The Congressional Oversight Panel (COP) reports today that Hank Paulson's Troubled Asset Recovery Plan (TARP) stole $78 billion of our money. This sounds like a huge under count to me -- I would put the figure at much closer to $350 billion. The questions now are what to do about TARP and whether similar waste can be prevented for the next $350 billion.

How did COP arrive at the $78 billion? It claims that TARP received bank assets worth $176 billion in exchange for capital purchases of $254 billion. Two hundred banks have gotten TARP money so far. In addition to assets, TARP has gotten preferred stock and warrants in exchange for its cash. And I would guess that the amount taxpayers have lost is well in excess of the $78 billion.

Continue reading TARP robs $78 billion in taxpayer cash

TARP robs $78 billion in taxpayer cash originally appeared on BloggingStocks on Fri, 06 Feb 2009 09:42:00 EST. Please see our terms for use of feeds.

Continue reading U.S. initial jobless claims surge to 626,000

U.S. initial jobless claims surge to 626,000 originally appeared on BloggingStocks on Thu, 05 Feb 2009 09:15:00 EST. Please see our terms for use of feeds.

What's your share of the $4 trillion bailout? originally appeared on BloggingStocks on Tue, 27 Jan 2009 09:15:00 EST. Please see our terms for use of feeds.

If you work in an organization, it looks like you'll be a big fat target for your headcount-cut-hungry bosses this year. That's because the economy is contracting fast -- many expect GDP to have slumped 5.4% in the fourth quarter of 2008. And those economists see GDP shrinking 4% this year. That means job losses not seen since 1982 (as I posted last week, these forces led to 40,000 layoffs on one day earlier this month).

How bad? The National Association for Business Economics (NABE) surveyed 105 corporate economists between December 17 and January 8 and found that 84% of them expect their employers to either cut significantly or make no change in its headcount. Specifically, the surveyed companies had the following to say:

• Job reductions through attrition or significant layoffs (39%) -- up from 32% in the previous survey it conducted in October 2008
• No change in employment (45%)
• Hiring (17%)

These forecasters are reporting customer demand dropping, capital spending reductions and shrinking profit margins. These reports are symptoms of a deflationary spiral which, as I posted, works as follows:

Continue reading Will you lose your job in 2009?

Will you lose your job in 2009? originally appeared on BloggingStocks on Mon, 26 Jan 2009 09:45:00 EST. Please see our terms for use of feeds.

Since August 2007, the Fed has cut its Fed funds rate from 5.25% to 0.25%. So shouldn't the cost of borrowing be down 5% as well? At first glance you might think that the cost of corporate borrowing would be down right along with the Fed funds rate. But rather than dropping 95%, the cost of borrowing for even the most credit worthy companies has nearly doubled. That matters because companies are likely to try to borrow $700 billion in 2009. And therein lies the reason that the Fed has no power to fix what ails us.

Here are two examples:

• Southwest Airlines (NYSE: LUV) , the only investment grade rated airline, raised $400 million in bonds in December 2008 to cover its losses from betting that fuel costs would stay high. Rather than paying the roughly 6% it had paid in 2004 to raise $350 million when the Fed funds rate ranged between 1.25% and 2.25%, Southwest had to put up 17 of its Boeing (NYSE: BA) jets as collateral and pay interest of 10.5% percent, nearly double the rate it had paid in 2004.
• Nabors Industries (NYSE: NBR), an oil services company, issued $1.1 billion in 10-year bonds in early January 2009, agreeing to a 9.25% -- in January 2008 when oil prices were rising, Nabors paid a mere 6.15% to borrow $975 million.

Why are companies paying more to borrow even though the Fed has slashed its short-term rate to near zero?

Continue reading With 0.25% Fed funds rate, why are companies paying 10% to borrow?

With 0.25% Fed funds rate, why are companies paying 10% to borrow? originally appeared on BloggingStocks on Mon, 19 Jan 2009 10:15:00 EST. Please see our terms for use of feeds.

Continue reading How much money can the Fed create?

How much money can the Fed create? originally appeared on BloggingStocks on Tue, 23 Dec 2008 09:15:00 EST. Please see our terms for use of feeds.

Federal Reserve Chairman Ben Bernanke likes to tout his expertise in studying the Great Depression. To show off the knowledge, he's taken a Fed balance sheet with $800 billion in Treasury securities a year ago and nearly tripled it to $2.26 trillion by acting as the toxic waste absorber for a financial industry run amok. Now Bernanke is planning to take that campaign to the next level.

How so? As I posted, Bernanke has run out of interest rate cutting ammunition -- dropping the Fed Funds rate from 5.25% down possibly to as low as 0.5% today -- so he'll start to use the Fed balance sheet to perform "quantitative easing." Bernanke has set short term interest rates to zero or below and now he'll try to do the same for longer-term ones, say, two year interest rates as well. One way to do this would be to purchase those longer-term Treasuries to inject more cash into the economy.

What affect is all this liquidity having on the economy? Things seem to be quite bad -- a 3.9% GDP decline is anticipated for the fourth quarter of 2008 and job cuts are rampant -- 1.9 million so far this year. The stock market has lost $30 trillion in value in the last year and home equity values have declined $6 trillion. Not only that, but consumer borrowing is down. That is probably because banks don't trust consumers to pay back the loans that the U.S. wants banks to make with our taxpayer money.

Continue reading Will the Fed risk its solvency to pursue Bernanke's academic theory?

Will the Fed risk its solvency to pursue Bernanke's academic theory? originally appeared on BloggingStocks on Tue, 16 Dec 2008 10:01:00 EST. Please see our terms for use of feeds.

Continue reading The federal government's $2 trillion bailout is one big secret

The federal government's $2 trillion bailout is one big secret originally appeared on BloggingStocks on Fri, 12 Dec 2008 12:20:00 EST. Please see our terms for use of feeds.

The government is printing money like there's no tomorrow and running record deficits. So why isn't inflation out of control? To answer that, we need look no further than Economics 101. When demand exceeds supply, prices rise and when supply exceeds demand, prices fall.

Up until July 2008, commodity prices were rising because institutions were able to borrow money to go long commodities and short the dollar. As a result, the demand for commodities exceeded their supply and prices rose -- contributing heavily to rapid inflation. For instance, oil rose from $24 a barrel in January 2001 to peak in July at $147 a barrel. But since then, this commodity trade has evaporated along with access to debt -- and oil now trades 70% lower at $43.

But this fall, there were some slight problems with the financial markets -- for instance, the government decided to let Lehman Brothers file for bankruptcy. This financial collapse has caused banks to clamp down on lending. And since consumers, which account for 70% of GDP growth, depend so heavily on borrowing to finance their consumption, an end to lending cuts way back on their purchasing power. So does their $10 trillion loss of housing and stock wealth in the last year. With the disappearance of debt, supply exceeds demand and prices tumble.

Continue reading With $1 trillion deficit and $11 trillion national debt, why no inflation?

With $1 trillion deficit and $11 trillion national debt, why no inflation? originally appeared on BloggingStocks on Wed, 10 Dec 2008 11:00:00 EST. Please see our terms for use of feeds.

Transition time: Obama must start acting immediately originally appeared on BloggingStocks on Wed, 05 Nov 2008 09:44:00 EST. Please see our terms for use of feeds.

Day after day the media reports on the "reasons" that the market is moving up or down. Nobody seems to challenge these reports even though they are often patently bogus. And since the reports seem to change every day, we just get used to the idea that nobody offers a real explanation of daily market movements. So just like we simply have to accept that our portfolios are worth 40% less than they were last October, we have to accept that nobody will bail us out or even explain why the market moves up or down every day.

Yesterday, for example, there were two "explanations" offered -- both of which are silly. One was that investors were buying stocks yesterday in anticipation of a Fed rate cut, the other that investors were snapping up bargains. Yet just a little analysis suggests that both "explanations" are probably wrong. The Fed rate cut explanation makes no sense because the market has been anticipating a 50 basis point cut since last week -- if this was news why didn't the market rise last week?

The other -- that investors were snapping up bargains -- is also shaky. That's because a lower stock price does not necessarily mean that the stock is a bargain. Investors must evaluate a stock based on its price in relation to some measure of value -- such as its earnings growth or its net worth. But most analysts agree that 2009 earnings projections are not worth the paper they're written on. Some anticipate that earnings will decline 35% or more next year so P/E ratios are meaningless. And for many companies -- particularly those holding asset-backed securities -- net worth as stated on their books is a fiction that does not reflect the diminished value of this toxic waste.

Continue reading Does bogus 'analysis' of market moves slash investor confidence?

Does bogus 'analysis' of market moves slash investor confidence? originally appeared on BloggingStocks on Wed, 29 Oct 2008 09:45:00 EST. Please see our terms for use of feeds.

As has happened so many times in the last several weeks, the global markets have plunged while Americans slept. But the reason for the plunge seems elusive. Articles suggest that stock prices fall due to negative economic news. But such explanations imply that investors are surprised to learn this. And I question whether any intelligent person would be surprised to see evidence of a shrinking global economy and bad earnings.

Here's this morning's carnage. Asian markets were down more than those in Europe which have not been open as long as of this writing.The Nikkei 225 index fell 9.6% -- linked by analysts to Sony's announcement of a lower earnings forecast, Korea's Kospi (down over 50% this year) tumbled 10.6% -- attributed to Samsung's 44% earnings decline; and the Hang Seng lost 8.3%. Meanwhile Europe's major exchanges are down roughly 9%.

With the Dow set to open as low as trading limits allow -- 550 points lower, I find it striking that both the dollar -- at $1.2595 to the Euro -- and the yen -- at 92.61 yen to the dollar -- are rising in value in relation to other world currencies. Since oil is traded in dollars -- this currency strength should offset the impact of OPEC's decision to cut production by 1.5 million barrels a day. So far this theory is working -- the oil price dropped $4 a barrel after the announcement. (It couldn't happen to a nicer bunch of people.)

Continue reading With Dow to open limit-down 550, why are global markets plunging?

With Dow to open limit-down 550, why are global markets plunging? originally appeared on BloggingStocks on Fri, 24 Oct 2008 08:50:00 EST. Please see our terms for use of feeds.

It looks like Ben Bernanke is getting under the Wall Street Journal's skin. That's because Rupert's Rag is not happy with the direction of its candidate for President. And it is annoyed that a Republican appointee, Ben Bernanke, is helping out the Democratic candidate -- Barack Obama. That's what prompted the Journal's headline -- Bernanke endorses Obama.

Oh poor Wall Street Journal! Is this the best you can do? Why does it bother you so much that Ben Bernanke is supporting Obama's call for a new stimulus package? In an October 13th speech, Obama "urged Congress to act 'as soon as possible' before the Bush administration leaves office on January 20 to pass a stimulus measure. If Congress and the president didn't act 'it will be one of the first things I do as president of the United States.'" says Bloomberg News.

But Rupert's Rag is in the tank for McCain and although Obama is already setting U.S. policy on big issues -- a few months ago, Iraq and Bush agreed with Obama's Iraq withdrawal plan -- the Journal is upset that Bernanke and ultimately Bush will go along with Obama's proposed stimulus plan as well. First Colin Powell, and now Ben Bernanke are reading the tea leaves and choosing to position themselves for power in the next administration.

And the Journal is finally waking up to the fact that it will be on the outs for at least the next four years.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Is Ben Bernanke in the tank for Obama? originally appeared on BloggingStocks on Tue, 21 Oct 2008 10:45:00 EST. Please see our terms for use of feeds.

The New York Times reports that the Federal Reserve has less reserves. Specifically, a year ago it had $800 billion in reserves and that number is down 63% to $300 billion. The other $500 billion is "encumbered" -- that's a nice way of saying that instead of being invested in "safe" Treasury bills, the Fed owns the assets of American International Group (NYSE: AIG), $29 billion worth of grubby former Bear Stearns collateralized debt obligations (CDOs) and the like through a little something it calls "Maiden Lane LLC", and tens of billions worth of the same from Lehman Brothers Holdings Inc. (NYSE: LEH) and other banks.

I raised the question of Fed solvency in July. Whether it was solvent then, it is less so now. But is there a limit to how much money the Fed can create to fund itself? With demand for Treasury Bills skyrocketing (albeit at interest rock bottom interest rates of 0.14% for the 1-month bill), it looks like now would be a great time for the Fed to replenish its coffers by issuing a trillion dollars worth to shore up its balance sheet. If it can indeed do that, the downside is that these low rates will pay it very little income.

And assuming that the Fed does not want to be in the business of owning half a trillion worth of encumbered assets, it will eventually need to get rid of them. And in so doing, it could find itself in competition with the ever- dwindling portion of the investment banking and insurance industry which the government does not own. How so? Because the Fed will be competing to get the best price for the assets it is trying to sell.

Will it use its power to put those publicly traded companies in a pickle? Or will it forgo the advantage to the taxpayer so its competitors can profit? Beats me.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG shares and has no financial interest in the other securities mentioned.

Here we go again: Is the Federal Reserve solvent? originally appeared on BloggingStocks on Thu, 18 Sep 2008 10:10:00 EST. Please see our terms for use of feeds.

Another shoe is dropping in the ongoing credit collapse here in this nation of whiners. According to the New York Times, the default rate on so-called Leveraged Loans -- (a very strange name if you ask me since a loan is leverage) that refers to loans used to finance corporate takeovers -- climbed fast from 0.24% in August 2007 to 3.3% in August 2008.

The loans that have gone bad so far are not big ones -- they are more like the canary in the coal mine -- hinting at bigger problems to come. The Times says, "the loans that have gone bad have been concentrated in two industries - real estate and auto parts. S.& P. calculates that they have accounted for almost half of this year's defaults. Gambling has also had problems, as it turns out that there are too many casinos in some places."

The biggest loans have yet to default. But their collapse is inevitable. That's because banks are scrambling to raise capital and shore up their balance sheets. And the leveraged loans were structured to benefit from a lending market in which the name of the game was to keep from losing market share by making it ever easier to borrow. Thus the terms of leveraged loans were easy -- featuring, as the Times reported, a "flood of 'covenant-lite' and 'toggle-[Payment in Kind] PIK' loans."

Continue reading Corporate loan default rate spiking

Corporate loan default rate spiking originally appeared on BloggingStocks on Fri, 05 Sep 2008 11:20:00 EST. Please see our terms for use of feeds.

Unfortunately, I do not know enough about how the Fed gets its capital or how it accounts for the value of its assets and liabilities to be able to do more than raise questions. But here are three things that concern me:

• Declining asset quality. The total value of the U.S. Treasury securities on the Fed's balance sheet declined by $312 billion between July 2007 and this July -- a 43% drop in this highest quality asset.
• Increase in shakier assets. During this same period, the balance in Term Auction Facilities -- the credit line that investment banks are using to get their shakier assets -- such as Collateralized Debt Obligations (CDOs) off their balance sheets --increased from $0 to $150 billion. Another $29 billion in assets come from Maiden Lane, LLC -- the entity created for the Fed to take on the toxic waste that sank Bear Stearns.
• High leverage. While the Fed has more capital backing up its assets than the typical investment bank -- which holds $1 of capital for every $32 in assets -- the Fed is still highly leveraged -- with only $1 of capital for every $23 of assets -- it borrows the rest. Put another way, if the Fed was forced to account for its balance sheet on a mark-to-market basis, a mere 4.5% decline in the value of the Fed's assets would wipe out its capital.

These observations raise questions in my mind:

Continue reading Is the Federal Reserve solvent?

Is the Federal Reserve solvent? originally appeared on BloggingStocks on Mon, 21 Jul 2008 10:00:00 EST. Please see our terms for use of feeds.

Continue reading The Federal Reserve says the party is over

The Federal Reserve says the party is over originally appeared on BloggingStocks on Wed, 25 Jun 2008 15:30:00 EST. Please see our terms for use of feeds.

Stocks fall as Ben Bernanke signals 'last call' for interest rate cuts originally appeared on BloggingStocks on Tue, 03 Jun 2008 15:52:00 EST. Please see our terms for use of feeds.

It seems that the Fed just got done cutting rates. Now, it may want to raise them. Inflation appears to be getting bad enough so the the agency could need to up interest rates to keep prices from overheating. According to Reuters, "Two Federal Reserve policy makers warned on Wednesday that interest rate increases might be needed before too long to curb inflation." And, the FT writes,"A sell-off in the US bond market pushed the yield on 10-year Treasuries above 4 percent on Wednesday for the first time since January, as investors bet that pressure from record oil prices would force the Federal Reserve to raise interest rates this year."

In other words, two different papers using two sets of reasoning to come to the same conclusion. Great minds thinking in the same direction but coming at it from different points of view. In all probability so many smart people are probably not wrong.

But, what about that recession? If credit is tight and housing markets continue to fail, where is the relief for consumers? Their spending did drive the economy for half a decade. If they do not return to their old habits, how does the foundation of a recovery get built?

The answer may not be very attractive. Inflation may be cut down by Fed increases, and the lack of credit may drive the economy further into a deep downturn.

It may be as simple as realizing that both problems cannot be fixed at once.

Douglas A. McIntyre is an editor at 247wallst.com.

Signs point to Fed rate increase originally appeared on BloggingStocks on Thu, 29 May 2008 09:09:00 EST. Please see our terms for use of feeds.

Many people are saying that the rise in oil prices is the result of loose monetary policy. They say that there is an easy solution to the problem. Raise interest rates substantially, and the problem will be solved. Since the rise in oil is also the primary cause of rising inflation, the inflation problem will be resolved as well.

There are several problems with this line of reasoning. Oil continued to rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has the some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

Then, there are the big questions. Why are oil prices rising? What is the short-term solution?

I believe that the main reason for the rise in oil prices is the rise of the developing world. The two nine hundred pound gorillas in this equation are India and China. Automobile demand is increasing in these countries and is likely to continue in the near future.

This is similar to the rise in oil prices in the late 1960's and early 1970's. After World War II, the United States was the primary industrial power. As the world industrialized, demand for oil increased. The United States was not the only nation driving cars extensively. Supply constraints were also introduced in the mid to late 1970's with the Arab oil embargo and the Iranian revolution.

Continue reading Oil prices and Fed policy: A solution is not as easy as it seems!

Oil prices and Fed policy: A solution is not as easy as it seems! originally appeared on BloggingStocks on Fri, 09 May 2008 10:05:00 EST. Please see our terms for use of feeds.