by John Bougearel
Citigroup posted an $8.29 billion loss in Q4 08 compared to a loss of $9.8 billion in Q4 07. The $8.29 billion loss was twice as much as estimated. More than half of those losses came from subprime related, CDO, and SIV writedowns. Offsetting the writedowns was a $2billion gain related to an accounting rule that lets companies market their liabilities to market value. FASB accounting rules and changes are riddled with flaws. The definition of market value is subject to wide variance in interpretation and the gap between market value and street value widens as the debt-deflation spiral worsens. But we won’t go there for now, suffice to say, this allowed Citi a $2 billion fictional mark-up that is at variance with the reality of debt-deflation. The only way to narrow the widening gap is to end the spiral.
In other financial news, BofA posted a Q4 lows of $1.8 billlion, excluding $15.3 billion from their Merrill Lynch acquisition. BofA’s CEO Ken Lewis, who won the award for the stupidest acquisitions of 2008, received a publicly-funded $138 billion lifeline from taxpayers today for his heroic 2008 efforts. Worse than collusion with BofA, Lewis said the government insisted that BofA take $138 billion taxpayer dollars on the grounds that they all agreed it would be in the best interest of the country to further fund their reckless risk-taking in 2008:
“We just thought it was in the best interest of our company and our stockholders and the country to move forward with the original terms and timing” for buying New York-based Merrill. Renegotiating the deal could have cost more than it would have saved, and the government — which insisted the deal go forward — promised financial help in “recognition of the position Bank of America was in.”
The agreement made between the govt and BofA is justified once again under the government’s commitment to “support financial-market stability.” Please feel free to replace with “support a zombie financial system burdened with over-indebtedness” with government over-indebtedness which should be escalating well beyond $13 trillion by now. The government suffers from mistaken goals at taxpayer expense. Irving Fisher’s debt-deflation theory needs to be addressed by our policymakers. Specifically, Fisher said that “over-investment and over-speculation are often important [as causes of the Great Depression]; but they would have far less serious results were they not conducted with borrowed money.
The government is insisting taxpayers over-invest in private companies burdened with over-indebtedness. The clog in the over-indebted financial system today can not be solved by throwing public debt on top of it. The financial system is drowning and these policies will only serve to further drown the consumer already overburdened with too much of his own debt. If the government is to insist on being part of the solution they must remove themselves from being part of the problem. And that means if they are going to insist on expropriating taxpayer dollars to alleviate the economic crisis, then by god, they had better invest our monies into sectors of the economy that are not clogged, that are not drowning, that will provide a return on investment.
This is the stupidest course of action imaginable. Banking crises have been escalating since the 1970’s, and the fail and bail interventionist response has begun to lose its viability. Pursuing the same market intervention policies then and expecting the same positive outcome/resolution as in the past needs immediate discussion in the new administration. These ad hoc remedies do not address the underlying structural problems that wounded the financial system so badly in the first place. The policies we are pursuing are mistaken goals. Structurally, the wound is still oozing, no matter how big the gov’t bazooka is or how big a TARP they put over it. (Paulson is proud to say he and FDIC Sheila Bair has done a lot work exploring what they are calling an “aggregator bank.” It will call it TARP II, no doubt. No, I think we should call the aggregator bank TARF-short for the Troubled Asset Relief Fund, as it rhymes with so much better with BARF).
These policies are not working; pursuing them is akin to staying the course and sailing into a worsening storm. Frankly, I’d like to ask when is the Fed and Treasury going to get a grip on reality, stop sailing the ship into the ever-worsening storm, There is more of that storm where it comes from if we stay on this course. And in the end, that debt-financed storm will prove to be a bigger bazooka than anything the Treasury of Fed can fire at it. And you know why it is that the storms bazooka is bigger than ours: for the simple reason that that storm grows every time we finance it with more debt and more borrowings - ala Fisher. This is truly the definition of insanity. We truly need our policymakers/captains to modify their course and behavioral response to this crisis. See the storm for what it truly is: a ginormous debt-financed storm. Do not fire more debt and borrowings into it anymore please, it will only grow larger! Throw the public borrowings in another direction, cast your nets to the other side of the boat.
“You will see the benefits” when the economy improves, Lewis told investors. Credit default swaps fell 10 bps today following the govt-funded bailout reported CMA Datavision. You can bet there was a corresponding increase in the credit default swaps of the US government today.
But I digress and apologize. And now for the short term good news that may evolve into something more substantial as Obama takes reign and the rest of the Q4 08 earnings season kicks in. These two earnings reports are conceivably going to be the worst shocks that the stock market will have to absorb this season. And guess what? The Q3 08 earnings season low at 826 in the SP500 cushioned the market today. I myself am stepping out as a bull for the duration of the month. I’d like to step out beyond that, but the stock market will have to digest adv-gdp for Q4 at the end of month and the NFP report for January in early February. The visibility can’t extend more than a few weeks yet. Of course, below 826, scratch everything I just said optimistically about the SP500 for the next two weeks. The more than obvious target will be for the stock market to rally hard to the November 4 Election high at 1006 (or higher) during Obama’s first 100 days. This is purely a technical call, and has nothing to do with actual Q4 earnings-though we do suspect it the SP500 could beat the lowered expectations. Valuation models based on earnings scare the bejeezus out of me for 2009 at present because they are going the wrong way hard!
