Better Than Expected

The Paulson plan emerged from Congress better than I expected, and certainly much better than the plan as announced on Thursday by the Democrats. Maybe McCain and the R revolt helped. I don't know, but it's a far better plan now than Thursday. [My commentary is based on this morning's WSJ summary as of about 4AM.]

The $700 billion survived. $250 billion at once, then $100 billion on request and then last $350 billion is approved on request and can only be blocked with a vote of Congress, which could be vetoed by the President. So a real revolt in Congress will be needed to block the last $350 billion. No delay until May for it. And the fact that it will take Treasury a bit of time to get going, and conduct the auctions, the phasing seems OK.

The warrants are minimal for assets the Treasury buys in auction. For direct buys, the warrants are a lot, but that's what Treasury got in AIG, etc. The requirement for recovery of losses is just a requirement for a plan to be submitted. SEC is required to review mark-to-market accounting. Good.

And the Fed gets authority to pay interest on reserves. Very good. The Fed can now push money into the monetary base without causing the Fed Funds rate to collapse.

And no mortgage cramdown provision. Very good, too.

So overall, I like it.

As implemented, this should really help stop disintermediation from pushing more banks into insolvency. But of course a bank has to survive until the plan gets going.

From recent events, WB might not make it. C and WFC are looking over buying it. But I suspect a WM-style purchase is needed to give the buyers enough cushion on the option ARM writedowns.

Huge Belgian bank, Fortis, was 50% nationalized. Mid-sized lender Bradford & Bingley in the UK failed and was sold to Banco Santander.

MS says the Mitsuibishi investment is perking along.

So what other banks are on the hit list ? Right now, interestingly, none come to mind. I suppose NCC and a few other regionals are problems, but rather manageable as long as runs or walks on the bank don't occur.

So let's wait & see. Congress needs to pass the bill, though. I just heard a vote is expected around Noon.

More

From Barron's I see the Fed finally increased the monetary base substantially - $70 billion in the last two weeks. Very good.

Share buybacks are now more widely recognized as very poor uses of corporate cash. One can see that financial firms wasted huge sums buying shares at high prices, but now issue new stock at low prices. And GE made a similar mistake, buying high and now cutting the buybacks when prices are low. An article in FT shows that buybacks are really just used to prop up sock prices so executives can cash in options at higher prices. Really, they are a fraud on the stockholders. Maybe FT reads this blog, as I've written to that effect often.

Share buybacks encourage short term investing and thinking. Regular dividends encourage long term thinking and investing.

Markets

A mini-euro panic seems occurring this morning, likely due to a realization that their schadenfreude of last week was wrong, as their banks have big problems, too, which are not solely due to investments in the US mortgage markets.

On Friday I bought small, starter positions in three dry bulk shipping companies (DRYS, GNK and EXM). This is a speculation on the world NOT ending. The Baltic Dry Freight index has been collapsing and beefers have been crushing these stocks. But they have over 50% of their charters locked in for a couple years. And some of the drop in he Baltic Dry Index is due to a stand-off between China and RIO over iron ore prices. Financial Times had an illuminating article. So I will give them some time and add slowly to avoid large losses on my usual "early" positioning.

PS: I am stunned that Congress did not pass the bill. I am very worried for first time in awhile. My partner, who lived through Penn Central debacle, expressed concern to me about firms failing due to inability to roll over commercial paper. So I figured it wasn't worth the risk to stick with even my excellent stocks.

Word of the Day

"Purblind" - adjective [$10]
Purblind means lacking in vision, insight or understanding.
Sentence: Will the purblind public scare enough pusillanimous Congressmen to defeat the Paulson plan ?

[btw, pusillanimous means cowardly]

Quote of the Week - a new feature of this blog.

From "The Impossible H. L. Mencken", pg. 595 in an article written to cover the Scopes "monkey" trial in 1925 on teaching Darwin's theory of evolution in high schools. The event provoking the quote was an inane speech by William Jennings Bryan, a famous populist politician and religious fundamentalist.

"As Bryan said that learning is dangerous, that nothing is true that is not in the Bible, that a yokel who goes to church regularly knows more than any scientist ever heard of. The thing went to fantastic lengths. It became a farrago of puerilities without coherence or sense."

Ferrago means a hodge-podge, a confused mixture. [An old $10 word of the day]
Puerile means immature, childish. [ a recent $10 word of the day]