by Addison Wiggin & Ian Mathias

• Another one bites the dust: CIT marks fifth biggest bankruptcy, first taxpayer TARP loss
• So who’s next? One bank drawing major ire from all corners
• Addison Wiggin with a Fool's look at “too big to fail” legislation…and a candid admission from one man behind it
• Rob Parenteau identifies what will REALLY mark the recession’s end… and why we haven’t seen it yet
• Plus, Chris Mayer on when to sell your gold

  Hopefully, you won a bet this weekend. Maybe you cashed in on winning stock or picked up a little overtime pay… something to make up for the $2.3 billion that was just lost on our behalf.

As we forecast, CIT Group has kicked the bucket. The mega-lender filed for bankruptcy on Sunday after an unsuccessful attempt to sway their belabored bondholders. When the dust settles, this will be the fifth largest bankruptcy in U.S. history, a $71 billion mess rivaled only by Lehman, WaMu, WorldCom and GM.

But perhaps more importantly, CIT Group will mark the first official, irreversible taxpayer loss for the TARP program. The Treasury gave them $2.3 billion late last year in exchange for shares of CIT… which are now and forever worthless.

  The CIT failure won’t cause a Lehman-style stock collapse, market makers confirmed this morning. It’ll be one of those organized, prepackaged sorts of bankruptcies, we hear. And since the S&P shot up 1.5% this morning, traders don’t seem worried about the imminent absence of this big player in small business lending. (Much of the stock market rise this morning is a “buy the dip” after Friday’s big sell-off, plus some surprises from global manufacturers… more on that in a minute.)

  So what’s the next big bank to fail? We’re picking up a lot of ire (even more than usual) directed at GMAC lately. Not only is the financial arm of GM begging for its THIRD government bailout, but it just got a well-deserved FDIC smackdown over the weekend. The heat is on Ally Bank -- GMAC’s rebranded consumer bank, famous for its honest-to-God commercials and hilariously fraudulent ads like this:

Heh, more like “we make money because of you”… the U.S. taxpayer owns 35% of GMAC.

Anyway, the FDIC put the kibosh on Ally Bank’s excpetionally high interest rates and recently risky auto loan practices… both big life preservers for GMAC.

  Speaking of failing banks, we were sifting through the proposed “too big to fail” legislation that’s floating around the House and found this nugget: Under Barney Frank’s plan, the legislation would establish a “Financial Services Oversight Council.”

Essentially, it would be a group of bureaucrats who decide what companies are too big to fail and what new regulations/capital requirements they must subsequently observe. The proposed voting members:

 ·  The secretary of the Treasury, who shall serve as the chairman of the council
 ·  The chairman of the Board of Governors of the Federal Reserve System
 ·  The comptroller of the currency
 ·  The director of the Office of Thrift Supervision
 ·  The chairman of the Securities and Exchange Commission
 ·  The chairman of the Commodity Futures Trading Commission
 ·  The chairperson of the Federal Deposit Insurance Corp
 ·  The director of the Federal Housing Finance Agency
 ·  The chairman of the National Credit Union Administration.
 
In other words, all the people who never saw the crisis coming (and a few who enabled it) would sit on a council together and have to arbitrarily decide who gets to grow and who doesn’t … just when innovation in the financial markets is needed most. Brilliant.

  “Mark Warner, the junior senator from Virginia and one of the architects of the Oversight Council idea spoke to a group of financial publishers gathered at the Motley Fool in Alexandria, Va., on Friday,” writes Addison Wiggin, who was at the meeting himself. “Warner said he and his colleagues were working on the most sweeping and comprehensive reform bill since the 1930s, when the SEC itself was created.”

“The reform effort is focused on four fronts:
 
a) The council on “Too Big To Fail” (named above)
b) Increased capital requirements and strident guidelines (for speculative gambling instruments)
c) Increased funding and authority for the Resolution trust (so at least the lawyers won’t go bust)
d) and consumer protection (for those dimwits who got in over their heads in the first place).

“The parentheses, of course, are all ours.”

“The most striking thing to me,” Addison continues, “ was not that Warner was basically describing a massive land grab on regulatory authority stemming from Washington… that’s a given, especially since so much taxpayer money is being thrown down the money hole created by Wall Street.

“What was really shocking was how candid Warner was. He’s a co-founder of Nextel, so he, unlike many politicians, has a basic understanding of business and entrepreneurship. When he joined the Senate Finance Committee, he immediately rose to a position of respect and leadership within the group. He said he ‘puffed up his chest’ and was proud they all thought he ‘had a handle on all this banking stuff.’ Then he realized, without much practical experience in banking, finance or crafting legislation, he found himself leading one of the most aggressive revamps of the financial system ever attempted in history.”

“‘Well,’ Warner concluded after a quick Q&A session, ‘That’s all I have for you today. I hope we don’t screw this legislation up too badly for you.’”

Uh.

  One suggestion he made to the group of publishers: “Put your best researchers on this: When the bankruptcy laws were rewritten in ’04 and ’05, someone slipped in a provision that took counterparty risk in the CDS market outside the bankruptcy framework.

“So... in effect, when AIG was bailed out... it had to pay 100% of the obligations it had built up, rather than have those obligations negotiated in a bankruptcy court. He challenged all the publishers in the group to put our best people on it to figure out who had slipped that provision in…”

  Score one for manufacturers of the world this morning: purchasing managers indexes in the U.S., Europe and China all reported notable growth. Our ISM manufacturing index rose from 52.6 to 55.7 in October, still above the contraction score of 50 and the fastest pace of monthly growth in about three years. Europe’s PMI rose to 53.7 last month, its first month of growth since January 2008. And China’s manufacturing grew for the eighth straight month in October, its government claims.

  “Even with the third-quarter GDP advance of 3.5%, inflation-adjusted personal income, excluding government transfer payments, is still falling,” says Rob Parenteau, cutting to the heart of this crisis.

“Labor productivity is surging, and firms are starting to show the profit boosts from these efficiency gains as pricing has begun to stabilize and revive of late. Higher profit margins and higher profit levels, however, will need to feed back to higher production and employment gains for household income streams to benefit. To date, all we have is the first part, higher production, but with fewer employees.

“Part of that feedback loop will require a willingness of firms to reinvest in the United States. While purchasing managers are recording higher new orders, the actual new orders results printed by the Commerce Department are making only incremental advances.

“In other words, for the recovery to take root and build into a sustained, above-trend growth path, the profit signals now being generated by policy largesse must lead to a revival of private production and higher reinvestment rates… We will need to see companies reinvest their reviving profits into more efficient capital equipment or new technologies and products, and so far, that is occurring in only a marginal fashion, at best. That leaves too much dependent upon policy stimulus, which we know is bound to fade in 2010.”

As we mentioned Friday, if you haven’t checked out Rob in the first Richebacher Society Round Table -- it’s a must. Members can click here to listen to the whole 45 min discussion. (Not a member? Find out if the society is right for you here.)

  Today’s stock rebound has the dollar back in the dumps. The dollar index is down almost half a point today, to 76.

  That means commodities are back up. Oil has inched up just a couple cents, now at $77 a barrel. Gold, meanwhile, has registered a more notable jump. The spot price is up $25 from Friday’s low, to around $1,060 an ounce.

  “I think we’re still in the early stages of what could become a gold mania,” opines Chris Mayer. “While there are a lot more people talking about gold now and the gold price is close to all-time highs, it remains an underowned asset. Only a small fraction of investors own any gold at all. Hardly any institutions own any gold, either. As we now have 10 years of market-beating data for gold, it’s going to attract more attention.

“I think that attention will eventually carry it to a price of $2,000-3,000 pretty easily -- maybe more. So far, gold has had a steady march up since 2000. The last leg, the mania phase, always has a rapid and explosive move before it’s all over. We’re not there yet.

“As for what will pull gold back down, I think a strong economic recovery could derail gold’s story for a time, but as long as the U.S. dollar makes its way to new depths over time, I think the gold price will drift higher.

“Most people think of gold as an inflation hedge. To me, it is more than that. Gold is primarily a bet against the creditworthiness of the issuers of paper currencies. In other words, as the creditworthiness of the U.S. government weakens -- thanks to high debts and deficits -- gold will be a strong asset… and gold stocks ought to be one way to juice the return you get from gold. Our two gold stocks are up 80% and 40% since we bought them earlier this year. If we get any pullback in gold, I’ll be a buyer.”

But a buyer of what gold investment exactly? Look here for answers.

  “In Friday's 5,” a reader writes, “you stated: ‘18.8 million homes in the U.S. were officially vacant in the third quarter, the Census Bureau reports today… Thus, 2.6% of all houses in the U.S. have no occupant, three-tenths of a percent from the record high.’

“If 18.8 million homes comprise 2.6% of the total, then we have 723 million homes (18.8/0.026 = 723) in the U.S., or about 2.4 homes per person. I know we have overbuilt, but I don't think by quite that much…”

The 5: Both numbers are right, just not right together. Of the 130.3 million homes in the U.S, the official homeowner vacancy rate -- what the Census calls “the proportion of the homeowner inventory that is vacant for sale” -- is 2.6%. In the same report, which you can read here, the Census says there are 2 million empty places for sale, 4.6 million sitting empty that are for rent, another 4.6 million empty vacation homes and our favorite -- 7.6 million “other” empty homes. That’s 18.8 million, or about 14% of all homes. For some reason, Uncle Sam only uses a portion of that total for the official tally.

The real percentage is likely even higher than 14%, or 2.6%, or whatever number the government wants to use. Just here in Baltimore, there are hundreds, if not thousands, of empty homes in neighborhoods that no Census taker would ever brave. Watch The Wire for details.

At any rate, thanks for keeping us in line.

Best regards,

Ian Mathias
The 5 Min. Forecast