This Thanksgiving, many of us took some time to think about what we’ve had to be thankful for over the past year. We all know it has been a very troubled time for the economy and financial markets, so we are fervently hoping to add their recovery to our lists next year. While we think the economy will continue to produce ugly statistics in the months ahead, some things do appear to be getting better for financial markets. President-elect Obama has been putting together his team of advisors and Cabinet officers, and we think he has made good choices of seasoned people. He has designated the current head of the New York Federal Reserve, Timothy Geithner, as his Secretary of the Treasury. We view this as a very good choice because Geithner is already up to speed. We also think Paulson, Bernanke and Bair have been doing a good job and will continue to do so through the transition. As an example of why we think they’re doing a good job, the Treasury, the Federal Reserve (Fed) and the FDIC announced a second-round bailout of Citigroup (Citi) that we think signals a restart and a major change of direction for the Troubled Asset Relief Program. Rather than the Treasury directly buying troubled assets, as was considered earlier, the term sheet gives the government a great deal of control over management of the securities and loans being guaranteed, executive compensation and dividend payments, and provides for substantial up-front deductibles from Citi in the event of further loan losses. In return for the $20 billion capital injection to Citi by the Treasury, the Treasury and the FDIC received $27 billion in preferred shares and warrants. More importantly, a net of more than $250 billion of Citi’s troubled loans will be guaranteed by the Treasury, the FDIC, and the Fed, which provided a large non-recourse loan guarantee for losses. Including all three government entities in this new TARP process appears to us to be beneficial, and this model may be a more workable one for lifting risk out of other banks. It now appears that the Treasury and the Fed have sufficient ammunition to fight this crisis. These changes have breathed life into the very distressed U.S. equity and credit markets. Is this the bell ringer that the stock and bond markets have hit bottom? Again, nobody knows, but we are encouraged by these new policy actions and see both the incumbent, as well as the incoming Administration, as demonstrating renewed determination to do whatever it takes to resolve this financial crisis and limit the damage to the economy, but we have a long way to go. As we enter this holiday season, we expect the bad news on the economy will outweigh the good news for a while. The recession will be difficult and trying. Financial markets will likely remain volatile. There are a lot of things that are broken, but there are a lot of policy actions already under way to fix them, with more to come. If there is one thing we are sure of, it is the ability of American people to absorb these shocks, pick up the pieces, and get going again. I wish you all the best this holiday season. Bill Shank & Christian Shank

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