More details came out from the Bush Administration on turning the USA to the USSA.
700 billion dollars of taxpayer money will be used to buy bad debts from US based financial institutions. Our debt ceiling will be raised to 11.3 trillion dollars. No court oversight will be allowed on the program which would give the Treasury Secretary and his underlings absolute power, something that would make Hu Jintao of China and Vladimir Putin of Russia jealous. Hank Paulsen essentially tells the American People "Give me 700 billion dollars and look the other way, don't question my authority and give me the power to spend it as I please". In addition to this the Democrats are trying to load the bill with additional billions of dollars of pork in helping Main Street. Where's the regulation for Credit Default Swaps? Where's the law banning mortgages for jobless, assetless people? Is this just a plan to dump all the past mistakes of Wall Street, get a fresh start and start going back to the business of creating new bubbles for a future taxpayer bailout?
What does this ultimately do? It creates 700 billion dollars of liquidity in the system that wouldn't otherwise exist, funded strictly off of debt. This is in addition to the 30 billion given to JP Morgan to buy Bear Stearns, potentially 500 billion to Freddie/Fannie and 85 billion to AIG. Add the total up and you get over 1.3 trillion dollars. What does this mean for us? The One Dollar Bill we have in our pocket is going to be worth a whole lot less in the future. It's called dillution and eventually it will trigger more inflation.
We would like some more clarity in the bailout bill. We will not be buying back the toxic debt from foreign countries, although we sold it to them in the first place and scammed them. It looks like we'll be bailing out both healthy and struggling financial institutions alike, which is pretty unfair. Bank of America who bought Countrywide for about $5 a share can simply take all of their bad loans and dump it on the taxpayers for a tidy profit and keep their lucrative servicing business. Wachovia can simply take 125 billion dollars of the toxic loans they acquired from Golden West and dump that on the taxpayers and then can go merge with Morgan Stanley or Goldman Sachs for a premium. These mortgages are described as "toxic" and "worthless" for a reason. It's akin to creating a market for all the old Enron, Pets.com and Worldcom stock that people may be holding on to and bailing out equity holders who should be punished rather than rewarded for a bad investment.
Imagine that we had a president who didn't go to war with Iraq and stopped this financial crisis from happening, something Warren Buffett talked about in 2003 and something any homeless person on the street who were offered mortgages can figure out. We' be sitting with 2 extra trillion dollars that we could spend on developing our infrastructure, cutting our national debt and developing alternatives to foreign oil.
The Long Squeeze?
Legitimate short sellers and not the terrorist naked short sellers did serve a purpose of providing liquidity in the stock markets. As long holders sold stock and the stock price moved down, the short sellers would buy to cover providing stability for the stock. That function of short sellers was overshadowed by the naked shorts whose sole purpose was to flood the market with sell orders in order to collapse the stock.
Here is the dillemma. You have lots of stock in financials that are up 20-200% in the past 2 months (or even the past 2 days). Institutions will know that it is their duty to take some profits. As they take profits in mass, there aren't any short sellers to prop up the stock as they cover. And institutions would be fearful of taking new long positions in financials as their hedging strategies are severely curtailed by the fact that they can't short sell a weak stock to buy a stronger stock, and put options are now priced with extreme bid/ask spreads due to market makers unable to make a proper market in them now. Also the UltraShort Financials "SKF" which is a popular tool for hedgers can no longer be accurately priced as their managers are unable to short the stocks in their index. This may not happen Monday, as the short squeeze may continue creating an even more dangerous bubble followed by the eventual long squeeze where the stocks are sold in mass. Then when the SEC allows the shorts to enter in 10 or 30 days, this bubble will be promptly quashed creating new volatility in the markets.
The Bottom Line
Bush, Bernanke, Paulsen and Chris Cox (and their predecessors Greenspan, Snow and Donaldson) were all asleep in their beds as the termites were eating up the foundation of our capital markets as early as 2003. Then they refused to call the exterminator when they had plenty of chances to just spray a little orange oil and do a little fumigation. Then this month they decided to demolish the whole thing and build a new one from scratch paid for with taxpayer dollars.
Like I said before...was this all part of their brilliant master plan to nationalize our entire financial system in creating a North American Socialist Union or are they all just victims of stupidity and bribe money from Wall Street? Only time will tell...but there are plenty of reasons to fear the outcome.
