So lets recap on what has happened in the past 3 months:
Write Downs
- Disclosed estimated total write downs 150 billion (Total expected 285 billion)
FOMC
- Dec 2007- Fed Fund Rate 4.25%; March 2008 2.25% (Irresponsible monetary policies)
Overseas
- Societe Generale Trader loses 7 billion dollars overnight (French guy who beat Nick Leeson )
Domestic Financial Institution
- After 85 years, Wall Street's Fifth-largest securities firm goes belly up. One day worth approximately $60 per share and the next day worth about $2.84 per share. (If you bought at $2.84 and sold at $10.85 like ex-CEO Cayle, you would have been happy with the return)
- Almost every major bank decreases in equity value by more than 30 percent. (Citigroup value per share was trading at $17.99, as low as People's United Bank shares but with larger risk than People's, BUY PBCT and C)
U.S. Economy
- Core inflation rose to 2.3 % ( Still within Feds comfort zone of 2-3 percent)
- 170 Billion Bipartisan "stimulus" package (Encourage spending for Americans)
- 3 trillion federal government budget (OUT OF CONTROL)
- Gold trades over $1,000 (sign of recession)
- Oil trades over $111 a barrel ( I need a donkey or horse)
Everyone is going GREEN
- Euro 1.58 for every dollar(not going to Europe anytime soon)
- Pound 2.10 for every dollar(not going to England either)
In August 2007, the Federal Reserve Bank lowered its discount rate to encourage borrowing from major U.S. banks. During this time period, foreign capital was flowing into our financial system by the truck loads and major banks did not want to borrow from the Feds for fear of showing weakness. The federal reserve is known as the "lender of last resort," which carries a negative perception for banks who borrow funds from the discount window. Although the major banks felt this would have a negative view on their financial health, they borrowed the funds. What is ironic is that major banks felt "pressured" to borrow about 500 million dollars from the central bank's discount window after the FEDs cut the discount rate(J.P. Morgan, Bank of America, Wachovia, and Citigroup). Only to use tax payer money to bail out companies such as Countrywide days later after borrowing the funds(BofA). Economist Ed Yardeni wrote to clients explaining,"The Government of Last Resort is working with the Lender of Last Resort to shore up the housing and credit markets to avoid Great Depression II." Unfortunately, the Feds nor the government could save the inevitable of what would happen to the financial markets.
In the 4th quarter of 2007, a popular term known as "write-downs"would be introduced and used by major hedge funds, banks, and brokerage companies. The first company, which I recall using the term write-downs, would be Bear Stearns. Around June 2007, two of Bear Stearns' Hedge funds, took aggressive bets on mortgage back securities, said to be valued at peak $16 billion, only to lose all of it and be rescued by Bear Stearns with a 1.6 billion dollar infusion. Bear Stearns' then CEO Cayle, reasures investors that everything is under control. Bear Stearns stock had been down 14 percent, trading at $134, after the news had broken out to their investors during this time period. After Bear Stearns reported that two of their hedge funds were in financial distress due to leverage taken on mortgage back securities, other banks and brokerage houses followed in suit. Merrill lynch, Citigroup, Bank of America, RBS, UBS and Goldman Sachs all reported problems with mortgage back securities being held in their portfolios. One by one, they would report numbers to their shareholders that seemed to come from the top of their heads; for example, Merrill lynch reported one week $5.5 billion and the following $8.4 billion. The total damage done by the housing market for the 4th quarter would be 150 billion dollars. According to the streets consensus we "only" have 135 billion dollars more to go before its all over.
The federal reserve have implemented irresponsible monetary policies. During the 1st quarter of 2008, the FOMC lowered rates three times, totaling 200 bases points (2.00 percent). In late January 2008, the Fed Fund rate was lowered twice in less than 9 days by more than 125 bases point (1.25 percent) in order to prevent the market from crashing. Only to find out days later, after implementing a rate change, that a French trader from Societe Generale unwinded 7 billion dollars into the global market disrupting markets across the world. Is it the FOMC's responsiblity to help Wall Street? The responsiblities of the federal reserve are to keep inflation under control and control money supply for the broad U.S. economy. The baby boomers are not able to keep up with inflation. The younger generation is spending between 40 to 50 percent of their payroll checks on fueling their vehicles. The average U.S. household is consuming less which will not help GDP. Who is Bernanke going to sleep with at night?
How did we get into this mess?
Is it time to change a financial system that was created during the Civil War? Paulson thinks so!!!
Quote:
By Brian Wesbury of the WSJ
"In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover's tax hike passed in 1932, and then FDR's alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%."
