Bailout Bill to Nowhere: Why we’re still not out of the woods

The $700+ billion bailout bill has passed through Congress and been signed by the President. The debate, the stock market volatility, and the lack of cogent reporting of events has left many of us wondering what in the world we have just witnessed.

MM calls it “Crap Sandwich 2.0.” In fact, she live-blogged the House debate.

While our government pats itself on the back for avoiding financial Armageddon, I wonder if they realize that the drama of the past few weeks is only the first layer to be peeled from this onion.

The next layer will begin to be pulled away next Monday, as settlement of credit derivative trades involving Fannie Mae and Freddie Mac are unwound.

On Friday, the Lehman auction is scheduled.  WaMu follows one week later.  That is, if anyone is left standing.

How many billions will have to come off the balance sheets at settlement? As interesting and unsettling as the past few weeks have been, we haven’t seen anything yet.

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PPT has a busy weekend

Not much time was spent on the golf course this weekend for members of the Plunge Protection Team. Today’s announcement of a support plan for Fannie Mae and Freddie Mac follows another grim week on Wall Street. Hank Paulson and Ben Bernanke faced the impending meltdown of Fannie Mae and Freddie Mac with the only real tools at their disposal: expanded borrowing authority from the Fed, and, pending Congressional approval, direct government ownership of equity shares in the mortgage giants.

“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owner companies,” Paulson said Sunday. “Their support for the housing market is particuarly important as we work through the current housing correction.”

Last week’s market volatility culminated with a large-scale bank failure, numerous 52-week lows on the Dow, and the CEO’s of America’s largest financials wondering when and if the bloodletting would end.

Just one blogger’s guess, but I expect a strong market rally next week as news of the support plan for Fannie and Freddie gives a much needed shot of confidence to beleaguered investors. Hopefully, Congress will take a very close look at this and demand that government’s ownership positions will be both limited and temporary. I can dream, can’t I?

Update:
from WSJ

The federal government’s seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry, which is in a tightening bind following a long run of prosperity.

Banks and thrifts are struggling against a rising tide of bad loans, and it is becoming increasingly clear that some lenders won’t be able to dig their way out. While fewer banks are expected to fail than the 834 that went under from 1990 to 1992, it will likely take several years for battered financial institutions to work through their bad loans and replenish their depleted capital.

It may take longer than that. The BOGNONBR graph has been updated since our last look, and the trend shows no indication of changing direction. Quite the contrary: a 15% decrease in non-borrowed reserves from the previous month.

Update 2:

a grim assessment from UK Telegraph, predicts “de facto nationalisation of the banking systems in the US, Britain and Europe.”

I might have to reconsider my “Monday Rally” prediction.

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Sercan Ondem

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