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Busch: Things Will Get Better (It Can't Get Much Worse)

There are no significant US economic statistics until November 24th (existing home sales) and then there's a slew on the 25th with 12 stats released prior to US Thanksgiving. This means the markets will focus back on developments in the corporate world and in D.C.

Both have been a disaster for the equity markets, but I expect this to change. Like the old Beatle song goes, "I have to admit it's getting better, it's getting better all the time, (it can't get much worse). Corporations, governments, and unions are making rapid adjustments to the events.

The Citibank saga is now front and center with its stock collapsing this week after it announced that it was re-levering by taking $17.4 billion in assets back onto its balance sheet from an SIV. If you think about a graph of assets on the y axis and leverage on the x axis, these two are positively correlated and banks were far away from the origin prior to August of 2007. In a credit crisis like 1998, banks started from the same position and then moved as quickly as possible to the origin. This de-leveraging can be accomplished by raising capital or selling assets. Both were done quickly in 1998.

In 2007, the banks were forced to initially move further away from the origin as they had back stopped SIVs that contained toxic debt. This meant that the need to capital raise was much stronger and then need to sell assets more acute. This is why the current credit crisis is incredibly destructive and ongoing. By putting more assets on its books, Citibank has now increased the need to raise capital and/or sell assets. This development has made the stock a target for the markets and it has dropped significantly since the announcement. Overnight, we're getting stories from CNBC and WSJ about the company selling parts or getting additional capital. This is exactly what needs to occur. It should also be a signal to all financial firms to anticipate the possibility of problems and not wait for the bull's-eye to find them.

Andrew Busch On Today's "Power Lunch"

In this vein, the proposals in front of the standard-setting Basel Committee on Banking Supervision (BCBS) are to make banks hold larger capital reserves and to limit the amount they can borrow. The latter is a limitation on the absolute amount of debt a bank can take relative to its capital base. This is part of the global financial re-regulation that is going to occur and is done to eliminate a repeat of the current credit crisis. The G20 meeting in DC last weekend pushed this type of change after governments around the world have bailed out banks under duress. The risk from this is timing. If everyone followed this immediately, then the credit crunch would be exacerbated and prolonged. Fortunately, the BCBS is aware of the pro-cyclical nature of this and they would encourage banks over the long term to make provisions for bad debts throughout the economic cycle.

Lastly, we're getting news that the UAW is negotiating the possible elimination of its controversial jobs bank and is considering other concessions to help Detroit's automakers win low-cost loans from Congress, according to the Detroit Free Press. "Union officers from several locals said they did not know if the concession had been made but expected the jobs bank to be ended as part of a package of shared sacrifice when the automakers and UAW President Ron Gettelfinger return to Congress early next month.

The jobs bank pays laid-off workers, sometimes for years." It appears that the UAW is ready to compromise to save the jobs they can while knowing job losses are enviable from the Big Three. I don't not expect a repeat of this week when the auto makers submit their plans by December 2nd. Hopefully, the Big Three, the UAW, and the Congress have all learned their lessons. Can't wait to see the mode of transportation for the car executives should they go back to DC.

Wrapping this up, events move much faster than individual corporations, unions, and governments can act. However, they all are finding ways to adjust. While I expect the learning curve to remain steep, the knowledge is getting processed and acted upon. Things will get better (they can't get much worse).

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Andrew Busch

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