Safehaven | $7.4 Trillion Bailout - Oh My, Oh My

November 24, 2008

$7.4 Trillion Bailout - Oh My, Oh My
by Richard Shaw

This news leaves us simply speechless.

Nov. 24 (Bloomberg) -- Fed Pledges Exceed $7.4 Trillion to Ease Frozen Company Credit -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department's $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

Nov. 23 (Bloomberg) -- U.S. to Back $306 Billion in Citigroup Assets, Regulators Say -- The U.S. government agreed to protect $306 billion of loans and securities on Citigroup Inc.'s books against losses, as it seeks to shore up investor confidence in the bank.

Citigroup will, as a fee for the guarantee, provide preferred shares to the Treasury and Federal Deposit Insurance Corp., the regulators said in a statement. The government will also inject $20 billion into the bank from the Treasury's $700 billion Troubled Asset Relief Program.

Are we supposed to stand up and cheer because the cavalry has arrived? Or are we supposed to cower in fear, because the end is near?

Is this cause for a rally or a crash? We have no idea whatsoever.

How are we supposed to gauge the depth of problems when the stream of announcements of ever growing rescue goes on and on.

One of our five criteria for evaluating time to re-enter the markets with available cash is governments moving to the background and cessation of the weekend surprise announcements by the Fed, the Treasury and other central banks. The midnight announcement of $326 billion for Citi, and a $7.4 trillion tab for the overall rescue just pushes the likely prudent re-entry date farther out for us.

We have yet to learn of the "massive" stimulus plan contemplated by the new Congress and President. Anybody for $10 trillion total rescue package?

Who is going to buy all those bonds? If we don't borrow, then we have to print more currency. Either approach is highly problematic.

As of this moment (1:15 AM EST) the futures markets like the news. The S&P 500 index futures are up over 6% since the announcement. What might the judgement be by the close of the market today? No clue.

1/2 of the US GDP !?

1.5 times the entire outstanding Treasury debt !?

Oh my, oh my.

Richard Shaw
QVM Group LLC