Jim Cramer, the well known market guru made two revelations yesterday which should raise genuine concerns for the general public with money in the stock market. Cramer, the host of Mad Money on CNBC, is easily one of the most colorful and even controversial investment experts in the industry, yet his insight into the market turmoil has for the most part been dead-on.
Yesterday morning, Cramer in an interview with the Today Show's Ann Curry, stated that investors who might need to utilize investments within the next five years should immediately re-assess their needs and "take it out". Cramer told Curry, "Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.?
Cramer's statement alluded to the turmoil that was occurring throughout global markets and the realization by much of the world that their economies strength was dependent upon the strength of the US economy. Cramer, pointed out the weekend revelations that European Banks were collapsing at an astounding rate, stating, "?One thing is certain ? they are, in Europe, behind us. We?ve experienced more pain than they have, we are surprised at their pain, we didn?t know how bad off they were.?
Later in the day as the market appeared to be melting down, Cramer on CNBC told viewers that a decline to 7,700 point in the Dow Jones Industrial Average was a "real possibility". Once again, Cramer who typically focuses on informing investors of bullish opportunities, warned short-term investors to pull their money out. Cramer made sure to qualify his remarks by stating that the market turmoil is creating long-term opportunities for those who have the ability to ride out the storm; but for those who may need funds for children's educations, retirement income, home purchases or other needs within five years should watch the market for any short term bounce and pull those funds out.
The collapse of the large financials has raised serious concerns within the investment community. Typically, the financial markets have been among the last sectors to effects of a recession and among the first sectors to recover. However, the economic pressures being exerted today are a direct result of the combination of a weakening financial sector coupled by high energy and food costs. As a result, the markets are in turmoil and the extent of the global financial systems melt-down may not be realized for months. The time is now to re-assess your financial portfolio, budgetary and financial needs.
J Brown
October 7th, 2008
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Former Lehman Brothers CEO and long-time Barack Obama contributor Richard Fuld is testifying today concerning his role in the failure of the Investment banking giant. Fuld joins the ranks of the dozens of former wall street executives who have or are likely to be paraded in front of Congress over the coming months. Fuld also contributed to Senator Dodd's campaign and The Democratic National Senatorial Committee's fund.
Among Obama's campaign contributors are dozens of other Lehman Brothers Executives, such as President Joseph Gregory ($4,600). On June 19th, Lehman shareholders filed suit against Fuld and Gregory for the company?s exposure in the subprime market. In addition to dozens of Lehman executives are Obama's bundlers from Lehman Brothers who have raised top dollar for the campaign. Direct contributions from Lehman Brothers have exceeded $395,000 for Senator Obama, while bundled contributions raised by Lehman Executives have been just short of phenomenal.
John Rhea - (over $500,000) Co-Head of Lehman Bros. Global Investment Banking
Mark Gilbert - (over $500,000) Lehman Brothers Senior Executive
Christine Forester - (over $500,000) Lehman Brothers Senior Executive
Theodore Janulis ? Bundler (over $100,000) & Lehman Brothers Head of Global Mort.
Nadja Fidelia ? Bundler (over $50,000) & Managing Director of Lehman Brothers
Fuld now holds the distinguished position of joining other highly influential Obama contributors within the financial sector including Franklin Raines and Jim Johnson.
Stanley Price - Former CEO of Merrill Lynch (testified in front of Congress in 2007 after receiving $161 million in compensation after being ousted for ML's subprime exposure)
Brad Morrice - CEO of imploded subprime lender New Century
Steve Boland - Managing Director of CountryWide
Andrew Beer - President of Wachovia's Subprime Lender Evergreen Investments
Robert Wolf, the CEO of UBS Americas, helped the Obama campaign raise more than $500,000. Louis Susman, the Chairman of a Citibank Subsidiary.
John W. Roberts - (over $500,000) Ariel Capital Management
Richard Leweke ? Vice Chairman of Washington Mutual Card Services
Seth Waugh ? CEO of Deutsche Bank
Charles Lewis ? Vice Chairman of Merrill Lynch
Click Here To Read More About Obama's Subrpime Buddies
J Brown
October 6th, 2008
   
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For 2 weeks the Bush Administration and Democratic and Republican leadership in the house have driven fear into the American public, predicting calamity and depression if a government intervention of the credit markets did not occur. After a majority of House Republicans joined by 40% of House Democrats rebuffed the bailout plan, the Senate turned a 110 page bill into a more than 450 page "crap sandwich" chock full of pork spending. After the initial vote, the markets suffered their largest 1 day point drop (not percentage drop) in history, and once again government leadership played the fear card while reassuring us that as taxpayers we would recover the $700 billion used for this bailout. Yet, despite the hundreds of hours of network coverage, no one in the media actually examined the back end of this bill and whether or not our government would ever recover the $700 billion.
Unfortunately in their quest to manipulate the financial markets upward, the bill passed yesterday; was signed into law by President Bush; and now our government is in a position to become the largest sub-prime mortgage company in history. Yet the question remains, Can We Really resell these toxic assets and recover taxpayer dollars?
No, and here is why:
First, politicians such as Senator Obama have compared this bailout bill to government real estate purchases and bailouts of the Great Depression, referring to the fact that the Treasury turned a profit when the economy recovered. In reality, however, this bailout is in no way similar to the government interventions in the 1930's. The underlying causes of these toxic assets are a combination of government over-regulation (such as the pressure the government applied to mortgage companies to lower credit standards to offer loans to low-income or poor-credit buyers) and deregulation which muddied the lines between investment banking, commercial banking and the insurance industry. At the root of this failure was Fannie and Freddie who began purchasing these high risk mortgages and reselling them; this move by Fannie and Freddie legitimized the lowering of credit-standards, removed the risk from commercial banks and pumped profits into these institutions. As a result, lenders now realized that they could turn enormous profits through offering these risky mortgages and then unloading the risk through Fannie and Freddie. There of course are dozens of other regulatory failures (both over regulation and deregulation of certain operations) that contributed to this credit failure.
The repurchases during the depression, revolved around an entirely separate set of circumstances. The mortgage defaults that occurred during the early years of the depression that led to a bailout, occurred not because of the credit-worthiness of the mortgagees, but rather because of the collapse of the banking system. The lack of reserves and insurance protection within the banking system in 1930 resulted in money being loaned out as quickly as it was deposited within financial institutions. The 'run' on banks that occurred in the early 30's created a situation by which the banks did not have sufficient reserves (if any) to pay out account holders trying to withdraw their funds. With a lack of mortgagee protections in place, banks began calling back loans and demanding repayment on existing mortgages. Naturally, the land-owners and homeowners could not meet the repayment demands and the system collapsed. The collapse was not caused by a lack of creditworthiness or defaults of property owners, but rather by a collapse of the overlying banking system.
As a result, the government land bailouts of the depression were not a bailout of 'toxic assets' or high risk mortgages; it was a bailout of a collapsed system in which there were no buyers, only sellers. The bailouts of the 30's were designed to take mortgages off the hands of the banking system, thus allowing the banking system to return lost assets to tax payers, not to allow the banking system to return to business as usual. An overwhelming majority of mortgagees were able to continue their scheduled payments as originally set forth, with only a small percentage defaulting. When the economy recovered as a result of WWII (that's right, unemployment in 1936 was still at 19%), the mortgage based bailout assets, of which most had continued to paid as usual, were able to be re-sold by the government for a profit because the underlying assets were never 'toxic' and the mortgages were originally underwritten to individuals with sound repayment abilities (a majority of depression bailouts were agricultural). This bailout is completely different as the bailout consists of our government accepting the highest risk mortgages that were written, with high default rates coupled by little or negative equity positions. Additionally, this bailout was not a result of a run on the system in which bailout funds are funnelled to depositors, this is a bailout designed to allow the banking system to carry on business as usual. As a result, there are three reasons why we will never recuperate the taxpayer dollars forfeited to this bailout.
#1) A New Bureaucracy. This bailout just created an expanded property management program under which bureaucrats will be charged with handling the massive number of federally-owned high risk mortgages. This expanded program will balloon in size and will require years of federal funding to pay for the expanded agencies. This bailout is the gift that keeps on giving because every year tax payers will pay millions of dollars out to fund what will most-likely be another inept government agency. To give you an idea of what to expect: When the failed windfall profits tax of 1980 was instituted, the IRS soon opposed the tax as the most expensive collection effort in history. The IRS stated that the collection of this tax, imposed on a relatively small number of companies had cost taxpayers of $150 million per year. Now consider the size of this bailout and sheer number of mortgages that will be managed by the government. It is safe to assume that the property management efforts of Fed will easily cost tax payers $500 million to $1 billion per year (if not more). Plus, with bureaucracy comes corruption and waste, especially when the congressional members who got us into this mess are the ones designing the solution and responsible for oversight.
#2) Trillions of dollars in 'toxic assets'. The mortgages that government will take over under this bailout are the highest risk mortgages in the marketplace, thus 'toxic assets'. Although the government will be purchasing these assets for 10-20 cents on the dollar, they are also assuming a tremendous risk as there will continue to be defaults, management costs and collection costs. This bailout contains provisions to protect the mortgagees of these toxic assets. Under the bailout, if a mortgagee is in risk of defaulting on the loan, a government property manager will have the power to force the servicing institution to adjust the interest, principal and points associated with that mortgage in an attempt to allow the mortgagee to maintain the home. In other words, if you can't afford the home, we will simply lower your payments, lower your interest and extend your mortgage.
Because the government is only buying 'toxic assets', it is safe to say that a large number of these assets will undergo this loan restructuring. Additionally, as the public, whose loans have come under control of the Fed, becomes more aware of the ability to reprice their loan, more will take advantage of the opportunity. The result of this repricing of interest, principal, points and repayment period will be a larger loss in the open market price of the mortgage. So even when the economy and real estate market recovers, the government will find it difficult to find buyers for mortgages with below market interest rates and extended repayment periods. The problem is that no investors in the marketplace today will touch these assets, and no investor in the future is going to want to purchase mortgages with a high risk of default and below market interest rates (high risk, low return).
#3) The Once Bitten, Twice Shy Principle. A major influence in investments is psychology. Even within the institutional investment world, psychology is a major factor in buying and selling. Every investor, including institutional managers will have trouble purchasing these 'toxic' assets when the market recovers. Why? Simply consider this:
I you purchased AIG stock at $78 per share and then lost 85% of your investment, would you consider purchasing more of that stock 5 years later when the value recover to $45 per share. Even if the company were now sound, with a high credit rating and strong outlook for profits, you would think twice; three times; four times and if another alternative was available you would avoid it. You would heavily research the company to assure the turn-around was real. Even if the real estate market recovers and economy enters a boom period, investors in mortgage backed securities are not going to be likely to repurchase these assets. Why? Because the underlying mortgages will still be 'toxic'; many of the underlying mortgages will have been restructured at lower interest rates and extended repayment periods; and most importantly because there will be new "non-toxic" assets available for investment. If the markets recover, the muck mortgages of today, will still be the muck mortgages of tommorrow; the marketplace may improve, but these government owned assets will not have changed. As an investor, why would you take on a higher-risk, lower-return mortgage backed security, when you could take on a lower-risk, higher-return mortgage backed security?
Unlike the depression-era mortgage bailouts, this bailout is essentially a buyout of the highest-default, highest-risk mortgages in the marketplace. Regardless of what economic changes occur, the underlying mortgages will remain the highest-default, highest risk mortgages in the marketplace. The government has used our money to purchase the muck of the industry, and as the House Minority Leader put it, now we are all stuck with the biggest "crap sandwich" in history.
J Brown
October 4th, 2008
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Less than 1 week after both the House and Senate passed a $25 billion bailout for the automotive industry, Senator Obama promised a crowd in Michigan government intervention and funding for the industry. The bailout passed as part of the stop-gap bill came in the form of low interest government loans expected to save the automotive industry over $100 billion in interest and designed to be used for improvements to factories and re-tooling for new hybrid vehicles. Yet the bill that passed, had no built-in restrictions or oversight on how the industry was to utilize the money. In addition, the $25 billion, a mere 25 times larger than the 1979-1980 bailout of Chrysler, contained no provisions for limitations on executive pay, no requirement for restructuring of operations and no repayment schedule; all of which were contained in the 1979-1980 bailout.
Perhaps more disturbing is the fact that an economic stimulus package introduced into the Senate last Thursday contained language for an additional $25 billion in loans/bailout funds for the industry. Although lawmakers have stated that this $25 billion were the same loans, the bill was introduced the same day that the Senate received the Stop-Gap bill and the language calling for the additional $25 billion has never been removed.
Senator Obama made no mention of this loan/bailout in his speech in Grand Rapids on Thursday, but did promise the crowd that he would provide new Government funding for the automotive industry. In his prepared remarks, Obama stated, "But I refuse to accept that Washington has to stand idly by while foreign automakers outpace us. I?m running for President to make sure the cars of the future are made in the same place they?ve always been made ? right here in Michigan. I?ll be a President who finally keeps the promise that?s made year after year by providing the funding our automakers need to retool their factories and make fuel-efficient and alternative fuel cars and trucks."
"Funding Our Automakers Need"!
Obama;s statement amounts to nothing more than dangerous populous pandering, especially in light of the $25 billion our government is handing automakers to "retool their factories". Obama's statements can only be taken two ways:
A) He is simply trying to accept credit for a bailout that has already been passed, or
B) He is promising a new bailout of the industry aimed at capturing votes in a state that appears to be in perpetual recession.
My guess is the latter.
Obama of course, failed to recognize the fact that foreign automakers such as Daimler, Toyota, Honda and others employ tens of thousands of Americans. However, Obama's statements should worry everyone. This congress has done nothing to address the underlying problems of plummeting sales within the auto industry. This week they threw $25 billion to this industry without any preconditions at a time in which Ford & GM lost over $22 billion in the second-quarter alone. New Government Funding of the auto industry, as Obama is now promising, does nothing to solve automakers' underlying problems and will do nothing to create new jobs in Michigan. Just last week, despite the passage of the bailout funds, ford announced additional layoffs, and to believe that throwing more money at these companies will solve the problem is ridiculous.
If Obama wants to help the auto industry, then he should work to take steps to immediately lower energy prices. Lower energy costs mean a revival in sales for the industry; and with profits comes reinvestment in new technologies and new jobs. Throwing more bailout dollars to an industry with no sales, will do nothing more than allow these companies to barley survive while continuing to lose billions. Bailout dollars will be diverted into payroll, insurance and increased operating costs in order to survive and will never find their way back to their original purpose.
The American taxpayer should not have to continue to foot the bill for these companies whose own mismanagement and bloated expenses have ruined their ability to compete in the marketplace. But then again, Obama is just telling the crowd what they want to hear.
Populism within this campaign cycle is out of control; and as history has proven, turmoiled economic times threaten the very basis of capitalism and democracy. Today's populism prey's upon the fears that every American family has and promises that the Government will solve their problems. The government should only have 2 purposes in intervening in private industry; first to protect consumers & workers, and second, to promote competition.
Additional government bailouts of the auto industry (or government funding as Senator Obama call it) will do nothing to solve the underlying structural and macro-economic challenges that face that industry. Pumping billions of taxpayer dollars into companies whose products that taxpayers aren't purchasing is ridiculous. If Senator Obama really wanted to help Michigan workers than he would not offer billions in bailout funds while at the same time proposing a massive tax-increase on these companies (sort of hypocritical). Instead, he should be offering automakers new tax-cuts or credits based upon expanding investment and hiring new employees. Obama should be suggesting ways to strengthen the dollar and lower short-term energy costs which would revive purchases of the products these companies sell.
At the end of day, the Senator who just months ago attacked automotive industry executives is now promising them "government funding", which should prove to everyone he will say anything so long as he gets your vote. The combination of Bush's inability to veto spending legislation and a Democratic Congressional Leadership with no fiscal constraint will break all previous deficit records. As our deficit grows; the dollar will fall. As our deficit grows; the cost of clothes, food and energy will rise. And despite all of this, Senator Obama is now promising new bailouts for an Auto Industry that congress just gave $25 billion too.
J Brown
October 3rd, 2008
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Welcome to Illinois in 2003:
In 2003, Democrats took the reigns of Illinois government with control of both houses of the legislative branch and the Governor's office. Facing a budget deficit caused by out of control spending and budgetary shortfalls from post 9/11 recession, Democrats, such as Barack Obama promised to restore fiscal responsibility to the budget. Their solution to this budgetary crisis was the implementation of nearly $2 billion in new social programs, increases in fees and taxes imposed upon Illinois' business community, and massive budgetary cuts in agencies across the board. Over the next 5 years the Democratically controlled legislature and executive branch would fail to balance a single budget, wasting billions on unsuccessful and costly programs while taxing Illinois businesses to the point that Illinois would rank among the bottom 25% of all states in economic growth.
Today, we hear Senator Obama, the prodigal son of the Chicago Political Machine, running on a platform nearly identical to that of the 2002 platform that brought Democrats to power in Illinois. Obama has taken the financial crisis head-on by pointing blame to Republicans and calling for a new 21st century Regulatory platform. Yet, Senator Obama's record in regard to regulation is far from Stellar, especially in Illinois.
After taking control of Illinois in 2003, over the course of the following two years the State would double regulatory fees collected by it's two financial regulatory agencies. Increased fees collected by the Department of Financial Institutions and Office of Banks and Real Estate would balloon. The Office of Banks & Real Estate, under fee increases would see regulatory collections double to over $60 million dollars. Senator Obama proudly voted for bills that imposed over 300 increased fees and taxes on Illinois businesses including regulatory fees.
Yet, with an increase in the collection of regulatory fees, we would expect that these 2 agencies would be better staffed to handle their regulatory functions. Not the case in Illinois.
The increased regulatory fees imposed on banks and financial institutions in Illinois were diverted into the State's general fund and used to help fund Obama and Blagojevichs' new social programs. The regulators in Illinois never received a dime.
More importantly however, is the budgetary cuts that Senator Obama voted for in both 2003 and 2004. Obama supported and voted for Blagojevich's budget cuts which directly affected both financial regulatory agencies in Illinois. In 2004, the Office of Banks and Real Estate suffered an 11.6% cut in it's funding. Obama voted for the $3.6 million cut which resulted in the elimination of 45 positions within the agency which included the elimination of auditors and regulators of banks, financial accounting and real estate transaction auditors. But remember, regulatory fees doubled in 2004. In addition, 2004 budget cuts, supported and voted for by Obama led to a 10.8% cut in the funding of the Department of Financial Institutions. The cut led to a reduction in the staffing from 117 positions to just 90 positions. Now for the kicker...As of 2002, Illinois had the largest number of Commercial banks whose main offices were located within the state of any state in the nation.
Once again, Obama's short lived record just doesn't cut it. He talks the talk, but when push comes to shove he has not walked the walk. Over the past 5 years Illinois has consistently ranked among the bottom of all states in economic growth. Coupled by 6 straight years of fiscal policies identical to those Obama has called for in his campaign, this lack of fiscal constraint has led to a government unable to balance a single budget. It has not worked in Illinois and will not work nationally.
Obama record in Illinois is clear, when given the chance he raised regulatory fees, diverted the money to other agencies, and voted to cut the budgets of the very agencies responsible for regulatory oversight of the financial industry.
J Brown
October 2nd, 2008
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Yesterday I wrote about the lack of sound fiscal judgement exercised by extending the insurance limits on FDIC deposits within the bailout bill. The move which is aimed at nothing more than restoring consumer confidence in banks puts the entire Federal Deposit Insurance program at risk.
After the failures of Indymac, WaMu, and Wachovia and failures of dozens of other banks, FDIC was forced to negotiate buyouts of these corporations from larger financials because FDIC did not have sufficient assets within their own insurance fund. Yesterday, I pointed out that just one national failure or large regional bank failure could easily wipe out the $45 billion Federal Insurance fund and cause a bailout of FDIC and panic to sweep through the banking sector.
Congress apparently has the same fear, as yesterday they approved the bailout plan with not only an increase in FDIC coverage (bad, fiscally unsound move), but also granted FDIC unlimited borrowing power from the United States Treasury over the next year. Unlimited borrowing power, without congressional oversight or approval. This move would allow FDIC to tap into billions of Taxpayer dollars to maintain the viability of the system.
With increased limits, FDIC only has the insurance funds available to protect 180,000 accounts with maximum deposits of $250,000. Although this number seems large, take for instance if National City Bank, a bank that has been on the Failure warning list for months, were to fail. FDIC would immediately try to negotiate a buyout of the bank from a larger institution in order to relieve their liability; but if no buyer was found, FDIC would be responsible for claims on deposits at the bank. National City is a large regional bank with over 1400 branches and over 4 Million Households With Deposit Accounts. National City alone has over $98.5 billion in deposits and like other banks only a pittance is held in reserves. Now imagine if a larger bank, perhaps JP Morgan, or Citi, or Bank of America would collapse.
In business you plan for the best, but must be prepared for the worst. Yesterday, the Senate, in an attempt to do nothing more than restore consumer confidence in the banking system, passed legislation that increased FDIC's actuarial risks and granted that agency unlimited access to taxpayer dollars.
J Brown
October 2nd, 2008
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