Stocks rallied Monday morning as investors welcomed news that Citigroup is getting a massive rescue package - and geared up for the announcement of President-elect Obama's economic team.

I heard this morning from several popular media sources that that prices falling, month’s supply coming down and foreclosures as a percentage of total sales rising is a ‘great thing’ for housing. DON’T BELIEVE IT! These are the same forces as we have seen for the past year and the housing market is worse off today than ever. Show me a month where a) organic sales rise b) values stay flat or rise and c) new loan defaults and foreclosures stay flat or drop - that would be a positive. Remember, when one person gets a ‘great deal’ on a foreclosure in a neighborhood all similar homes within the appraisal zone (one mile radius) lose value. This puts everyone closer to or deeper into a negative equity position exponentially increasing their likelihood of loan default. This creates more foreclosures, which creates more supply, which pushed home prices down further. This exponentially increases likelihood of loan default, creates more foreclosures, which creates more supply, which pushes home prices down further and so on and so on. It is amazing nobody understands how devastating this negative feedback loop is. It is great that all of you do. With respect to month’s supply dropping it makes no difference. Month’s supply is absolutely flawed because a) banks don’t list all their REO for sale - the amount of shadow REO dwarfs that actually listed b) as prices fall home owners trying to sell their properties have to pull their listings because they can’t sell for more than the home is worth c) at the end of the summer selling season inventories always plunge as sellers pull listings awaiting the Spring selling season. Foreclosures now make up 45% of all sales as reported by the NAR. Organic sales, which are typically the all-important ‘move-up buyer’ and gauge the true health of the housing market are at record lows. Organic sales plummeting means that home owners are not freely able to transact. This tells me a few things a) that home owners are stuck upside down in their home...

What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup Chris Whalen November 24, 2008 Christopher Whalen is Managing Director of IRA. Chris has worked as an investment banker, research analyst and journalist for more than two decades. After graduating from Villanova University in 1981, Chris worked for the U.S. House of Representatives and then as a management trainee at the Federal Reserve Bank of New York, where he worked in the bank supervision and foreign exchange departments. Chris subsequently worked in the fixed income department of Bear, Stearns & Co, in London. After moving back to the U.S. in 1988, Chris spent a decade providing risk management and loan workout services to multinational companies and government agencies. In 1997, Chris worked as an investment banker in the M&A Group of Bear, Stearns & Co. ~~~ > On Friday, the FDIC closed and facilitated the sale of two CA savings banks, Downey Savings and Loan, the bank unit of Downey Financial Corp (NYSE:DSL) and PFF Bank and Trust, Pomona, CA. All deposit accounts and all loans of both banks have been transferred to U.S. Bank, NA, lead bank unit of US Bancorp (NYSE:USB). All former Downey and PFF Bank branches reopen for business today as branches of U.S. Bank. Earlier this year we wrote positively about Downey and the funding advantages it had over larger thrifts such as Washington Mutual due to the solid deposit base and strong capital. Indeed, as of Q3 2008, the bank’s Tier One leverage ratio was over 7.5%, more than two points over the minimum, and its charge offs had actually fallen compared with the gruesome 400 basis points of default reported in the previous period. But since the September resolution of WaMu and Wachovia, the FDIC, it seems, is not willing to wait to resolve institutions, even banks that are apparently solvent and not below any of the traditional regulatory triggers for closure. The visible public metrics indicating soundness did not dissuade...

by November 23, 2008 David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs, including Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, and Worldwide Exchange. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG). ~~~ NY Fed president Timothy Geithner will face a Senate confirmation hearing about his nomination to succeed Hank Paulson as Secretary of the Treasury. Here are a few questions for the Senators to consider. Politics being what they are, we recognize that some of them may not be asked. Q. As the NY Fed president, you held a unique position. NY is the only one of the 12 regional Fed banks that is always a voting member of the Federal Open Market Committee (FOMC). The other 11 banks rotate the voting slot, with only four of those 11 presidents are voting at any one time. Mr. Geithner: is this system obsolete? Is there a need for 12 regional banks now that payments are largely electronic? Isn’t the concentration of banks in the north and east (Boston, New York, Philadelphia, Cleveland, Richmond) a reflection of history and not the present distribution of economic and banking activity around the United States? With your experience as the NY Fed president and now as the new Treasury Secretary, would you recommend any changes...

The Bailout of Citigroup moves forward (Is this book ever going to be finished?): “Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan. In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for [$27 billion of] preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.” Un-fricking-believable. For Citi, its a great deal — but its a terrible one for taxpayers. The US is guaranteeing $306 billion on bad investments. (So much for Capitalism without failure) Where is the “Protection” for the taxpayers? Where are the clawbacks? How about going after the idiots that bought a third of a trillion dollars worth of junk, and then got paid large on it? Where is the sense of outrage and justice? At what point do taxpayers demand that the people responsible for creating this mess must pay their pound of flesh? > Sources : http://www.federalreserve.gov/newsevents/press/bcreg/20081123a.htm Bradley Keoun Bloomberg, Nov. 24 2008 http://www.bloomberg.com/apps/news?pid=20601087&sid=aBdUcxoRPkp4&r ERIC DASH NYT, November 23, 2008 http://www.nytimes.com/2008/11/24/business/24citibank.html Plan Injects $20 Billion in Fresh Capital, Guarantees $306 Billion in Toxic Assets DAVID ENRICH, CARRICK MOLLENKAMP, MATTHIAS RIEKER, DAMIAN PALETTA and JON HILSENRATH WSJ, NOVEMBER 24, 2008 http://online.wsj.com/article/SB122747680752551447...

submits: Recent complaints by Citi's (C) Pandit and Bank of America's (BAC) Lewis can only leave investors shaking their heads. Vikram Pandit said Friday that "rumor mongering" was at the heart of the company's stock slide and called in Gov't officials on Thursday to re-instate the short sale ban. It should be noted that this was tried earlier this fall, and , well, stocks fell anyway. Not sure what Pandit hopes to accomplish here. He also said the bank has plenty of liquidity and will not break itself up.

From the NY Times: Mr. Obama said he would direct his economic team to design a two-year stimulus plan with the goal of saving or creating 2.5 million jobs, “a plan big enough to meet the challenges we face that I intend to sign soon after taking office” on Jan. 20, an indication that he would begin pushing his plan through Congress even before taking office. ... “The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions,” Mr. Obama said. “We now risk falling into a deflationary spiral that could increase our massive debt even further.” Here is Obama's radio address today (3 min 52 secs): On the size of the stimulus plan from a Goldman Sachs research note yesterday: We need a fiscal stimulus package that offsets most of the retrenchment in private spending that remains after offsets from a smaller real trade deficit and lower oil prices. Our recommendation has been a $300-$500bn package, but we regard this as the minimum of what would be desirable. The 4% of GDP that we estimate for the retrenchment amounts to $600bn. The good news is that the likelihood of a large package under President Obama is rising. Now many economists are calling for $300-$400bn, and some have proposed as much as $600bn; as recently as late October, when we first outlined the case for significant stimulus, $200bn was the highest figure on the table. The bad news is that implementation of whatever is adopted is at least two to three months away absent an extraordinary bipartisan effort. This is unfortunate, as the dynamics of the retrenchment have clearly developed a life of their own. It sounds like we should expect a massive stimulus package to be signed by the end of January. There is a good chance the simulus package will be along the lines by Larry Summers: The Composition of Stimulus In many ways the composition of a fiscal stimulus program is a decision that goes to value rather than economic judgments. It seems to me however that particularly...

Federal regulators seized three banks last night, including Downey Savings and Loan Association, a large California mortgage lender, expanding what is by far the most expensive crop of bank failures in modern American history and indicating that the pace of failures is increasing.

Shares of Citigroup fell another 20% today to $3.77 and touched a new low at $3.05. Billed as "too big to fail" . Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said. Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September. “There is no question that Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.” While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating agencies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was “on the right track” five days before the firm went bankrupt. “The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients today. “In situations where the government has stepped in, the equity holders have not fared well.” Citigroup CEO Vikram Pandit told employees today that he doesn’t plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup Claims Adequate Capital Assuming one believes Citigroup has adequate capital, exactly why should the Fed care what its share price is? No one seems to care that Fannie Mae is trading at 30 cents. So, if Citigroup is well capitalized why can't it just keep lending and otherwise go on its merry...

"Downey Savings and Loan finally drew it's last, painful breath, then released it in a sigh of utter relief as one of the longest, most painful bank insolvencies to date. The body has been claimed by US Bank, which means if they don't get killed by the same disease Downey did, they may end up owning as many homes in SoCal as people in SoCal do."

Last night, I gave a presentation to the New York Chapter of the Risk Management Association regarding the US banking sector and the long-term issues facing same. You can read a copy of my slides by As part of the presentation (Page 17-21), I argued that until we rid the markets of CDS, there will be no restoring investor confidence in financials. Here is how I presented the situation to about 200 finance and risk professionals in the auditorium of JPM last night. Of note, nobody in the audience argued with me. Start with the $50 trillion of so in extant CDS. Assume that as default rates for all types of collateral rise over next 24-36 months, 40% of the $50 trillion in CDS goes into the money. That is $20 trillion gross notional of CDS which must be funded. Now assume a 25% recovery rate against that portion of all CDS that goes into the money. That leaves you with a $15 trillion net amount that must be paid by providers of protection in CDS. And remember, a 40% in the money assumption is VERY conservative. Could easily be 60-70%. Q: Does anybody really believe that the global central banks and the politicians that stand behind them are going to provide the liquidity to fund $15 trillion in CDS payouts? Remember, less than 10% of these positions are actually hedging exposure. The rest are speculative. My answer is that we pay the hedge positions at face value, but the specs get pennies on the dollar of the face of CDS. And the specs should take the pennies gratefully and run before the crowd of angry citizens with the torches anbd pitchforks catch up to them. So we can either follow the example of Tim Geithner and Hank Paulson in AIG, paying out the CDS at face value, and embrace the Japanese model of economic stagnation for a decade. Or we can put AIG and the other providers of protection through a bankruptcy and force the CDS market into extinction. I’ll be expanding on this happy them Monday. Good weekend.

Paul Kedrosky writes: (hat tip Brett) I just had someone email me something interesting today about their adjustable-rate mortgage resetting –- but to considerably lower levels. How widespread is this phenomenon? Or, asked differently, what percentage of ARMs are tied to Treasuries, as opposed to Libor, etc.? The answer from American CoreLogic, via Sue McAllister at the , is 60% of ARMs are tied to a LIBOR index, about 25% to various treasuries, and the remaining 15% to the 11th District Cost of Funds Index (COFI -popular in California). Click on graph for larger image. This graph shows the . It appears ARMs tied to the COFI and treasuries will be non-bombs. The other 60% of loans tied to LIBOR might reset at a higher rate, although with the 3-month LIBOR down to 2.16% (it was 5.02% one year ago), even these 60% aren't bombs. But we have to remember a higher interest rate is only one problem. Many of these borrowers had Option ARMs and were choosing the negatively amortizing or interest only options. When these loans recast, the borrowers will be required to pay the amortizing payment - and that could have a much larger impact on the monthly payment than the change in interest rates. Remember "Reset" refers to a rate change. "Recast" refers to a payment change. See Tanta's

How 'credit default swaps'—an insurance against bad loans—turned from a smart bet into a killer.

Yesterday saw a stunning flight to treasuries across the board. The 3-month yield fell to zero. The 2 year yield was at a . Even the 30 year yield decreased sharply. The 3-month at zero can be explained as a flight to quality and another crisis in the credit markets, but the declines in the longer yields probably suggest deflation trades. Here are a few indicators of credit stress once again suggesting little progress over the last few days. The three month LIBOR increased slightly to 2.16% from 2.15%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. ( unchanged ) The : 2.13. ( slightly worse ) The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5. The on 3 month treasuries increased to 0.045% from 0.01%. ( bad ). Still essentially zero! The 10-Year Treasury Note yield is also up slightly at 3.17%. The rush to treasuries of all durations was stunning yesterday! The decreased to 4.16 from a record (for this cycle) 4.83 ( Better ). This is the spread between high and low quality 30 day nonfinancial commercial paper. If the credit crisis eases, I'd expect a significant decline in this spread - and the graph makes it clear this indicator is still in crisis. The from Bloomberg: 107.5, up slightly from 103.0 ( unchanged ). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100. For the LIBOR, the TED spread, and the two-year swap, there has been clear progress - but there is still a ways to go. For the A2P2 spread (and all treasury yields), the markets are still in crisis.

(Reuters) -: Pimco's Mohamed El-Erian on Friday said fourth-quarter GDP is falling off a cliff, in an interview on CNBC. Highlights:

submits: In February, Barlcays that if one major institution went down, there would most likely be between $36-$47 billion in losses due to counterparty risk in the credit default swap market as risk was repriced. A by BNP Paribas put the figure at $150 billion in potential losses. But the repricing of risk extends just beyond the CDS market, IMF economists Miguel A. Segoviano and Manmohan Singh argue in a . Using data on banks' counterparty positions before the Bear Stearns collapse, the pair calculate the potential loss to the financial system from a repricing of risk across the entire OTC derivatives market:

submits: Embattled U.S. banking giant Citigroup Inc. (C) has agreed to buy back $17.4 billion of assets remaining in a series of funds known as structured investment vehicles, or SIVs, after it previously agreed to guarantee the liabilities in those funds. In a separate story Wednesday, Wall Street banking analyst David Trone said that he expects higher credit costs and additional losses to force Citi to take $3 billion in write-downs in the year’s final quarter, a realization that prompted him to boost his quarterly loss estimate for the company and cut his target price for the stock.

Um, a bit late to come to that realization, don'tcha think? From (hat tip reader Michael): That ‘’super spike” in oil prices that Goldman insisted would lift crude to $200 a barrel ….? ....It never really turned out to be that prescient: instead of the 50% jump in oil that Goldman anticipated back in May, when it made the call with crude trading at $132, the price of a barrel never got more than 11% higher. And has since, of course, lost fully two-thirds of that price in the intervening four months. Now Goldman is left with the ignominy of summarily abandoning the investors who listen to its research calls... On Thursday, Goldman said it was ”closing” its recommendations for oil trades. Meaning that in a perilous time when the traders who pay attention to Goldman’s recommendations could use some guidance the most, Goldman has opted to give them the least. And some traders are furious about it, comparing the maneuver to then-strategist Abby Cohen’s decision to abandon her targets for equity indexes in the fall 2001, citing the uncertainties abounding in the market. Goldman specifically talked about four trade recommendations it previously issued, and said clients shouldn’t put any stock in them any longer. One particular trade, a Nymex-WTI swap on the 2012 contract, issued in September, when crude already had declined to below $70, suggested that the contract would reflate to a range of $120 to $140. Obviously, that hasn’t happened. The big losers, of course, would be anybody who continued to trade on Goldman’s recommendations. And the stocks of companies linked to those underlying commodities. Exploration and production names have had an awful go of it Thursday....But Goldman …? What did Goldman lose today? It’s worth noting that, for reasons unrelated to its oil trading call, Goldman shares dropped below their 1999 IPO price in Thursday’s trading.

After he takes office, President-elect Barack Obama will face monumental challenges posed by the U.S. financial system. Some experts say a key is getting money back into the mortgage market. MarketWatch’s Stacey Delo reports. (Nov. 20) 11/20/2008

NEW YORK -- JPMorgan Chase & Co. is shedding about 10 percent of its investment bank staff in an effort to better weather the global economic slowdown.