[Roccland]

An exchange from Mish's Blog...

This Bam_Man guy makes an interesting observation:

Mish's Global Economic Trend Analysis

Bam_Man
Wednesday, September 24, 2008
4:34:06 PM

Most still seem totally baffled as to why this "bailout" is being rammed down the throat of the American people.

As far as the US Treasury and Federal Reserve is concerned, there are 16 VERY good reasons why this "bailout" MUST go through ASAP. They are:

BNP Paribas Securities Corp.
Bank of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
RBS Greenwich Capital
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

These are the primary dealers in US Treasury securities. Between them, THEY PURCHASE THE VAST MAJORITY OF US GOVERNMENT SECURITIES SOLD AT AUCTION and then re-sell them to their foreign and domestic customers.

When they have a problem (like hopelessly impaired balance sheets), the US Treasury has a problem. The impaired balance sheets of many of the primary dealers is starting to hinder their ability to participate in Treasury auctions. This could lead to failed Treasury auctions in the very near future.

Anyone who is still puzzled as to the nature of the Wall St/Washington relationship needs look no further than this. This is the crux of the problem and the reason why the Treasury Department is forcing this bailout on the American people.



MethodMan
Wednesday, September 24, 2008
4:50:07 PM

@bam_man: good analysis. That's why I say if we really, really want to end this charade you have the power, at your fingertips, and it's so simple: just don't fund it. Don't buy treasuries.

Treasuries will be needed by the trillions to fund the bailout, and you buy them, you're supporting it, directly. Not only that, you are also voting for debt that future generations must service.

Now, the government can then choose to print. But that will end the game, permanently for them.




Bam_Man
Wednesday, September 24, 2008
4:58:56 PM

@MethodMan:

The amount of Treasuries purchased by individuals through the 'Treasury Direct' program is literally a drop in the bucket.

The primary dealers do the Treasury's 'heavy lifting' when it comes to financing.

Can you imagine Paulson sitting in front of a Congressional committee saying "We have to bail out the primary dealers at taxpayer expense so they can continue to participate fully in Treasury auctions"?

Not likely. Instead we get vague references to some sort of impending financial Armegeddon. Much more persuasive I think.


They are doing just what you suggested



MethodMan
Wednesday, September 24, 2008
5:07:37 PM

@Bam_Man: what I mean is through 401k/pension allocations. Banks have (had) this money to play with because they have retirement fund depositors. If BANKS had the same amount of customer outcry about "supporting the bailout with treasuries using my deposits" their tune would change very fast. If foreign banks see US buyers leaving, well, you have your auction failure and then some.

Bam_Man
Wednesday, September 24, 2008
5:29:16 PM

The whole point of this $700 billion 'gift' to the primary dealers is to keep the US Treasury bubble from bursting.

Even at today's ridiculous artificially low Treasury yields, the interest on the Federal Debt is over $400 billion per year.

This year's budget deficit was around $400 Billion. With next year's budget deficit expected to approach or maybe exceed $1 TRILLION, they will need to have the primary dealers be able to absorb an ADDITIONAL $600-$700 Billion.

Do you think they plucked that $700 Billion figure out of thin air?

Paulson's plan is to give the primary dealers $700 billion of balance sheet relief with the understanding that they replace DOLLAR FOR DOLLAR the toxic mortgage securities they offload to the Taxpayer with newly issued US Treasuries.

Makes getting through next year's "challenging Treasury calendar" a heck of a lot easier.

No Tin Foil required here. It is simply a matter of financing the Gubbermint.

Bam_Man
Wednesday, September 24, 2008
6:17:04 PM

@GoldmanSachs-

Jim Willie makes for entertaining reading, but he is W-A-Y out there.

This whole thing is about lining up financing for next year's HUMUNGOUS Federal Budget Deficit in advance.

The $700 Billion "gift" allows the primary dealers to handle $600-$700 Billlion more in expected 2009 Treasury issuance than they were able to do this year. They were able to handle $400+ Billion this year, so with $700 Billion of "help", they should be able to absorb the $1 Trillion next year.

This how you go about financing (or at least try to) a $1 trillion budget deficit without printing.

The real reason for this "bailout" is not that complicated and does not require any Tin Foil at all.

Can you imagine Paulson and Bernanke telling a Congressional Committee that we expect the economy to completely tank next year and that the budget deficit is going to approach or exceed $1 Trillion? And by the way we need you to help the Primary Dealers out with $700 Billion in balance sheet relief at taxpayer expense so that they can help us finance it.

No. They can't do that. So this is what we get. Vague references to "financial meltdown". It's not like they are out-and-out lying. Failed Treasury auctions will not produce pleasant consequences for anyone in the US.


Bam_Man
Wednesday, September 24, 2008
6:34:05 PM

My point is that this "bailout" is not part of some Wall Street conspiracy to loot the US Treasury and taxpayer. Sorry to spoil everybody's fun.

Rather, it is how the Treasury gets prepared to finance next year's gigantic budget deficit without printing.

I have said before that I am sure that the Chinese have already made "the phone call". The one where they say "You start printing and we start selling." This approach keeps them in the game.

The taxpayer gets benefits from this as well. Assuming the primary dealers get the $700 Billion in balance sheet relief and are able to absorb the $1 Trillion in new issuance next year, the taxpayer avoids a tax increase and interest rates stay low.




Bam_Man
Wednesday, September 24, 2008
6:58:48 PM

@sumdumguy asked:

"Why do we need primary dealers? Why not sell Treasuries directly at an open auction?"

Primary dealers insure that there is ALWAYS a COMPETITIVE bid for Treasuries and they distribute the Treasuries they buy to their customers throughout the world.

They serve as the Treasury Department's distribution network and insure that there is ALWAYS a RELIABLE and DEEP market for US Treasuries.

When it comes to meeting the funding needs of the US Treasury, they are INDISPENSABLE.

That is why this "bailout" must/will become law.


Bam_Man
Wednesday, September 24, 2008
7:06:07 PM

@BlindSight-

If I am correct in my assumptions, then this really is not a "bailout". The Treasury is helping its distribution network to get ready to handle a whopper of a budget deficit next year.

It is not a giveaway. The Treasury (and therefore the taxpayer) stands to get real benefits from this deal. Those would be NO NEW TAXES and a continuation of very low interest rates. Both these things are essential for there to be any chance for an economic recovery next year.

The thing that is giving people fits is that it looks worse than it really is.

Paulson and Bernanke get low marks for salesmanship.


Goldman Sachs
Wednesday, September 24, 2008
7:08:59 PM

@Bam_man

What if there is a boycott by foreign purchasers of treasuries (SCO, and perhaps Germany) such that the primary dealers are unable to finance treasury auctions? I mean, we need a net influx of $2 billion a day of foreign cash just to stay afloat already, right?

MethodMan
Wednesday, September 24, 2008
7:11:34 PM

"Failed Treasury auctions will not produce pleasant consequences for anyone in the US"

I would like to tell that to my credit card company when they fail to "buy" my credit line request of ten million dollars. Oh, shucks, you mean I will have to live within my means?

Funding this is refunding the credit bubble and malinvestment when it should have deflated. Doing this scheme, we push even more debt out against our nation's future prosperity. We set ourselves for an uncertain, even harder fall, when it could just be moderately painful now.



Bam_Man
Wednesday, September 24, 2008
7:16:33 PM

@GoldmanSachs:

If that were to ever happen (and it could) the primary dealers would be stuck with the US Treasuries. It is true that foreign appetite for Treasuries is not infinite.

In that case, this "bailout" would amount to yet another swap facility. The primary dealers would have essentially swapped their toxic MBS/CDO's for Treasuries. Not so bad for them.

Paulson and Bernanke are covering all the bases here. They are not evil or stupid. They are just lousy salesmen.

Bam_Man
Wednesday, September 24, 2008
8:37:48 PM

@StandardDeviation:

Kindly show me where you summed it up nicely in 25 words or less. I would be honored to read your brilliant yet succinct analysis.

The reason the real truth cannot be stated by anyone is obvious. They would have to state flat out:

"The economy is going to hell in a handbasket and the deficit next year is going to go through the roof. To get ready to finance this whopper of a deficit, we are going to have to help out our primary dealers by giving them $700 Billion in balance sheet relief. The Treasury will do this by buying distressed assets from them at above market prices."
Nobody can come out and say that. Period."

[Iaato]

$700B is what we started with in the Fed before all of this happened. This money replenishes the Fed, who is out of dough.

[jupiters_release]

$700B is what we started with in the Fed before all of this happened. This money replenishes the Fed, who is out of dough.

How much do the Fed's shareholders make? When was the last time the Fed was audited?

I don't see anything abnormal with the current economic fallout and money grab if the Fed is fraudulent in nature. Business wise there's nothing more brilliant than making everyone think you're broke while simultaneously tithing everyone and hiding the money.

[Dreamtwister]

When was the last time the Fed was audited?

As far as I am aware, the Fed has NEVER been audited.

[seldom_seen]

So the government is going to give the banks the money to buy US treasury securities? It sounds very, very inflationary (larry).

A win win for the banks though. Imagine going to the government car dealership, "Hi there folks, I'm going to sell you this 2009 Cadilac Escalade. Not only that! I'm going to give you the money to pay for it!" "Geez Wilma, that's a steal!"

[Cashmere]

Great find Roc.

Thanks for the post.

[jboogy]

Sorry Rocc, but I'm not buying it. It seems all the evidence and balance sheets seem to jive with what the stated reasons for the bailout are. Alot of mortgages in default, alot of banks not receiving the mortgage payments on loans made, alot of banks running into very real red ink problems. It's as simple as it seems, it's the size of the problem that's blowing everyone's mind. The default numbers are real, looking for nefarius reasons for the near collapse beyond that is unnecessary and to be honest Bam Man and Method Man are presenting a case that, when examined closely, has several weak or unlikely suppositions.

[mklkatreeandleaf]

Fat Cat ceo's deserve what they get!
WA MU fat cat CEO's deserve what they get, since the bubble was setup by the NWO and gov, and businesses are there to make loans at interest rates the GOV SET then the FAT CAT CEOS deserve what they get.

and the GOOD BOYS like JP m organ who must be running things well are the good guys, so we can, after this failure, fully trust JPM to run the world

Ha ha ha laughing my eyes out.

this is too rich

man, ever seen the STING?

america is so deluded.

WA MU was one of our saviours from NWO with their cash machines, but they ahve to go,

make room for internet based beastl;y morgan.

yah he is the good guy.

America deserves what they ask for.
have a nice imagination, it won't last long.