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Generational Dynamics Web Log for 13-Nov-2008
Treasury Secretary Paulson declares victory, then reverses direction.

Web Log - November, 2008

Treasury Secretary Paulson declares victory, then reverses direction.

Wall Street stock prices plummeted 5% on Wednesday, reflecting investor reaction to the move.


Market summary, 12-Nov-2008
Market summary, 12-Nov-2008

As I write this on Wednesday evening, Asian stock markets have also fallen 5% on Thursday morning.

Treasury Secretary Henry M. Paulson began his press conference almost by declaring victory:

"The actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system. Before we acted, we were at a tipping point. Credit markets were largely frozen, denying financial institutions, businesses and consumers access to vital funding and credit. U.S. and European financial institutions were under extreme pressure, and investor confidence in our system was dangerously low."

Of course, investor confidence is still dangerously low. In fact, the commentary by the tv analysts on Wednesday sounded almost as gloomy as I do.

"We also acted quickly and in coordination with colleagues around the world to stabilize the global financial system. Going into the Annual IMF/World Bank meetings in early October, I made clear that we would use the financial rescue package granted by Congress to purchase equity directly from financial institutions the fastest and most productive means of using our new authorities to stabilize our financial system. We launched our capital purchase program the following week when we announced that nine of the largest U.S. financial institutions, holding approximately 55 percent of U.S. banking assets would sell $125 billion in preferred stock to the Treasury. At the same time, the FDIC announced it would temporarily guarantee all newly issued senior unsecured debt of participating organizations for up to three years. In addition, the FDIC provided an unlimited guarantee on non-interest bearing transaction accounts that expires at the end of next year.

As I assess where we are today, I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world we have already seen signs of improvement. Our system is stronger and more stable than just a few weeks ago."

Then Paulson dropped a bombshell: the $700 billion bailout money would no longer be used to purchase toxic mortgage-backed securities.

The original plan was to use the $700 billion to purchase near-worthless mortgage-backed securities, so that financial institutions wouldn't be forced to write down their assets because of mark-to-market rules. Apparently they will now have to do exactly that. Perhaps Paulson is hoping that there are no more toxic mortgage-back securities.

The reason for the change in direction is that it's now becoming apparent that structured securities backed by consumer loans are just as toxic as structured securities backed by mortgage loans.

So the new plan is to throw money at financial institutions that are in trouble because of things like credit card loans, student loans and auto loans.

Meanwhile, pressure is building to throw money at the automobile companies. Democrats in Congress are demanding that some of the $700 billion be used to bail out the automobile companies.

We can expect more of these. If you're an employee of a company that the Democrats favor, you might hope for a bailout; but if you're an employee of a company that Republicans favor, expect to be out on the street.

Here is the Guardian's summary of where the money has gone:

"Of the US treasury's $700bn rescue fund, some $250bn of the $350bn allocated by Congress has been earmarked for capital injections into banks. Of this, $115bn has gone out of the door. Paulson had planned to spend the rest buying "toxic assets" from banks' balance sheets. But instead, it will go towards further capital injections, securing non-bank institutions and averting repossession for struggling homeowners. Another $40bn has been given to stricken insurer AIG, leaving $60bn to dole out before the treasury has to ask Congress for the final $350bn. This year, 19 high street banks have collapsed in the US - more than in the previous four years combined."

There is one major event that we're still waiting for, the generational panic and crash, that I've described this way several times in the past:

"A generational crash is an elemental force of nature, like a tsunami.

You'll have millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, not even believing it was possible, and in a state of total mass panic, trying to sell all at once. Computer systems will crash or will be clogged for hours, or perhaps even for a day or two. People who had hoped to get out just as the collapse is occurring will be totally screwed, and will lose everything. Brokers and other institutions will go bankrupt."

This might happen tomorrow, next week, next month or thereafter. We can't predict when it will happen, but it's coming soon with absolute certainty.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (13-Nov-2008) Permanent Link
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