Main Street > Wall Street

Monday, September 29, 2008

Clearly there are more voters on Main Street than Wall Street, and we all know that the first job of a Congressman in October is to make sure that he is a Congressman in January.

Regardless of whether "the package" was a good idea or not, it doesn't exactly paint the US political system in good light that an apparently palatable deal has been shot down (with defectors on both sides.)

Particularly heart-warming was the individual who rescinded their "yes" vote, taking the yes tally from 207 down to 206, once he saw that the deal was going to fail.

So the question now low do equities have to go, and how many banks have to fail, before Main Street decides that bailing out Wall Street might not be such a bad idea, after all?

Barring a volte-face from the House, we may be about to find out....

UPDATE: Macro Man is shocked, shocked to see Democrats blame Republicans and Republicans blame Democrats for the failure of the bailout bill. The problem with modern democracy is that only professional politicians seem to want the job of governing....

(As an aside, how does Vikram "we only have $42 billion of downside on Wachovia" Pandit feel right now?)

Posted by Macro Man at 7:13 PM  


How is the credit market right now? I mean the real, local cash and loan markets. When will we see the massive BKs and layoffs in the middle and small businesses. I am sure there are some market rates that can be used to get a ballpark figures. Commercial paper markets, maybe?

Anonymous said...
7:41 PM  

The Senior Loan Officers' Survey is the best, albeit low-frequency, indicator of non-financial credit allocation.

Needless to say, the outlook ain't great.

Macro Man said...
7:49 PM  

The correlation between success of package and oil price probably led to its rejection : )) Why pay $700 billion for higher oil prices?? Seems like Team 1250 is dead.

mikarsky said...
8:01 PM  

I, on the other hand, think that one of the problems of modern democracies is that CEOs like Paulson, Cheney etc. get access to the top government jobs far too easily.

Joe said...
9:14 PM  

The former of those, at least, represents bureaucracy, not democracy.

The elected representatives of the people, on the other hand, collectively need a good hard slap and to be turfed out on the arses so that someone who's accomplished something other than passing the bar and smiling a lot can do the job of governing.

(The same holds true in the UK as well.)

Macro Man said...
9:19 PM  

The left didn't like it cause it was fascism. The right said it was socialism. As if the issue were to join the internationals or convene HUAC. Everybody's become a politician.

Charles Butler said...
9:19 PM  

CB: indeed. What the situation calls for is policymakers; what we actually have is politicians. (I particularly enjoyed one of the Dems using the phrase 'profiles in courage' during the press conf.)

Macro Man said...
9:25 PM  

Wouldn't a better solution be just to close the markets for a week for everyone to take a deep breath???? People are running around like headless chickens, panicking left, right and center.

The markets are frozen (more or less) anyways, everyone funds from a CB, so how about the global powers that be declare two weeks of bank hols in US/UK/EU/Asia and try to come up with something coordinate and slightly better then chucking more and more money at the banks in the hope they will have their hands full and something will slip past? I think we could all do with a few days of hols...

vlade said...
9:29 PM  

You can tell how good times got to be when huge lots of people think the only skin they have in the game is philosophical. Yet another victim of liquidity.

Charles Butler said...
9:35 PM  

Don't worry, Vlade. It'll come to pass.

Charles Butler said...
9:37 PM  

Every day these past weeks I've seen people and articles calling for a "Swedish solution". Now I'm not an expert in financing but I lived through that crisis in the early 90s. It seems to me that the broad political backing of the plan was the key. That's clearly not in place in the US. What good is there to have funds and plans if no one is prepared to grab the ball and run with it?

bengt said...
10:20 PM  

Having that accomplished guy around to do the governing doesn´t solve the problem. The guy´s name could be Bill Gross or Warren Buffett. Or it could be Ross Perot or (insert name of another anti-interventionist - John O´Neill perhaps, as he voiced his opposition to the proposal). So politics remains pretty much a binary affair - like sex. Of course, what we tend to wish for is unifying government or genuine love that transcend all boundaries.

And the politicians that get good grades from posterity tend to be ones that were, in fact, arch-political. Like, oh, Reagan, Lincoln, Roosevelt. Then there was Hoover - certainly a well-credentialed businessman. With military men the difference seems to be split in the middle: Eisenhower, yes - but what about Powell? His main achievement appears to be to have become guilty, yet also look like a victim of sorts.
Your post kind of reads as if you bemoaned the fact that this time around politicians defected from the party leadership instead of performing the geese walk.
Given that your conviction regarding the matter doesn´t go deeper than stating that the bill was "apparently palatable", I don´t quite see that this is the best day for criticizing the elected representatives. Of course, they may also just have feared that the financial WMDs - which undoubtedly do exist - may not be deposited in the place where they were being told to look for them.
(I don´t see the point of calling cabinet-level members of the executive like Paulson - or, in my example, Powell - bureaucrats. In fact, both of them - with different degrees of success - proposed to do away with procedural constraints that tend to be lumped under the heading "bureaucracy".)

Joe said...
10:26 PM  

Incredible: Bush, hank, Ben, all saying the bill is necessary to avoid armagheddon, and finally they hadn't votes to pass it. This is worse than doing mothing.
That said, i think the bill or something very similar will be approved for sure. Question is: how long it will take for this to happen (or better for mkt to understand it will happen). That could really provide handsome profits to someone playing a relief rally/unwind of flight to quality. Swings are so severe that being a bit early/late could cost a lot.

sick trader

Anonymous said...
10:28 PM  

Joe, there were a couple of quotes from the press conferences from house members (including Pelosi) that Bernanke and Paulson had told them that markets were in trouble.

Now, I don't expect politicians to be watching screens all day. But it it really unreasonable to expect them to have extracted their heads from their asses at least once in the last thirteen months, and thus to be aware of the state of the financial system without having to be told?

I would much prefer a rank and file Congress (and Parliament)that is in there to serve for a limited number of terms, then go back to their careers, rather than piss-poor porcine inhabitants of government trough that we currently have.

Macro Man said...
10:35 PM  

The issues here (markets rather than geographical) are that politicians are simply wandering around with little idea of what they are voting for or against for. Worse the upside is not going to be a return to good times more a period of at best being stationary. So for them the upside is limited and the downside if they do nothing can always be someone elses fault. So can we blame politicians playing politics?

What's needed is to give the CB some real power such that it doesn't need to be passed through political chambers because they half of what is being talked of is going over their heads.. Just last week Paulson was being asked by a Senator if the bail out plan could create more opportunities for women and ethnic minorities within the work force of any Fed organisation managing this stuff?!

I mean talk about missing the bigger picture! Then look at us poor saps in the UK. At least the US have some powerful figures in the Fed - we have Darling who hasn't got a plan to deal with this chaos. Nevermind plunging SPX, UKX, etc when people start realising that jobs across the board are going to be lost and loans/mortgages terms get tough it could cause real unrest...where's the shotgun?

Anonymous said...
10:37 PM  

unfortunately Eid is not celebrated in the western world. maybe knowing we will have rough week, its god's will that banks and financial instn and businesses in general remain closed for Eid starting morrow (30 sep as i write) till saturday/sunday in most of Gulf.

gsm_73 said...
10:42 PM  

The other issue in the UK is that fundementally most people are oblivious to this stuff. They read the Daily Mail or Express perhaps a red top and the manage to make this an issue for other people. Its a problem for the banker in the City or HF guy in Mayfair. Not realising that these guys have a huge impact on the rest of the economy.

TED spread at 350bps is telling us things are not good. Does it mean anything to the man in the street? Given it meant jack all to those voting down the Fed proposal probably not

Anonymous said...
10:47 PM  

And anyway, with shorting financials being outlawed, there aren´t quite enough trading strategies available to pick from and complement your sentiment with...

I was hoping the Bovespa might rise a bit.

Joe said...
10:51 PM  

Good riddance to a terrible plan that never should have been proposed.

There is nothing noble about stealing from children who cannot vote to pay for poorly run banks.

This was never a crisis. Bad banks are supposed to fail -- its called capitalism.

Investors refusing to lend (or invest in) a bank that can't spell risk management much less do it is NOT a crisis, its common sense.

Not being able to borrow and live beyond your means is not a crisis either. It has worked for centuries.

This stupidity where MBAs think the economy is "growing" when people take on more debt than they can handle was always destined to fail.

Down with Wall Street (at least the current "leaders"). Down with crony capitalism, nepotism and selecting traders based on country club memberships.

Bring back real capitalism and a meritocracy.

gramps said...
10:56 PM  

@gsm_73 good point, maybe we can all convert tomorrow and take a holiday? Mass conversion solves a whole lot of other issues too....

bengt said...
10:58 PM  

mikarsky wrote:
"Why pay $700 billion for higher oil prices??"

When I think about it, that is more than a joke.


Anonymous said...
11:11 PM  

Too much hope for a plan that would aleviate the unemployment rate in 2009 just litle. My bet is that we will see an umpleyment rate of 11% without the bailout and 9% with bailout, so I don't see much excitment about it. In the other hand it is realy dificult to negotiate a package without clear macro goals. They should have sold the plan as a way to avoid the 2% extra unemployment rate for a couple of quarters.

Anonymous said...
11:14 PM  

You paint an inaccuate picture when you imply that there was some sort of equality between the defections on each side. Pelosi had promised to deliver 110 democrat votes. She delivered 140. Two-thirds of the republican representatives voted against it. Let me say that again: two-thirds. What we saw today was the complete shattering of the Reagan coalition. The republican president, the republican presidential candidate and the leadership in the house supported the bill and two-thirds of republicans voted against it. There are very real business interests somewhere between main street and wall street who will remember this day. And it will not be good for what is left of the image of the republican party.

PureGuesswork said...
11:24 PM  

Until there is honesty and transparency, everyting is on the books, no mark to hope, a bunch of these bankers are rounded up and put in prison where they belong, Paulson and Benankie asses hit the door there will be no trust and only a CON in the CONfidence in the US markets.

Anonymous said...
11:25 PM  

"Bernanke and Paulson had told them that markets were in trouble... But is it really unreasonable to expect them... to be aware of the state of the financial system without having to be told?"
No quibble with that. Thing is, you and I do read the screens all day and might still not agree on what should be done. And if I think of what passes for the European financial system I am sure you will get a chance to witness an even less inspiring response to the trouble at hand - as in, a veritable cacophony.
Personally I liked Mike Bloomberg´s comments during the tax rebate frenzy to the effect that any intervention should focus on public investment, period.
What we might have now is that first the taxpayer got a rebate and then the banks may be getting one in disguise, while said taxpayer will be losing his job anyway. And that is worse than becoming a renter. And yet after all that hoopla lots of investment spending is likely to still be necessary.

If you ask me, I would also claim that Bernanke and Paulson were not quite telling it as it is. Not all segments of the system are alike. Surely they had to do what they did to prevent money market funds from imploding. The interbank market is a different issue, however. They are not backstopping it, they are in effect supplanting it. That´s a revolution, and any competent revolutionary should expect to extract not just a pound of flesh, but a whole meat-packing plant worth of it. There is always the alternative of watching kabuki, of course. As a European, however, I always thought that it was kinda un-American. It might also irritate the Japanese to be emulated on not just one, but two continents at the same time. That is so not culturally diverse.

Joe said...
11:42 PM  

MM: Why bail out banks? Households have more debt that they can handle, and they get nothing out of this bill. I know that *you* would like banks to be bailed out, but your exposure is quite different form the average Joe Sixpack.

Why not simply mail every taxpaying citizen a check for $50K, signed Uncle Sam?

If money supply is contracting, why not good dose to new money?

Some of this will go into buying stuff, which is good for business. Some of it is going to pay down debt, which is good for credit markets, and some will be put in the bank, which is good for those undercapitalized institution.


zanon said...
11:46 PM  


One of the guys in our group called his local representative of the House and the reps staffers said they received an overwhelming majority of people NOT in favor of the TARP plan.

I don't think main street (and the useless pols) en masse truly understand the gravity of the situation in the money markets. It's going to take the failure of some sort of major industrial company or non financial to wise up mainstreet.


Anonymous said...
12:39 AM  

IMHO, a lot of the negative pressure on the bill comes from the belief that it will not work. In order to vote for the bill, you have to believe the folks who have been consistently wrong. A lot of folks who have been consistently right believe it will not do any good. For example (there are many)

Robert said...
12:40 AM  

many economists have described how this particular bailout would be a very bad idea, with empirical historical examples.

The ones which worked (nordics, naturally) did it a different way.
Direct capital injection in banks, in return for punitively large equity.

Anonymous said...
1:40 AM  

Macro Man,
One: I've enjoyed your posts on market action for over a year now. I highly regard your insight.

Two: The second paragraph of your post is nonsensical. If the package is a bad idea, how can it paint the US political system in a bad light to have rejected it? A bad idea that is palatable is an oxymoron.

Third: In fairness, the US Congress passes bills that are bad ideas all the time. That history paints them in a far worse light than the rejection of this bill today.

Fourth: It is astonishing to me that those who appropriate to themselves the responsibility for the proper functioning of the financial markets don't believe that the market works. (I'm talking about Paulson and Bernanke.)

Fifth: This bill was, in fact, a bad idea.

Sixth: If you disagree w/ point five, it will be much cheaper for you to exit all your positions, take the losses, go to cash and wait for better opportunities. If smart people like you can't find profit opportunities in times like these, we are all truly matter what the US Congress does.

Thank you.

2:30 AM  

MM: Now, I don't expect politicians to be watching screens all day. But it it really unreasonable to expect them to have extracted their heads from their asses at least once in the last thirteen months, and thus to be aware of the state of the financial system without having to be told?

Who the hell are you to write this kind of stuff? Anyone elected you?? Appointed you god??? You people f**k up and now expect your asses to be dragged out of fire: no apologies, no thank-you, no shame, just in your face snaring and barking…

Do something productive in your life. Go get a real job, you piece …

Anonymous said...
3:10 AM  

Gramps, to say that this was never a crisis is factually incorrect. There is a crisis of confidence in the banking system, which is an industry founded on confidence, i.e. if I give you money today, I must have confidence that you'll give it back to me tomorrow. For more than a year now, that market hasn't worked.

Insofar as the TARP would have restored some confidence in the banking system, its failure to pas has been damaging. Now, we can debate all night as to how effective the TARP might be, though I suspect to little effect. We won't know until the passage of time.

What I do feel confident about, however, is that doing nothing is the wrong response in the midst of a credit crisis in an economy built on a foundation of private sector-debt. I have no doubt that Main Street views the plan as bailing out Wall Street....but just wait til the next Senior Loan Officers' Survey, linked in post 2 above. That represents credit available to Mom and Pop's corner shop, and guess what? If Citi won't lend to Goldman, they ain't gonna lend to Joe Sixpack, either.

We have a model in recent history of what doing nothing in a credit crisis can accomplish; in Japan, it created fifteen years of economic oblivion from which the country has never truly escaped.

Now, if the TARP is ultimately replaced with an effective nationalization of the banks via large, punitive equity injections, so be it. Maybe that will work. But the scale of this crisis is so much larger than in Scandinavia (in terms of the global size and breadth of holders of non-performing assets), that I suspect that its resolution requires a buyer of last resort who will not need to mark-to-market. I have long thought that a government agency would end up filling that role.

To be clear: I and my firm are doing quite well in all of this, so I am not asking to be bailed out for my mistakes. But I don't take any particular joy in profiting from financial crisis, and would much prefer as speedy a resolution to this crisis as possible. Maybe this makes me a bad person, but I go to bed every night with a clear conscience.

And so, anon 3.10, who am I to be writing this stuff? I am the author of this f***ing blog, for which, last time I checked, I hadn't received your subscription cheque. If you don't like the views expressed here, feel free to kindly piss off.

Macro Man said...
4:38 AM  

Anon 3:10's check bounced...he's a martingale trader.

D said...
6:34 AM  

speaking of martingale traders...I haven't heard about Lenny Dykstra, is that guy still giving out free options trading advice on

The street has needed to go advice-lite for a while now, this cleansing will hopefully destroy a lot of the chaffe.

D said...
6:35 AM  

When Vikram Pandit became the CEO of Citigroup, Indian Press was so upbeat.

My brother asked me what I thought and I calmly told him that according to me, he will be out before Dec-2009, latest by Summer 2010.

Not a reflection on the person. I am sure he is very smart and becoming the CEO of Citigroup is quite an accomplishment. But, the problems are so huge that he is going to be overwhelmed by them.

Still stand by that opinion.

- An Indian who wishes to remain anonymous for obvious reasons.

Anonymous said...
7:03 AM  

ButtercupBen: We'll never succeed. We may as well die here.
AsYouWishHank: No, no. We have already succeeded. I mean, what are the three terrors of the Fire Swamp? One, the flame spurt (of inflation)? No problem. There's a popping sound preceding each; we can avoid that. Two, the lightning sand (of deflation), which your printing presses can luckily deal with, so in the future we can avoid that too.
ButtercupBen: Hank, what about the R.O.U.S.'s?
AsYouWishHank: Republicans of Unusual Size? I don't think they exist--certainly not enough to foil our plans...

Daniel said...
7:40 AM  

MM: Fascinating blog, as always. In your response to Gramps you made two points:

1. There's a massive crisis of confidence afflicting banks.

2. The problem is probably too big for a Nordic solution.

If point 2 is correct, then surely $700B wouldn't solve point 1. The media and the equity markets might get some short-lived relief and you guys would make a killing on the rally, but the banks themselves know just how dodgy their own balance sheets are and $700B won't make much of a dent in all the unaddressed time-bombs (of which loans to hedge funds represent just one).

Anonymous said...
10:23 AM  

Anon, I really don't know what the "right amount" is. I do know that the face amount of crap that can be purchased for $700 bio is substantially higher $700 bio. Restricting the participants to US-only banks would also enable the money to go farther.

I'd also say that confidence, both positive and negative, feeds on itself....and if the ball ever gets rolling towards people thinking that the problems are receding, much of the problem could solve itself.

Macro Man said...
10:28 AM  

@ Gramps,

this is really angering nonsense, sorry.

Economies grow because of innovation (Schumpeter 101). With innovation lacking, your economy will fall behind, but others won't.

Innovators need credit. Sometimes there's too much credit, so every dumb fuck who can read and write tries to start his own company (or hedge fund). That's costly, but at least it's not lethal.

When an economy stops to innovate, because of a general lack of trust (=credit,)that's lethal.

But that's not even the beginning of the problem...

The USA was deemed creditworthy by its creditors, because of its long history of innovation.
When the USA manages to not live up to its reputation; when they manage to dig into status quo, because of widespread consumerism and some dumb f***s in congress, they will not only fall back in the global game of competition, ultimately their credit lines will be canceled.

Welcome to the United States of Argentina...
That's the risk.

The USA is not in the position to cut back any more. Not with negative equity. They MUST grow out of this and most likely they will. But without decent access to credit they would be just one more rich superpower going down the drain.
But since you're obviously prepared to work for Chinese salaries to prove some moral point, you will be fine with it, won't you?

normal being said...
10:53 AM  

This was a frightening day. Virtually all my expectations and, accordingly, trades went wrong. Will get back up on the horse tomorrow, but am not sure that I have learned much. In search of some understanding of the politics of the day I watched various Congressional speeches on C-SPAN. They were mergling together with mind-numbing sameness unitl the Speaker of the House came on, just before the vote was taken. She devoted most of a 15 minute speech to trashing the other side of the aisle and blaming them for everything except the weather. She effusively congratulated her side of the aisle for accomplishing the save. Then the vote was taken. I am not politicial, but I wish that the House leadership had the common sense of a 12 year old boy trading baseball cards -- praise all until a deal is made, then one can be free with taunts and insults. Following the vote and the loss of $1 trillion in the markets, Congress left town for the Jewish holidays (transport provided courtesy of the US taxpayer, including, in the case of the Speaker of the House, a personal 767.) Sigh.

Anonymous said...
11:20 AM  

One of my long time goals is to accumulate enough wealth that I can one day say "Who is John Galt?" and mean it. Politicians in every country are no more that total idiots. As you have stated they are there as much to protect their own asses as they are to help their constituents. One day I will be done paying taxes being at the mercy of these jackasses. But until then......

Anonymous said...
11:56 AM  

BTW MM - that individual was Bobby Rush (D), Chicago - ex-Black Panther.
And so it goes.

Anonymous said...
1:30 PM  

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