That’s right, the greatest show on earth is happening in Washington D.C. today. The announcement that came out late this afternoon that the US Treasury will now inject tax payer funds directly into the veins of the US banks is nothing more than throwing the kitchen sink at the problem. And it is a big show to make the US people ‘feel good’ that something is being done to protect their money in the banks.

And what a show it is. Today we learned that the CEO’s from major banks were summoned to Washington for an emergency meeting with Hank Paulson. And while in that meeting they were told to roll up their sleeves and the IV was placed into their arms. On the other end of the IV line is our wallets. For all intents and purposes this is nationalizing the United States banks. And because the tax payer is now connected right to the banks veins every disease they have will be carried over to you and I in the form of destroying the balance sheet of the United States even further.

It was not good enough to buy the bad assets from the banks and other financial institutions, to do that the Federal Government and financial institutions would have had to divulge the price of those transactions. Instead, this ‘new’ plan will not force any disclosure or transparency at all. All we do now is connect our wallets right to the banks. It is my assumption that the financial institutions started to have second thoughts about the plan when Congress added the provisions for transparency and disclosure to the bail out bill. So now Hank Paulson is resorting to essentially just nationalizing the banks, although he will say this is not the case, it is in my view.

Oh and this does scare the crap out of me. How many banks will end up on the tax payer IV line? The equities market shot upwards after this news was announced with the S&P futures rising 25 points after the close (currently at 1040.5). But the US dollar is heading down on this news and it is expected that we will see a rise in the bond yields when the bond market opens tomorrow. Rising bond yields would not be a good thing if your entering deeper into a recession. The rising bond yields would also signal a vote of ‘no confidence’ and it won’t take too long for the equities market to figure out that this plan is a disaster in the making.

The details of the plan will be provided at 8:30 am (US EST) Tuesday morning. And it will be quite a show:

October 13, 2008
HP-1204

PWG Announcement on Market Stability Initiative

Secretary Henry M. Paulson, Jr., Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair will be joined by the other members of the President’s Working Group on Financial Markets to make statements in the Treasury Department Cash Room at 8:30 a.m. (EDT) on October 14, 2008 on a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets. Following the on-camera statement Treasury officials will conduct an off-camera, background briefing in the same room.

Washington, DC–

Treasury Secretary Henry M. Paulson, Jr.

Who

Federal Reserve Chairman Ben Bernanke

FDIC Chairman Sheila C. Bair

SEC Chairman Christopher Cox

CFTC Chairman Walter Lukken

OCC Comptroller John Dugan

OTS Director John M. Reich

Statement on Market Stability Initiative

What

Tuesday, October 14, 8:30 a.m. (EDT)

When

Treasury Department

Where

Cash Room

1500 Pennsylvania Avenue

Washington, DC

Note The pen and pad background briefing will follow at 9:15 a.m. (EDT) in the Cash Room. No cameras will be permitted for the background briefing.

Media without Treasury press credentials planning to attend should contact Treasury’s Office of Public Affairs with the following information: name, Social Security number and date of birth.

The ‘cash’ room? Just who the heck came up with a name like that? Will they be in a room filled with cash? If so I can tell you where it came from… you and me!

Maybe Hank Paulson will set this up as a game show. Call it the  “Wheel of Treasury“. Go ahead Hank.. spin the wheel and see which financial institution gets handed a bundle of that ‘cash’ this week. Tune in next week when guest wheel spinner will be Ben Bernanke.

Ok, I’m being sarcastic here I know. But this plan is just so dangerous. The risks being placed onto the tax payers just keeps growing.

The latest synopsis of this disaster plan:

The Treasury plans to inject $250B in US banks; The plan will be done on a non-voluntary basis and the Treasury will acquire preferred stock, which will carry a 5% annual dividend that rises to 9% after 5 yrs; Also, in order to receive an investment from the Treasury, banks (except Bank of America) will have to raise $10B each in private capital; The Treasury also plans to take equity stakes in possibly thousands of other banks.

- In terms of the specific amounts some banks will receive, Goldman will receive $10B (18.9% of market cap), Morgan Stanley $10B (52% of market cap), Citigroup $25B (29% of market cap), Bank of America $25B (22% of market cap), JP Morgan $25B (22% of market cap), Wells Fargo $25B (24.9% of market cap), State Street $2-3B (12% of market cap) and Bank of NY $2-3B (7.1% of market cap)

- FDIC to insure all non-interest bearing bank deposits through 2009; Non-interest bearing accounts are typically used by small businesses

-  FDIC to insure new preferred debt issued by banks and thrifts; This measure will apply to sr unsecured debt and debt issued by June 30 with maturities up to 3 yrs.

- Treasury to announce a 3 yr guarantee of bank-to-bank lending

- The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through commercial paper will start in about 2 weeks.

And a part of this huge new plan is that the FDIC will raise the insured limit to infinity. Let’s see, the FDIC has some $45 Billion (if memory serves me correctly) of cash ready to reimburse depositors of failed banks. Now that they will insure to infinity that should go over well if there is a large number of bank failures which is still probably coming down the road. Then the FDIC has to go to the Treasury and get more money (from you and me again).

This move by Hank Paulson does two things:

1. It prevents transparency (which is needed to restore confidence).

2. It is Paulson’s attempt to woo the American’s into a false sense of security. Guarantee just about all deposits and make the tax payer feel he will now get something for his dollars.. bank stocks.

And if I were to add a third reason it would be that this is Paulson’s last bullet. He is throwing the kitchen sink at a problem that has simply grown too large for them to manage any longer. The crisis has gotten out of control and now the banks need a transfusion of capital. Right from our wallets into the veins of the banks and institutions who were all a part of creating this mess in the first place.

Think this will end the bear market? Not us, this may very well be the nail in the coffin for the bulls. It will take a little while, but I don’t see this ending well at all.

Long term outlook remains bearish.