Financial Wisdom – By Kalidas

Radical Solution for Credit Crisis from Kalidas

Paulson’s Poison Pill – Cost $700 Billions

with 44 comments

 

Defrauding American Tax payers of $700 Billions in Mouse Trap Plan

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 arises, whether their bail out plan was genuine or was it the proposal from these con-men 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 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

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Written by anilselarka

September 26, 2008 at 3:47 pm

44 Responses

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  1. As usual, Kalidas at his best. Please declare the stocks you bought to help retail investors.
    Regards,
    Amit

    Amit

    September 26, 2008 at 5:14 pm

  2. Dear Kalidasji,

    I started my first investment reading your blogs on MMB. I feel privileged to be able to learn so much from your experience.

    Thank you.

    Sincerely
    Girish

    Girish

    September 26, 2008 at 5:43 pm

  3. Congratulations Sir! for setting up this wonderful blog.

    vikram

    September 26, 2008 at 6:05 pm

  4. Congrats Sir.
    It is Very Nice. I have been following your writeups on MMB for quite sometime now.
    I appreciate your efforts in helping people like us understand financial markets

    warm regards

    shivashankar

    September 26, 2008 at 6:46 pm

  5. Dear Anil/Kalidasji

    U made it finally. Congratulations. I am sure in a very short time this blog will soon be the most visited on this planet. I sincerely hope and pray that someone from the US Congress visits this blog and sees reason to your PPP.

    Today NIFTY cracked 3972 which was the last support available. Now even if the DOW shoots up on monday NIFTY will take some time before retracing the previous highs of 4200. I feel NIFTY is set to touch 3500 quickly on Monday and then retrace.

    God Save America.

    bubbu64

    bubbu64

    September 26, 2008 at 7:01 pm

  6. Dear Sir,

    Very nice blog. I have a small suggestion: please add
    RSS feed to your blog. So that readers can access it easily by the google reader.

    regards,
    v8r.

    v8r

    September 26, 2008 at 7:21 pm

  7. Dear Sir,

    Its quite nice and informative blog. I am sure it will be one of the best finance blog in the world

    Thank you

    Best Regards,
    Rajmohan

    Rajmohan babu

    September 26, 2008 at 7:29 pm

  8. Thanks for this great post sir. Looking forward to more insights on this ongoing crisis. I wish this becomes the most tracked blog on the current crisis.

    Thanks and Regards,
    dutchman.

    Dutchman

    September 26, 2008 at 7:33 pm

  9. Dear sir

    Nice to c..ur new blog…..lot of info….

    manitoganesh

    September 26, 2008 at 7:37 pm

  10. It is great to see the blog finally. I have added this blog address to my favourities.

    I will reading this on a daily basis instead of newspaper.

    Thank you,
    Ravi

    Ravi

    September 26, 2008 at 7:54 pm

  11. This blog is more informative then the 1000’s or so pages that I might have read on this topic in the past few months. Your sincerity and hard work will always have followers.
    May god bless you
    Regards
    Martin

    Martin

    September 26, 2008 at 8:13 pm

  12. I think its a little biased towards free market. try to fathom the opposite…
    1.Imagine the plight of investors and middle class who had their investments in these Banks. They will be lost forever
    2.Also think about the million of people who work for these banks.
    3.Also think about those people who work for companies who are vendors to these banks, they too will lose their jobs. So and so forth. The domino effect.
    4. Since the market is destabilized, companies sunk, recession will set in like that of 1929. Credit will be hard to find, spending capacity reduced to a trifle.
    I don’t think that’s a pretty scenario either. When UTI made losses in India, and government came in to bailout UTI the investors were the beneficiaries (and ultimately the govt too because the junk papers it bought from UTI were finally sold for a profit). True the companies should pay for their greed and inefficiency but saving them is a small price to save the population and the world at large! Free market may always be efficient but it is not always the best thing to have.

    Gaurav

    September 26, 2008 at 8:17 pm

  13. Dear Kalidas
    I have been following your posts in MMB for a long time but never interacted with you on the board. I read your comments and followed all your instructions regarding buy and sell as given by you. I have profited a lot by your advice. I congratulate you on starting this blog and hope it benefits many more readers like myself.One last request; I have been given your name as my login Id. I would not want to dishonour you with this title. Is there any way I can change.Sorry for this.

    Bonzo ( this title was on the MMB board as my user ID) Can I retain it here.

    anilseraka

    September 26, 2008 at 8:31 pm

  14. Kalidas,
    Congratulations. My best wishes are with you.
    Iam sure the blog will go places & provide interesting read .

    Deekay

    Deekay

    September 26, 2008 at 8:37 pm

  15. Hi Sir,

    I just don’t understand the difference between knowledge and wisdom by seeing your posts. Simply awesome.

    Warm Regards,
    M.Das

    M. Das

    September 26, 2008 at 8:41 pm

  16. Kalidasji,

    Thanks for setting up the blog.

    Was eagerly awaiting this.

    The MoneyControl forums are structured not that well, and difficult to follow threads. The blog is a great relief.

    And nice to know your identity. All these days I was thinking that this is Marc Faber posting with an assumed Indian identity and context 🙂

    Beetle

    Beetle Bailey

    September 26, 2008 at 9:34 pm

  17. Dear Kalidasji,

    We are happy to see your long awaited blog. It has come out really good, and content as expected from you are logical and explained for lay man.

    I am sure this will be among the most read and sought after blog in very short time span.

    Rajesh

    Rajeshhimself

    September 26, 2008 at 10:55 pm

  18. Dear Sir,

    At last this happend. Congrats and Thank you very much for taking so much effort to educate common man like me. Sir I am sure day will come your blog will be linga Franca of finance world including Ivy League schools.

    Shiva

    shiva

    September 27, 2008 at 12:33 am

  19. Hello Kalidasji..

    Congratulations for your new Blog..

    Trust you will be still avaialble at MC for helping and guiding small investors with their silly doubts..

    Goodluck and all the best in whatever you do..

    Ramesh

    Money_Bull+Bear

    September 27, 2008 at 12:44 am

  20. Finally, you have made it to the Blog World. Your Loyal readers have been waiting for so long & now the wait is over.

    Congratulations on your new blog & i can’t wait to learn & share ideas with you & the rest of your loyal fans.

    Ashish

    Ashish

    September 27, 2008 at 1:11 am

  21. Fantastic post to start with. As people above say, you will achieve a cult following here.

    Rajiv

    September 27, 2008 at 1:11 am

  22. Hello Anil Sir..

    Congratulations for your new Blog…

    i think you deserve a special place in this Financial/ market world and you created on of your own.. instead of getting silly comments from silly guys in the MC – MMB..

    Wish you all the best and keep helping, guiding and educating us with your emense knowledge..

    I earned more knowledge from you than money… and i prefer the earlier (knowledge) becos i cant buy that with any amount of money… i feel proud and glad reading your messages becaus i can always share with my colleagues and kids in future…

    Thanks for that.. and i am glad i came across ur posts in Jan 2006..

    Good luck sir…

    Ramesh (Money=Bull+Bear)

    Money_Bull_Bear

    September 27, 2008 at 1:14 am

  23. Hello Anil Sir.. (Ignore if it is reposted)

    Congratulations for your new Blog…

    i think you deserve a special place in this Financial/ market world and you created on of your own.. instead of getting silly comments from silly guys in the MC – MMB..

    Wish you all the best and keep helping, guiding and educating us with your emense knowledge..

    I earned more knowledge from you than money… and i prefer the earlier (knowledge) becos i cant buy that with any amount of money… i feel proud and glad reading your messages becaus i can always share with my colleagues and kids in future…

    Thanks for that.. and i am glad i came across ur posts in Jan 2006..

    Good luck sir…

    Ramesh (Money=Bull+Bear)

    Money_Bull_Bear

    September 27, 2008 at 1:15 am

  24. Hi Anilji,

    I am a regular reader of ur writings on MMB since Sept-07. But I didnt replied there coz the MOD doesn’t approve msg that quickly. This wud be a grt platform to interact wid a genius like u.

    I survived the Jan-08 crash reading from u, but then slowly I kept on losing money. And from 70% profit in Jan-08, at present am in 70% loss. I hope I can recover my money wid ur guidance.

    Regards,
    Ojal Suthar

    Ojal Suthar

    September 27, 2008 at 1:43 am

  25. Hi Anilji,

    Looking at the present scenario I feel if the decision isn’t finalized about BAILOUT or NO BAILOUT, then in confusion alone NIFTY will go below 3500 and if there is NO BAILOUT then we can see NIFTY below 3000 and if there is BAILOUT we will see 4600 on NIFTY this october… Don’t know what’s up next..What future has in store for us?? Let’s keep our fingers crossed and hope for the best.

    I feel there will be every possible action to save DOW and if DOW is saved, then we are saved too. Today too DOW is trading in positive even if there is uncertainty regarding the BAILOUT and WaMu failure.

    Regards,
    Ojal Suthar

    Ojal Suthar

    September 27, 2008 at 2:19 am

  26. Hi Anilji,

    I read on Yahoo that “Some Republican lawmakers want an alternative plan under which the government would provide insurance to companies that agree to hold frozen assets, rather than have the U.S. purchase the assets.

    I feel this is better option instead of purchasing those ZERO value assets.

    Today RIM (Research In Motion, producer of BlackBerry) fell 25% too. So now the pressure is expanding from Financials to Technology and other sectors too. Whole America is on verge of collapse.

    Regards,
    Ojal Suthar

    Ojal Suthar

    September 27, 2008 at 2:25 am

  27. Hi Anilji,

    Wasshington Mutual Inc. also becomes the largest US bank to collapse. In this financial turmoil, how did JPMC paid 1.9 billion USD for WaMu is a big Question??? I feel all this is to fool investors and all are doing something unusual to avoid fall of USA…

    This BAILOUT will suck access money from US financial system and there will be Civil Wars ahead. Like we add money to the falling stock(RANBAXY right now) and we keep on losing more and more, USA is doing same mistake.Adding money to the bad unworthy money n they will go on losing it.

    Within six months we’ll see fall of CitiBank, Goldman Sachs and Morgan Stanley and finally USA…

    Regards,
    Ojal Suthar

    Ojal Suthar

    September 27, 2008 at 2:42 am

  28. Hi Anilji,

    I would like to discuss the post I found:

    S&P’s recovery checklist

    Standard & Poor’s Market, Credit and Risk Strategies (MCRS) has created a short checklist of economic and market variables and identified the general developments to track:

    1. Real estate values — must stabilize or edge higher

    2. The rate of existing and new home sales — must rebound

    3. Credit conditions — must ease up substantially

    4. Crude oil prices — must continue to decline, and then stabilize

    … … …

    Plz read the whole story here and guide us
    http://biz.yahoo.com/bizwk/080926/sep2008pi20080925049629.html

    Regards,
    Ojal Suthar

    Ojal Suthar

    September 27, 2008 at 2:54 am

  29. Hi Anilji,

    Washington Mutual paid former CEO Kerry Killinger $14.4 million in 2007 and over $54 million from 2002-07, Forbes reports. In return, the nearly 120-year-old firm was led into the biggest bank failure in U.S. history.

    This states that the position USA is in today is all because of the GREED and LOFTYNESS of their people..

    Regards,
    Ojal Suthar

    Ojal Suthar

    September 27, 2008 at 2:56 am

  30. Hi Anilji,

    Another greed and waste of money by WaMu: WaMu CEO Alan Fishman is entitled to $11.6 million in cash severance and to keep his $7.5 million signing bonus, just only for about three weeks of work.

    GOD BLESS AAMERICA..

    AMERICA R.I.P.

    Regards,
    Ojal Suthar

    Ojal Suthar

    September 27, 2008 at 3:01 am

  31. I was watching the debate between the presedential candidates this morning for a brief period of time and the interviewer was asking the question to both on what solution they had for the current financial crisis and the replies form both were no where near the question which the interviewer had to repeat 3 times , but to no avail. I was wondering then as to what difference is there between those candidates and the people’s representatives in our country – none I should say.
    In which scenario how does anybody expect them to solve the problem in the first place. Hence they have to rely on the likes of Paulson, Bernanake et al.

    Xavier

    September 27, 2008 at 1:41 pm

  32. sir, you r most wonderfull. your blog has th strenght as u had at mmb . i was scared when i saw your mail about your own blog that i will loose out your so to the point observations and deep market understanding which i so important to thenewone like me specificly in these market conditions.may god bless u with the best .

    anu

    September 27, 2008 at 3:59 pm

  33. Hi Kalidas Sir,

    If saw these below lines in your blog.

    Quote –
    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.

    – Unquote

    Since the starting of the short-selling ban many of the hedge funds and others have already covered their shorts which led to a 500+ single day rally on the Dow earlier.

    Will not he hedge funds or others be opening new short positions when the ban gets lifted on Oct 2. In this case will not the US markets come down rather than going up .

    Please share your thought on this.

    I would like to confess that i have started reading your posts since the past six months , itz only b’coz of your posts and the knowledge you have shared that today iam in a situation to understand the whole mess that’s happening in the financial world. Thank You Sir.

    Regards.,
    Gloom & Bust

    Gloom Bust

    September 27, 2008 at 5:49 pm

  34. Dear Mr.Kalidas,

    I am keenly following you in MMB for almost an year now. Your advice helped me to save lot of money both in Janauary and March. Even though my education is in Chemistry your articles made me to feel like I got my graduation in Finance.

    Thanks for your splendid and seamless education to novice investors like me. I am sure this blog is going in win millions of hearts.

    Good luck to you.

    Best regards
    Saravanakanth, Oman

    Saravanakanth

    September 27, 2008 at 10:36 pm

  35. Dear Mr. Kalidas,
    “True wisdom” indeed!
    The crisis is due to derivatives and here too it is due to unregulated CDSs, more than CDOs. Cost of US Govt CDS at 26 to 28 cents is more than that of Mcdonalds at 23 to 26 cents!
    Looks like the authorities in USA have allowed things to deteriorate so far due to lack of foresight and sheer incompetence.
    One way to solve the muddle would have been to use state funds or Fannie and Freddie to buy out the defaulting primary/bundled up mortgages, instead of Paulsons’ proposal to buy out derivatives, which are based on the failure or default of loans, i.e. CDSs. The underlying assets are not Zero in primary or bundled up mortgages, as they are backed by the properties and are earning when EMIs are paid.
    The cost of buying up such defaulting mortgages is far lower than the cost of buying up derivatives which are manifolds.
    Even now this approach would help the masses rather than Wall Street,but as you say the conspiracy clouds the thinking of the powers that be…….
    Once there is a basic value established(however low) the derivatives value will automatically start improving as foreclosed properties will move to new buyers who will start servicing the fresh mortgages.
    Some existing homeowners could also be assisted to enter into fresh agreements at lower interest rates or through subsidies, if they are found to be serious and credit-worthy. The overall cost to Govt would still be lower than a complete write-off.
    Demand for housing is not totally dead…..it’s dried up because of uncertainty and lack of liquidity.
    The whole world is suffering due to excesses in USA.
    Best regards,

    suresh

    September 28, 2008 at 3:31 am

  36. Congrats sir!!!

    Lot of education here and I am sure the entire knowledge-seeking investor fraternity will be benefitted by your kind service.

    Keep up the good work.

    jimmyrocks

    September 28, 2008 at 4:19 am

  37. I agree that its an excellent source of education from an unbiased person.

    I can’t wait to read more.

    aselarka

    September 28, 2008 at 10:07 am

  38. Hello Kalidas sir,
    Great to know about your blog.

    I have been following you from past 1 year ..
    Its really nice to read your posts ..

    Great! keep going sir!

    Thanks
    Shiva

    shiva

    September 28, 2008 at 12:08 pm

  39. dear sir,
    great source of information your blog is. My suggestion is why don’t you open a blog on blogger.com rather than wordpress as it is easier to post and reply to comments there. Anyhow, please keep posting to let us know more about financial world.

    investor

    September 28, 2008 at 5:30 pm

  40. Congrats sir!!!
    It is great to see the blog finally. I have added this blog address to my favourities.

    I will reading this on a daily basis instead of newspaper.

    Thank you
    T.S.RAJKUMAR

    RAJKUMAR.T.S

    September 29, 2008 at 1:15 am

  41. Hi Anilji,

    I would love to see a FeedBurner Email Subscription option here, so that we get updates straight in our mail and we dont miss any of ur articles..If any doubt reply me…

    Thanks,
    Ojal Suthar

    Ojal Suthar

    September 29, 2008 at 2:20 am

  42. Thanks for your new venture. I read almost all your posts in MMB and gained a lot of knowledge. I am proud of your services for the people in the financial world. I recommend people known to me to read your posts in MMB and they may be silent readers.

    Regards,
    Mathiazhagan

    Mathi

    September 29, 2008 at 3:29 am

  43. Kalidasji (I would like to call you so),
    thanks for this wonderful blog which shows the unimaginable naked truth of this economical WILD world.
    In past almost 1 year, you have wrote on MMB from farm land to gold to properties to bond and so on.
    You wrote on almost every type of investment (In fact I learned it from you.)
    Thanks for sharing all of you knowledge with small investors like me.

    Best regards,
    Prashant small_invester1

    Prashant

    September 29, 2008 at 7:02 pm

  44. I have read this post a couple of times now, and although I agree with you in every way. I must ask you this below, as I would like to get your view.

    You mentioned:
    ———————————————-
    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.
    —————————————————–

    Now, if you go back in history to 1929 during the great depression in the US, and when the banks were left to go bankrupt, there was a panic in the market, where people were starting to withdraw their funds, by lining up for hours and days to get their funds out, and this was not only for the banks who were failing, but also with banks who had a good standing & were in no pressure to go bankrupt, yet the public were going & trying to withdraw their funds, because of panic in the market, that it might be my bank next.

    My question is, don’t you think that it would happen again, meaning public would start to rush out & start to withdraw their funds immediately, and the banks who are doing fine compared to the banks who would file for bankruptcy would be affected again, which would drive up Inflation to a all time high.

    Looking forward to hearing your views.

    aselarka

    October 2, 2008 at 10:47 pm


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