Day One. Ground Zero.

This is Day One for my blog and Ground Zero for the global financial markets. Yesterday the DOW jumped over 936 points (11%) as Wall Street reacted to Neel Kashkari’s (aka $700B man) comments on the Treasury’s TARP plan. At 35 years old, I doubt that he has the personal experience necessary to lead such a massive financial restructuring, but he is at least a good speaker. With that said, he basically rehashed the 400+ page bill in generic terms for us mortals to understand. Mr. Kashkari has chosen some steady hand people to help him sort out this mess but I am not sure they are the right people. Two of his people worked for the Resolution Trust Corporation back in the 80s. The problem with that is that the RTC was a failure for the U.S. Govt because they did not get out what they put in. In a sense, they sold most of the assets for a loss to the same people who needed rescuing. (albeit under different corporate structures) The TARP organization leaders should have been sourced from outside the Govt to get real world experience on how to deal with these financial instruments, many of which have been created in the past ten years. It looks like Hank Paulson is back to rewarding Goldman Sachs employees for following him to the Treasury. (aka The Hookup)

With the DOW and world markets taking such a drastic bound on Monday, we must keep in mind that for the month, all indices are still dramatically down. Although it is fun to break records and flush the market with renewed optimism, the rises must be placed in the proper context. Firstly, none of the indices around the world recouped what the lost last week. On Monday, the DOW gained $305B of the $612B in market cap that it lost last week. So if you look at it that way, today is ground zero. Secondly, Monday was a holiday, so the bond markets, banks and other financial/corporate places were closed. This means that the volume would have been much higher than it was. (i.e. there would have been more people selling) Lastly, Kashkari only spoke about information that was already public. What was decided after markets closed and early this morning could change the way traders view things. What I do know now is that the Treasury is buying preferred stakes in the top 9 largest banks in the U.S., and up to 8,000 of its member banks, for an aggregate of $250B. The terms of that investment is not known at this time but it looks like it could come with restrictions to the companies that were forced(*) to take the money. I do expect the markets to rise but what I cannot foretell is Friday’s closing. Many professional traders, of which I am not, might think of this as blaspheme because we could all die tomorrow and no trader gets paid to wait and see. However, for most small investors (sub-millionaires), caution should be the word of the day. Let me also make clear that I am a market-bull in the fullest sense of the word but I have been stung so I am a cautious bull.

(*)When I say forced, I mean that fully. It has been reported that Goldman Sachs and Morgan Stanley did not want to take the money from the Govt. They felt that they did not need it. I think the same. MS just received $9.9B from MitsuUFJ and GS received $5B from Warren Buffett with an option for $5B more. It seemed to their CEOs and me that they were capitalized enough to make it through this downturn in the market. Hank Paulson knew that they did not need the money, but to restore confidence in the market, he had to show that everyone was taking the money and not just the failing banks. To be more specific, Hank did want the public to know which bank had the greatest amount of toxic assets so he forced them all to take the cash. I suspect that the terms are vastly different for each bank.


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