Sometimes, a bailout is not enough.
When Dubai World black swanned global investors last month with what amounts to be a reported $80 Billion in debt liabilities, it sent shivers down the spine of many a financial manager and stock trader. For those who were paying attention, Dubai’s troubled assets were no surprise, it was simply a matter of time. Oft repeated by contrarian analysts and investors like Dr. Doom Marc Faber, Gerald Celente, Jim Rogers, and Karl Denninger, the mathematical certainty of the economic crisis would play out – eventually.
It was a year ago that the entire global financial system, spear headed by the USA, faced the real possibility of total meltdown, that is if you trust the motivational fear tactics employed former Treasury Secretary Henry Paulson.
This week, the American public received word that the banks once deemed too-big-to-fail will be paying back their TARP funds, ostensibly because they are now cured of the financial contagion that threatened sudden death, economic collapse and the implemntation of martial law.
In addition to Bank of America and JP Morgan Chase, we have commercial real estate powerhouse and partially owned subsidiary of Warren Buffet Enterprises, Wells Fargo, which announced it will sell $10.4 billion in stock and exit the TARP bailout. According to a company statement, the bank plans to pay back $25 billion in taxpayer funds. CEO John Stumpf, presumably also doing gods work, says â€œweâ€™re ready to fully repay TARP in a way that serves the interests of the U.S. taxpayer, as well as our customers, team members and investors.â€ Management did not comment on whether the share sales totaling around $14.8 billion, when you count additional plans toÂ raise capital, will devalue, by way of dilution, the amount of market capitalization held by shareholders.
Citibank, who also committed to repaying $20 billion in TARP funds yesterday saw a stream of positive news throughout the media when they announced their intentions. Just 24 hours later, Bloomberg reports that Citigroupâ€™s Exit From the Bailout is Clouded by Citi Holdings Assets. It seems that CEO Vikram Pandit failed to mention that his company is “emerging from a U.S. bailout with higher capital levels and loan-loss reserves than any peer.” That amount to somehwere in the area of $617 billion.
Dubai showed how investors and traders are ready to run at the first sign of trouble. As has been the case for the last nine months, however, the Dubai crisis was quickly subdued by stories of bailouts from their sister city, Abu Dhabi. And indeed, Dubai has been rescued with what amounts to be a $10 billion bailout that should help the former real estate Mecca of the Middle East make at least a few payments to keep it a float for a little bit longer. Regional investment firms will receive some of their funds, but as for non-Middle Eastern investors, the verdict is still out, though, as Abu Dhabi’s rulers said, “they will not necessarily just bail out everyone across the board. They will be selective.â€
This seems to be the norm these days, so it’s no surprise. Certain entities, for whatever reasons, are bailed out, while others suffer the collapse of their wealth for trusting in the belief that asset prices always go up forever.
As Real Estate Collapse (Wave One)Â in the US proved, no asset will appreciate all the time. Like Dubai, the underlying assets in America, Europe, and even China have been slowly simmering for the last year or so. And once the public gets a taste of the toxicity, there will be no stopping the panic as everyone in just about every asset class decides to run for the exit.
When the panic does start, it may be an event perceived to be too-small-to-matter, like a Dubai that exposes several larger global players, which leads to a domino effect that will echo through the entire financial markets. It may start with debt defaults in anÂ Euro Zone country like Greece or Hungary, or maybe with commercial real estate or Wave Two of the Mortgage Meltdown in the US. It could be a geo-political eventÂ with Iran and Israel, or a terrorist attack on a Saudi Arabian pipeline.
Right now, the world is on edge. The citizens of the US, as well as the global public don’t really know who to trust to tell them the truth. They are on alert, consciously or subconsciously, and if they perceive even a small threat, the fight-or-flight system will be activated.
Some say that a year ago we faced economic disaster on a massive scale. In one year, governments around the world have printed money, and done little else, except to provide daily lip service and commentary. The contagion has been lying dormant and will become an epidemic.
No bailout will stop it.
Mac Slavo, Thanks for this article. I always enjoy reading your perspectives. Yeah, none of the Wall Street structures have changed since the crisis. The government took on all the responsibility for curing (read as delaying) the economic collapse while it’s business as usual on Wall Street. Where’s the tighter regulation and oversight? Seems that the system, by it’s nature, will exasperate the financial problems down the road.
At first I thought perhaps I was crazy — maybe the bailouts WILL work.. Then I read John Williams’ new report and it solidifies the perspective I took in this article…
It’s funny, because we have all the regulations we need.. and we have countless agencies to oversee the regulations… but we have zero enforcement, because, like Congress, the regulators have been bought and paid for.
It really sucks, because the average guy on the street is really going to pay the price this time. I guess it’s been the same throughout history, though.
I come here to verify. Everything you say meshes perfectly with the sources I trust. A very nice article with good, broad perspective. Indeed, nothing has changed except the RPMs of the print rollers on the government approved counterfeiting devices.Regulation will only result in a false since of security and allow a quicker crash since people will be more reckless. I’m doubling down on PMs and other commodities. Its hard to say what biznesses will survive this. A few smaller bold ones and a few larger ones that will suck government teet during the crisis. …they’ll survive, that is, if the people don’t firebomb them when they see what they are doing.
All in all it makes me have to make a hard decision: Beans, Bullets or Gold? Beans, Bullets or Gold… Beans, Bullets or Gold.
I finally have decided: Beans *AND* Bullets *AND* Gold!
When all of this hits the fan, those will be all that matters.
“nothing has changed except the RPMs of the print rollers on the government approved counterfeiting devices”
Businesses that survive: according to that recent report from John Williams, economic activity may be completely destroyed for a time…. In a real SHTF hyperinflationary depression scenario, there will be little or no traditional commerce at all. Hard to believe, but that’s the nature of that beast, it seems.
But say we only go “regular” depression…. Then perhaps we can go long things like The Family Dollar, bartering/flee markets, farming, etc…. Not many businesses the provide non-essential services are going to survive.
Thanks for the article Mac. While I would like to think that this will be more of a “regular depression”, I can’t help but shake one nagging thought:
Never before have we as a country endured a credit collapse under a fiat monetary system with such unprecedented levels of debt. Additionally, the fact that the US dollar is the world’s reserve currency simply means this thing will be global.
I think once one considers how much different our situation today is from the 1930’s, I think it becomes clear that the probability is probably greater than half that this will be no regular depression.
An excellent & thought-provokingÂ post that normally would warrant a comment from me. However I have already commented (twice actually)Â on this post over at Zero Hedge where I found it prominently displayed on their front page.Â It’sÂ encouraging to know that common sense and sober assessment are still valued in outposts beyond the confines ofÂ SHTFplan. Continue to speak out!
Thanks for the comments guys!