Tuesday, September 23, 2008


is the fed moving before a bailout? paulson and bernanke probably just realized today that this bill is probably not going to pass this week and right now timing is everything.

with the credit markets falling apart i wouldn’t be surprised to see a Fed cut this week. We get a lot of economic numbers before the weekend, so that may be their opening. The market is priced in over a 50% odds of a 25 bps cut by the Oct. 29th FOMC meeting.

a hint? gs is behaving well into the close.

Is this a tip off for tomorrow?

lots of stupid posturing by the Lawmakers. the spectacle makes me quite angry. One point that seems to be missing here is the fact that the very first thing that should be done is the elimination of FAS 157. At that point we could see how many banks may decide to keep a portion of their paper. Then we get approval for $700 bln, only have to use $450 bln or less and the program is an immediate success.

Might we see American International Group (AIG) approach $10 before we see the $2's again. We get a Fas 157 reprieve and I'll own AIG for a trade.

what are paulson, dodd and boehner afraid of saying will happen without a bailout, and what is the best plan to proceed with?

Simply put, they are afraid of the psychological aspects of debt deflation. That is what the Fed fears as well. It is not simply a matter of making credit available. The Fed has many, many tools with which to do that. The problem is getting people to use that credit. That problem is magnified because of the present burden of debt service both on Main Street and Wall Street.

The "unmentionable"they refused to discuss was just this: the immediate shut down of an extraordinary number of businesses unable to access the short-term credit markets (commercial paper, instit. money market funds, etc.) and pay for their day-to-day operations.

Think about your own personal balance sheet for a moment. Most of us have our paychecks direct deposited into a bank account. We have an ATM card and a checkbook. Imagine for a moment that your bank freezes the ability to access those funds. What would happen to your ability to operate your household? That is what businesses were facing last week. That is essentially what Bernanke and Paulson told members of Congress and described to Dodd and Boehner. We were facing the shutdown of the economy virtually overnight.

The issue now is no longer the details of the proposal. That sounds counterintuitive to people, but it is true. How and whether the assets are purchased and sold, the mechanics of it, are long-term issues that will settle over decades, not months. What matters NOW is whether the gambit will provide enough psychological impetus to unfreeze credit markets, especially as we approach a major surge in new credit issuance.

The best plan, whatever it might be, will be fruitless if the deflationary psychology manifests as aggressive debt revulsion and credit avoidance.

I think that because we are seeing a secular transition of a credit cycle from peak to trough, not a cyclical transition, that debt revulsion and balance sheet repair is unstoppable. But that is a probabilistic belief, not an absolute. I may be wrong.

Regardless, the point to understand today is that the "proposal" at this stage is a red herring, as hard as that may be for people to believe. It simply does not matter in the long-term what the mechanics of the bailout will be. The issue is whether people will allow companies to issue and rollover credit, and if they do, at what price?

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