CNBC Liveblog 2/3/09

CNBC's Closing Bell

Now, listening to the financial talking heads is about as useful of licking your finger and holding it into the wind for direction. For just one day's delusions, read on.

Dylan Ratigan: Interesting thing today is we’re seeing a shift from this “good bank/bad bank conversation” to now this conversation that instead of that we’ll do a Bank of America or Citibank insurance policy on all the bad assets writ large. In other words, whatever the toxic assets are, if they don’t work out, the government will deal with it. The government becomes the insurer of last resort, as opposed to being the owner of last resort.

This is a comment about the "new" TARP model coming with the next round of governmental financing. The question is whether the taxpayers will be owners or insurers of the bad loans. Which would you like to invest in?

Bulls Argue for a Rally: 1) Expectation of more clarity on TARP, stimulus and “bad banks” soon

Scott Jacobson, Capstone Holding Group: Stay away from energy and financials.

Maria Bartiromo: “A trading range because we’re waiting on a sort of definitive resolution on to the stimulus package? A trading range because we’re waiting to see what happens next in the economy? The recapitalization of the banks, or what? What is behind this lack of movement?

Maria is raising several possible reasons for the the market doldrums. Markets love uncertainty, right? Especially when it comes in multiples.

Eric Ross, Canaccord Adams: Unfortunately, all of that. We’re waiting for TARP funds to actually make its way through the economy which have already been deployed. We’re waiting to find out how bad the economy really is. We all know that it’s very bad. Today’s auto sales looked even worse than people were expecting. Things continue to pile on and get worse and worse. I think we’re really waiting for another leg down has to drive us much further. It has to be much much larger than what we’ve seen.

We don't know how bad it is (Bush didn't like that quantification stuff, so a lot of financial indicators were scrapped or distorted). Government regulation impedes business, so aggressive regulation was scrapped, too. It's the financial equivalent of the Wild, Wild West - all over the globe.

Dylan Ratigan: The skeptics argue you can do what you want with TARP, you can do what you want with stimulus, we’re dealing in hundreds of billions with the government for what is a multi-trillion dollar problem and so really we’re just scrambling around in a hole that is too small, er, a pile of dirt that is too small considering the size of the ditch.

One man's skeptic is another man's realist. The situation is so bad, so complex, that it can't be quantified, and the fix - read that taxpayers' money - is paltry compared to the magnitude of the underlying problems.

Dylan Ratigan: Again the question is: How do we deal with the banks? The most recent iteration of the banking conversation being interpreted out of the Geithner, both timing wise, we could see something next week, and structurally, is instead of good bank/bad bank, an insurance policy like the $300 billion collateralization the taxpayers already provided to Citi, or the $100 and some odd collateralization we have provided to Bank of America, where, basically, if and as these bonds do in fact default, the risk resides with the US taxpayer. Think of it as the JP Morgan – Bear Stearns deal writ large, where, again, the US taxpayer is on the hook for some of these aspects. It’s unclear what the other elements would be in terms of compensation, clawbacks, etc. but the market, you can see, likes the conversation.

Dylan points out the importance of both timing and the structure of solutions to deal with the banks. There are two examples: one, where taxpayers provided an insurance policy if Citi's loans go bad. He cites $300 billion that Citi collateralized, meaning they pledged assets (presumably good rather than bad) to secure repayment of the loan.

Bank of America is different as that is only secured by bonds - paper written to promise repayment at a specific rate and date - which now has become a debt to the taxpayers as bond issuers didn't pay their bondholders.

Tracking the Tarp:

GM $14.3 Billion

Goldman Sachs $10 Billion

Morgan Stanley $10 Billion

PNC Financial Services $7.6 Billion

U. S. Bancorp $6.6 Billion

Source: Propublica

Segment:

Steve Liesman, CNBC Sr. Economics Reporter: One of the big ideas out there is that the Fed winds up being this kind of “uber-regulator” when it comes to creating the new financial regulatory system, so that’s one thing. The other question is “What broader role does the Fed balance sheet play in this good bank/bad bank stuff, or the insurance stuff?”

First off, remember that the Fed, regardless of its governmental sounding name, is actually neither fish nor fowl. It's a quasi-governmental corporate structure. So, what we're talking about here is actually more assumption of risk by taxpayers.

The Fed is responsible for sizing the money pool. Start the presses! And what happens when there's more of anything in the marketplace? Right. It's devalued. It takes more dollars to buy anything.

...That raises the question of what role the Fed has, and let me just say, I’m speculating here...it is possible, and again, just speculating...it is possible a big chunk of the TARP, the next (Indecipherable) of the TARP goes over to the Fed and that’s used to fund a whole bunch of new loans, very much like they’re going to do in this TALF idea, where 20 billion of TARP money is being used to finance $200 billion of consumer loans. If you scale that up, say you used the figure of $150 billion, that’s $1.5 trillion of potential lending there.

Steve Liesman is referring to leveraging the $20 billion dollars of TARP that banks will keep on deposit to meet their Fed Reserve requirements so they are able to loan 10 times that amount, or the $200 billion. Then, extrapolates that idea out to $1.5 trillion.

And that's only one portion of the presumed economic fix. Don't forget that interest!

Dylan Ratigan: So then the Federal Reserve becomes the buyer of asset backed securities and credit creation flows basically through the taxpayer at that point.

This is a key acknowledgment because the Fed will be both buying controlling the money supply and buying the bailout debt, indebting you, the taxpayer.

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Steve Liesman: Well, with the taxpayer essentially or, actually, the banks would be in the first loss. Think of the taxpayer, the FDIC and the TARP being in the mezzanine, then the Fed would be in the third position there.

This is a scrim, shielding the reader from recognizing that that the 3 levels he notes, in the final analysis, all mean taxpayer indebtness.

Dylan Ratigan: Anything on the transition – to the extent there really is one – from a bad bank conversation to some version of an insurance for bad assets conversation? And what’s the difference?

Steve Liesman: It is going to be different, Dylan. One keeps the assets on the books of the banks, the other would take it off the books. The record should be clear. When we reported they were talking about this good bank/bad bank idea, we were always reporting that they were very interested in this insurance idea, too. The trouble is this insurance idea has limitations. It’s bank-by-bank, you don’t have the transparency from an investor’s standpoint where you can say “That bank is clean.” No, I’ve got to say: “That bank is clean because it has a big wrapper inside of it.” And it doesn’t have the transparency that people would be looking for, the clean break that a good bank/bad bank would provide.

This is slick speak. In the first instance, that of bad bank conversion, the bank keeps the bad assets on their books, which they don't want to do. They want the taxpayers to take the loss. And for good reason. They may not be able to prove, legally, that they own the debt.

Remember that those mortgages have been "securitized," cut into pieces and bundled into groups of mortgages to be sold and re-sold around the world multiple times. After all, what foreign investor wouldn't want to buy an investment in a piece of real property, a bundle of promissory notes backed by the "full faith and credit of the US government?"

Once securitized, it's problematic for lenders to present to judges the promissory notes that mortgage loan borrowers signed. Legally, no note, no debt. Bankers now have to pass off the paper to - you, the taxpayer.

Banks are loathe to be rated, despite routinely rating consumers for their credit worthiness. Banks certainly wouldn't want to subject themselves to an assessment of their decision making vis a vis their profit and loss statements.

Dylan Ratigan: So bad bank/good bank, you get to see all the body parts, as ugly as it may be, whereas the insurance version, the assets remain hidden, but insured by the US government.

Steve Liesman: And you can say: “This bank is clean” and it’s a better recipient, you would think, of private capital, which is ultimately the goal here.

CNBC's Kudlow Report

Wells Fargo “reconsiders” annual conference in Las Vegas. Wells Fargo received $25 Billion in bailout funds.

Larry Kudlow repeatedly raised the question of whether Tim Geithner should resign.

Senator Charles Schumer (D-NY) offered this for the good bank/bad bank dilemma. “A much better solution, in my opinion, which is somewhat modeled on the bad bank is not for the government to buy the assets but rather to guarantee them and to guarantee them below an amount that the banks now have them in their books. So if the asset was originally $100, the bank is valuing it at $80, it would be guaranteed if it fell below $65.”

Larry Kudlow repeatedly raised the issue of President Obama stating that “now is not the time for them to get profits...to get bonuses...now is not that time.”

Guests Steve Moore and Robert Reich discussed it with Larry Kudlow, who queried: “How can banks recover without profits?”

Steve Moore: If profits are a dirty word, it’s no wonder that the stock market is in the tank. Profits are a good thing!

Robert Reich: Well, remember, we are talking about taxpayers who are keeping and propping up these banks to the tune of, so far, $350 billion dollars and under these circumstances, big bonuses, big parties, big undertakings that give the impression of profits but are based on taxpayer contributions really completely inappropriate.

Larry Kudlow: How can banks recover without profits? When you say “This is not the time for profits” this is something out of a socialist handbook.

Robert Reich: O, come on now! Listen when you talk about socialism...wait a minute, wait a minute, we have already socialized risk. We have capitalism for the winners and we have lemon socialism for the banks and everything else that’s going downhill. This is not a good thing. I’m not apologizing for it. I think it’s a travesty of capitalism.

Steve Moore: The problem is that you don’t understand that if companies are not making profits as the big three learned, they can’t hire workers. You and I want to see more workers working, and you can’t do it without profits.

Robert Reich: We have to have a massive reorganization of the financial sector.

Larry Kudlow: We have to explore this issue. Why is Obama lashing out at profits? And why does he equate profits with bonuses? They’re two – they may be related – but they’re different subjects.

Robert Reich, I asked you about this, and you went off about parties and stuff. How can you have a recovery of anything – now must be the time – to encourage profits, it would seem to me, and I do not understand President Obama’s reference here. Did he let something slip by? Is this a philosophical bias against profits?

Robert Reich: There’s no philosophical bias against profits at all. What he is saying is that the banks are pretending to be profitable, giving out big bonuses, big parties, buying executive jets, when in fact, they are not profitable at all. And in fact, they are dependent on taxpayers to the tune of $350 Billion, it looks like it may be $800 Billion, maybe a Trillion dollars. Now, under these circumstances, what are you going to do?

Are you going to pretend you have profits? No, this is not now the time to make that pretense. And now is not the time for big bonuses. Now is the time to actually get back to the task of turning these balance sheets around. (crosstalk)

And Steve – I don’t think that Steve disagrees with me. This idea of a bad bank being a bad idea, a kind of a sinkhole for taxpayer money…do you Steve?

Larry Kudlow: But, I want to close down this profits thing. I think there’s some confusion here. Bonuses are a form of compensation, and I think it’s been greatly exaggerated, but if Wall Street has a tin ear, so be it. There’s going to be a cap on the big bank bonuses who have taken TARP money. OK, fine. But, Steve Moore, profits are different from bonuses, are they not?

Steve Moore: Without profits at the Wall Street Journal, I don’t have a job. Without profits, Larry, at CNBC, you don’t have a job. And without profits in corporate America, most Americans don’t have a job. Yes, of course, we need profits.

Bob Reich, I agree with you on this bonuses issue. I think it is outrageous that firms that lost money are paying out bonuses. We talked about this before. It would be like giving every player on the Detroit Lions a big pay raise after they lost 16 games this year.

But the point is, unless these companies start to become profitable, we’re in deep trouble in this country with respect to the stock market and with respect to workers.

Robert Reich: Steve Moore, I agree with you. The question is: How do we get them to be profitable? And you’re not going to get them to be profitable simply by turning taxpayers’ money over to dividends and bonuses and everything else.

Steve Moore: Bob, you made a very wise point that I wish you’d stick – keep - in your head. We have socialized risk taking in this country, and that is a formula for losses or economic decline.

Robert Reich: Well, alright, why don’t we get to the big issue here, which is: How is the next tranche, the next $350 or $800 billion going actually to be used?

Steve Moore: No. There shouldn’t be any more money.

Larry Kudlow: What message do you send to the investor class, to shareholders, when you say that now is not the time for profit?

Robert Reich: O, come on...

Larry Kudlow: I think it is a very bad slip. We have an investor strike, a capital strike...

Steve Moore: We do...

Larry Kudlow: And I want to go beyond the banking system. We’re talking about a drop in profits across the board: industrial companies, service companies, retailers. What is the message when a President said “This is not the time for profits.”

Steve Moore: Well, it’s the same thing, Larry, when President Obama and other Democrats have talked about things like “windfall profits.” It’s as if when companies make a big profit, it’s a bad thing. It’s no wonder that we have this lousy stock market when there’s an assault against corporate profits which are the driving force for innovation and growth.

Larry Kudlow: Are profits a dirty word?

Robert Reich: I think both of you guys are reaching for straws here, you’re creating red herrings. Nobody that I know of in the administration, from President Obama on down, or any Democrat I know of, is against profits.

Larry Kudlow: Then why did he say it? Why did he say it?

Robert Reich: He’s talking in the context of these large bonuses. And you don’t want to get to this issue, Larry, which I think is the heart of the issue this week and next week, which is: What are we going to do restore the banks to profitability...

Larry Kudlow: And by the way...

Robert Reich: And why is it that more and more taxpayer money is going to be put on the line...

Larry Kudlow: The vast majority of banks, the vast majority of banks don’t want TARP.

Steve Moore: That’s right…

Larry Kudlow: and they’re going about their business. If you take out their compensation, you’re not going to get any good people.