Paulson’s Poison Pill - Cost $700 Billions

1)
Both Mr. Paulson and Mr. Bernanke displayed extreme concern to protect the interests of American Tax payers while seeking $700 Billions from their existing pocket or from their 5 coming generations. One generation may not be able to take so much of load. The question arise, whether their con men was genuine or was it the proposal from the conment out to manipulate whole financial system and defraud the American Tax Payers? These public servants are supposed to follow the best practices and protect the pockets of the tax payers. Do they?

If you read what Bernanke said during the Congressional hearing, you will ask “Where is the protection of Tax payers under the $700 billion plans? Mr. Bernanke said he was not in favor of paying the price of “Fire sale”. Mr. Paulson said that he was willing to buy the Bad Debts at substantial discount (about 35%), that is, paying $65 for every $100 face value of the debt and holding them until maturity (HTM or Held Till Maturity). To one question from the Senator, how much the securities are worth now, Mr. Bernanke said only a few cents! Oh my God! Mr. Bernanke is in charge of FED overseeing the dollar that only he can print which bears the imprint “In God We Trust”. In reality, they care the least about the God.

Read them together, the Paulson – Bernanke plan foresees the payment of 65% of face value of $100 for the Bad Debts currently trading at few cents (about 20 cents to 98 cents). What is the Asset backing? Big Zero. Why? Because all derivative papers are secondary mortgage papers or mortgage with second lien that gets paid only after primary lender is paid off. Since the primary lender has foreclosed, seized and sold the mortgaged property, and he retains both the surpluses and deficits under the law, nothing is left for the secondary mortgage holders who have to rely upon the mortgaged property alone. They have no other recourse or option to realize their dues.

The question arises, why Bernanke and Paulson are bent upon paying $65 when the security backing is ZERO and current market is just 20 cents. That is, they are willing to pay the premium of 320 times or 32,000% more than the market value. As public servants, they have fundamental responsibility to look after the interests of the American Tax Payers (ATP), and buy the assets at the best bargain price or at least current prevailing price. Anything contrary to this dictate, amount to betrayal of and defrauding the tax payers to the extent of $700 billion dollars”

Holding Till Maturity…A great deception
Mr. Paulson said that he (treasury) would hold the securities until maturity to realize the full value. There is no market for those securities at the moment, he said… Since the Treasury will have no tangible security under the secondary mortgage paper and it can not sue the borrowers due to non recourse nature of the mortgage, the possible value realization is ZERO, whether he hold them for one year, 10 years, 30 years or 100 years. That is, the entire amount of $700 billions will turn to ZERO almost instantly when distributed or used to buy the bad debts

Why do Paulson/Bernanke duo want passage of bill before September, 2008 end?

Mr. Paulson and Bernanke also want clean passage of bill before this weekend, that is, before the September end. Also, significant is the ending of ban on short selling of financial shares 2 days later or October 2, 2008. Again read them together. What Mr. Paulson and Bernanke seek to achieve by hustling agreement before September end? Here is the possible explanation.

Manipulating the Market Price of worthless Derivatives

September is the end of the quarter or Q3. The quarterly result or Q3 for the period ended September 2008 will arrive in the market in second or third week of October. If the bad debts are bought before September quarter, new market price will be established @ $65 against just 20 cents at present. Under the MTM or Mark to Market rule, the securities are marked to market price for valuation purpose. By paying the price of $65 against just 20 cents, almost all banks will be valuing their portfolio at newly established market price - $65 against 20 cents.

This is nothing but the manipulation of the market price by artificial means. All banks, investment banks, and brokers will be re-valuing their portfolio based on concocted market price under MTM rules, and they will start reporting bogus profits by reversing the excess provision in the past and providing less for the future. If this was to be pursued, why did not he propose it before Bear Stearns, Lehman Brothers and Merril Lynch came into serious trouble? They could have been saved and prevented the domino effect in the world financial markets. Thousands of investors could have saved billions of dollars of losses, and the present scenario would not have arisen.

What happens if the $700 billion proposal is passed before September end?
If the budget is passed before September quarter, there will be huge rally in financial shares. When the short selling ban on 799 financial shares is lifted by SEC on October 2, there will be fierce short covering rally that may see the financial shares choking up 20% to 60% gain in single session. When the reporting season starts in mid October, all bank shares will show tremendous improvement in their profit and balance sheet due to use of concocted market price that will fuel further rally.

Looks Banks and brokers will be saved…But who will be the losers? - Tax Payers. How?
If some one gains, some other loses. Who will be the loser? Of course, American Tax Payers who’s $700 Billions will be gone forever. Their bonds have neither tangible security nor any other recourse to pursue the defaulting borrowers. The next 5 American generations will never pardon the President Bush, Mr. Paulson, the Treasury Secretary , Mr. Bernanke, FED chief and Mr. Cox, the SEC Chief for criminal waste of $700 billions, misrepresentation and fraud for which they will never be tried - for ever.

What should be the correct approach?
Instead of manipulating and falsifying the entire debt market, and losing Tax payers’ $700 billions in a flash, it is time to let the bankrupt banks to really go bankrupt and not spend even a single good dollar after every bad dollar. The nation will be better off in granting $300 billions to remaining good small regional banks to ease the credit crunch which will be more satisfying than distributing largesse to bankrupt banks, investment banks and brokers.

If the banks and brokers were to be saved from complete disaster in the interest of the economy, the accounting rule should have been amended to permit these culprits to consolidate their debts in some warehouse similar to RTC, without any sort of federal guarantee to save the taxpayers, and be allowed to be written of in 10 years @ 10% of such losses.

What is true Capitalism?
In true practice of capitalism, the efficieny is rewarded, and inefficieny is penalized. The present practice of Paulson and Bernanke mocks fun at capitalism. The present plan is not a “bail out” but mouse trapping the Americans.

Lady Liberty may be crying in the middle of the sea, lamenting “What happened to my America”

Kalidas, Hong Kong

September 26,2008

2)
for whatsUP,

sorry, I did not clarify properly. It is 20 cents per $100 for which the Adminisration want to pay $65. Since the collateral is ZERO and there being no recourse to the defaulting borrowers, the security is worthless.

In % terms, it is 20 cents per $100 or 0.2/$ or 0.002%

Kalidas, Hong Kong
26/9/2008

3)
for Raju55,

All bankers are living in nightmare. In Gujarati, there is a saying that 'a person who has burnt his finger in hot milk, blows even ice cold buttermilk'

Today, no bank knows what the other bank is into. This is known as 'Counter party risk'. This will not last long. After a while, they will have no alternative but to start lending again. The bankers are having holiday after violent honeymoon. They are drained off for a while and recuperating.

India should not have problem. However, the bankers in India are unnecessarily scared off. They feel that if it has happened to USA, it may happen in India.

This is where RBI, FM and SEBI have to come out and hold seminar at various centers, release advertisement on state owned TV and newspapers, hold conferences where they have to educate that India is not USA. the problems in USA are unique to them - not transferable to India. This is where the leadership counts. When such things happen, almost all ministers including Prime Minister get back into holes and do not come out like a scared bird.

This situation sets apart strong leaders from weaklings. This is the time for a leader and problem solver like Laloo. These are the days of Laloo, not Mohan or Chidambaram. The latter have only bookish knowledge.

A case to the point. When US wanted to catch Saddam Hussein or Osama Bin Laden, they announced a prize of $ 25 millions. Why not they announce prize of $100 million or even $1 billion in nationwide contest payable to those wise guys who provide solution to the present mess. There are millions of Americans who are also very bright, problem solver and ambitious, lying low in urban and semi urban centers.

Even I can provide such solution, if they give me $100 Millions or pay me based on % of money they receive.

But this kind of common sense is not available in President Bush, Bernanke or Paulson. such things are also not taught in Harvard. So in spite of Harvard claim they represent the brightest, I would say - you generate the dullest dumb heads. it is easy to make a person no.1 from no. 5. The institution is great who bring the best of those student who are brought from last line to the front line. That is called achievement.

Kalidas, Hong Kong
26/65/2008

4)
for hembhat

I love your questions. Here are the answers:

Q: ..I feel that Bush had no alternative but to advocate a Bailout package. What would have happened if he had not acted like that?
A: Nothing would have happened so seriously as fret about by Paulson and Bernanke. At the most, Dow would have gone down by 2000 points or even 3000 points. This is nothing when you compare the Dow index at reduced level of 8000, which is still 150% more than 1987 and they are talking about worst economic scene since the era of great depression - 1929. If that was so, the Dow should have been at 1100 and not at 11000.

You have to understand how this crisis has come about and why so swiftly. Unless you diagnose this problem well, there can not be any solution. You don't spend $700 Billion on solution for unknown problem! It is outrageous.

WHY THIS CRISIS HAS COME ABOUT SWIFTLY? WHY NO ONE HAD ANY IDEA?
This is due to off shore centers, called Tax heavens, like Bermuda, Cayman Island, British Virgin Island, where the banks and brokers floated the derivatives. They did not disclose these items in their parents' balance sheets, but the income earned were shown in the income. This is the reason the banks and brokers were showing huge profits for last few years - $25 Billions of more. When the trouble arose, the off shore centers who carried the guarantee of their parents, had no alternative but to transfer the liabilities to their parent bank in USA. This is why billions of dollars of derivatives, that were remaining off the books of the parents, suddenly started appearing on the balance sheet.

I am posting another article soon, where I have discussed the balance sheet of HSBC, the bank having least troubles, where there is violent transfer of many items from one head to another - running into several hundred billions to over 1.2 trillions. In just under 2 years, HSBC balance sheet has swelled by $1 trillions or $1,000 Billions or Rs 4,500,000 crores. Why? It seems that all assets and liabilities of off shore centers are now booked into the balance sheets of HSBC. Wait before this bank explodes into pieces. (Google your search as HSBC balance Sheet. Very first item under Yahoo will reproduce the balance sheet)

IT IS FED ROLE TO CREATE MONEY...NOT BANKS AND BROKERS
It is the function of the FED to create and manage money. Not Banks, Brokers or Investment banks. In India, it is the job of Reserve Bank of India. Tell me, is RBI supposed to legalize so called 'Black Money' or honour the currency notes printed in private press?

By creating 7 times leveraged derivatives in off shore centers, these bastard bankers in blue suits at various banks, brokerages, and Investment Banks, created trillions of dollars out of vacuum. And when they found difficult to manage, they quietly transferred to their parents in USA. This all happened in last 12 months, and this is why I have been writing for over 12 months of impending disaster to come, and it did come.

Now, instead of destroying this parallel economy, what FED is doing by giving $700 billions in the name of saving economy is LEGALIZING THE PARALLEL ECONOMY. This is creating bigger problem, not solution.

I ask you, if Man Mohan Singh, Chidambaram and RBI come to you to bail out, some lousy bank or brokerage, say Champion Brokers and Bank Ltd. running into 100,000 crores that were created by them without RBI approval or outside India in off shore center like Mauritius, will be approved by Indian citizens who were not even benefited by a single paise in the past, and enriched the pockets of those executives in that lousy bank about to fail?

My book called 'Sub Prime Resolved' is exactly dealing with all these issues in complete details.

DO NOT COMPARE FARMER LOANS HERE
I do agree that farmers in India do require help. They are in real productive business. Suicide rate is inflated. More in next post, no space here.

Kalidas, Hong Kong
29/5/2008

5)
for hembhat (continued)

Your Question:
Socio-economic considerations will always prevail over pure economics. What UPA did to waive off farmers' loan was a right & compassionate step in my opinion. Otherwise many more farmers would have committed suicide. The taxpayers have to bail them out. Persons who earn fortunes in stock market are not known to donate or lend to families of dead or living farmers. It is still known at the inception that the fresh loans to farmers would also be bad but then agriculture is no more a profitable business. If farmers have to survive then we all have to agree for higher prices of agri commodities.

My Answer:
I have number of farms in Vidarbha region where the suicide rate is highest. When I heard this story number of times, I asked my relation that farm prices must be quite low, why not we buy more? He was always quoting farm prices almost 100% to 300% higher than what I had bought only 12 months ago. He took to the 'Patil' of a village and we posed the same question.

I was shocked to learn that many of the suicides are fake. There is a government scheme that the families of suiciding farmer benefit instantly by Rs 1 lakh (paid in 24 to 48 hours).Many who die natural death, just place a rope around the neck to feign a suicide to get Rs 1 lakh less some expenses to the village chief who willingly certifies for small fee. He is also seen as God for the villager, because he helps them out.

Yes, Farmers do need help. Of all the people in India, farmers are the only one who really need financial aid.They are feeding the whole nation, so if we can not pay higher grain price, let us pay them in the form of non-refundable subsidies or loans. What is Rs 60000 crores compared to what they really produce - not on paper like the brokers or banks do, but in real physical sense?

Farmers do not lose in farming business, to be sure. They stretch themselves in wedding of their daugther where they are required to pay dowry - this is still prevalent. Actually, this debt is killing the farmers, not their prime business. There are hundreds of subsidies, help, free gober gas plant, free water, subsidized electricity, etc. I do not think anywhere in the world, so much has been done by the government. Yes, there are many corrupt officials, but they should be arrested, and punished in their village itself, by re-introducing 'Beating or lashing them with the Cords or Ropes' (I do not know the right word). Once that punishment is reintroduced (it was the regualr practice during the days of Maharajas and Sultans), and used in cities and villages for all kinds of small crimes, the crimes will simply disappear in less than 24 months.

Kalidas, Hong Kong
29/5/2008

6)
for shia,

I have not disclosed 90% of my total secrets. Thanks for your concern.

Certain things I have to inform the investors here. I consider as my obligation to my readers.

By the way, I have posted another article on the blog today titled - Retiring President's Partig Gift to Paulson - Buying Rotten Eggs for $700 Billions.'

It has not been front paged as yet. You will find it in the sidebar. It will be front paged after a few hours.

Kalidas, Hong Kong
29/5/2008

7)
for drswastik

Banking collapse has begun. Even Japan has started withdrawing money from everywhere, this is why Japanese Yen despite Zero interest, is going up against US$, Euro, GBP, Aussie $ etc.

It is a home coming of all currencies. All foreign investments of FII will be liquidated either out of strategy, or requirements of funds redemption back home. It has nothing to do with the fundamental of individual companies.

When the banks collapse, the people will shift the money to treasury bonds. When they find that even treasury is useless, they buy only one thing - GOLD

WHERE IS IMF? Have you heard its name in such humongous crisis? Whenever there was crisis in Asia or Latin America, they were rushing here and there and offering many solutions on stringent terms. Now that their original mentor USA is in deep trouble, they do not utter even a single sentence.

Finally, after these currency and banks collapse, the world monetary system will be linked to Gold as standard. It may happen when the current crisis is fully played out.

Almost all troubled banks are nationalized. The only countries to come out strongly will be India (China too), France and Brazil.

India is very strongly positioned. It is least leveraged, almost all banks are already nationalized, so there will be no run on the banks, has over 30,000 tons of gold with private holders, people are now more literate now, and the country is blessed with well defined friendly weather. There is no better place than India. Most NRIs will start sending money to India from their banks (except perhaps Canada). If only RBI does not intervene to keep the rupee low, which is the most hazardous policy over decades - rupee should have been at Rs 26 now - that is biggest disincentive to NRIs

We can not predict the market even for tomorrow, so do not talk about 2010 and 2011 like an Astrologer.

Yes, one thing, The best opportunities for long term investment is coming in a few months. Brace it for that. If some FII withdraws the money from India that causes the loss of hundreds of points, that is more due to his weakness, or requirements back home, rather than the weakness of Indian economy.

It all depends how imaginative our PM and FM are. Being a good person is not enough. India needs leadership of highly imaginative persons who are relatively young (40+ to 55-) who can stay longer. We should not have leaders for whom we would have national holidays in a few years with flags hanging out at half mast.

Kalidas, Hong Kong`
6-10-2008

8)
for slowhand22

Is liquidity in Indian market affected. it should not. Interest rates are very high now, so RBI has lot of leeway to reduce the interest rates.

Banking collapse has started already, this is what I was forecasting from 12 months onwards. US is heading towards Civil War, and I will not be surprised if national emergency is declared and election postponed.

Solution is already there, but the US Administration did not listen to me or respond to my letter. As I have stated before, I am the only person in the world who has solution to US problem. I am not boasting or not telling you out of ego. Whatever actions taken by Paulson and Bernanke are terribly wrong. They are printing their way out of the problem.

If they had listened to me earlier, they would have prevented all these collapses, in fact there could have been massive rally. I will release the letter at appropriate time.

Now that the situation has come out of hand, the solution will be more curative rather than preventive. it will hurt almost all, regardless of your country.

India will emerge strongest in the world. I am only worried about Rupee policy of the RBI and Government. They know that it has not worked for over 60 years, and they are still following the beaten path.

In India, most banks are nationalized, so there should not be any problem in Inter-bank lending. Nothing may happen to India, unless the Indian officials become super charged and panicky in which case they will hurt the nation. This is more likely to happen, if past is the indication.

Inflation is no longer a problem now - there is no money in the market. The present problem is liquidity. Indian government has most powerful tools in its armoury. The rates are inordinately high at about 10% for deposits. Even if the rates are progressively reduced by 5% in small steps of 0.5% for next 16 months, (0.5% per 2 months)

Further, next step will be to lower the taxation rate. These are all bullish scenario being set up by the present crisis. To be quite honest, I am super bullish at Indian prospect, but that time has to wait. You have to be stock specific.

A few months ago, I had asked for investing into HPCL (came down to 180), BPCL (came down to 230) when the Index was near 15000 or about. Today, the market is down to below 11000 or by about 35%, and the same stocks are up by 35% to 50% in less than 4 months.

At that time, there were many who were comparing Reliance (RPL) as best buy which was at about 172 to 192. Now it is at Rs 132, down 25%.

This is the difference between my recommendations and others blind loyalty to Ambanis, Tata, Birla, etc. I never attach myself to any stock, and allow my self to be conducted by the sheer logic and dispassionate analysis of any scrip or market.

Perhaps I am the only one today, who is superbullish about the Indian market, and you will see that in coming days.

Kalidas, Hong Kong
6-10-2008

9)
for tally

Profit is yours if you take it. Book the profit in scrips in which you are in money and buy back same scrips in violent correction.

If RBI eased CRR, it is good thing. They should reduce rates rather than reducing CRR - reducing CRR does not enlarge credit, as most banks in India are anticipating tight money conditions ahead in inter bank market.

You should remain long on Gas stocks like Indraprashtha Gas, GAIL, GSPL, Petronet, and State Owned Refineries, Buy LIC HSG FINANCE when it corrects more in violent crash. When there are no bids for such counters, is the time to buy them at 20% lower circuits

I am not bullish for RIL - as I had mentioned before, this stock is hyped up and its real value should not be above Rs 900. It has long way to go down - but do not listen to me. Others were telling me that it will never go down and see it is collapsing.

Not because of fundamentals, but the shares of RIL must have been pledged by the promoters for their various projects. If the share value go down, they will get margin calls and if they can not meet thousands of crores of margin calls, their shares will be simply sold off in the market. That will cause the market to fall also because of their index weighting

Kalidas, Hong Kong
6-10-2008