders. The common stockholders might as well go out for a beer, because they have no hope of seeing any money from the carcass.

So now the question is: Why are stocks of the remaining troubled banks not at pennies? Will the shareholders learn the lesson from WaMu?

Goldman, Morgan Convert

From Yahoo -- Last major investment banks change status :

"Investors feared that the last remaining independent investment banks would not be able to survive in their current form. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding."

What a great idea! Now you too can do your daily banking with the company that lost so much of their investors capital that they BROUGHT DOWN THE BANKING SYSTEM AND NEEDED A TRILLION DOLLAR BAILOUT!

Great idea, people will just run to deposit money in this bank.

We are rewarding failure

Bloomberg informs us that:

The Treasury is stepping up as the buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy.

This statement is absolute rubbish. The problem is that the banks do not want to sell at the current market prices. Some of those prices are, in fact, zero.

The correct response is to sell them out of bankruptcy. Instead, we give them a subsidy by having taxpayers' money buy the toxic waste. We are rewarding failure.

There is only one sensible response from the public: Unelect them all. Vote anti-incumbent this year.