Okay; I can honestly say that I didn’t see this happening. I figured that Citigroup, like Bank of America and JP Morgan Chase, would both be strong enough to weather almost anything the economy could throw at them, but their recent stock movements are highly precipitous.

Citi Weighs Its Options, Including Firm’s Sale - WSJ.com

Executives at Citigroup Inc., faced with a plunging stock price, began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright, according to people familiar with the matter.

The internal discussions are at a preliminary stage and don’t signal that Citigroup’s board and management are backing down from their insistence that the New York company has ample capital, funding and strategic direction, these people said. But with the stock down another 26% Thursday, its worst one-day percentage decline ever, Citigroup officials have decided they need to reckon with a range of scenarios that were unthinkable only weeks ago.

Citigroup’s board of directors is scheduled to have a formal meeting Friday to discuss the options, according to a people familiar with the situation. Meantime, directors have been talking by phone about what could be done to reverse the stock’s slide.

Top executives were locked in meetings Thursday to hash out a stabilization strategy. A Citigroup spokeswoman said in a statement Wednesday evening: “Citi has a very strong capital and liquidity position” and is “focused on executing our strategy,” which includes cutting expenses and selling assets. “We believe the benefits will be seen over time.”

With roots stretching back to 1812 and more than 200 million customer accounts in 106 countries, Citigroup is an icon of global capitalism. It is getting battered by the same financial storm that has already remade the face of Wall Street, forcing the sale of Bear Stearns Cos. and Merrill Lynch & Co. earlier this year, and triggering the bankruptcy filing of Lehman Brothers Holdings Inc.

Chief Executive Vikram Pandit and other Citigroup executives have told colleagues they are frustrated and befuddled by this week’s 50% stock decline. Investors have dumped bank stocks en masse on fears that economic woes will batter financial companies worse than previously expected.

It’s going to be interesting to see how this plays out. Wonder if the A-Train has been shorting “C”?

Looks like Paulson has taken at least one stance with which the A-Train shouldn’t have too many problems (if any), and while in many ways I disagree with the Train about how to fix the problem, in this particular situation I think we’re probably both on the same page.

Bloomberg.com: Paulson Warns TARP Isn’t ‘Panacea’ for Economy Ills

Nov. 18 (Bloomberg) — Treasury Secretary Henry Paulson rejected using the government’s financial-rescue program as a “panacea” for economic difficulties, clashing with lawmakers who want the funds to help beleaguered homeowners and automakers.

“The rescue package was not intended to be an economic stimulus or an economic recovery package,” Paulson said in testimony to the House Financial Services Committee in Washington. The $700 billion Troubled Asset Relief Program was designed to stabilize financial markets and the flow of credit and “is not a panacea for all our economic difficulties.”

Barney Frank, who heads the House panel, took issue with Paulson, urging the Bush administration to step up efforts to stem record foreclosures. Democrats are also pursuing legislation to deploy part of TARP to prevent General Motors Corp., Ford Motor Co. and Chrysler LLC from collapsing due to lack of cash.

The American auto industry has been weak for years, and there’s absolutely no evidence that throwing additional cash at the industry will resolve any problems; it will just delay their inevitable collapse. It may be best for the Big 3 to go through Chapter 11, just as the airlines have done time and time again.

If the government starts bailing out every large corporation that is going through economic ills, then the claims that we are moving towards socialism start to gain a little more credence. It’s one thing to shore up the backbone of the American economic system by injecting capital into banks. It’s quite another thing to start buying stakes in every company that starts to experience some financial problems.

As for mortgages and foreclosures: in my opinion, the best way to help stem the tide of foreclosures is for the banks who are carrying these toxic assets (now that Paulson has indicated that the Treasury won’t be buying them, opting for direct investment in the banks instead) is for the banks to work with the individual mortgagees to reset the terms, using various loan-modification programs.

The IndyMac plan developed by the FDIC has been getting a lot of praise:

FDIC: Loan Modification Program for Distressed Indymac Mortgage Loans

Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.

If, consistent with maximizing the net present value of the mortgage, an interest rate reduction below the current Freddie Mac survey rate is necessary to achieve a 38% DTI, then IndyMac Federal could reduce the rate further for five years. After five years, the interest rate would increase by no more than 1% per year until it capped at the Freddie Mac survey rate where it would remain for the balance of the loan term. Other modification features could be combined with an interest rate reduction, as necessary and consistent with maximizing the value of the mortgage, to achieve sustainable payments.

A program like this should help out most people who either didn’t understand what kind of loan they were getting when they originally purchased their home, as well as some of those who bit off more than they could chew when they bought their homes, but it won’t benefit the most egregious acts of recklessness by home buyers (the $30K family who buys a $500K home).

More details (and in a more reader/listener friendly format) on Sheila Bair’s plan can be found in a great story broadcast on NPR’s Morning Edition this past Friday morning.

While Ms. Bair’s plan is meeting some resistance from Henry Paulson, it sounds like it’s a matter of working out some of the finer details, rather than a wholesale rejection of the plan by the Treasury; and hopefully Paulson’s successor in the Obama administration will be even more open to Ms. Bair’s plan.

Sometimes, I really wish I didn’t have to turn to the foreign media to get the best news from an unbiased and objective perspective. The Economist has long been one of those foreign sources of news to which I have turned to get a broader perspective of world events.

The Economist generally has a center-right leaning … it is a British magazine concerned with world events and the economy, after all … and yet, like so many other media outlets, it is giving its endorsement to Barack Obama.

If there is anyone out there reading this blog that is still undecided about whom to vote for, please read this article … for once, I’ve quoted the entire article, rather than just an excerpt. Hopefully The Economist won’t come after me for copyright violation.

Read the article, and then go vote. Cast your ballot for whomever you think will better lead the United States over the next four years. I feel that man will be Barack Obama, which is how I cast my ballot in early voting. Even if you vote for the other guy, please make sure you get out today, brave the lines and the weather and exercise your right, your privilege … and as far as I’m concerned, your duty to vote.

Just vote.

An endorsement of Barack Obama | It’s time | The Economist
Oct 30th 2008 - From The Economist print edition
America should take a chance and make Barack Obama the next leader of the free world

IT IS impossible to forecast how important any presidency will be. Back in 2000 America stood tall as the undisputed superpower, at peace with a generally admiring world. The main argument was over what to do with the federal government’s huge budget surplus. Nobody foresaw the seismic events of the next eight years. When Americans go to the polls next week the mood will be very different. The United States is unhappy, divided and foundering both at home and abroad. Its self-belief and values are under attack.

For all the shortcomings of the campaign, both John McCain and Barack Obama offer hope of national redemption. Now America has to choose between them. The Economist does not have a vote, but if it did, it would cast it for Mr Obama. We do so wholeheartedly: the Democratic candidate has clearly shown that he offers the better chance of restoring America’s self-confidence. But we acknowledge it is a gamble. Given Mr Obama’s inexperience, the lack of clarity about some of his beliefs and the prospect of a stridently Democratic Congress, voting for him is a risk. Yet it is one America should take, given the steep road ahead.

Thinking about 2009 and 2017

The immediate focus, which has dominated the campaign, looks daunting enough: repairing America’s economy and its international reputation. The financial crisis is far from finished. The United States is at the start of a painful recession. Some form of further fiscal stimulus is needed (see article), though estimates of the budget deficit next year already spiral above $1 trillion. Some 50m Americans have negligible health-care cover. Abroad, even though troops are dying in two countries, the cack-handed way in which George Bush has prosecuted his war on terror has left America less feared by its enemies and less admired by its friends than it once was.

Yet there are also longer-term challenges, worth stressing if only because they have been so ignored on the campaign. Jump forward to 2017, when the next president will hope to relinquish office. A combination of demography and the rising costs of America’s huge entitlement programmes—Social Security, Medicare and Medicaid—will be starting to bankrupt the country (see article). Abroad a greater task is already evident: welding the new emerging powers to the West. That is not just a matter of handling the rise of India and China, drawing them into global efforts, such as curbs on climate change; it means reselling economic and political freedom to a world that too quickly associates American capitalism with Lehman Brothers and American justice with Guantánamo Bay. This will take patience, fortitude, salesmanship and strategy.

At the beginning of this election year, there were strong arguments against putting another Republican in the White House. A spell in opposition seemed apt punishment for the incompetence, cronyism and extremism of the Bush presidency. Conservative America also needs to recover its vim. Somehow Ronald Reagan’s party of western individualism and limited government has ended up not just increasing the size of the state but turning it into a tool of southern-fried moralism.

The selection of Mr McCain as the Republicans’ candidate was a powerful reason to reconsider. Mr McCain has his faults: he is an instinctive politician, quick to judge and with a sharp temper. And his age has long been a concern (how many global companies in distress would bring in a new 72-year-old boss?). Yet he has bravely taken unpopular positions—for free trade, immigration reform, the surge in Iraq, tackling climate change and campaign-finance reform. A western Republican in the Reagan mould, he has a long record of working with both Democrats and America’s allies.

If only the real John McCain had been running

That, however, was Senator McCain; the Candidate McCain of the past six months has too often seemed the victim of political sorcery, his good features magically inverted, his bad ones exaggerated. The fiscal conservative who once tackled Mr Bush over his unaffordable tax cuts now proposes not just to keep the cuts, but to deepen them. The man who denounced the religious right as “agents of intolerance” now embraces theocratic culture warriors. The campaigner against ethanol subsidies (who had a better record on global warming than most Democrats) came out in favour of a petrol-tax holiday. It has not all disappeared: his support for free trade has never wavered. Yet rather than heading towards the centre after he won the nomination, Mr McCain moved to the right.

Meanwhile his temperament, always perhaps his weak spot, has been found wanting. Sometimes the seat-of-the-pants method still works: his gut reaction over Georgia—to warn Russia off immediately—was the right one. Yet on the great issue of the campaign, the financial crisis, he has seemed all at sea, emitting panic and indecision. Mr McCain has never been particularly interested in economics, but, unlike Mr Obama, he has made little effort to catch up or to bring in good advisers (Doug Holtz-Eakin being the impressive exception).

The choice of Sarah Palin epitomised the sloppiness. It is not just that she is an unconvincing stand-in, nor even that she seems to have been chosen partly for her views on divisive social issues, notably abortion. Mr McCain made his most important appointment having met her just twice.

Ironically, given that he first won over so many independents by speaking his mind, the case for Mr McCain comes down to a piece of artifice: vote for him on the assumption that he does not believe a word of what he has been saying. Once he reaches the White House, runs this argument, he will put Mrs Palin back in her box, throw away his unrealistic tax plan and begin negotiations with the Democratic Congress. That is plausible; but it is a long way from the convincing case that Mr McCain could have made. Had he become president in 2000 instead of Mr Bush, the world might have had fewer problems. But this time it is beset by problems, and Mr McCain has not proved that he knows how to deal with them.

Is Mr Obama any better? Most of the hoopla about him has been about what he is, rather than what he would do. His identity is not as irrelevant as it sounds. Merely by becoming president, he would dispel many of the myths built up about America: it would be far harder for the spreaders of hate in the Islamic world to denounce the Great Satan if it were led by a black man whose middle name is Hussein; and far harder for autocrats around the world to claim that American democracy is a sham. America’s allies would rally to him: the global electoral college on our website shows a landslide in his favour. At home he would salve, if not close, the ugly racial wound left by America’s history and lessen the tendency of American blacks to blame all their problems on racism.

So Mr Obama’s star quality will be useful to him as president. But that alone is not enough to earn him the job. Charisma will not fix Medicare nor deal with Iran. Can he govern well? Two doubts present themselves: his lack of executive experience; and the suspicion that he is too far to the left.

There is no getting around the fact that Mr Obama’s résumé is thin for the world’s biggest job. But the exceptionally assured way in which he has run his campaign is a considerable comfort. It is not just that he has more than held his own against Mr McCain in the debates. A man who started with no money and few supporters has out-thought, out-organised and out-fought the two mightiest machines in American politics—the Clintons and the conservative right.

Political fire, far from rattling Mr Obama, seems to bring out the best in him: the furore about his (admittedly ghastly) preacher prompted one of the most thoughtful speeches of the campaign. On the financial crisis his performance has been as assured as Mr McCain’s has been febrile. He seems a quick learner and has built up an impressive team of advisers, drawing in seasoned hands like Paul Volcker, Robert Rubin and Larry Summers. Of course, Mr Obama will make mistakes; but this is a man who listens, learns and manages well.

It is hard too nowadays to depict him as soft when it comes to dealing with America’s enemies. Part of Mr Obama’s original appeal to the Democratic left was his keenness to get American troops out of Iraq; but since the primaries he has moved to the centre, pragmatically saying the troops will leave only when the conditions are right. His determination to focus American power on Afghanistan, Pakistan and proliferation was prescient. He is keener to talk to Iran than Mr McCain is— but that makes sense, providing certain conditions are met.

Our main doubts about Mr Obama have to do with the damage a muddle-headed Democratic Congress might try to do to the economy. Despite the protectionist rhetoric that still sometimes seeps into his speeches, Mr Obama would not sponsor a China-bashing bill. But what happens if one appears out of Congress? Worryingly, he has a poor record of defying his party’s baronies, especially the unions. His advisers insist that Mr Obama is too clever to usher in a new age of over-regulation, that he will stop such nonsense getting out of Congress, that he is a political chameleon who would move to the centre in Washington. But the risk remains that on economic matters the centre that Mr Obama moves to would be that of his party, not that of the country as a whole.

He has earned it

So Mr Obama in that respect is a gamble. But the same goes for Mr McCain on at least as many counts, not least the possibility of President Palin. And this cannot be another election where the choice is based merely on fear. In terms of painting a brighter future for America and the world, Mr Obama has produced the more compelling and detailed portrait. He has campaigned with more style, intelligence and discipline than his opponent. Whether he can fulfil his immense potential remains to be seen. But Mr Obama deserves the presidency.

Copyright © 2008 The Economist Newspaper and The Economist Group. All rights reserved.

Don’t vote … unless you care about your future, your children’s future, your grandchildren’s future, the economy, civil rights, human rights, women’s rights or gay rights, the war in Iraq, the war in Afghanistan, freedom of speech, freedom of the press, freedom to worship (or not to worship) how you choose, education, defense, the arts, the environment, alternative energy, renewable energy, oil prices, gas prices, healthcare, welfare, social security, veteran’s affairs … if you care about any of these things, then perhaps you might want to consider voting.

Vote your heart. Vote for the person who you feel best represents your values. Vote for the person who you think will do the best job.

But only if you care. Otherwise, don’t vote.

We all know what happened yesterday, with the DJIA closing up 936 points. As happy as I was to see it, Morgan Stanley’s 88% gain in a single day seems almost as irrational as the fears that pushed it down as low as it got.

Early news seems to be indicating that the market should have another up day today in light of the new bank recapitalization plan announced by the Bush Administration.

Today’s Markets - WSJ.com

U.S. stock index futures rose after the previous day’s record-setting rally, as investors cheered the government’s bank-recapitalization plan.

About an hour before the start of trading, Dow Jones Industrial Average futures were higher by nearly 400 points. S&P 500 and Nasdaq 100 futures also gained by a large margin. Futures trading doesn’t always accurately predict early stock market moves after the opening bell.

Monday, stocks snapped a brutal losing streak as the Dow Jones Industrial Average enjoyed its biggest one-day point gain ever following new moves by governments to shore up the global financial system. The Dow leapt 936.42 points, or 11.1%, to 9387.61. The rally ended an eight-day slide in which the blue-chip measure plummeted almost 2,400 points. Meanwhile, the S&P 500 added 104 points and the Nasdaq Composite put on 194 points.

Those gains spurred rallies Tuesday in Asia and Europe. Tokyo’s Nikkei surged 14.2%, its biggest single-day percentage gain. European markets were broadly higher in midday trading, with most major indexes gaining at least 5%.

Even so, I full expect there will be a profit-taking pull-back before the end of the week.

Now, believe me, while I am hoping that yesterday’s action does mark the bottom and the beginning of a turnaround, I don’t think that volatility to going to stop anytime soon. This is a time to carefully weigh your decisions in the market … invest wisely, hedge well, and be prepared for more pain (although hopefully not as deep as it has been the past several weeks). I think things are going to be far too unpredictable for at least the next few months, until well after the election and inauguration, until the new President has a chance to start implementing his economic policies.

Just be prepared for the roller coaster ride …

From this morning’s Wall Street Journal:

‘No’ Votes Came From All Directions

The fatal “no” votes to the financial rescue package came from a strange-bedfellows coalition of lawmakers, from the most conservative to the most liberal members of the House, with a large number of representatives from low-income districts angry that Wall Street seems to be getting handouts while people getting tossed out of homes would get minimal aid.

One common strand that tied some of the diverse opponents together: a tough re-election fight. Eighteen of the 21 most vulnerable Republicans up for re-election, and 10 of the 15 Democrats in the closest races voted against the $700 billion financial rescue, illustrating the political hazards of bailing out Wall Street without offering an equally generous hand to taxpayers.

To me, this illustrates that the members of the House aren’t really thinking about doing what’s best for the country, even if it’s unpopular, but just care about protecting their jobs. It does make me wonder how many of those “no” votes would have been “yes” votes if we weren’t only 5 weeks from Election Day?

As Juvenal said in Roman times, “Two things only the people anxiously desire — bread and circuses.”

If everything was left solely to the people, do you think we’d be paying any taxes? But without tax revenue, how would vital government programs, such as say … Defense … be funded? Taxes are not popular, but are vitally important to ensure that our government can continue to function.

Putting together a plan, even an initially flawed plan that can be revised down the road, is vital to getting our economy back on track. The current ad hoc approach causes more uncertainty, more panic, more consolidation, less competition, and certainly doesn’t seem to be working.

What is going to happen if the Citigroup, Bank of America, and JP Morgan Chase acquisitions of WaMu, Wachovia, Bear Stearns and Merrill Lynch lead to their own financial troubles?

Without a Bailout Plan, What Will the Cost Be? - TIME

By voting down the proposed $700 billion financial bailout package — and causing a spectacular stock market rout — a majority of members in the House of Representatives made a clear statement that they didn’t want to put taxpayers on the hook for the failures of financial institutions.

But there’s a catch: taxpayers are already on the hook for the failures of financial institutions, and it’s possible that the bill will actually be larger without bailout legislation than with it. That’s because the regulators who mind the financial industry — the Federal Reserve, Treasury and FDIC — will keep doing what they’ve been doing: stepping in to prevent the chaotic failure of banks and other large financial institutions. This means continuing to put hundreds of billions of taxpayer dollars at risk, but in a way that adheres to no clear plan of action and doesn’t require members of Congress to explicitly approve their actions.

The fact is that as much as many of us would like to think so, there’s truly no such thing as a free-market economy; especially not as global as the economy has become over the past 20 years.

On Monday afternoon, Wall Street basically stopped trading to watch TV — mainly CNBC — to see how the House of Representatives would vote on the $700 billion bailout package. When it first started looking like the bill would fail, the Dow plummeted 389 points, or 3.6%, in just seven minutes. If it had continued at that pace for much longer, this would have been perhaps the most harrowing day in stock market history. It didn’t, but things were still really, really bad. The Dow ended the day down 778 points, or 7%, and the S&P 500 — a better measure of the overall market — was down 107 points, or 8.8%, its worst performance since the 1987 market crash. And markets for bonds and short-term loans were, for the most part, nonexistent.

And without a market for commercial paper, there is no short-term financing available for most businesses to conduct their day-to-day business … like rent and payroll. According to a recent Bloomberg article, “a continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services.”

So what happens now? On Capitol Hill, House leaders said they’ll try again soon. Treasury Secretary Henry Paulson practically begged for a revised deal in his brief appearance after the market carnage. “Our tool kit is substantial but insufficient,” he said. The market’s traumatized reaction today may change some minds and some votes.

In asking Congress 11 days ago for the authority to spend up to $700 billion to buy troubled assets, Paulson and Fed Chairman Ben Bernanke were hoping to share some of the responsibility and the blame — and get the freedom to boost companies that weren’t already on the brink of failure. Instead, they’re back to being crisis managers for the moment — and maybe for the duration of the crisis.

That’s not all bad, especially now that most of the endangered financial institutions are commercial banks. The Federal Government has clearly defined that authorities take them over, merge them out of existence or shut them down — whereas it had to make things up as it went along with investment banks Bear Stearns and Lehman Brothers and insurer AIG. That’s why the demise of giant banks Washington Mutual and Wachovia, arranged over the past week by the FDIC, occurred in a far more orderly fashion than the non-bank meltdowns.

But orderly isn’t the same as cheap. To get Citigroup to absorb Wachovia, the FDIC agreed to share the risk on a $312 billion portfolio of loans (Citi has to eat the first $42 billion in potential losses; anything above that hits the FDIC fund).

According to a Bloomberg story last week: “It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year.” And that was BEFORE the FDIC became exposed to another $280 billion … so now the FDIC may be in need of its own $430 billion “bailout”.

Also, the fact that every big FDIC deal so far in this crisis has been different — IndyMac was allowed to fail, with only insured deposits safe; WaMu was seized, but all depositors were protected; and Wachovia was sold in a deal that protected both depositors and owners of the company’s bonds but left shareholders with very little — has left investors guessing about the fate of the rest of the banking world. Hardest hit in today’s market sell-off were regional banks like Sovereign Bancorp and National City, perhaps because they seem too small to get special FDIC treatment.

Federal authorities are going to keep doing whatever they can to keep the financial system from collapsing. Taxpayers will bear the risks and the costs of that, whether Congress votes to put them there or not. And it’s possible — although nobody can know for sure — that this ad hoc approach will end up costing more than an up-front $700 billion bailout.

So … is it better to have a imperfect plan, but a plan nonetheless? Or is it better to simply keep floating along as if the market will take care of itself, and have the government step-in again, and again, and again, with no real rhyme or reason as to which companies they help and which they don’t?