The Geithner plan is actually a good one - it avoids creation of a government bad bank, it avoids nationalization

Foreign Exchange - Currency Outlook

The big question on the table today is "Where is Tim?" Geithner is disappointing the market by not disclosing details of the plan to lend money to the private sector (vultures) to make a market in toxic assets. It looks like he is part of the problem rather than part of the solution, and critics are calling him an empty suit who has never placed a trade himself.

This is a terrible thing.

Remember that Rubin had instant credibility on the Street because he had been a trader.

The Geithner plan is actually a good one - it avoids creation of a government bad bank, it avoids nationalization (a semantically loaded word), and most of all, it avoids the government putting a price on assets at taxpayer expense. So where is it? Market News says "The market is anxiously awaiting the Fed's rollout of its Term Asset Backed Lending Facility (TALF) which has the potential to lend up to $1 trillion against assets and loans to spur lending in autos, credit cards, student and small business loans and commercial mortgage backeds. Bernanke said last week the facility should open any day."

When the history of this period gets written, we will find out the cause of the delay, but right now, nobody cares. If it turns out to be a legal constraint, the Street will issue the Shakespearean scream "let's kill all the lawyers." And yet it really is preferable to resolve these problems without writing new laws or twisting the capitalist principles on which the country is (more or less) founded. This is why letting judges arbitrarily re-set the principal of mortgages is such a contentious idea. We need flexibility and adaptability, yes, and fortunately laws can be amended, but delay is a bad thing in its own right, at least if you are a saver/investor today.

It's likely that Geithner is side-tracked by the Citigroup problem. Citi, along with about 20 other banks, is supposed to undergo the stress test this week. Presumably it will fail, despite big downsizing actions already taken. Converting the government’s preferred shares to common stock would solve some capital adequacy issues (while creating massive moral hazard and a competitive advantage for Citi).

The other question of the day is "What will Ben say?" Bernanke starts the semi-annual Congressional testimony today. He wants to talk about the economy but is going to get button-holed on bank nationalization whether he likes it or not. Congressmen will have their usual opportunity to look stupid and partisan on TV, although Bernanke is more gentle than Greenspan used to be. The real question, although it's conceivable no one asks it, is what is the Fed’s exit strategy, i.e., how will it halt inflation after all that Fed-created money at the banks is no longer used for capital and is used for lending? The obvious answer is to pull a Volcker—to raise interest rates so high that lending is choked off. This is obviously a long way in the future, probably years, but it's important for the inflation - obsession crowd that Bernanke acknowledge this is the expected outcome and assert that he will deal with it. After all, expectations of future inflation from money supply creation is why a Chinese official said

"We hate you."


Some foreign exchange analysts want Bernanke to state out loud that the Fed will adopt an inflation target. This would supposedly reduce fear of upcoming inflation and add confidence that the Fed knows what it’s doing by ballooning its balance sheet. But we say inflation targeting is still too hot a potato and Bernanke will be cagey about it. The downside among politicians outweighs the upside among market players.

Institututional factors tend to trump economic data and this is a huge week for institutional factors. The fiscal responsbility summit that kicked off yesterday - with Obama promising honesty in government accounting plus efforts to reduce the deficit - and meetings go on all week. This is probably an effort to woo those idiotic Republicans who want basically to secede from the rest of the US (with some governors rejecting federal unemployment money for its citizens - good luck in the next election). Tonight Obama will pre-empt our regular TV shows with an address to Congress and the nation on the budget, which is formally released on Thursday. Tomorrow the banks’ stress tests begin. The White House is no doubt hoping to get through the week to Friday’s GDP revision without having to nationalize anything.

Finally, we do get data although probably no heavy surprises. Today it's the Case Shiller home price index, backward looking to December, and Thursday, durables. We suspect the dolar could ping-pong around and perhaps weaken today if stocks recover, but looking ahead, the ECB will be cutting rates next week and we have to ask whether that is fully built in.

The trend is your friend and the foreign exchange traders continue to sell euros and buy US dollars and trend remains downward.

Pounds to US Dollars = 1.4417
Pounds to Euros = 1.1260
Euro to Pounds = 0.8870
Pounds to Australian Dollars = 2.2330

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790

the public is in no mood to bail out Citibank and its rich shareholders.

Foreign Exchange - Currency Outlook

The financial crisis is made worse - prolonged - by the talk of US bank nationalization if nationalization is not a real possibility today, and we say it's not. It’s just smoke. On one side we have a bank that wants to protect important foreign shareholders and on the other we have a wide array of interests that want to protect the US reputation as a capitalist country that believes in private property ownership. Nationalization was always a last-ditch prospect and we are not at the last ditch, although with its stock at $2,

Citi thinks it is.

But the Geithner plan, which relies on lending government money to vulture speculators to make a market in toxic paper, is actually a good one. It’s a market solution only a little contaminated by government interference. The Paulson plan (the first version of TARP) was to buy toxic assets to free up the capital to let the banks operate properly again.

Paulson had to draw back from that plan because he had not appreciated the sheer size of the questionable paper. But the questionable paper remains at the heart of the financial crisis and the Geithner plan does address that, while simultaneously addressing bank capital levels and protecting taxpayer interests. The government is not setting the price on toxic assets, as TARP would have done. The Geithner plan is the one viable alternative to the "bad bank" plan that was rejected by the Obama Administration.

To nationalize Citigroup (which contains a lot more than Citibank) would be to throw a monkey wrench into the Geithner works. Not only would it destroy the credibility of the Treasury, it would create suspicion that more nationalization is to come - the famous "slippery slope" of the lawyers. And it almost certainly would entail creation of a mini-bad bank, an idea already rejected by the Administration and Congress as too expensive and involving too much government interference in markets (price-setting). So, what leverage might Citi have to get it done anyway?

This story has a way to go to ripen and it’s always possible that Citigroup gets broken up with a heavy dose of government money that is not quite nationalization (which would be majority ownership and management duties). But we have no reason not to believe Obama and Congressional leadership, including the hilarious Barney Franks, when they say this is not the road they intend to go down. It’s not insignificant that before the nationalization story got going, the story on Friday morning was Rick Santelli’s rant on CNBC the day before that the Obama mortgage bailout plan was rewarding the bad behavior of people who bought more house than they could afford and took on more debt than they could afford to buy luxuries. This got a large and favorable response, except for the rebuke from the Obama spokesman, who said Santelli didn’t understand the mortgage plan and didn't know what he was talking about. The favorable response is the voice of the people, who are mad as hell at bankers as well as their irresponsible neighbors. It’s not unrelated that disapproval is running really high over the woman who deliverately set out to have octuplets (while already having 6 children), which is seen as irresponsible (at best).

In this social environment, the public is in no mood to bail out Citibank and its rich shareholders.

All this story has done is distract attention away from the plight of the debtors in Eastern Europe, including a vast number of Poles and Hungarians with mortgages denominated in Swiss francs.

The nationalziation story is going to hold imaginations until something else comes along. Tomorrow and Wednesday, Bernanke gives the usual twice-yearly testimony to Congress on the state of the economy. He is likely to say what the Fed has been saying recently, that even if the financial sectors starts loosening up credit and seeing signs of recovery by year-end, it will still be a jobless recovery, the third jobless recovery since 1991. The Fed thinks unemployment will not fall under 7% until 2011 or later. Bloomberg reminds us that the 1991 recession bottomed in March but unemployment kept rising for another 15 months, reaching 7.8% in June 1992. “Similarly, the last recession ended in November 2001, and unemployment didn’t peak until reaching 6.3% in June 2003.” We seem to recall Greenspan excusing away the jobless recoveries as being due to improved productivity.

Another factor this week will be the "fiscal responsibility summit" tomorrow, at which Obama will announce more details of the plan to cut the budget deficit by the end of his first term to $533 billion, from the $1.3 trillion he inherited from Bush. The $533 would be about 3% of GDP - the Europeans will say the US is imitating them. Actually, the amount inherited is much larger because the Bush gang left out various chunks of spending that they didn't want to acknowledge, like the cost of the Iraq war. We get the actual budget details on Thursday (the same day we get new home sales). Signs of fiscal rectitude and honesty in the US "should" be US dollar -friendly.

Meanwhile, the March 5 ECB policy meeting creeps ever closer, and it's a surefire bet that the bank cuts rates, probably by 50 bp. We may also speculate that somewhere in the EC or ECB a plan is being hatched to buy the sovereign debt of troubled members like Portugal, Spain, Greece, Italy, and Ireland.

Maybe

Europe will come up with the equivalent of a plunge protection team, i.e., private players getting their arms twisted to buy this paper and reduce the spread against Bunds. Nobody seems to have noticed that Trichet, as of this morning, is changing his tune and is worried about the spillover economic effects of the financial crisis.

We call this a day late and a dollar short.

We get a lot of data this week, probably to be overshadowed by the Citi nationalization and Obama budget talk. Nothing will be much of a surprise, except possibly Friday's GDP revision from -3.8% in Q4 to possibly as much as -5.3%. Everyone is already thoroughly disheartened so it’s not clear that a downward revision is going to hurt much. Before then we get the Conference Board consumer confidence (tomorrow), existing home sales on Wednesday and new home sales on Thursday, and the University of Michigan consumer confidence on Friday. Also Thursday is Jan durables, probably the one other data point that can move the market this week.

We continue to like the dollar.

Watch gold - it’s not really a currency and its limitations are clear to even the most ideological of true believers. Secretary of State Clinton told the Chinese she wants them to keep buying dollars and dollar paper. So far we have no reason to think they will not, and you should, too. It is the safe-haven. Unless the stock markets rallies like crazy this week - and why would it do that? - the US dollar should recover smartly.

Pounds to US Dollars = 1.4619
Pounds to Euros = 1.1400
Euro to Pounds = 0.8765
Pounds to Australian Dollars = 2.2600

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790