10/14T11:01 News & Notes

How did Einstein define insanity? I believe he said it was doing the same thing repeatedly while anticipating different results. Witness our government's actions in the story below.

ECONX Paulson, Bernanke and FDIC Chairman Bair to give joint statement on actions to strengthen financial institutions and markets
Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, and FDIC Chairman Sheila Bair to give joint statement on a series of comprehensive actions to strengthen public confidence in financial institutions and restore functioning of credit markets... "Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets. These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world. The overwhelming majority of banks in the United States are strong and well-capitalized. These actions will bolster public confidence in our system to restore and stabilize liquidity necessary to support economic growth. Last week, the President's Working Group on Financial Markets announced that the U.S. government would deploy all of our tools in a strategic and collaborative manner to address the current instability in our financial markets and mitigate the risks that instability poses for broader economic growth. This past weekend, we and our G7 colleagues committed to a comprehensive global strategy to provide liquidity to markets, to strengthen financial institutions, to prevent failures that pose systemic risk, to protect savers, and to enforce investor protections. We welcomed the steps announced by our European colleagues this weekend to implement the action plan, and ensure financial institutions in Europe can finance economic growth. Today we are implementing our strategy with three important actions. First, Treasury is announcing a voluntary capital purchase program. A broad array of financial institutions is eligible to participate in this program by selling preferred shares to the U.S. government on attractive terms that protect the taxpayer. Second, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. Regulators will implement an enhanced supervisory framework to assure appropriate use of this new guarantee. We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy. By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve home ownership. Third, to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program, which provides a broad backstop for the commercial paper market. Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers. Together these three steps significantly strengthen the capital position and funding ability of U.S. financial institutions, enabling them to perform their role of underpinning overall economic growth. These actions demonstrate to market participants here and around the world the strength of the U.S. government's commitment to take all necessary steps to unlock our credit markets and minimize the impact of the current instability on the overall U.S. economy. The actions taken today are a powerful step toward restoring the health of the global
RCM Comment: What does it all mean? Allow me to draw a picture to help explain the announcements today. You have heard us call Ben Bernanke "helicopter Ben" because of his comments about dropping money out of helicopters to avoid a depression. And we recently promoted him to "B-52 Ben" for his prolific use of the printing press during this crisis. Well, he now has serious company in the form of Rear Admiral Hank Paulson who is the captain of an aircraft carrier full of B-52s. Question: What do you think would be a good investment during a time of epic currency creation? If you can't answer this question then you have not been reading this blog enough and frankly, I'm a little disappointed.

Systemic risk exception to the FDIC Act. This step is a desparate attempt to address the troubles in the Credit Default Swap (CDS) market. By guaranteeing the debt of all FDIC-insured institutions Paulson and Co. have essentially wiped the slate clean of all CDS business related to these institutions. If the debt is guaranteed then there is no need to buy insurance on the debt in the form of CDSs. So in essence, all of the financial institutions that sold the CDSs (insurance) and collected premiums e.g. Paulson's Goldman Sachs, are able to keep the premiums and never need to payout. What a gift! Once again the government changes the rules in the middle of the game as it tries to navigate through this quagmire of a credit crisis.

Commercial Paper Funding Facility (CPFF): Can you hear the bomb bay doors opening? I will now answer the previous question for the new reader. The best assets to buy during a time of unabated currency creation are commodities, led by precious metals and GOLD in particular.

Follow Up:
Iceland index OMXI15 reopens -76% as financials reduced to zero - DJ
DJ reports Iceland's stock exchange index of its 15 largest listed companies opened after a three-day halt down 76% Tuesday, after exchange operator Nasdaq OMX Monday reduced the stock prices of the country's three largest banks to zero in the index calculation. At 1045 GMT, the OMXI15 was down 2,296.27 points at 708.35, a decline of more than 76% from the 3,004.62 closing level Oct. 8, the last day that stocks were traded on the exchange. Nasdaq OMX said Monday it had decided to reduce the closing prices of Kaupthing Bank, Glitnir and Landsbanki to zero in the index calculation, which accounted for the drop.

Iceland, with IMF deal in works, turns to Russia - Reuters.com
Reuters.com reports Icelandic officials are in Moscow for talks on an emergency loan that could be worth billions of euros, the country's latest attempt to raise cash to help save its economy from collapse. Iceland has tapped the International Monetary Fund for financing to help ease the crisis and some ministers have raised the possibility of membership of the European Union, long resisted by its fishing sector, to safeguard the economy. An official from Iceland's central bank said a delegation from the bank and government left for Russia on Monday to begin talks on the emergency loan, a move that has raised questions about Russia's motives and what price Moscow might extract.