Just yesterday I wrote a post about how the IMF is predicting that toxic debt will increase to nearly $4 trillion worldwide. Now, a recent report released by the Congressional Oversight Panel - those in charge of overseeing the TARP - indicates that $700 billion may be just the beginning in the U.S. (see ABC News article). To date, the TARP, Fed, and FDIC have set aside, lent, or spend more than $4 trillion.

There is an interesting post over at the Business Insider Clusterstock blog regarding the bonus tax bill that recently passed in the House and is now on its way to the Senate. The bill was written mainly in response to the recent AIG bonuses that Congress wrote into the previous 1000+ page bill that no one read (or had time to read). Apparently, some members of Congress have finally gotten around to reading the bill they passed - or at least their constitutes did - causing outrage, both real and opportunistic. The bonus tax would essentially apply a 90% tax rate to bonuses paid at firms which have taken over $5 billion from the Government TARP program. While I cannot really disagree with trying to spend bailout money wisely, attacking the bonuses in this way after the same body passed them just weeks before seems not only wrong, but reactionary. In addition, you have to wonder why Congress decided on the 90 percent number. If the bonuses are unacceptable, why not 100 percent? Is 10 percent OK for poor performance, while 20 percent is an outrage? Furthermore, why are only big companies affected? Is it just the size, or is there some other guiding principal? In case you are interested, the companies that reach the $5 billion bailout threshold and are potentially affected by the bill include some of the usual suspects, along with a few others who want to get out of the lineup as quickly as possible:

• AIG
• Bank of America
• Citigroup
• General Motors
• GMAC Financial Service
• Goldman Sachs
• JPMorgan Chase
• Merrill Lynch
• Morgan Stanley
• PNC Financial Services Group
• US Bancorp
• Wells Fargo
  

While it looks like the bill will fail in the Senate, since it seems to be unconstitutional (kind of a sticking point), it certainly gives you an idea of which companies are likely to be the targets of future hostility against wealth creation. It also gives you an idea why more and more companies and states are looking to pay back TARP money as quick as possible, and reject any future stimulus and TARP-type funding. Investors can certainly expect the companies on this list to have difficulty going forward as their best talent moves to companies not affected by any future legislation impacting companies on the government dole. Their competitors, on-the-the-hand, are going to have a field day snatching up talent that is trying to escape lower paying government wages, along with the restrictions placed on such businesses.

A few weeks ago in a post I made a comparison of how both baseball and the markets had a steroid problem, although with the markets the steroids were in the form of leverage, loose lending standards, poor risk management, complex derivative products, unrealistic valuations, and unethical behavior, among others. Another comparison is unfortunately coming to bear. As with baseball, as long as the markets and the government continue to focus more on the juicers, and less on the solutions for fixing the current problems, both will continue to suffer and fail to reach their objective - reminding us of the opportunity that the markets have for making our lives better. Even though daily 450 foot home runs are a thing of the past, hitting a natural home run is still a thing of beauty, and something to be encouraged, both on the field and in the markets.

Insiders at Bank of America (BAC) have been taking positions in the stock over the last few weeks. This includes the CEO Ken Lewis, former President John Thain, and various directors. As seen in the chart below, the stock, while still in a steep down trend, has seen an increase in volume over the last month, and has "rallied" off its recent 52-week low of $3.77 (but still down tremendously from its 52-week high of $43.60).

Source: Bigcharts.com

Ken Lewis was recently interviewed on CNBC. When asked if Bank of America will take addition TARP money beyond the $45 billion that has already been provided to the company, Lewis gave a categorical no. Yet it could be argued that BAC is technically insolvent, and that nationalization may be the next step (see John Brown article at SeekingAlpha), regardless of the CEO's view on existing and future TARP funds. Nonetheless, given the CEO's optimism (and his willingness to back it up with additional purchases), a recent upgrade, and comments this week by Treasury Secretary Geither that are expected to begin publicly addressing potential solutions for the housing and credit problems, this could turn out to be an interesting week for BAC shareholders, and may provide a window for the rest of us as to the viability and direction of the banking sector, the economy, and the market in general (stimulus bills notwithstanding).

The Nasdaq is planning to launch a series of trading and investment products based on companies receiving TARP money (see WSJ article). The first is the GRI (Government Relief Index), tracking 24 companies that received over one billion dollars in bailout assistance. The index is being pushed as a way to track the effectiveness of the TARP, yet it seems that for the index to be successful (profitable), it either needs to be widely followed and reported, or used as a vehicle to be traded against. The first seems unlikely (since many will argue that the success of TARP is not based simply on the individual companies doing well), and the second seems counter-intuitive, or at least counterproductive. Given a potential ETF product, it is not exactly clear how making it easier to short the companies in trouble and needing assistance helps the recovery. Maybe a simple "dead or alive" count would be easiest, but even that is difficult to gauge. Is Bear dead or alive? How about Merrill? Fannie or Freddie?

US financial institutions reported an increase in Level 3 assets in Q3 to $610 billion (see Financial Times article). This amounted to an increase of 15.5 percent from Q2 as low liquidity has made it difficult to sell MBS and CDO assets. Classifying assets to Level 3 also gives the banks more control over how valuations are modeled and set. As banks begin reporting Q4 results, many analysts expect the number of writedowns of these assets to increase, especially given the recent announcement that the Treasury plans to use TARP money for capital injections directly into financial companies, as opposed to the original purchase of illiquid assets.

Surprise, surprise. A GAO audit found that more oversight is needed for the $700 billion TARP bailout package (see CNN Money article). Apparently, as a result of lack of oversight, those receiving billions in funds have not been using the money as originally intended. Not only is it amazing that this is a surprise, but it is interesting how as the amount of money increases, the level of monitoring seems to go down.

Time to bailout alternative energy (see Spiegel Online article). Cheaper crude oil is decreasing the demand for clean and efficient energy. The credit crisis is also making it difficult for new renewable energy companies to get the capital they need to expand and continue daily operations. Spain and Germany are already offering incentives, and the European Commission announced a $252 billion recovery plan that included targeted investments for carbon reduction. President-elect Obama is also expected to use some of the $700 billion stimulus package on eco-businesses.

In an effort to survive the current credit crisis, hedge funds are lengthening lockup times in order to reduce the number of redemption requests (see Bloomberg article). In return, and in an attempt to raise more capital, some of the very same hedge funds are lowering management fees from 2 to 1 percent, and further lowering performance fees from 20 to 15 percent, or even as low as 10 percent in some instances.

Goldman Sachs, still adjusting to its new role as a bank holding company, is considering online banking (see WSJ article). The move in being done in part to help increase its deposit base. While a lower-margin business, the increased deposit base will allow Goldman to have a more stable capital base during difficult market conditions, one of the main reasons for changing its status to a bank-holding company.

Changing rules, even when the change may ultimately be good, can be disruptive. As a result of the change in the TARP from buying troubled assets to injecting capital directly into companies, the credit markets have once again reversed course (see Financial Times article). The fact that now there are no buyers for some toxic assets has the value of some mortgage-related securities falling to new lows. Jay Mueller, portfolio manager from Wells Capital Management, said it best:

“Now those markets will go back to being completely illiquid as there will be no price discovery process started by the Tarp. It is tremendously difficult to trade when the rules of the game change.”

Now that the government has realized that it cannot justify and support non-market prices, the banks and other holders of toxic debt will have no choice but to further discount and account for reduced asset values. For the rest of us, this just means more volatility, lower asset values, and a market that continues to suffer under its own weight. At this point, "building a bottom" may be the best we can hope for in the near term.

There is an interesting post at the Bespoke Investment Group blog. Apparently, the entire TARP application is only six pages long, with the first four pages describing eligibility and confidentiality. The actual application is just two pages. Of the two main pages, page one is just for your name and contact information. Page two does ask for some details on financial information, but not much - basically how much do you have, and how much do you need. I wish my home loan was that easy. Then again, maybe that was part of the problem - some home loans were that easy. Certainly not encouraging. Will there eventually be a TARP for the TARP?