This morning, the government reported that non-farm payrolls fell 598,000 in January versus the consensus expectation of a 540,000 drop. The unemployment rate rose to 7.6% versus the 7.5% consensus. We are struck by the rapid pace of deterioration in the unemployment rate from a low of 4.4% in March 2007 to 7.6% today. We are not alone.
With regard to the bank rescue, it looks increasingly like Geithner is leaning toward guarantees over an aggregator bank (bad bank). The rationale behind this approach is that nobody knows how to figure out a fair price for the assets that would be bought and added to the “bad bank”. A lower price would protect taxpayers but provide less relief to struggling banks. A higher price would cause higher taxpayer losses but result in a healthier banking system. Given this pricing dilemma, it may actually be cheaper for the government to simply provide the banks insurance for losses sustained on the assets. The guarantees may be coupled with the purchase of bank preferred shares that would be later convertible into common stock. There is also the possibility of a temporary easing of the mark-to-market rules. As for the stimulus plan, the House has already passed its $819 billion version and the Senate is still working on its version. The tug-of-war between tax cuts and spending continues.
Geithner is scheduled to speak early next week, and his comments will be critical. The numbers this morning are bad and getting worse. We think that unemployment will exceed 9%. The government’s seeming departure from the creation of a “BAD bank” and towards guarantees or some type of insurance strikes us as a step in the wrong direction. Guarantees do not add clarity nor transparency. The muddled suspicions of how toxic bank assets are may continue to undermine the banking system under this guarantee proposal.
Geithner’s comments on Monday will be a turning point as to whether this crisis begins to heal or continues to worsen. We are never sanguine with so much riding on government. The nationalization of some of the weaker US banks not only seems inevitable but underway. As we’ve written before, some revision to mark-to-market rules seems necessary. Please, Mr. Geithner, get this one right.
We are seeing a good deal of new business. Most new clients are showing up with very damaged portfolios and asking if we can help rebuild. Our first job is to stop the destruction of value. We have been doing a lot to help very difficult situations. Please let us know if we can help you.
Enjoy the weekend. We will write more next week as events unfold. Come on President Obama, don’t let us down. I’m worried you may be surprised by the size of this problem.
Hang in there.