Uncle Ben Vs. Grandpa Ben

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The catalyst for today’s rally is the rumor that the Obama Administration is in the process of putting together a bad bank proposal to buy up bad assets from financial institutions.  The financials are crushing today with the XLF up 11% on good volume.  See “Bad bank idea gains steam, financial shares up”, Reuters, Wed January 28, 1:28pm EST.

The thorny issue is what price to pay for the toxic assets.  This is what deterred Paulson and the Treasury from moving ahead in this manner.  There was talk about reverse auctions but it became apparent that valuing these things was going to be really tricky.  In all likelihood, the banks will get a pretty good price and taxpayers won’t get great value on their purchases.  That’s why it makes sense for financials to be up today because if this rumor is true it means they’ll be able to sell their garbage at above garbage prices.


The other event of note today is the Fed Decision.  On that score, there really wasn’t much change from December 16th (see, “Fed Goes For Shock And Awe”, Top Gun FP, December 16, 2008).  The Fed Funds target was kept at its hisorically low 0.0%-0.25% range. 

I did observe two noteworthy changes.  First,  they merged the new “We will stop at nothing” paragraph at the end of the December 16th statement with the policy paragraph.  Second, they moved the sentence “The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time” from the end of the policy paragraph to the very first paragraph which is usually reserved just for stating the actual policy decision.  The latter is somewhat eye opening.  The intent is to emphasize that interest rates will stay low.  We got the message guys!  Thanks!

Thinking about all this, an article on Bloomberg caught my attention: “Greenlight’s Einhorn Follows Grandfather’s Advice, Buys Gold”.  In a Jan 20 letter to clients Einhorn wrote: “To everyone’s dismay, we believe some of Grandpa Ben’s predictions are playing out.  The size of the Fed’s balance sheet is exploding, and the currency is being debased.”

(For more on David Einhorn and his Greenlight Capital hedge fund, check out this New York Magazine profile: “Why Did David Einhorn Publicly Attack Lehman Brothers?”, New York Magazine, June 15, 2008).

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