Wednesday, January 12, 2011

Another benefit of the new liquidity bubble 

Massive deficit spending and monetary stimulus may not be enough to overcome the Obama administration's suffocating regulatory policy, but it makes for a lot of dollars chasing too few shares of stock. The market is rolling ever higher even while business turns its attention to rewriting proxy statements and "improving" its "governance" and other such deadening activities. The hope is that the wealth effect will cause the rich, at least, to spend some money. There is some evidence this might be happening.

There is another benefit to the monetary rally in the stock market, and that is that it is making it easier for the government to make a "profit" on the equity positions it took as part of the TARP in 2008-2009. Even AIG, which was dead as dead can be two years ago has recovered to such an extent that the government might well make back its money.

Bob Benmosche, AIG’s chief executive, told the Financial Times the deals “clearly show that US taxpayers will get all their money back and they will make a nice profit on it”.

The government will make a profit if it sells its AIG shares for more than $29 apiece. Shareholders holding the warrants will profit if the shares are above $45. AIG shares closed at $58.40 on Wednesday.

I am man enough to admit that while I supported the TARP with great reluctance I also did not think it was possible that AIG would survive. Little did I realize that the federal reserve would pump so much liquidity in to the economy that even AIG would inflate its way to solvency, and then some.


By Blogger Deuce, at Thu Jan 13, 08:22:00 AM:

Off topic, but Obama's claim in his speeech and that of two Democratic Congresswoman that Gabby opened her eyes for the first time is an outright lie, being dutifully repeated everywhere:

Her eyes were open three days before Obama's speech  

By Blogger Progressively Defensive, at Thu Jan 13, 09:38:00 AM:


I think it's a substantive bull market. U.S. equities dropped 50% in 2008 ... why? Because banks underestimated the risk of the mortgage-backed securities in their portfolio and real estate nationally was over-valued? It was part liquidity crisis and part histeria. But the corporations businesses were solid medium-long term. GE was $8.

I think what we are seeing now is the ascendence of corporate USA. It is in the driver's seat when it comes to hiring being able to choose the best people and rely on technology and out-sourcing for a lot. The recession is over and all aspects of the economy are coming back on-line, real estate being the slowest. Interest rates are low, labor costs are low (because of high unemployment), and demand is rising. Boom-time. Dow 14,000 in 12-18 months; maybe more.  

By Anonymous Capn Rusty, at Thu Jan 13, 10:45:00 AM:

THawk: Could you explain what you mean by "inflate its way to solvency"? A German baker might receive 12,000,000,000 Marks for a loaf of bread in 1923, but he still wasn't solvent.  

By Anonymous Sean Hackbarth, at Thu Jan 13, 11:34:00 AM:

I backed TARP, but I didn't think the government would make its money back. That wasn't a great argument for doing it.

I sort of wish the government doesn't make too much since that could incentivize politicians to do more bailouts. Such a drastic move should only be used in the most desperate circumstances.  

By Anonymous Ignoramus, at Thu Jan 13, 03:07:00 PM:

1) Original TARP was just a paper shell game. The USA bought preferred from the banks at low rates, with a modest equity kicker in bank warrants. In most scenarios these investments would book a modest profit for the USA. In bad scenarios, for most of these banks the USA was already on the hook as guarantor through the FDIC.

"Good Hank Paulson" would say that this stopped more bank runs like the ones that had already taken down Wachovia and WaMu.

"Bad Hank Paulson" -- and former Goldman CEO -- would say that he included Goldman in TARP for "auld lang syne" even though it wasn't an FDIC-insured bank.

The USA booked most of the TARP profit it will ever see last year. The remaining TARP banks are mostly small banks with political juice (just ask Congresswoman Maxine Waters).

2) Don't forget the alphabet soup of other non-TARP programs run by the Fed and the FDIC for the particular benefit of GE, Citibank, Goldman and Warren Buffet, etc. These were huge and substantial. In just one of these programs, Goldman got to raise $5 billion at 2% with the benefit of an FDIC guaranty. GE did too, even though GE's historic business model has always been a one-of-a-kind end-run around the Bank Holding Company Act.

These programs were give-aways, often using government guarantees. No USA profit here.

3) AIG was always a special case. AIG had just a small hole but it proved really really deep. Most of AIG is high-end insurance, and most of that is foreign. That's where the value has been salvaged.

4) Obama & Co perverted TARP by using it to bailout GM and Chrysler. As investors, the USA is down about 50% on GM. Much of this shortfall was a direct transfer of wealth to UAW retirees, pure and simple.

5) Federal government accounting is totally fucked up. TARP investments in bank stocks were treated as an expense in FY2009; their payback in FY2010 as revenue. This has had the effect of making the Bush FY2009 budget look nearly $400B worse, and the Obama FY2010 budget nearly $400B better.  

By Blogger Gary Rosen, at Thu Jan 13, 04:10:00 PM:

Good point, Capn Rusty. Right now my brokerage fund is worth more money than I ever dreamed I'd have. But I don't feel as good about it as I should because I don't think those dollars are real.

Ig: "This has had the effect of making the Bush FY2009 budget look nearly $400B worse, and the Obama FY2010 budget nearly $400B better."

Sheer coincidence, no doubt.  

Post a Comment

This page is powered by Blogger. Isn't yours?