CIT shows us what can happen if you are a finance company not in the the Fed Club. Other examples are Thornburgh and Countrywide and of course, Bear Stearns. Commercial banks had access to liquidity from the Fed. Last week, the investment banks were given free membership to the Fed’s liquidity club via the PDCF. But not every financial institution can come to the discount window and CIT is suffering that fate. Maybe it’s only a matter of time before Chairman Bernanke and Secretary Paulson find some creative way to resolve this issue.

When CFC had no choice before going bankrupt, they cut a deal with Bank of America. Does anyone still wonder how involved the government was to put that one together? When Bear Stearns had no choice before going bankrupt, a deal was cut with JPM. Does anyone wonder how involved the government was in that one? They shouldn’t. After all, it’s the Fed’s Club of liquidity so it seems they have the right to decide who gets to come in. But there are rules even though they are bent lately.

So for now, CIT is not allowed in. But here’s the problem, they drew down their lines of credit to the tune of about $7 billion from JPM, C, BCS, and BAC. This tells you that the ABCP market is not fixed despite all the previous attempts by the Fed Club of liquidity. And more importantly, if all these finance companies start to draw down whatever they can, it is going to put a tremendous stress on the commercial banks, investment banks and the Fed. The banks have to make good on their existing commitments. But I suspect they will be avoiding renewals on any unused facilities when they come due. If they do, that means a constriction on the economy and if they do not, they will most certainly have to deal with the impacts on their reserves. Maybe the Fed has a plan or it just has a never ending commitment to being the lender of last resort. That may be true, but there are consequences to this behavior.

I rarely use sports analogies - they annoy me. So you can only imagine my opinion on the constant speculation about “what inning we are in.” Why baseball? Does the market action since July make you feel like you are either playing on the Field of Dreams or watching the World Series? Getting hit with a bat would probably feel something like this. Getting beaned by a 100 mph steroid filled fastball might feel like trading has felt. But as for the game itself, I find it rather slow and boring (my apologies to baseball fans). This market has not been slow or boring. If I had to come up with a comparison, it wouldn’t be baseball. I’d pick boxing. Except you are not sitting around the ring. You are in it. You are getting punched or you are trying to hit back. Headbutts? Low blows? Thumbs to the eye? Before the bell? After the bell? All of that applies to this market. What round are we in?

Fannie and Freddie got their capital reserves loosened up. Listening to all the cheers and comments from the government officials, we are supposed to believe that all this money solves all the problems at Fannie and Freddie (and maybe even the mortgage industry). Giving them money without the conditions that the administration had previously been insisting upon shows how far certain people are willing to go to avoid dealing with the fundamental weaknesses we have. It’s similar to believing that giving several hundred billion dollars to investment banks will solve all their problems. Or believing that giving $160 billion to consumers will solve all their problems. Man, if we can just spend a few trillion extra on the Iraq war, maybe it will create world peace and everyone will love America again! There is great relief that the investment bank crisis was somehow washed away with Bear Stearns and the PDCF. Just like there was with the TSLF. And temporarily with the TAF. And sporadically with all the rate cuts. But in the end, while liquidity is a big factor, it is only the consequence of the real problems we have. We had a ton of liquidity when we made the subprime loans, we had a ton of liquidity when we were packaging the CDOs, we had a ton of liquidity in the ABCP market and the muni market and the ARS market and we had a ton of liquidity when we were giving out leverage loans for Private Equity.  Throwing money at problems does not change the behavior that is the root of these crises.

When we start to rally during bear markets, bulls suddenly pretend like they were not behind any of the recent selling. It wasn’t them. It must have been evil short sellers or hedgies or any manner of short term speculators. Yeah - right.

To emphasize their bullishness and love affair with flawed long term buy-and-hold strategies, they often point out how terrible it would have been to be out of the market and miss yesterday’s 4% in the S&P index or 10% on some particular stock like GE.

Supposedly, there is some great pain for missing out on that and the pain of actually losing money is nothing to worry about. Tell that to someone who got out on September 4th. Why September 4th? I just picked it because it was after we knew there were obvious problems with the credit markets and it was not the record high so you cannot say I topticked this analysis. If you don’t like September 4th, just pick December 13th, the day after I wrote that it was okay to Refuse To Participate in this market and then repeat the analysis that follows.

On September 4th, the Dow opened at 13,358.39. If you had exited entirely at that moment and did not get in until yesterday’s close, you would have definitely missed out on the 4% move in the market over the previous 2 days. You also would have missed out on the -7.2% decline since September 4th. Did you enjoy battling in the markets since September? Was being in it on Monday of this week and getting a 4% pop worth it or would you prefer to have avoided all the stress and still saved 7% even after missing out on this week’s pop?

And just remember, these bullish comments (from Farr) about missing out on rallies pretend to promote the benefits of long term investing. So don’t be too convinced when the best example bulls can come up with isn’t long term, it isn’t even medium term like 6 months (since September 4th), it is 2 freaking days. Beware Bullish Perspectives like this!

In the last two weeks, I have found it much easier to do the fundamental and technical analysis that determine the signals on all the thousands of stocks I cover.  I am not sure how long it will last or whether it means anything for the market’s direction, but I am enjoying it compared to how ridiculously difficult it has been since November.  However, now is no time to take a breather and relax.  Stay on guard at all times because not much has changed regardless of all the efforts by the government.

The smarties are out and about proclaiming that the bottom was set.  Many are even spending time telling us how they predicted this months ago.  They are certain about it.  Just like they were certain about the previous bottoms every other time they called them over the past few thousand points on the Dow.  How many bottoms do these people have?

When the Fed dropped the Discount Rate in August and wanted to encourage the commercial banks, it staged a ceremonial borrowing by C, JPM, BAC and WB.  Remember that?  They each borrowed $500 million to show others how to do it.  Most importantly, they said they didn’t really need the money but were showing support for the Fed’s actions and to reduce the stigma associated with borrowing from the Discount Window.  Within a few days, the $2 billion of ceremonial money was returned and we know what happened after that - almost no one else borrowed for months.  And by the way, consider what we ended up learning over the next few months about the four banks that stepped up to the plate.   According to them at the time, they didn’t need the liquidity.  Okay - whatever you say!  So forgive me if I am not impressed by Goldman and Lehman testing out the Fed’s new play thing and showing up for the PDCF ceremonies.  According to them, their liquidity is excellent, maybe even “the best it’s ever been”.  And by the way, they didn’t need the facility but were trying to support the Fed and help reduce the stigma.  Okay - whatever you say!

• If you are not suffering a physical challenge, you should not park in the “handicapped” parking space.
• If you are not starving, you should not be eating free meals at the shelter.
• If you are fortunate enough to have health insurance, you should not seek treatment at the free clinics.

Our society is full of people in genuine need and when governments or charitable organizations try to help them, those resources should not be soaked up by anyone who does not genuinely need the assistance.

Hearing that Goldman Sachs hasn’t used the PDCF makes sense. After all, aren’t they given credit for being so brilliant they have avoided the mess that the industry is fighting through?

Hearing that David Viniar, the GS CFO, says that it is likely Goldman will use it in the future makes me sick. If they need it…fine…go ahead and use it. If they don’t need it but just want to because it is available for them to make more profits with a cheap source of capital, that pisses me off. Is that why Bernanke set up this facility?

Contrary to many market experts, I believe there should be a stigma attached to borrowing from the Fed whether it’s through the Discount Window or through the PDCF. Otherwise, we are not just helping those in need, we are helping those who have no need. That does nothing other than generate a new form of Moral Hazard.

Like many other aspects of my political and economic views, I have an opinion that does not fit perfectly with traditional definitions of “Republican” or “Democrat” or “CENTRIST” and “Socialist” or “CAPITALIST”. Many capitalists struggle with the issue of regulation. I do not. I have made numerous comments here about my preference for more regulation of capital markets whether that means the CFTC or the SEC or the OCC.

Sadly, the abuses of a capitalist system are often used as an attack on capitalism. I view these not as capitalism, but as greed. There is “greed” in communist societies where the political leaders get special treatment and live a special life that is much higher than the rest of society. There is “greed” in capitalist societies where the market participants run wild and free of government regulation. We have had way too much greed and both an absence of regulation in certain markets (derivatives) and a total failure to enforce existing regulation in other markets (mortgage lending.)

Our founding fathers, made it clear that the federal government must be responsible for providing services for the common good where private entities (citizens and businesses) and local governments could not. In my opinion, regulation is one of those services where the federal government is not only necessary but required by the enumerated powers of Article 1, Section 8 of the Constitution, specifically the power to regulate commerce among the states and foreign nations. Obviously, Congress has overdone some regulations and those bad examples form the basis of complaints against all regulation by conservatives and libertarians.

The mortgage and derivatives crisis in America is a failure of existing laws and expectations of regulation to protect the common good. The banks and investment banks and non-regulated entities got a free pass to violate common sense and business practices in the pursuit of exploitive profits. Politicians and regulators encouraged much of this bad behavior and more importantly, they failed to enforce regulations that would have minimized the risks we are now facing. Free market capitalism should not mean that some capitalists are free to exploit for a time until the rest of the free market capitalists (or socialists) suffer for these abuses.

Today, I heard Secretary Paulson give his view of the importance of regulators and their need to fix the current mess (the very end of this clip). I disagree. I think that the proper role for regulators is to prevent bad behavior and to minimize the stuff that happens anyway. If it gets to the point where we are today, the regulators have failed. So I give them no credit for attempting to fix the messes that they failed to prevent or keep under control. In this case, politicians and regulators including the Congress, Administration and the Fed had the responsibility to make sure the subprime and derivative disaster did not happen. Instead, they proposed and promoted easing credit for subprime borrowers and they either intentionally looked the other way when this nonsense was going on or they were negligent in their supervision.

I know Secretary Paulson believes in proactive and preventative regulation and I do not believe he or Chairman Bernanke should be held accountable for the current failures. However, it is more than a bit discouraging to hear no one state the facts - regulators failed to regulate and that is why we are facing these dramatic situations.

Democrats that believe they can legislate excessive regulation and then encourage policies that ignore the spirit of this regulation are hypocritical and abusing their powers. Republicans that believe all regulation is a restraint of trade and interference of free market capitalism are obstructing the important responsibilities bestowed by the framers of our republic. The current crisis in our economy and credit and stock markets is a failure of regulation that already existed.

It used to be the case that the dollar was the unofficial currency no matter where you traveled around the globe.  I can remember seeing vendors writing “Dollars welcomed here” on little signs near their shops in the markets.   I suspect that is no longer the case.  I’ve also been thinking of all the counterfeiting that the American government has been battling for years and wonder whether any foreigners are wasting their paper and ink printing up some fake greenbacks.   Maybe the Euro won’t devalue before the ink is dry.  A friend of mine forwarded this story that some currency exchange shops in the Netherlands will not even accept dollars for exchange fearing the devaluation before getting the money banked.  I can just picture a sign saying “Dollars unwelcomed here.”