by Calculated Risk on 9/22/2008 06:48:00 PM

Several years ago I predicted that the National Debt would reach $10 trillion by the time President Bush left office. For a short period (thanks to the housing bubble), it looked like the deficit would be less than I projected.

Back in March, with the housing bust starting to hit government revenues, it started looking like the $10 trillion projection had a chance.

So here is an update: The current National debt is $9.727 trillion (see TreasuryDirect) as of Sept 19, 2008. That leaves the debt about $273 billion short of my projection with 4 months to go.

Last year, from Sept 19, 2007 to Jan 20, 2008, the debt increased $185 billion. That is not quite a fast enough pace to make $10 Trillion by next January. But the debt is accumulating much faster this year.

Over the last month, the National Debt has increased $112 billion compared to $34 billion for the same period last year. At this rate, the National Debt will blow by $10 trillion before Bush leaves office.

Add in the Paulson plan, and it's not even going to be close.

by Calculated Risk on 9/22/2008 04:03:00 PM

Headline Only: Treasury Says No Deal With Democrats on Government Taking Equity Stake in Financial Firms

by Calculated Risk on 9/22/2008 03:14:00 PM

From Bloomberg: Paulson, Lawmakers Agree on Equity Stake for Debt, Frank Says (hat tip Bob_in_MA)

``We got a lot of advice from people in the financial community that they should also be able to take some equity, and we agreed and the secretary has agreed with that,'' Frank, a Democrat from Massachusetts, told reporters today in Washington.

Update: From the WSJ: Democrats Craft Bailout Plans To Include Compensation Limits

The Bush administration has conceded several changes to its rescue plan for the troubled banking industry, including agreeing to compensation limits for bank chief executives taking part in the plan and the need for more help for homeowners facing foreclosure, a leading House Democrat said Monday.

Chairman of the House Financial Services Committee Rep. Barney Frank said the Treasury also agreed to Democrats' idea that the federal government should receive warrants to take an equity stake in financial firms in exchange for the government purchasing toxic assets from them.

That was quick. I guess another 300+ points down day on the DOW is scaring a few people.

by Calculated Risk on 9/22/2008 02:42:00 PM

From MarketWatch: Crude futures set for biggest daily price leap ever

Crude futures leaped as much as $25 per barrel, or 24.3%, shortly before the New York close Monday, to tap a high of $130 per barrel.

Wow.

by Calculated Risk on 9/22/2008 01:18:00 PM

From Politico: (hat tip Professor Krugman)

I'm still reading through the plan, but this is definitely a step in the right direction. In the Dodd plan, taxpayers will receive contingent shares, and there is substantially more oversight.

by Calculated Risk on 9/22/2008 12:05:00 PM

Apparently Diamond Hill Investment Group has opted out of the short selling ban. (hat tip Tom, HH)

I don't know anything about this company, but I think this is an appropriate reaction to the ban.

by Calculated Risk on 9/22/2008 11:11:00 AM

Since the administration is trying to railroad the plan through Congress - with no changes or additions - here are a few questions to ask:

How does buying troubled assets help recapitalize the financial institutions unless the Treasury pays a premium for the assets?

Why aren't taxpayers receiving some sort of contingent shares in the companies based on the losses to the taxpayers? If there are no taxpayer losses (as some are projecting), then the shares would not be issued - if there are substantial losses, then the taxpayers would own a sizable portion of that institution.

Note: Senator Dodd proposed something along these lines this morning. From the WSJ: Dodd Bailout Draft Could Give Government Shares of Companies

Sen. Dodd's plan would not allow the Treasury Department to purchase any assets "unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased."

Why isn't the entire process transparent? There are no national security issues, so Treasury could provide an online site that listed each transaction purchased by the government. This could be updated daily and list the details of the asset, the PAR value, the selling institution, the underlying characteristics, the originators of the loans, the price the government paid (and eventually sold the asset for) and any other relevant detail. This transparency would help with pricing and oversight.

by Calculated Risk on 9/22/2008 09:29:00 AM

From the NYSE:

The SEC has delegated to each national securities exchange the authority to identify additional listed companies that qualify for inclusion in the list of companies covered by the revised prohibition.
...
According to the SEC, companies that were on the original list attached to Friday’s Order, or that fall into one of the categories expected to be covered by the new order, may opt out of the application of the revised short sale prohibition by informing the NYSE of that determination.

I'm still waiting for a company to opt out!

Here are the added companies:

GLG GLG Partners
GE General Electric Co.
OCN Ocwen Financial Corp.
KBW KBW Inc.
GFG Guaranty Financial Group Inc.
MFG Mizuho Financial Group, Inc.
FMR First Mercury Financial Corp.
STC Stewart Information Services Corp.
FCF First Commonwealth Financial Corp.
MTB M&T Bank Corp.
DFS Discover Financial Services
BMO Bank of Montreal
TD Toronto Dominion Bank
CM Canadian Imperial Bank of Commerce
FMD First Marblehead Corp.
BBV Banco Bilbao Vizcaya SA
CIB BanColombia SA
LM Legg Mason, Inc.
NFP National Financial Partners Corp.
AXP American Express Company
CIT CIT Group Inc.
GM General Motors Corp.
HIG The Hartford Financial Services Group
ADS Alliance Data Systems Corp.
ALD Allied Capital Corp.
RAS RAIT Financial Trust
DRL Doral Financial Corp.
FSR Flagstone Reinsurance Holdings
MCO Moody's Corp.
COF Capital One Financial Corp.

by Calculated Risk on 9/22/2008 12:06:00 AM

Professor Krugman writes in the NY Times: Cash for Trash. A few excerpts:

How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging ... Even that isn’t clear ... And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?
emphasis added

I believe this is exactly the plan - to buy assets at premium prices and thereby recapitalize the banks. As I noted earlier, this will probably be successful in getting the banks to lend again, but that "success" would come at an astronomical cost to taxpayers. And there would probably be other unintended consequences.

The logic of the crisis seems to call for an intervention ... but ... the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

The current plan is vague, opaque, has almost no oversight, puts the taxpayers at extreme risk and encourages future moral hazard.

A better plan would be transparent (all deals would be publicized), involve a share in ownership for the taxpayers, and have substantial oversight. We can do better.

by Calculated Risk on 9/21/2008 11:43:00 PM

From the WSJ: WaMu, Under U.S. Pressure, Scrambles for Deal or Capital

Washington Mutual Inc. pushed Sunday to decide its fate, continuing talks with potential buyers amid mounting pressure from federal regulators.

...some people close to the discussions hope a deal could be struck within days ...

A spokesman from the Office of Thrift Supervision ... said "we are aware of the situation and following closely"

I'm not sure if or how the Paulson plan will impact the negotiations.

A likely scenario is that a deal will be struck between a buyer and the FDIC, and then WaMu will be closed with certain assets going to the buyer, and the FDIC taking the toxic waste.