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Friday September 26, 2008 - 13:40:16 GMT
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Forex Blog - End of the world as we know it, and I don't feel fine...

I don’t know where to begin.  I thought I could believe the leaders of both parties in Congress and the White House and the Treasury that there was an agreement with bipartisan backing for the Paulson plan or TARP (troubled asset repurchase program).


Well it turns out that in the House of Representatives there was a coup against the White House and its own minority leader Rep Boehner by the conservative caucus of House Republicans (few dozen) that caught the attention of the poll challenged Senator McCain looking for a second hail Mary pass after it turned out that Governor Palin, uncovered in the end zone, had butter fingers and dropped the ball (please watch the Katie Couric interview of Palin and I dare anyone to say she has the gravitas to run a Starbucks much less the USA). 


McCain decided, in short order (don’t confuse madness with maverick), to embrace the conservatives in the House and turned against the bailout that he favored, albeit reluctantly like everyone else, earlier this week.  So McCain and a handful of Republicans in the House turned the bailout with all its blemishes into a choice for Congress between supporting President Bush and not supporting President Bush and left the Democrats and the Republicans who were prepared to vote for the bill unable to vote for the bill.  Why?  The public opposes this legislation 99-1.  Unless everyone or nearly everyone votes for it, it is a political self-immolation to vote party line for the bill.  Yes the Democrats have the votes to pass it but it would be risking political suicide in November, especially if the package does not prevent a deep recession which I and many others think is now too late to avoid, bailout or no bailout.  The bailout is only about banks remaining open, and a lot less about banks getting back to risk taking anytime soon much less leveraged risk taking.  And $700bln is a down payment that keeps getting smaller every minute it is delayed.


The Democratic leadership in Congress has one choice.  Okay House Republicans let’s take up your plan (that was never presented until after the White House meeting Thursday).  In the meantime the markets may not have anything to fix…full destruction of the banking system.  Next week we may all be taking money from the Fed directly.


Speaking of the Fed the balance sheet for the week ending Wednesday showed the Fed opened its vault for banks…banks are being fully propped up by the Fed.  Banks are hoarding cash…companies are hoarding cash running up their revolving lines of credit because no company can issue commercial paper (Lehman effect…thanks Hank).  It is only a matter of time before the public starts hoarding cash – it is already hoarding gold…US Mint is out of buffalo bullion coins…inventory depleted. 


Fortis is on the ropes…ECB’s Wellink who is in Chicago at a Chicago Fed conference had to cancel his speech and fly home – Fortis owns part of former Dutch bank ABN-Amro.  And one has to think that the ECB needs to respond to the banking panic…past crisis stage this is a panic.  Lastly I wanted to share an email from a client on bank leverage – I think this is off a Bloomberg page and have no reason to question the data showing leverage still in the banking system – European banks look like hedge funds on steroids…all levered 20- to 50-1, though this data is from end of financial year and may not capture deleveraging that has flooded banking system since July.


Bank              Assets           Shareholder Equity            Ratio
BoA               $1,715bn            $146.8bn                       11.7x
Citi                 $2,187bn            $113.6bn                       19.2x
JPM               $1,562bn            $123.2bn                       12.7x
WFC              $575bn               $47.6bn                         12.0x

Note the three big US banks have balance sheets that represent 40% of US

Deutsche            EUR 2,020bn      EUR38.5bn                    52.0x
UBS                   CHF2,272bn        CHF42.5bn                    53.4x
Credit Suisse    CHF1,360bn       CHF59.8bn                    22.7x
Fortis                  EUR871bn          EUR34.2bn                    25.5x
Dexia                 EUR604bn           EUR16.4bn                    36.8x
BNP                   EUR1,694bn        EUR59.4bn                    28.5x
Barclays            GBP1,227bn        GBP32.5bn                    37.8x
RBS                  GBP1,990bn        GBP91.4bn                     21.7x


So what happens next.  Central banks cut rates…today, maybe next week.  The Fed will urge that citizens have no reason to lose faith in the banking system despite the crisis and will make sure that deposits, check clearing, and ATM machines will continue working.  The Fed meanwhile is quickly becoming the de facto bank of the USA.  This will require adding zeros to the balance sheet and dropping money from the sky.


I reserve the right to be wrong.  I pray I am wrong.  I was wrong about assuming Congress was done on the Paulson plan…but then again this is from the same theater director that brought us Sarah Palin.


David Gilmore


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