USA Bailout: So, How Much Is $700+ Billion, Anyway? And What Would Sweden Do?

UPDATE #1: See the comments to this post for updated numbers and links.

UPDATE #2: See updates and articles on my 2009-2-12 blog post. Also see this New York Times graphic: The tab is now $8.8 trillion, equivalent to the second largest economy in the world, behind USA at $13+ trillion.

The chart above shows the world’s largest economies (measured by GDP), ranked by size.  Assuming the US bailout is only $700 billion, the bailout is larger than all the economies highlighted in yellow.

Note: The bailout is actually already well over $950 billion if you count $150 billion stimulus package (checks to individual tax payers this spring), Bear Stearns, FannieMae, FreddieMac, and AIG.  If you add in the cost to bail out insured bank depositors and all the others who are lining up, it’s going to be well over $1 trillion. But let’s just call it $700-$800 billion for now.  How much is that?

As shown on the chart above (Wikipedia page here), it’s about the size of the Dutch economy, the 15th largest economy in the world (it shows as #16 on the list because the list counts the EU as #1). That’s a lot of “coffee”!

Remember, GDP (the “economy”) is the total value of ALL goods and services produced by ALL people and entities in a country in a year. All that money, down the drain.  Well, not actually down the drain, but into the pockets of those who profited on the way up (privatize the profits) and will profit and/or not lose as much on the way down (socialize the losses).  Nice.  Ok, I better nip that rant in the bud ’cause I gotta hop in a minute.

Real quick, lets say the bailout cost climbs to $1 trillion, how much is that? Larger than Mexican, Australian, and South Korean economies, getting close to the size of Inda’s and not far from Rusia, Brazil, and Canada.

Yeah, it’s that big…

Quick Updates: Stock Market, London, BuzzPal, Nouriel Roubini

2008-9-24 UPDATE: See here for pics and a complete debrief of me week in London.

Some interesting events since my most recent post (“The End of an Era“) and market update, when I said “it’s time to allocate some [brain] CPU and bandwidth, primarily for the purpose of monitoring the sentiment as it works towards its next extreme (and reversal).”

This is exactly what happened.  Unfortunately (for my trading), BuzzPal and I were in London for Seedcamp week, where we went to events, held meetings, and co-sponsored the first-ever TechCrunch Tech Talk, which was a smashing success and a great party, including after hours with some people you might recognize (see pic, below).

Cartoon Capitalism

Exactly on point! It would be funny it wasn’t true.

Of course, the same may be said of America’s – and Britain’s – entire economies during the last 20 years. The loose credit that built cartoon houses also constructed cartoon economies; they look like real economies, but they are essentially perverse, consuming wealth rather than creating it.

What Happens Next to Fannie and Freddie?

Insolvency of the Fannie and Freddie Predicted Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts”
By Nouriel Roubini
2008-7-11

A pretty good article from Nouriel Roubini. A choice quote below, then on to the article.

“Privatizing profits and socializing” losses may dominate the policy outcome. Financial institutions love a system where they gamble recklessly, pocket the profits in good times and let the fisc (taxpayer) pay the bill when their reckless behavior triggers a financial crisis; this is socialism for the rich. That is why you already hear the whole Wall Street Greek chorus moaning for a bailout of the GSEs.

Old Joke That Applies to Ben Bernanke

Got this from Don Cox’s piece, “Traders of the Lost Arc”:

The Clark Kentish ex-professor has been transformed into a financial superhero who bails out bankers faster than a speeding bullet. As the chart on Fed Treasury holdings shows, his creativity in crisis seems to know no bounds, as he continues to pump liquidity into failing banks.

We can’t help recalling an old joke about the little boy who brought home a stray dog. He wanted to keep it, but his father objected. After a few days, his father told him:

The Numbers Racket: Why The Economy Is Worse Than We Know

The Numbers Racket: Why The Economy Is Worse Than We Know
By Kevin Phillips
13 May 2008
Harper’s Magazine

If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

The corruption has tainted the very measures that most shape public perception of the economy-the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances-inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences too. An administration is helped when it can mouth banalities about price levels being “anchored” as food and energy costs begin to soar.

CDO Fantasy (to the tune of Bohemian Rhapsody)

Not sure who created this, but it’s pretty good!

Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I’m now a poor boy
High-yielding casualty

The Dilbert Strategy

Even better than the following article is this excerpt from a newsletter I received today. This is the root of the problem. The incentive system is wrong and needs to be fixed. Until that happens, nothing will change.

Executive compensation should be calculated based on multiple years of performance and subject to high water marks and claw backs in the event one year’s profits from a transaction or a specific activity are lost in later years when that activity turns out to have been fraudulent or flawed.

Now on the the article:

New York Times
March 31, 2008
Op-Ed Columnist
The Dilbert Strategy
By PAUL KRUGMAN

Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes and lines that say who reports to whom.

Would You Believe ONE Bank Has $92 Trillion in Credit Exposure and 416x Leverage?

It’s true.

According to the following Comptroller of the Currency report (you can download it below), JPMorgan Chase has $91.7 trillion of total derivatives on $1.2 billion of equity, for a ratio of 416x.

Now, I’m no expert, but this sounds just a titty bit excessive. I don’t think I’m going out on a limb when I say we are well passed critical mass. At this point, it sounds like one of those mountains of sand Mark Buchanan talks about in his book Ubiquity: Why Catastrophes Happen.

Talk about the ultimate Butterfly Effect! This thing is primed and ready. I mean, if anyone even blinks in this Mexican standoff, let alone a major counterparty fails, it’s going to come down faster than Paris Hilton’s panties on a Saturday night. Shit, at this point, something as mundane as a mouse farting in the maid’s room at some hedge fund manager’s leafy estate in Greenwich, Connecticut could trigger the “event.”

Better Off Dead?

Down 80% in a year, then down the other 99% overnight. Is this the wake up call? Will it end the denial? Probably not? It’s a nasty and stubborn lot that seems to have taken root in “power” in general in the USA. As my favorite idiot likes to say, we need to smoke them out of their holes. One more bubble burst for “Sir Alan”: GreenspansBubbles.com.

To put this in perspective, the infamous Long-Term Capital Management (LTCM) Federal Reserve organized in 1997 was $3.63 billion. This time, to “save” Bear, the Fed agreed to provide up to $30 billion in financing. Talk about desperate.

True, the bottom this crisis will probably be put in place a big collapse LIKE this one, but I suspect that we are not there yet. The pain is not yet great enough. Corporate profit margins are not done falling, the layoffs are not done, the bear market is not done, the perp walks are not done, the witch burnings are not done, and, finally, the “regulators” closing of the barn door after the cows are gone is not yet done.

Here’s a couple of links before we get to: 1) a MarketWatch article about the “saving” of Bear Stearns, and 2) a New York Times article on the coming massive bailout.

• Nouriel Roubini’s Worse than LTCM article
• Answer.com’s Long-Term Capital Management entry

Article: America Risks Mother of all Meltdowns

A good Nouriel Roubini summary from the Financial Times. This is the damaging, scenario that’s motivating the Fed and politicians to stuff their CYA (“cover your ass”) files. [Read Roubini’s complete article here: The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster]

February 19 2008
America’s Economy Risks Mother of all Meltdowns
By Martin Wolf

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.” Alan Greenspan, The Age of Turbulence.

That used to be Mr Greenspan’s view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor.

Great series of articles on sub prime mess

Subprime Securities Market Began as `Group of 5′ Over Chinese
By Mark Pittman

Dec. 17 (Bloomberg) — Representatives of five of Wall Street’s dominant investment banks gathered around a blonde wood conference table on a February night almost three years ago. Their talks over take-out Chinese food led to the perfect formula for a U.S. housing collapse.

The host was Greg Lippmann, then 36, a fast-talking Deutsche Bank AG trader who aspired to make mortgage securities as big a cash cow for Wall Street as the $12 trillion corporate credit market.

His allies included 34-year-old Rajiv Kamilla, a trader at Goldman Sachs Group Inc. with a background in nuclear physics, and 32-year-old Todd Kushman, who led a contingent from Bear Stearns Cos. Representatives from Citigroup Inc. and JPMorgan Chase & Co. were also invited. Almost 50 traders and lawyers showed up for the first meeting at Deutsche Bank’s Wall Street office to help set the trading rules and design the new product.

Article: The Wages of Financial Sin

As hinted at weeks ago, the Fed today took action to inject more liquidity into the market in a desperate attempt to stave off the now inevitable recession (IMHO). It seems they are now driven by fear, like American politicians and consumers, only reacting to events… and reacting too late.

The Wages of Financial Sin

“The western world has embarked on a speculative journey for which all the historical precedents are ominous.”

Peter Warburton[i]

Make no mistake about it – if the Federal Reserve is holding back on interest rate cuts because of near-term inflation fears, it will be fiddling while Rome burns. The collapse of the structured finance edifice must be understood as a highly deflationary event. The sell-off in the equity and credit markets signify a severe loss of confidence in the benchmarks of value established by market gatekeepers such as rating agencies, underwriters and market makers. A failure of the Federal Reserve to demonstrate that it recognizes the systemic threat posed by the collapse of structured finance and the subprime mortgage market could send the markets into a full-blown tailspin.

Fortunately, Federal Reserve Vice Chairman Kohn, in a November 28 speech, made it clear that the Fed is getting ready to act. He acknowledged that a change in market conditions had occurred that posed a threat to economic activity, and stated that uncertainties about the economic outlook were “unusually high.” HCM expects a 50 basis point cut in both the Fed Funds rate and the Discount Rate at the December 11th meeting of the Federal Reserve’s Open Market Committee accompanied by a statement confirming that the central bank will endeavor to remain ahead of the curve.

Article: Icebergs

Icebergs
John Riley, Chief Strategist
12/03/07

Did you hear about the Fed Chairman that had his head in the oven and his feet in the freezer? He told Congress, “On average, I’m comfortable.”

Dead, but comfortable. This is the danger of using some averages, they don’t tell the whole story and it is the methodology that the Federal Reserve is following.

Three Icebergs, Two Imported, One Domestic
What is going on in our economy is out of the Federal Reserve’s control. There is nothing they can do about it. It is like an iceberg bearing down on us and everybody can see it, but nobody can do anything about it. (It’s actually 3 icebergs, more on them later.)

Article: The blood on Greenspan’s hands

The former Federal Reserve chief now admits there is a housing bubble, yet he still refuses to take the blame he so richly deserves.

By Bill Fleckenstein

A debate is beginning to rage about where to lay blame for the mortgage mess: the lenders or the borrowers. In some cases, I’d point to the lenders; in others, the borrowers; and beyond that, a combination of both.

But I think that where absolutely ridiculous mortgages were issued to folks who didn’t make much money and could be considered somewhat naive, the blame ought to fall more on the lenders. Of course, the lenders didn’t worry about their own exposure to risk, as they passed these mortgages on to financial companies. The latter sliced and diced them into derivatives — products that, in turn, got peddled to the next bag holder.

Claiming innocence abroad

Alan Greenspan

Article: The Coming US Consumption Slowdown that Will Trigger an Economy-Wide Hard Landing

(click for larger image)

UPDATE: In December 2008, the NBER made it official, dating the recession from December 2007.  See my “U.S. officially in recession” post and links.

I chose the chart above to go with the following article because it shows that U.S. Private Fixed Investment (PFI) is already at recessionary levels. As you can see, the chart goes back 25 years, covering the past three recessions, the official start and end dates of which are called — well after the fact — by the Business Cycle Dating Committee, National Bureau of Economic Research.

Key points are as follows:

Equity Cheat Sheet

weak data = Fed ease, stocks rally
consensus data = lower volatility, stocks rally
strong data = economy strengthening, stocks rally
bank loses $4bln = bad news out of the way, stocks rally
oil spikes = great for energy companies, stocks rally
oil drops = great for the consumer, stocks rally
dollar plunges = great for multinationals, stocks rally
dollar spikes = lowers inflation, stocks rally
inflation spikes = will inflate all assets, stocks rally
inflation drops = improves earnings quality, stocks rally

Source: From a friend via email.

Alan Greenspan: Creator of Bubbles, Master of Obvious

“The critical question is the price level of homes in the United States, which are almost certainly going to fall,” Greenspan said at the World Business Forum in New York.

Um, news flash to Alan:

Point 1: No shit the price level [and inventory and sales rate] of homes is critical.

Point 2: The rate of appreciation in home prices peaked over three years ago and prices have been falling for more than 1-2 years.

–alansbubble.com