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Guest Post: A World Crisis No Bailout Can Stop
Submitted by Mac Slavo at SHTFplan
Sometimes, a bailout is not enough.
When Dubai World black swanned global investors last month with what
amounts to be a reported $80 Billion in debt liabilities, it sent
shivers down the spine of many a financial manager and stock trader.
For those who were paying attention, Dubai’s troubled assets were no
surprise, it was simply a matter of time. Oft repeated by contrarian
analysts and investors like Dr. Doom Marc Faber, Gerald Celente, Jim Rogers, and Karl Denninger, the mathematical certainty of the economic crisis would play out - eventually.
It was a year ago that the entire global financial system, spear
headed by the USA, faced the real possibility of total meltdown, that
is if you trust the motivational fear tactics employed former Treasury
Secretary Henry Paulson.
This week, the American public received word that the banks once
deemed too-big-to-fail will be paying back their TARP funds, ostensibly
because they are now cured of the financial contagion that threatened
sudden death, economic collapse and the implementation of martial law.
In addition to Bank of America and JP Morgan Chase, we have
commercial real estate powerhouse and partially owned subsidiary of
Warren Buffet Enterprises, Wells Fargo, which announced it will sell $10.4 billion in stock and exit the TARP bailout.
According to a company statement, the bank plans to pay back $25
billion in taxpayer funds. CEO John Stumpf, presumably also doing gods
work, says “we’re ready to fully repay TARP in a way that serves the
interests of the U.S. taxpayer, as well as our customers, team members
and investors.” Management did not comment on whether the share sales
totaling around $14.8 billion, when you count additional plans to
raise capital, will devalue, by way of dilution, the amount of market
capitalization held by shareholders.
Citibank, who also committed to repaying $20 billion in TARP funds
yesterday saw a stream of positive news throughout the media when they
announced their intentions. Just 24 hours later, Bloomberg reports that
Citigroup’s Exit From the Bailout is Clouded by Citi Holdings Assets.
It seems that CEO Vikram Pandit failed to mention that his company is
“emerging from a U.S. bailout with higher capital levels and loan-loss
reserves than any peer.” That amounts to somewhere in the area of $617
billion.
Dubai showed how investors and traders are ready to run at the first
sign of trouble. As has been the case for the last nine months,
however, the Dubai crisis was quickly subdued by stories of bailouts
from their sister city, Abu Dhabi. And indeed, Dubai has been rescued
with what amounts to be a $10 billion bailout that should help the
former real estate Mecca of the Middle East make at least a few
payments to keep it a float for a little bit longer. Regional
investment firms will receive some of their funds, but as for
non-Middle Eastern investors, the verdict is still out, though, as Abu
Dhabi’s rulers said, “they will not necessarily just bail out everyone
across the board. They will be selective.”
This seems to be the norm these days, so it’s no surprise. Certain
entities, for whatever reasons, are bailed out, while others suffer the
collapse of their wealth for trusting in the belief that asset prices
always go up forever.
As Real Estate Collapse (Wave One) in the US proved, no asset will
appreciate all the time. Like Dubai, the underlying assets in America,
Europe, and even China have been slowly simmering for the last year or
so. And once the public gets a taste of the toxicity, there will be no
stopping the panic as everyone in just about every asset class decides
to run for the exit.
When the panic does start, it may be an event perceived to be
too-small-to-matter, like a Dubai that exposes several larger global
players, which leads to a domino effect that will echo through the
entire financial markets. It may start with debt defaults in an Euro
Zone country like Greece or Hungary, or maybe with commercial real
estate or Wave Two of the Mortgage Meltdown in the US. It could be a geo-political event with Iran and Israel, or a terrorist attack on a Saudi Arabian pipeline.
Right now, the world is on edge. The citizens of the US, as well as
the global public don’t really know who to trust to tell them the
truth. They are on alert, consciously or subconsciously, and if they
perceive even a small threat, the fight-or-flight system will be
activated.
Some say that a year ago we faced economic disaster on a massive
scale. In one year, governments around the world have printed money,
and done little else, except to provide daily lip service and
commentary. The contagion has been lying dormant and will become an
epidemic.
No bailout will stop it.
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Theres not stoppin what can't be stopped.
Theres no killin what can't be killed.
It's inevitable and I don't mean as in 30 years from now. This is the Minsky Moment. But, you won't hear it on TV (broadcast or cable), read it in the newspaper, hear it on radio (terrestrial or satellite). Nope, you gotta have an internet connection to know the truth. So, if you're reading this and you haven't sold your risky assets, commence as soon as possible.
a couple interesting pieces on the reverse minsky journey from the mack daddies @ PIMpco:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2007/GCBF+Oct...
"liquidity is not a pool of money but rather a state of mind." - 10.07
http://bit.ly/4SZOsv
"The objective of our policies is to turn deflationary swamp water into inflationary wine." - 4.09
Nothing you can say but you can learn how to play the game
It's easy.
All ya need is nub
la la la la
Yep, this will all end well. Rally on!
Nice article and I couldn't agree more. When the selling starts it will not stop. At least not until all margin calls have cycled thru and all bad debts are exposed.
Some volatility ahead, you just don't know exactly when.
Counter example: Isn't Dubai an example of how you can get the cattle to stampede? Then you buy the assets, pennies on the dollar and re-sell them after the panic subsides.
For a while, this tactic will work...until the day the buyers just don't come back.
The 10 billion injection, as correctly mentioned, is intended to make whole local banks and other connected local investors. They are now in the eye of the storm for maybe a month or two.
What's amazing is that the maintenance and/or scraping & dismantling these projects can cost as much as building them. That means banks and bond holders loose it all.
Even if these projects are handed over for free, they will never generate enough revenue to pay for the maintenance.
Bulldozers? erosion? sea reclamation?
Just as the flow of US Taxpayer funds through AIG into GS
Not even with all the slave labor available in Dubai?
and with that i give you tiger woods father's famous quote regarding his son... “Please forgive me…but sometimes I get very emotional…when I talk about my son…. My heart…fills with so…much…joy…when I realize…that this young man…is going to be able…to help so many people…. He will transcend…. and bring to the world…a humanitarianism…which has never been known before. The world will be a better place to live in…by virtue of his existence…and his presence…”
"He'll be bigger that Ghandi...or Mandela"
everything eventually is brought out into the light of truth. this market is no exception.
+1000
Amen.
"everything eventually is brought out into the light of truth. this market is no exception."
Who told you that?
...not when you have smooth-talkin Obama and a country full of hypnotized idiots!
So true....as we enter the Chinese "Year of the Tiger".....Tiger Woods is but a symbol of what will play out in 2010.....hidden things exposed for what they really are.
And don't forget all those college loans -- many of which interest free and/or don't have to be paid back until after graduation.
Repay a loan? What kind of country do you think the USA is anyway? Pfft!
Repay a loan? What kind of country do you think the USA is anyway? Pfft!
I would look for a 'real' crisis before more funny, money BS like a financial run. We all know the entire economy is underwritten by a handful of bankers and politicans running gigantic confidence game. Aside from printing massive amounts of money, the second change was to implement fraudelent accounting practices to obscure the next crisis from taking root and spreading. The last melt down couldn't have happened without the pigmen eating one of their own. That is why when the next story breaks, you won't see massive naked shortselling jackels piling on to collapse one of their own. Instead, it will be, shut up, face forward, big smile on Wall Street and the non-stop 'nothing to see here' from the media, just like Dubai. After all, they are all in this together. "You go, we go" so to speak.
If the past two years have taught us anything it is that 'they' can and will 'paper up' any sort of solvency / debt problems. There is no telling when the confidence levy breaks in this regard.
That is why I think the next crisis will have to spring to life from a actual, physical event. Air raid sierns in Tehran? Coup in Europe? Terrorism? Any number of black swans.
I am betting it all on Santa crashing into the Space Needle.
Awesome, totally awesome.
Dubai "coincidentally" hit the news on Thanksgiving. We'll see what happens on Christmas.
I think that a sovereign default of a prominent enough country, or a smaller one that nontheless rocks the entire Euro zone, would be an efficient enough black swan.
Then again, the whole sordid affair might be suprisingly un-dramatic, like a heroin overdose.
As the current American domination - and by proxy the standard of living - just makes one lap after another, swirling around the toilet bowl.
Whence commeth the next black swan?
Tehran? - That's the neocon wet dream, but apart from a few bombing runs it would accomplish nothing. Plus you get free backlash from the Shi'as in Iraq as well. Then there goes that 'stability' too.
Coup in Europe? - An interesting proposition. The Greeks have done it before, and it's not looking like easy pickings for the IMF to do another unlubricated ano-financial extraction. If Greece (or Hungary, Latvia, Lithuania, Ukraine, Slovenia, Poland, et al) decide to default on debt and/or enter into "new alliances" (Russia/China), so goeth the Euro.
Terrorism? - that old chestnut gets paraded out every time there's talk of lowering the defense budget, and it is painfully obvious. A larger segment of the population is no longer frightened now that they see the trick. Real terror (like a $23.7 trillion heist) is not addressed--it is in fact rewarded. But if you mean more terrorism in the form of rewards for unproductive psychos, then this is the most likely Black Swan to occur.
An interesting point and I largely agree, but why is Poland always roped in with basket case economies like Hungary and Ukraine whenever discussion of Eastern Europe comes around? Poland is actually Eastern Europe's strongest and healthiest economy at the moment and hasn't actually been effected much by the crisis at all so far - the economy is actually "growing" at over 1%, and is thus the only major EU economy to be doing so. I worry more about the UK and Germany going postal than I do about Poland.
Yeah and they were worried about the dominoes of Communism collapsing!
Dammit! Where is my sarcasm button? ;)
Yesterday a huge article on HYPERINFLATION and the resulting chaos.
Today this article on DEFLATION and the not so much on the resulting chaos.
It is one or the other - pick your poison- but it can't be both. One necessarily negates the other.
Perhaps all the hyperinflation fear is too focused on the money being printed and not on the larger and ever intensifying wealth destruction.
.02$
Of course you can have both, as is evidenced by what we are currently experiencing. Many people tend to forget that we have an underlying nominal fiat currency regime and a huge credit derivative bubble. The numbers vary greatly, but for simplicity, assume there's something like $1-2T of currency vs $50-100T -> 1-2QT in extended credit.
Clearly, the pyramided credit bubble dwarfs any measure of the currency basis. The deflation camp points to declining asset values (eg housing) that are driving creditors (ie mortgage holders vis-a-vis MBS portfolios) to insolvency. The inflation camp points to out-of-control monetary expansion.
That's why we are seeing both price declines in many credit driven asset sectors, such as property, occurring simultaneously with price increases in monetary senstive sectors like gold, etc. The question everyone is wondering is whether or not there will be a break in any one direction.
Excellent B9K9 - You have some of the best posts.
Likewise, hyperinflation in government spending and deflation in private (corporate & consumer) spending.
@B9K9
I just finished reading your earlier comments on ZH. I understand you blame "human nature" for this disaster (i.e., the economic collapse). Yes, we (humans) have abused central banking. Yes, the value of the dollar has gone down 95% (or so) since the creation of the Federal Reserve System. Even with all the economic inefficiencies (i.e., mis-allocation of capital) due to inflation (because of runaway fractional reserve banking and credit creation) we (humans) have made tremendous material progress (e.g., software, the internet, computers, machines, medicine, business process knowlege) since 1913 (year of the creation of the FED). I am an ERP analyst and I am astounded at the rate of material production that is now possible. Very few people can run a very large factory.
We can manage through this collapse without total chaos. Although, some chaos will be necessary for the populace to wake up and realize what is going on. What we need is an orderly bankruptcy and liquidation of our largest institutions (Financial and Government). Even then there will be lots and lots of pain and suffering and economic disruption. But we need not descend into total chaos.
As far as central banking is concerned the only "evil" part of central banking is the attempt to "manipulate" the price of money (interest rates). Central electronic safe storage of money and check clearing is the "wonderful" and extremely useful part of central banking.
"What we need is an orderly bankruptcy and liquidation of our largest institutions (Financial and Government)."
Yes, that's a fix, but the problem is, it will never happen voluntarily. It's extend and pretend to the end since "Financial and Government" institutions are effectively the same thing. So the eventual bankruptcy and liquidation forced upon them by market forces will be disorderly. Very disorderly.
It will not happen voluntariy right now. But it is very possible once chaos starts and the public sees the lies that the ZH readers see. We should not given up on democracy and America so easily. Human nature goes both ways. We can fall to the level of animals or we can rise to the level of saints. It is possible for the populace to see the truth. At least for enough to see the truth as things starts unraveling.
There are no saints, and the animals behave, happily, not as people.
There are no saints, and the animals behave, happily, not as people.
You don't understand that it is about controlling the volume of money (credit / leverage) and tipping off your connected banks on the direction. All booms and busts now are designed and are a result of monetary policy. If you can get enough individuals to default on loans you can acquire their hard assets (imaginary paper dollars are created to initiate a loan) and turn the created loan into real physical products (without fear of bankruptcy now because they are backstopped). If you acquire all the hard assets (homes/land) you win - think of it as a board game. Read Jeffersons quote about banks taking over the country - First by inflation then deflation all based on their manipulation of the printing press.
The problem is fractional reserve banking (which is practiced by the connected banks). All you need is to remove deposit insurance protection (which is a lie any way) and give the public a way to safely store electronic money (without credit risk) just like banks store their cash risk free at the central bank.
more at: http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system
How about a micorchip under the skin? :p
You certainly can have both.
I call it "Bagflation"
We all become 'Bag Ladies' while the prices of the most basic of necessities skyrocket beyond our reach....
At least we will FINALLY start to address the epidemic of obesity in this country....
that's a positive way of looking at it.
uncle sugar needs lean mean american machines!
Things are only beginning. The Peterson Institute, a well known econmic think tank whose policies have been followed for decades, just issued a report calling for a new $6 Trillion worldwide stimulus in 2010. This includes the FED buying $2 trillion of Treasuries in 2010.
Stocks will be much higher in 2010. It takes about 2 years following this stimulus for inflation to really kick in.
The question I would like to ask;
Why does Wells want to pay back the $25B in TARP Capital Purchase Program?
TARP Capital Purchase Program:
TARP ---> Wells $25B in Cash (sweet)
TARP <--- Wells Preferred Stock
Wells selling common stock to buy back preferred shares:
Wells <--- New Equity Purchase $25B
Wells ---> New Common Shares (dilution)
TARP ---> Wells Preferred Stock (retire shares?)
TARP <--- Wells $25B
-----------
So Wells is issuing common shares to buy back preferred shares. Both equity. Why? and Why now?
My guess:
Why?
It must be to remove Government conditions on executive compensation, or some other oversight unpleasantness. Maybe related to FASB changes, or something new, where oversight would not be wise.
Why now? Why not at the end of Q1 2010?
To take advantage of a very artificially high common stock price? If this is true, then these big banks feel that the current stock price is at its peak?
----------
I am not sure what other peoples experiences are in financial circles, but it is a relatively small universe. Perhaps 1 in 100 even track financial news. The general public really does not know the dangers of toxicity and how it may effect the economy. The people who do know these dangers have been taking their profits and pulling out of equities over the past few months. So in this respect, running for the exit has already occurred.
So who is left to trade anything? Who is sitting on the stock? Funds?
----------
The financial crisis was caused by FED systemic risk mis-management, non-regulation of derivatives, and loose credit, and for some reason, the over riding urge to inflate an asset real estate bubble. The disaster was how to wind down these insolvent institutions without crippling the nation's access and flow to credit.
Now. this could have been handled with the government providing some debtor in possession financing to stabilize bankruptcies. Have the FED modify its discount window to provide short term liquidity for the money market, and provide lending credit through the Treasury for big institutions and SBA for small business. If things where handled this way the problems would have been addressed more directly without the FED buying bad debt. But, it is clear that a lot of big banks on wall street would be in reorganization or gone.
----------
Also, I would like to suggest that the residential real estate crisis is not over. What has to be addressed is de-leveraging debt in the face of falling prices. As normal market forces are allowed to work, at some point in 2010 residential real estate prices should trend down again. This will sour a lot of paper. But, the FED is probably holding the majority of the really bad stuff.
Mark Beck
Watch the hellacious battle to close WFC in the green (currently red).
They simply cannot let a secondary like this fail on first day; it will be like popping the bubble. The air bubble that has been rising under the stock prices of all those waiting for their next round of dilutive secondaries.
And... it goes from negative to close plus .14 in the green with no pop in the SPX or financials...
Nothing to see here.
does anyone know anyone who bought this secondary?
GS and WFC (WB) 'clients.'
Which is why I wrote those comments about painting the price. Don't say GS doesn't work for its 2.25%.
Simple: They want to pay bonuses. Or it's just a big coincidence. Or the gummint really needs cash, since no one's buying Treasuries...
"In one year, governments around the world have printed money, and done little else, except to provide daily lip service and commentary."
Because the steps required to fix the problem were too severe to be possible... what does that tell you about the problem?
Mac,
Incredible post. Let's ponder our options for a moment:
A) Let the bankers cash themselves out & transfer more toxic waste to the Fed, and we take it on the chin again when it all goes kaboom..
or
B) We cashier the SOBs now, nationalize their sorry asses, and start a legitimate clean-up & liquidation effort.
It's a tough choice.....hmmmmm.....but we really need to DO SOMETHING.....well, considering we pay either way, I think option 'B' might save us a lot of both time & money....Shit-can 'em!
I find it AMAZING people come to ZeroHedge to find a semi-profitable trade to partake in!
Wake up, this crisis gives us a chance to take back the country!
The elite use crisis to push through massive changes, thus the only way to combat them is to use the very same crises they use, against them. Plus they created the crisis, so there is no point in feeling bad for making the most of the opportunity provided.
Transportation, Energy, Media, Defense industry, Finance (obviously) have all been infiltrated, if not completely taken over. This is not a battle which only started recently, the understand the dynamic one must look all the way back to when the Fed was established!
don't forget agriculture & healthcare
Nice work, Mac.
My first reaction is the fear and confidence in agreeing with darn near all of you. Then I look at the tape and the trend ... And it is all up. No collapses, no black swans... Those in power know that there hold on power is strong if they can make us see the illusion. So far so good. You tin foil hat types think they will stop the facade ??. Get a life..
The reason the Policy is the Policy is the bond market. There can't be a real reckoning, whether haircuts, bankruptcies or nationalizations (en masse) in the financial sector because the bonds on all the toxic financial instruments are held by pension, life and health insurance companies.
That's the line that's been drawn. Big fat kitties can make all the gaming winnings they want to as long as that line holds.
the question is where is that line?
Well, in Japan it's been a long time. TPTB hope to fake it to make it for, well, it could be twenty years. If all that happens is a couple more big sectoral crashes--commercial real estate, state fiscal crises--then maybe they do get away with it. But there are flotillas of Black Swans out there like sovereign defaults, regional wars, and insane squids with supercomputers. So, nobody knows. Maybe tomorrow. Maybe....for the rest of our natural lives....
a stitch in time saves nine
The line will be crossed when too many people want their pensions, and they have to start selling.
when insiders commute their pension rights for a lump sum.....
Following will be the trigger for the next crisis which would be impossible for anyone to halt. It will be the beginning of the end of financial system as we know it.
Trigger event: Japanese interest rates moving higher by many percentage poinst
Jim Willie was all over this well before anyone else that I was reading.
I am Chumbawamba.
The greatest disaster ALREADY happened, thousands of years ago. Humans evolved. Have no fear, though, for we are but a temporary surface nuisance that the Earth will purge soon enough.
Good one. That made me laugh.
Luciferian? Malthusian? If you feel that way you are no different than scrooge, and would then logically kill yourself and "reduce the surplus population".
You are made in the image of God and one of his greatest creations consisting of 100 trillion cells perfectly put together, the work of the greatest architect (Designed). DNA is a language, a blueprint, and the human body perfectly embodies the golden ratio - beauty or 1:1.618.
Be fruitful and multiply.
Why would anyone have to kill themselves to reduce the
population? People should have less children. Birth
control pills and condoms are cheap and very effective
for the money.
9 months ago all the World Economies looked like coming to an end. Since last march we haven't heard but nonsense and lies over lies all across the board. Those G20 G8 meetings were held just to be sure on something. Pump as much money u can, bailout the "too bigs to fail" and transfer the most amount of wealth to a handfull of executives across the World ad fast as they could.
Now, Systemic risk avoided? I don't think so!
Funny thing is that when I think of Madoff and what he did and how he was treated by the same people who are robbing the americans blind!
Dubai, Greece, Spain, Italy, Ireland the U.S.....who's up now? We once had banks failing...now we're going to see countries going belly up.
Just remember yesterday was the highest close since October 2008. This is setting up bad.
The initial event will be a food shortage and world wide massive jump in the price of basic foods. The starvation and disorder will motivate everyone to leave debt and risky investments, and this is the collapse.
The other possibility is the new nuclear standoff between Israel with its fleet of nuclear cruise missiles and robotic patrol boats, and nuclear Iran. Such a war would end the importation of Mideast oil.
Get yourself a home solar power center for heat and electricity, and seeds and grain for an extended time. And get some guns and ammo...gold will not help.
"Specifically, the USDA has declared half the counties in the Midwest to be primary disaster areas this year, including 274 Midwest counties in the last 30 days alone. These designated are based on the criteria of a minimum of 30 percent loss in the value of at least one crop in a county. The chart below shows counties declared primary disaster areas by the Secretary of Agriculture and the president of the United States."
http://www.marketskeptics.com/
This is the way the world ends,
this is the way the world ends,
this is the way the world ends,
Not with a bang, with a wimper.
Deflation of the asset stock is the killer, it cannot be stopped and it is devastating,
http://rutledgecapital.com/tag/flow-of-funds-report/
Inflation/Deflation of GDP is not the risk IMO.
Earnings are already coming in OK, no collapse anytime soon, next move is up.
"Read Jeffersons quote about banks taking over the country - First by inflation then deflation all based on their manipulation of the printing press."
Isn't that a fake quote? I read that the words "deflation" and "inflation" were not in use in Jefferson's lifetime. It is everywhere though. I think it's bogus however damning is does sound.
Wikipedia says inflation was coin during the civil war and that deflation is linked to classical economists.
Interesting. ZH spacemonkeys? Marla? Tyler?
It appears I have been had! In the words of TJ: 'merci beaucoup'.
http://www.snopes.com/quotes/jefferson/banks.asp
http://www.rense.com/general85/phony.htm
it's all just numbers on screens...
Who knows what new and improved little schemes are being hatched to prolong the inevitable.You can Be sure that the fat lady has not sung yet. Not as long as the rule makers and the players are one in the same.