Oh!  What a tangled web we weave …

Here are some of what I believe to be the key points in the series of emails going back and forth among Fed officials regarding the Bank of America / Merrill Lynch deal.

Though the emails are incomplete and a bit confusing, I have put them in chronological order to better detail the progression of events.

While a bit convoluted, the bits selected and highlighted should begin to tell the narrative of what really happened: Bank of America CEO Ken Lewis began to realize the magnitude of the problems facing Merrill Lynch - and his own company - and was doing a delicate dance with various Fed officials, at one point (according to a Fed email but “not recalled” by Lewis in testimony today) allegedly asking for formal Fed guidance on a deal, perhaps even a letter of Fed endorsement.   It is clear that Fed officials would not give Lewis a letter and indeed began openly discussing various lawsuits they knew were coming.   Note that the Fed also openly questions Lewis’ knowledge of the Merrill Lynch problems.

—-

(12/19 from Richmond Fed official to Federal Reserve Board - Fed beginning to realize the magnitude of the financial problems) “The preliminary assessment on the ML loss numbers is that ML does not appear to be overly aggressive in some of its larger markdowns - though we can’t yet say with certainty and for all positions - so the size of the losses/write downs may not (their emphasis) be overstating the problems at ML to a large extent in an attempt to ‘kitchen sink’ the losses in advance of the acquisition date. Details of the sources of the ‘new’ $4 billion in losses are being sought right now and that will be included in the analysis once we get a bit more clarity”

(Same email continued - Fed beginning to doubt Lewis) General consensus forming among many of us working on this is that given market performance over past several months and the clear signs in the data we have that deterioration at ML has been observably under way the entire quarter - albeit picking up significant [sic] around mid-November and carrying into December - Ken Lewis’ claim that they were surprised by the rapid growth of the losses seems somewhat suspect.’

(12/20 email from Jeffrey Lacker to various Fed officials - self explanatory and seems to reference Ben Bernanke ) “Just had a long talk with Ben [Bernanke?].   Said they think the MAC threat is irrelevant because ¡ts not cred¡ble.   Also intends to make ¡t even more clear that if they play that card and then need assistance, management is gone. (Forgot to tell him KL is near retirement.)

(12/22 email from unknown to Fed official - Fed responding to Lewis’ requests for some Fed legal guidance, potentially helping shift blame) [Lewis] had a question which I will address to Scott (also to Deborah).  He said he now fears lawsuits from shareholders for NOT invoking the MAC [material adverse change clause] given the deterioration at ML.  I don’t think that’s very likely and said so.   However, he still asked whether he could use as a defense that the gov’t ordered him to proceed for systemic reasons.    I said no.  It is true, however, that we have done analysis that indicates that not going through with the merger would pose important risks to BAC itself.   So here’s my question: Can the supervisors formally advise him that a MAC is not in the best interest of his company?  If we did, could he cite that in defense if he did get sued for not pursuing a MAC?

(12/23 response to above from unknown - You can see the Fed begin to set the state for its own defense and back Lewis into a corner) “Just to be clear, though we d¡d not order Lewis to go forward, we did indicate that we believe that going forward would be detrimental to the health (safety and soundness) of his company.   All that said, I don’t think its necessary or appropriate for us to give Lewis a letter along the lines he asked.   First, we didn’t order him to go forward - we simply explained our views on what the market reaction would be and left the decision to him.  Second, making hard decisions is what he gets paid for and only he has the full information needed to make the decision - so we shouldn’t let him off the hook by appearing to take the decision off his hands.”

(12/23 email from Fed official -  Discusses a potential lawsuit and how the Fed is starting to protect itself) “…Treasury gave our views on what we thought the likely effects would be of not proceeding [with a BAC/ML deal] but that’s different than ordering Lewis to proceed.   I want to avoid the Fed being the centerpiece of the litigation.   Lewis needs to have every incentive to analyze the facts and document and justify his decision.   If he [Lewis] thinks he can rely on us, he’ll assert there was nothing he could do and he can be reckless - not the right incentive.   Moreover, once we’re in the litigation, all our docs become subject to discovery, and you’ll remember from Deborah’s presentation, some of our analysis suggests that Lewis should have been aware of the problems at ML earlier (perhaps as early as mid-November) and not caught by surprise.”

(12/23 between Fed officials - Discussion of Lewis’ liability) His [Lewis] potential liability here will be whether he knew (or reasonably should have known) the magnitude of the ML losses when BA made its disclosures to get the shareholder vote on the ML deal in early December. I’m sure his lawyers were much involved in that set of disclosures and-Lewis was clear to us that he didn’t hear about the increase in losses ML recently.

(12/23 email from Richmond Fed official to Jeff Lacker - Discussing Lewis’ own, growing fears) ‘I think he is worried about stockholder lawsuits; knows they did not do a good job of due diligence and the issues facing the company are finally hitting home and he is worried about his own job after cutting loose some very good people.”

(12/29 email from Kevin Warsh to Ben Bernanke and other Fed officials - Shows BofA hinting to Fed that it will need money) “Spoke with BofA folks this morning, mostly Joe Price (CFO).  They seem to have taken on board some of the ideas we discussed with them last week, but did not install a lot of confidence that they have a comprehensive handle on the situation.   Their views, however, are evolving towards asking for some relief to parent co [Bank of America] in addition to ML.”

(12/30 email from a Fed official to Fed board members Don Kohn and Kevin Warsh - Rare insight into high-ranking Fed members discussing their PR strategy)  “Any help will depend on getting our arms around that, and then judging the market reaction to our a¡d.   Second, our potential solutions depend significantly on some amount of TARP money being available when it comes time to act and on the FDIC being willing to play a role like it did in C¡t¡.  BA won’t want a loan, which is all we can do on our own. The availability of TARP money around January 20 will depend on Paulson’s ability to convince Congress to give the funds to Tim, on Congress acting without imposing new restrictions on hows the funds are to be-used, and on whether a new, unexpected problem arises before January 20 (or whenever the next tranche is granted).  So we can’t be sure at this point what we can do.   So I’d stick to the message you suggested before.   Consummating the deal is important to BA and ML as-well as financial markets.   Failure to consummate at this point would send bad signals about BA and ML as well as financial markets.”

Try starting your work day like this (looks like he did it on purpose, doesn’t it?)

Courtesy: Failblog

Stories I’m reading this Wednesday:

• On again, off again Chrysler / Fiat deal is on again
• Michigan workers try to reinvent themselves
• Stocks set to rise on positive economic data out of China
• Home Depot also helps the market by raising its forecast
• Opinion: Why it’s in China’s interest to help Tim Geithner
• Inverse indicator?   BusinessWeek proclaims housing slump “over”
• Big hedge fund makes big commercial real estate investment
• Saudi Arabia starts pumping its giant Khurais oilfield
• You just can’t win with the sleep issue

The government just announced it is “allowing” 10 banks to repay $68 billion in TARP funds.   It was also noted that the banks involved have paid approximately $4.5 billion in dividends on the preferred shares to date.  This will no doubt be spun in Washington as “the taxpayer is being repaid” to the tune of $72.5 billion bucks and we should all be happy.

In 2007 there were about 139 million tax returns filed.   Simple math tells us that the TARP repayment and dividend payments comes to about $521 bucks per tax return filed.

Good news!

Or not.

What are the odds that the taxpayer - who fronted the TARP money through increased government borrowing - is gonna see one dime of that cash?    About the same as the Washington Nationals winning the World Series this year.

The top story in the Wall Street Journal tonight is that the Treasury plans to extend TARP funding to certain life insurance companies whose capital has been hit hard.

From the Journal:

The Treasury Department plans to extend the Troubled Asset Relief Program to certain eligible life insurers, according to people familiar with the matter. Several life insurers have been burdened lately by capital constraints amid ailing markets.

The Treasury is expected to announce within the next several days the inclusion of life insurers that are bank holding companies or own a thrift, these people said.

This shouldn’t be something new to viewers of the program.   I have spoken about this before on the program, and even highlighted it in a speech I gave at a conference in New York back in November.

You can watch the speech here (insurance comment comes 1:20 into speech)

In the face of a nearly daily barrage of bad news, new lows and low spirits, perhaps it is important to smash the news cycle and find a few reasons to be more upbeat regarding the economy and markets.

With that in mind, here are four reasons to be long-term optimistic:

1. Everybody is so negative.   Right now it’s practically in vogue to see who can be the most pessimistic, and that extreme negativity is a reason to be bullish for the future.  Just as those who were negative on housing during the peak of the boom (and were ignored or dismissed as crazy), those investors who are able to muster capital and have the ability and guts to ride this out will likely end up the long-term winners.   It is generally the contrarian who wins in the end.   Think billionaire hedge fund manager Paul Tudor Jones in his early days in Chicago going against the conventional wisdom.   Or Warren Buffett recently.   When the panic selling hits - and we are getting close if we aren’t there already - there will be solid companies thrown out with the ones who won’t survive the downturn.   It may take five or more years, but eventually the overall markets will recover.   Getting back to the Dow’s October 2007 highs now means investors at these prices will have doubled their money.

2. Valuations are down, down down.  There will be companies who don’t survive this washout.  The S&P 500 may be the S&P 475 before it is all over.  But most of America’s biggest companies today will still be America’s biggest companies in ten years.   Some names will go, some new ones will grow and deals will get done, but at least 75% of the names topping the market cap list now will be the same in 10 years.   The larger companies have have a greater ability to weather the storm, and the valuations on those companies are coming down.   We’re not talking about price-to-earnings ratios, because everyone on Wall Street knows that earnings are going to be abysmal for the next few quarters and the “E” in “P/E” ratio will go down and increase that valuation metric.   However, there are many long-term indicators - such as price-sales and dividend yield  - that suggest stocks are cheap on a multi-year basis and these ratios do not rely on earnings.

3. Money supply is up and interest rates are down.  While it is trendy to compare this economy to the Great Depression, there are major differences in terms of economic policies: money supply is growing and the Fed is cutting, not increasing, interest rates.  While there are critics of the current policies and Fed Chairman Ben Bernanke, the policy response this time is much different and we have much more practical experience dealing with sharp economic dowturns than 80 years ago.  It is unlikely money will simply dry up this time.

4. Despite all the mistakes, we’re still here.   As a friend of mine said recently: if the pool is 6 feet deep, it’s the short who can’t swim who worry when they fall in … not the pro basketball players whose heads stay above the waterline.   Right now the United States looks like the Boston Celtics compared to the rest of the world.   There is no doubt we are facing a severe economic downturn, one that is unlikely to be solved in just a few quarters.  The rest of the world is suffering mightily too, but unlike America many nations are neophyte capitalists, with governments and populations not as adept at handling the boom and bust cycle that is all too common here.   Countries such as Russia and Argentina are nearing their second debt crisis in a decade.   Tens of millions of angry young men are unemployed in China.   100,000 marched in Dublin recently to protest their once-hot economy gone ice cold (due to a real estate bubble and bust that makes ours look tame).   Is Obama’s stimulus plan perfect?   Far from it.   Are we still waiting on all the TARP details?   Yes.   Will some big banks probably be rolled up or rolled over?   Yes.   But even with all the problems, growing government, lack of regulation, dumb borrowing, and everything in between, we are still here and will be generations from now.  America is one of the few countries in the world with the capability to be as insular or as global as we need.   We can feed ourselves.  We are flexible.   Hell, all things being equal we simply work more and more productively than others.

This isn’t meant to be jingoistic, just a reminder.   A reminder to think about what we have rather than what we don’t.  A reminder to think long-term.   The most common phrase in history must be “this time it’s different.”  No one reading this was likely even alive during the Depression so for us, personally, it is different.   But not for America as a nation.    And the country will still be here when - 100 years from now - financial journalists are writing about the great water bubble of 2108 and how it really was different that time.

Stories I’m watching on this busy Tuesday, one which could go down as the most important in American financial history:

• Ladies and Gentlemen we have hit the “T” (trillion) word in the bank bailout
• We are actually going over $2 trillion announced today and details are still sketchy
• All that money and the stock market still isn’t rising
• Don’t forget the stimulus plan, which passed today with a total of 3 GOP votes across both houses
• Harvard economist says the stimulus bill is “worst since the 1930s“
• Anti-stimulus groups create their own websites
• Hating the rich is nothing new in America
• GM cuts more workers & pay as restructuring plan deadline looms in one week
• Even the “recession resistant” Wal-Mart (NYSE: WMT) is cutting jobs as its stock sinks back to near a 52 week low
• Credit is easing, but only for the top rated companies
• Inventories fall, meaning prices may rise as stores clean off their shelves
• Bullet shortages in Florida?   That can’t be good.
• Chicago is a great town but its airports are awful
• Mad magazine skewers Madoff

President Obama named the members of the Economic Recovery Advisory Board charged to oversee the $925 billion dollar spending package (interesting that the board was named even before the measure has passed Congress).   The list contains some known names, some new ones, some good picks and a few that are riddled with conflicts.   It also includes a few that gave or helped raise hundreds of thousands of dollars to the Obama campaign and two people who help run major television and media outlets, raising questions about conflicts of interest.

Here are the members of the advisory board:

Paul Volcker (Chairman), William H. Donaldson, Roger Ferguson., Robert Wolf , David Swensen, Mark  Gallogly, Penny Pritzker, John Doerr, Jim Owens, Monica Lozano, Charles Phillips., Anna Burger, Richard Trumka, Laura D’Andrea Tyson, Martin Feldstein, and Jeff Immelt.

Here’s how I break down the list, beginning with the appointments I view as positive:

Martin Feldstein.   Solid selection.   He has openly (on Fox Business) criticized the current stimulus plan as not creating enough, well, stimulus.  He will be a voice of reason and dissent on the board.

David Swensen.  Manager of Yale’s endowment and considered one of the brightest fund managers in the world.   A small town and self made guy, he will add some original viewpoints to the stimulus.

Roger Ferguson.   Alan Greenspan’s right hand man on the Fed for years.   Now CEO of pension giant TIAA-Cref.   Should be sound voice that helps represent the interest of billions in retirement money.

Jim Owens.  CEO of Caterpillar.   On the boards of IBM and Alcoa.  Also a director of the fiscally conservative Peterson Institute for International Economics.    Should bring some midwestern sensibility to the group.  One of the few non-Ivy leaguers on the board.

William Donaldson.  Co-Founder of investment bank Donaldson, Lufkin & Jenrette.   Also served as CEO of insurance giant Aetna.    Potential controversy may be that he served as Chairman of the SEC from February 2003 to June 2005, a time that saw the growth of many of the seeds of the subprime and credit crisis.

John Doerr.   Wealthy venture capitalist.   Start up investor in companies such as Google, Sun Microsystems, Compaq and others.   Also on the board of Google.    Spends much of this time working on and investing in ‘green’ projects so should help the push for alternative energy spending.

Charles Phillips.   President of database company Oracle, former investment banker at Morgan Stanley and former United States Marine.   Very sharp and disciplined.   Not distracted by multiple other board memberships as with many others on this list.

Laura Tyson.   Professor at Berkeley.   Former Dean of the London School of Business.    While her membership on the boards of Kodak, AT&T and Morgan Stanley may be viewed as distractions, she isn’t beholden to a single industry and is a specialist in trade.   May help cool some of the recent dangerous anti-China rhetoric coming from the Obama camp.

Now, to the names that should raise some eyebrows:

Penny Pritzker.   One of America’s richest people.   Heir to the billion dollar Hyatt Hotel chain Pritzker fortune.  She was also the finance chief of Obama’s campaign and one of his biggest fundraisers.   Now she gets a seat.

Anna Burger and Martin Trumka.   Big labor gets two seats on the board.   Representatives of the SEIU and AFL-CIO, respectively.   Sure to push the organized labor agenda with taxpayer billions.

Jeff Immelt:  CEO of GE, owner of NBC and its family of media networks.    When Michael Bloomberg became Mayor of New York City he put his interest in the company into a blind trust, in part to avoid a conflict of interest with his company’s radio and television operations and his political role.   Immelt will do his network a disservice by being both the CEO of a media company and serving in an official government advisory role.   It’s simply too close for comfort.    Moreover, GE shares are at a 12 year low, wiped out in part by huge losses at GE Capital, a huge lender during the credit boom.   Shareholders cannot be too happy that their CEO is going to be taking time from running their company to serve on this board.   Immelt should have politely refused this post.   There are many other industrial companies such as United Technologies and Honeywell that represent similar interests but do not have a media operation.

Robert Wolf.   President of investment bank UBS.   While Wall Street should like this appointment, it should open the eyes of those who have joined the President in criticizing massive banking bonuses.    Just this week it was reported UBS is offering “super size” bonuses to entice traders and bankers away from competing firms.   There has also been the PR problem of some UBS bankers being accused of helping wealthy clients avoid paying taxes.

Mark Gallogly.   Not a household name.  Very wealthy.  Runs private investment firm Centerbridge Partners.    Smart and successful and considered another Wall Street advocate.   Former Senior Managing Director of private equity firm The Blackstone Group.   According to this website he donated more than $100,000 to the Democrats in 2008.  He has also spoken publicly about his support for the President, calling into question how much he will dissent on Democratic projects.

Monica Lozano.   Another media conflict.   CEO of La Opinion, the largest Spanish-language newspaper in the U.S.    She is also on the boards of both Bank of America and Disney, the owner of the ABC television network.

Hypothetical…

A salesman for Company X - which makes widgets - has a quota of $1 million in sales per year.   His compensation is $50,000 per year base salary plus 10% of everything he makes over quota.   The salesman busts his rear all year, working the phones and hopping on airplanes.   He does well, bringing in $2 million in sales, doubling his quota.   His compensation is $150,000 that year.   Additionally, those on his work support team - back office, administration, etc - would also likely share in that success.  I suspect few in America would have a problem with that scenario.

But what if Company X lost money that year because top management decided to get into the business of selling “whatsits.”   The whatsits didn’t sell, and in fact did damage to the company overall.   Now let’s add that Company X was not only suffering massively but whose overall business is seen important to the American economy and it received Federal assistance to keep operating.   Should the salesman who did his job selling widgets and beat his quota not be paid his bonus?   If you say he shouldn’t, you probably want to stop reading.

Now let’s turn that to Wall Street.   This will be one of the least popular stories I have written but it needs to be said: the President is wrong on the issue of Wall Street bonus payments and when he says Wall Street should have “know better.”  Just as we should not lump any group of disparate individuals together to make a political point, neither should the President and his cabinet lump “Wall Street” into one, singular group of financial evildoers.

The President is wrong on the bonus issue for the following reasons:

• Most of that $20 billion dollar bonus figure thrown around Washington goes to the rank and file and not the top executives
• Many banks factored into this bonus pool did not take TARP money
• Most of the bonuses are paid as a percentage of sales and profits, and there are many on the Street who had nothing to do with the economic collapse and made money for their firm
• Most CEOs have canceled their bonuses (or been fired)
• Bonus payments have already fallen by nearly half
• As equity shareholders in many of the big banks, Americans now have an economic incentive to keep the best workers at the firms they now partially own

Thursday the President once again attacked Wall Street, calling bonuses “shameful” and making other strong remarks (video) about financial industry pay.  While no one can or will defend money-losing CEOs giving themselves multimillion dollar payouts, it is important to differentiate between the C-suite top executives and the majority of those working in finance.   Let’s put aside the rhetoric and examine the reality.

First, Despite the big headline numbers Washington likes to throw around, bonuses are already way down.   From the office of New York State Comptroller Thomas DiNapoli:

Cash bonuses paid by Wall Street firms to their New York City employees declined by 44 percent in 2008 in response to record losses suffered by the securities industry.   DiNapoli noted that the federal Troubled Asset Relief Program (TARP), which infused billions of dollars into the financial system, helped prevent more institutions from failing. TARP placed restrictions on bonuses for top executives and many have voluntarily forgone bonuses, but it did not impose limitations for lower-level employees.

Next, what many in Washington (and across America) forget is that most people on Wall Street are, at the core, salespeople.   Additionally, the majority of “Wall Street” - despite politicians who like to lump the hundreds of thousands of financial industry workers into a single group of “them” - had nothing to do with what is happening right now with the economy or credit crisis.  They are a diverse group who do thousands of different jobs across a variety of industries.   Stock brokers, commodities traders, investment bankers, and the hundreds of other specialized careers in finance have little to do with each other, much less be able to be harvested into some “group” to be singled out for misdeeds.   The President likes to use phrases such as “Wall Street folks” when making critical comments about the state of the economy.   That is no better than saying something to the effect of “those folks in California” should’ve “known better” than to buy homes when the market was clearly in a bubble.

What is also misunderstood is that many on the Street make a majority of their pay through a bonus.   This is not just the highest paid investment bankers and traders.  It is also the secretaries, administrative staff, and hundreds of other positions that support the company.    Guaranteed salaries among much of this group can actually be relatively low, and there are many positions where more than half of compensation comes in the form of a once a year payout.

Outside the upper echelon of management most highly paid financial professionals merely have a product, sell it, and make a percentage of the revenue and profit.   If an oil trader makes $10 million dollars for his firm, he expects a percentage of that profit to come back as his pay.   If he loses money he won’t get anything but his base salary and probably a pink slip.   Bankers are the same way.   They help companies buy and sell each other.   If they do deals, they get paid.  If not, they don’t.   Despite the mystery surrounding much of finance, most Wall Street workers are not that different than other sales driven industries.   Those who peddle software, cars, toothpaste or the thousands of other products sold around America each day face the same reality: sell, make money for the company or face getting the boot.   Most lawyers by the way, the previous occupation of most on Capitol Hill, operate the same way.

Right now you are no doubt saying I am wrong (if you are still reading at all).  After all, you say, Wall Street helped create the crisis and are now asking for taxpayer money and using some of that to pay their workers.  That’s wrong, you say, and so we should penalize the lot of them by getting rid of their “shameful” bonuses.  Let’s say then for arguments sake that you are right and I am wrong.   Let’s use that same logic to another end.

If the idea is that industries who 1) helped promote the economic collapse through 2) over zealous and some say greedy behavior and 3) who are now getting Federal help should not be able to receive the pay they earned that may have been related to the economic crisis, shouldn’t it also hold true then that others, and not just Wall Street, face the same penalty?

If you answered yes, then should we ask all the others related to and involved in the housing boom and economic malaise to “know better” and give up all future commissions on what they sell?  Should realtors not receive their sales commission because home prices are down 30% in some areas, the market was clearly in a bubble that should have been obvious to many, and now their industry is receiving Federal assistance through the Treasurys buying of mortgage related assets?   What of the auto industry?  GM and Chrysler accepted Federal money to keep themselves in business.  Does this mean that the car dealer who sells a GM or Chrysler product should “know better” and refuse to accept a commission on the sale because the car companies got themselves into trouble and needed rescue?

The answer on both of the above examples is “of course not.”  The majority of realtors, mortgage brokers, car salesmen and others associated with at-risk industries had nothing to do with the global crisis we now face.   Wall Street, despite what many want to believe right now, is much the same.   As with most companies, the big decisions - like begging for TARP money - are made at the top, by a small group.   Many of the people I know on the Street also believe many of their top management needs to be fired.

I am not a Wall Street apologist.  There are those on Wall Street who deserve to be stripped of their jobs and their headline-making compensation.   Those are the people at the top making the macro calls on company strategy, as well as the small group of those directly involved in selling the most toxic of assets.   But despite the desire in Washington to find a convenient scapegoat for the downturn we cannot punish the many for the mistakes of the few.  The majority of those working in finance do not receive million dollar bonuses.   Demonizing profit-based packages for those who earned it strikes at the very heart of capitalism.

Two other points:

Tax filings show that the President’s 2007 income was $4.2 million dollars, based primarily on sales of his book.   He was a Senator in 2007, a year when the U.S. government ran up huge deficits and failed to anticipate the economic collapse.  Should he give some of that money back because the government needs to bail itself out?

Additionally, before the government throws stones, it should look at its own home.  This excellent Bloomberg story outlines how the government isn’t exactly managing its own “bonus home” very well either.

Change is upon us.   Now the work begins.

America starts its real new year Wednesday with a curious cocktail blend of hope and anxiety, chased with long-term optimism.   The beautiful festivities in Washington provided a brief cover from a fit of negative economic news, but the tarp comes off Wednesday.   Lost in the confetti Tuesday was massive declines by many large cap banks.    Bank of America (BAC), Citigroup (C), State Street (STT) and many others sank as the world watched Washington.   There are reports that more bailouts may be needed for the financials, both here and abroad.   If we needed it, this is proof again that the global financial markets do not sleep and the awakened investing crowd is voting more problems may well lie ahead.

The water landing of U.S. Airways flight 1549 reminds us that at the beginning and end of every story are people.    The Airbus 320 is a high-tech piece of machinery that performed wonderfully for a task its designers hoped would never be needed, but the real genius of the day is found in the actions and heroics of ordinary individuals.    History shows that just when we think things can’t get worse, Americans have a past filed with overcoming obstacles and triumphing.   In some ways the U.S. Airways story couldn’t have come at a better time.   Sometimes triumph over tragedy can trump current trends.

As Niall Ferguson reminds us in his recent book “The Ascent of Money,” the root word of ‘credit’ is credo, Latin for “I believe.”   Money, Ferguson argues, is simply trust.   The belief one will receive what she bargained for in return for payment.

Now the new crew takes over in Washington and the challenges ahead are formidable.   There are numerous, simultaneous economic water landings ahead.   The men and women in the wheelhouse with whom we have placed our collective trust have no time to delay, and their performance in the early days and weeks may well define the mood of economic America for years to come.   Everyone one of those people is now a player in a generational crisis.   Many are young and untested.   That may turn out to be a blessing, with change pushed through in a fresh approach.   The alternative, as the collective market is already showing us with the retraction of the bank stocks, is further economic disaster.

Pilots have a clear checklist of procedural order for each flight.   The new Administration needs the same and it needs to make that checklist available for all to see, so the world financial markets can understand where the priorities are and place its bets.    That economic checklist must begin with the banks.    Unpopular as it may be, saving the banks is the basis for any recovery.    There can be no housing or retail recovery without credit.   Ferguson’s book details how the age of money as a physical object is largely behind us.   We are now fully ensconced in a credo economy.   Belief is the basis for recovery.   And it begins with a belief in the soundness of American banks.

Despite being widely hated, ridiculed and otherwise smacked down by the public, the $700 billion dollar TARP program may turn out to be the best investment the taxpayer made all year.

The folks over at Bianco Research (run by Jim Bianco, one of the smartest and most respected bond analysts in America) published a note today called “Tracking the Trust Cost of the TARP.”  This is their conclusion:

The Treasury infused $247.26 billion into 184 companies over the span of the credit crisis. In exchange for these bailouts, the Treasury received securities that are currently valued at $255.10 billion.  This means the TARP bailouts have actually turned a profit for U.S. taxpayers as of this writing. After factoring in the current value of the securities the Treasury received in exchange for its bailout money, the Treasury has turned a net profit of $7.84 billion for a 3.17% return on investment over the period.

There’s a phrase we don’t hear much these days, “turned a profit.”

The primary reason, Bianco argues, has to do with the nature of the preferred share investments the government made:

Every recipient of TARP funds, AIG and Citigroup excepted, had to agree to the same terms. In return for a capital infusion, the Treasury would receive 100% of the infusion value in the form of preferred shares of that company. This preferred pays a 5% dividend in the first three years and a 9% dividend after that. In addition, each company also would have to give the Treasury warrants equal to 15% of the infusion value.

This follows a story earlier this week that government money-receiving insurance firm AIG sold some mortgage related assets to the government.   From the story:

In the deal announced Monday, the Federal Reserve Bank of New York made a senior loan to Maiden Lane II to buy the residential mortgage-backed securities for an initial purchase price of $19.8 billion. The six-year loan is secured by the $39.3 billion face amount of the securities and bears interest at one-month LIBOR plus 1%.

Notice the sale price to the government is about 50% of the face value of the securities.   Granted, that face value may be less today than it was when the loans were made, but it is highly unlikely the value of those assets has dropped by half.   Additionally the government loaned the money to AIG and is making a few percentage points in interest.   If the value of these assets rises, the government will be holding them on the books at more than it paid.      Buying low, hopefully selling high.

We are still in the early innings of the TARP game, but the very early score indicates that the much-maligned $700 billion dollar rescue program may actually give a little back for the use of your money and, at the minimum, we get to hear a bit of all-too-rare good news.