KD's Year In Review: Part II: Trade of the Year

In the movie "Speed,"  Keanu Reeves attempted to keep the speed of a bus above 50 mph to avoid the triggering of a bomb placed by the villainous Dennis Hopper.  Our economic policy response increasingly resembles this sort of runaway freight train "can't stop" philosophy, which is why I've frequently used the term "Ponzi" to describe it.  Recall the Kevin Duffy quote I used in my last post: "Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable."

The greatest trade of the year was the one that best personified all the Ponzi values we embrace:  the Fed's Temporary Liquidity Guarantee Program (TLGP).   The official description of the program, from the FDIC's website:

"The FDIC has created this program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount."

In layman's terms, the TLGP utilized one insolvent institution (the FDIC) to guarantee the debt issued by a bunch of other insolvent institutions (the big banks and pseudo banks).  Jackpot!  Marty Up!  The FDIC managed to collect over $10B in fees, as firms took advantage of the stamp of approval to issue over three hundred BILLION of debt under the program.  The FDIC could never actually make good on this guarantee, but that doesn't matter, see, because the act of providing the guarantee "solves" the liquidity problem, and allows firms to re-fund their debt needs so that default won't be an issue.  Maybe... For two or three years at least, until the firms need to roll this debt, at which point the plan is that everything will be "better," and that investors will readily buy non-guaranteed debt. 

I've referenced a quote from Tommy Boy about taking a crap in a box and marking it guaranteed several times on this blog, but this seems like the perfect time for the full quote:

Tommy: Chicken wings! Let's think about this for a sec, Ted, why would somebody put a guarantee on a box? Hmmm, very interesting.

Ted Nelson: Go on, I'm listening.

Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to feel all warm and toasty inside.

Ted Nelson: Yeah, makes a man feel good.

Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted?

Ted Nelson: What's your point?

Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Build model airplanes!" says the little fairy, well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off your dresser and your daughter's knocked up, I've seen it a hundred times.

Ted Nelson: But why do they put a guarantee on the box?

Tommy: Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I've got spare time. But for now, for your customer's sake, for your daughter's sake, ya might wanna think about buying a quality product from me.

Ted Nelson: Okay, I'll buy from you.

Tommy: Well, that's... What?

Here's to 2010, and seeing what exactly is inside that box.  It may take a few years, but the truth is inevitable.

-KD