Fed’s New Bailout, Biggest Salary in Banking History, Resources Rally, and More!

by Addison Wiggin & Ian Mathias

  • Fed unveils yet another rescue plan… markets didn’t buy it — will you?
  • Greenspan denies fault in credit crunch of 2007… banks of the world harmoniously retort
  • Expecting a raise this year? So is Lloyd Blankfein… to the tune of $30 million. Details below…
  • Gold and oil prices spike… what’s fueling the latest resource rise
  • Plus, readers target the source of the housing crisis… but did they miss the mark?

Bernanke and his brood at the Federal Reserve regretfully stole the spotlight yet again yesterday.

The Fed announced it will coordinate an international “temporary auction facility” — a global lender of last resort for commercial banks.

The TAF consists of a soft alliance between the Fed, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Canada. Each injects a certain amount of cash into this TAF, and a couple times a month the funds are auctioned off to banks in need at a rate far lower than usual.

Apparently, the rates on loans between banks, or LIBOR, is just too dang high. Thus, the Fed to the rescue… over $40 billion will be up for grabs before the new year, with more auctions already scheduled for January.


“Huzzah!” exclaimed the markets. “Our benevolent Fed is saving us all… buy!” Domestic benchmark indexes rocketed at the open… up 1.5-2% within minutes.

But then someone started thinking. “Wait, maybe LIBOR is so high for a reason? Wouldn’t it be better for banks to actually fix the credit market, instead of just showering it with more easy money?”

Markets began selling off at a steady rate.

“I do not doubt that a low U.S. federal funds rate in response to the dot-com crash,” confessed Alan Greenspan in a WSJ commentary yesterday, “and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices…”

Could this be it? Could Mr. Bubble himself finally be fessing up to the mess he created?


“In my judgment, however, the impact on demand for homes financed with ARMs was not major,” he concluded. “The crisis was thus an accident waiting to happen.”

Maybe Mr. Greenspan should have a quick chat with Bank of America’s CEO Ken Lewis on how major the impact of easy-credit policies has been:

“The economy is definitely slowing,” said Mr. Lewis this morning. “We expect weak fourth and first quarters.” Lewis announced the bank will set aside an additional $3.3 billion to cover losses he expects in the fourth quarter alone. “While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing.” Ouch.

Not long after, Wachovia followed suit. The bank, in a filing with the SEC, revealed it too will set aside massive amounts of cash to quell a lousy fourth quarter… about $1 billion, twice as much as it forecast last month.

PNC then threw its hat in the write-down ring. It’ll be over $1.5 billion in fourth quarter losses for PNC, the Pittsburgh-based bank announced.

And how’s this for an economic indicator? Morgan Stanley has listed Citigroup as the No. 1 stock to short in 2008.

MS analysts issued a searing report yesterday, suggesting that new CEO Vikram Pandit will avoid spinning off units of the bank, probably cut the dividend and likely issue all kinds of funky hybrid securities — all of which will dilute the value of Citi shares. Morgan Stanley’s new price target for the bank is $28, down 13% from Citi’s current price per share.

By some miracle, the Dow, S&P and Nasdaq managed to stay in positive territory yesterday. The Nasdaq and S&P 500 ended up around 0.7%, while the Dow rose 0.3%.

International market makers weren’t quite so optimistic. Japanese, Chinese and Hong Kong markets all tumbled about 2.5%. This morning, European markets followed suit… French and English markets lost 2.1% and the German market fared “best,” with just over 1.4% losses.

Lloyd Blankfein, the CEO of Goldman Sachs, is on track to receive a large bonus — the biggest one ever.

The Financial Times reported this morning that Mr. Blankfein may be receiving a 30% raise for 2008, bringing his annual salary to $70 million dollars. Blankfein is estimated to take home over $54 million this year in cash alone, a Wall Street record.

The article only prompted us to ask one question: Why on Earth did Hank Paulson leave Goldman Sachs? Sure, the government has its share of spoils… but $70 million?

Wholesale prices rose an incredible 3.2% in November alone, the sharpest rise in 34 years. The Bureau of Labor Statistics producer price index was forecast to rise 1.5%, but a huge 14% swing in energy prices coupled with the dollar’s decline more than doubled analyst expectations.

Even the Fed’s precious food- and energy-stripped core PPI rose much more than expected… up 0.4% after not budging in October. Don’t forget to check us out for tomorrow’s consumer price index report… similar carnage is expected.

Gold rose overnight, too, to $810. We expect the Fed’s new wave of liquidity to buoy the price of gold, since preventing monetary inflation seems to be an idea out of favor in Washington.

A rush of somewhat troubling news sent oil prices up $4, to $94 per barrel yesterday. In its latest inventory report, the Energy Department said crude stocks fell 700,000 barrels last week. Such a decline marks a full month of negative inventory reports and brings stockpiles to their lowest levels since March 2005.

The same department also reported a rise in gasoline supplies, furthering the recent trend of decreasing fuel costs. Perhaps you’ve noticed… after climbing as high as a national average of $3.11 per gallon last month, gas prices have fallen considerably.

The national average for gas has dropped 12 cents since Thanksgiving, down to $2.99.

“Might want to look back to the days of ‘government deregulation’ that started with Reagan,” suggests a reader who believes he’s found the true root of the credit crunch.

“One esteemed senator brought forth legislation to do away with something called the Glass-Steagall Act. That act was brought by the Democrats under FDR in the depths of the Depression. That law mandated that banking, insurance and brokerage must remain separate. Many great economists and financial publications have found that the conspiracies of these three greatly contributed to the crash of 1929 and, of course, the Great Depression. When this legislation was done away with, the future handwriting was on the wall.

“And here we are today with one of the greatest financial disasters since the late 1920s looming over the heads of the U.S. and, possibly, world economies. One only has to look at MBIA and MBI to figure this albatross out. In my opinion, were Glass-Steagall still in place, this would never have happened. So the question begs itself, when will Glass-Steagall be brought back — and before it happens, will we once again suffer the fate of the late ’20s? Many are saying things are different this time. I’m not so sure.

“I’m beginning to think that things just might break down before the election of 2008. I am hoping that the next president and his or her Congress might have the same ability and desire to reduce the suffering of the common people and save the economy that was found under FDR’s administration.”

The 5 responds:
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government,” supposedly wrote the political philosopher Andrew Tyler way back in 1787, speaking about the fall of the Athenian Republic some 2000 years before. This passage is now largely believed to be little more than an internet hoax… but it has found a strong footing in many circles, regardless of its historical validity. The idea rings true… no matter who really wrote it:

“A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, (which is) always followed by a dictatorship.”

Glass-Steagall may have been a useful bit of regulation. Personally, we don’t think so. But we address the larger issues you bring up in a chapter about the demise of our own republic in a chapter in Empire of Debt called “The Revolution of 1913 and the Great Depression.” Many of the solutions to what ailed the country in the 1930s are now coming full circle and biting us in the arse 70 years later.

Of course, we’re aware that the views we express in that chapter represent an extremely unpopular view of both Wilson and FDR… but that’s the way we see it. Unfortunately, you’ll have to read the book to catch our drift entirely.

This election year is going to be a hoot. If the candidates are anything like the current White House press secretary, who recently copped to not knowing what the Cuban Missile Crisis was on NPR, we’ve got our work cut out as citizens.

“A large part of the problem with these mortgages and the fact that banks don’t voluntarily renegotiate the loans is that if the loans are federally insured,” opines another reader, “the banks and other lending institutions know that Uncle Fed is going to bail them out and they don’t have to do a damn thing except foreclose.

“I used to be a HUD-area management broker where I would take boarded-up houses that the banks had foreclosed on into my inventory. These houses were to be appraised by me and put up for sale. Some of my cities had two, three, four board-ups per block. The banks were supposed to maintain the properties, but Uncle Fed never complained when the houses were received after being held by the banks for years with no maintenance except a board-up. I received houses with burst water pipes, grass that was waist-high, 3-inch diameter trees growing in driveways, roofs in the basement, etc., ad nauseam.

“When I approached the district director about that issue, I was told that if I didn’t accept those houses into my inventory within three days pronto, he would find me in violation of my contract with HUD and sue me. So in they went. The banks didn’t have to worry about the bad loans, because Uncle Fed and those fine bureaucrats who work in it just accepted the problem with no questions whatsoever as to whether or not they should. Lobby, lobby, lobby. The taxpayer, of course, ultimately pays. I begged to be let out of the contract, which I ultimately was, but the reason that I couldn’t work with HUD was that I was literally sickened by the absolute disregard for the law and the ‘live to get by’ attitude of the employees.

“I wrote to my congressman, but hey, you know how far that went. I concluded that the only reason our government survives in this world is that other governments are more corrupt and inefficient. It certainly isn’t that we are at the top of our game.”

That’s for sure,

Addison Wiggin,
The 5 Min. Forecast

P.S. We’ll end today with a clarification. We wrote to you on Tuesday about our Agora Financial Reserve Focus List… it is on track to gain 20% by the end of this quarter.

We issue the Focus List — a list of our editor’s best stocks to buy right now — every quarter to our Reserve members. The list about to hit its annual maturity in January is currently returning 19%. Despite technical corrections and YTD single-digit returns from the Dow and S&P, we’re still quite proud of this vintage’s performance.

The Reserve Focus List is the easiest and most economical way to take advantage of the top-notch commentary and analysis of Agora Financial analysts. If you like The 5, you’ll love being a Reserve member.


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