Holy Sh-Smoke!

From Mish comes this link to Ken Lewis's testimony about the BAC-Merrill Lynch merger:

Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced.

Mish says:

It's crystal clear from the letter that a strong case can be made that Paulson and Bernanke coerced Lewis to carry out a merger agreement that was not in Bank of America's shareholders best interest. Lewis arguably did so only to save his own job and the board.

Here's Mish's post when the merger was announced:

“There was no pressure from regulators, absolutely no pressure,” said Mr
Lewis, who described the deal as “the strategic opportunity of a lifetime”. He said: “The first contact came on Saturday morning and we put the transaction together in 48 hours. The instant we talked it made sense.”

My [Mish's] Translation: "The pressure from the Fed was enormous. Anyone in their right mind knows this deal makes no sense to Bank of America".

In other news, the number of prime mortgages 60+ days delinquent owned by Fannie and Freddie rose from 497,131 in December to 743,686 in January, or 50%. These numbers are nothing short of apocalyptic.

How you get inflation out of these numbers, I don't know. What I suspect is that everyone is focused on what is easily seen: the amount the Fed is printing. The strength in prices of oil, copper, and weakness in bonds has been taken as a sign of inflation as well. I don't think so. I think it's just a by-product of Fed printing weakening the dollar. If you look for inflation on main street, there's none. On the contrary, there's epic deflation. Housing costs are down -20%, wages are down -6% according to the Withholding Taxes Blog, commercial real estate vacancy rates are ramping up to generational highs, and almost everything you can buy at a mall is 30-50% off. Bad assets at banks have tripled over the past year. They are nowhere near being repaired. Now, some of this may be exaggerated on a percent basis due to mergers. For example BAC also includes Countrywide and Merrill Lynch losses. But even when the banks are fixed, we still be stuck in the Japan scenario where more people are paying off debt than are borrowing.

Total 60+ day delinquent mortgages stand at 1,229,000 as of January 31st.

As far as bonds and inflation from printing goes, I will be watching the Pound and the UK. Their budget deficit for this year is projected at 11% of GDP. Ouch. I would love to short the Pound, but FXB is hard to borrow... I will keep my eyes open for another way to do this. Maybe I should just buy gold. It should be a good indirect play, as a collapse or panic in the Pound would push Pound-holders to buy gold to protect themselves. Moody's just said that the UK's debt rating may be downgraded.

And another thing... I'm not so sure that bankruptcies by GM and Chrystler are being priced into this market.

But wait, there's more: Bloomberg reports Fed’s Bear Losses Dominated by Commercial Real Estate. The losses are at 28% for commercial and 38% for residential mortgages.

And now for good news on gold: Bloomberg reports China Increases Gold Reserves 76% to Fifth-Largest. Well, the headline is more sensationalist than the reality. This number is since 2003. Big whoop.