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Friday, September 19, 2008

amazing and outrages turnaround in the stance of Paulson and Bernanke

A RFC-like plan collecting the toxic stuff will create a huge outrage in Washington, since they opposed even single bailouts. Now, after having already spent $500 bil. for Freddie, Fannie, AIG and Bear Stearns, they go ahead and spend another $500 bil. (it will never will be enough) to $1 tril., which will stir up big trouble in DC and in the election campaigns.

It was the trigger that saved the markets from collapsing. They can snap out of the panic mode - that we have to admit - but with smarter moves before, it would not have come to that anyway to far lower costs.

Let's put it into perspective: America has an official debt of $9 tril. Through these measures, they will have to borrow at least $1 tril. in new money. Actually that will not be enough. Once they start with this, it will be closer to $1.5 - 2 tril., that's 20% more and will be a big burden on the credibility of the US dollar and the US taxpayer. Citigroup alone has close to $500 bil. toxic stuff, Lehman still has $85 bil. So only these two names get us to $600 bil. - total the subprime and Alt A may mount to around $3 tril. Plus, the banks issued a multiple of that in derivatives - in any case we are looking at huge numbers.

It's amazing that the same two guys who said over and over again that they would not expose the taxpayers' money to bailout Wall Street and let LEH go bankrupt go broke, which triggered this mess, now go to the extreme of exposing taxpayers. It does not make any sense at all and these guys are definitely morons. Instead of spending a little money, they went for the biggest pot possible -- taxpayers' money.

It still does not change the underlying fact that no one can pay his mortgage any better due to this. Banks still need to de-leverage and a crucial aspect of the story is to what prices do they take the toxic stuff out off the banks? That was the problem all the time - at real market prices, some banks would have been broke right away. As an example, Citigroup has SIV's and CDO's alone with a nominal value of $500 bil. Writing off another 20% would mean bankruptcy (they wrote down around $50 bil. so far). To the scale others needed to mark down, they need (by my estimates) to be marked down to half – that's another $200 bil. So at what price does this RFC take over those instruments?

At a premium, the taxpayer will lose hundreds of billions at real price but the bank is broke. It's going to be interesting to see how that turns out. By common sense, the toxic stuff can only be swapped at the end of the day and someone will have to realize the losses and it will drag down the economy. I do not think its going to happen anytime soon, but this basically is the trigger to downgrade US debt from AAA - at least 1 A should go and will go at some point even more. It's going to be like with the CDO's, the rating agencies will leave the AAA, although they did not deserve it.

That is also a ridiculous situation. At some point, they (the rating agencies) declared a computer error and that was it??? Moody's and S&P have cost investors trillions of dollars with their faked evaluations and nobody speaks about those frauds anymore. The media has really become a global propaganda machine and one has to gather his own information if he wants to be informed and not brainwashed.

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