5 Day Dow Jones Industrials, 3 minute chart
~~~
Perfect timing by the Fed in their surprise, $200B lending:
As we have noted recently, markets have been moderately oversold, with
negative sentiment high, and disbelief in the economic recession still
surprisingly widespread (Some are even claiming that the credit crunch is a myth).
The Fed action came at a time when the markets were ripe for an oversold bounce.
Before we continue, let’sd understand what the Fed actually did: Rather than merely expanding the existing Term Auction Facility (TAF), they went several steps further. They created a new credit facility, the Term Securities Lending Facility (TSLF).
Then, they empowered the TSLF to accept a broad range of private collateral — "AAA" private mortgages in addition to those that are agency paper.
Note the quality of the paper the Fed is accepting, via a recent Bloomberg report:
"Even after downgrading almost 10,000 subprime-mortgage bonds, Standard
& Poor’s and Moody’s Investors Service haven’t cut the ones that
matter most: AAA securities that are the mainstays of bank and
insurance company investments.
None of the 80 AAA securities in ABX indexes that track subprime bonds
meet the criteria S&P had even before it toughened ratings
standards in February, according to data compiled by Bloomberg. A bond
sold by Deutsche Bank AG in May 2006 is AAA at both companies even
though 43 percent of the underlying mortgages are delinquent.
Sticking to the rules would strip at least $120 billion in bonds of
their AAA status, extending the pain of a mortgage crisis that’s
triggered $188 billion in writedowns for the world’s largest financial
firms. AAA debt fell as low as 61 cents on the dollar after record home
foreclosures and a decline to AA may push the value of the debt to 26
cents, according to Credit Suisse Group." (emphasis added)
If I read the Fed release correctly, this is the junky paper the Fed will be accepting as collateral.
Why did they do this?
-New pressures on ALL agency spreads;
-Rising mortgage rates despite FOMC rate cuts;
-Ongoing limited credit availablility;
-Dramatic widening spreads between mortgage-backed paper and US Treasuries
The good news is this will help brokers and banks; the bad news is it will do nothing to help the Housing market, or stop the decline in House prices. Nor will it help resolve the inverted pyramid of derivatives that sits atop Housing. And, one has to believe it will only add to inflationary pressures.
No recession at any cost seems to be the
Feds’ philosophy in light of the
latest massive cash infusion to Banks…
~~~
Watch this rally towards the end of the day. If it fades, it will be time to get crazy short . . .
20 Day Dow Jones Industrials, 3 minute chart
>
Sources:
Fed to Lend $200 Billion, Take on Mortgage Securities
Scott Lanman
Bloomberg, March 11 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMxbCGWcY5J0&
Moody’s, S&P Defer Cuts on AAA Subprime, Hiding Loss
Mark Pittman
Bloomberg, March 11 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=aRLWzHsF16lY&
Portfolio Strategy | Crunch Mythology
Ken Fisher
Forbes 03.24.08, 12:00 AM ET
http://www.forbes.com/home/columnists/forbes/2008/0324/168.html
biggest welfare queens on Wall St? i’d have to say Bear Stearns and Lehman. at least for today. they really kicked this thing off. i think it’s very important that the over-paid schemers who made fortunes getting us into this mess, be bailed out by the Fed. otherwise, how will we ever get out of this mess?
Thank you Ben. I had been in a bit of a funk as I dont like one way markets, but lo! a fed induced counter trend rally. It took all of 30 seconds this morning to put on a fresh faced short position. Now to do the dishes and the vacuuming.
Crazy Short? An end of day fade could set up a week that leads to Black Monday v 2.0.
Idunno much about high finance, but it seems like this TSLF is just one big washing machine, designed to clean the banks’ and insurers’ books with American citizens’ taxes. Consider that this news comes (not only perfectly timed for the market, as Barry points out) the same morning (as Dick “Dick” Cheney is in Saudi begging them to increase output) as this: “Moody’s, S&P Defer Cuts on AAA Subprime, Hiding Loss”. Good thing! — if they had cut the ratings, they wouldn’t qualify as TSLF collateral!
http://www.bloomberg.com/apps/news?pid=20601109&sid=aRLWzHsF16lY&refer=home
This move by the Fed has desperation written all over it.
I am curious. If pledged collateral declines in value, who recognizes the loss? Is this not but a mechanism to postpone the inevitable?
Does this mean they are only going to cut rates by 50 basis points next Tuesday?
It was really comical to see both the Bloomberg stories on one page (one announcing the Fed’s willingness to accept private-label AAA MBS, and the other pointing out much of it doesn’t deserve the AAA.)
Of course, the Bloomberg article on the Fed move didn’t even make note of their own article on ratings. Duh.
It’s always been about helping the brokers and banks. Does anyone really believe they care about homeowners? It’s all smoke and mirrors to keep everyone stupid. The rate cuts weren’t about reducing mortgage rates, but rather, to allow the B & Bs to extrecate themselves from their wrong way bets. Lending long and borrowing short wasn’t working when the yield curve wasn’t steep enough. Look at the curve today.
Crazy short? I’m already crazy short; in fact I added some FXP this morning when it was down 13%.
IMO, this is just another Fed induced counter-trend, sucker’s rally. The Fed action will only postpone the inevitable by a few days or weeks.
There is much more bad financial news coming,
Warnings and losses from investment banks this month.
A smaller rate cut on the 18th – ½ instead of ¾.
Perhaps a failure or two in hedge funds or a regional bank, more margin calls, a municipality filing for bankruptcy, etc.
It is almost certain that some of these things will occur and the fear level will rise again.
And that is just financial news, just think of all the bad economic news we will be seeing in the coming weeks and months – job losses, inflation or deflation, etc.
If you are short, stay the course. Don’t them let scare you out of your positions.
If you need encouragement read Roubini or this article at Marketwatch.
http://www.rgemonitor.com/blog/roubini/248801
http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D%2D4796%2D4D0D%2DAC9E%2DD9124B59D436%7D
Barry,
You are hitting ’em hard this morning. Another great story.
I’m not a finance guy, so, anybody reading please jump in as needed…
This looks like the Fed is “buying” up bad paper before it gets downgraded in a containment move. The Fed will keep the true effects of the bad paper from being felt.
However, since the Fed is not actually “buying” the paper, and instead is merely extending the loan period of it, they can strip out and “write off” all the bad bits, and repackage any part of it that is indeed worthy. Or, simply disappear the lot.
It would seem that getting rid of the M3 report makes something like the above _a lot_ easier to slip past most people.
I’m sure glad all these banks and securities firms – the TAF and TSLF beneficiaries – that are so desperately in need of capital are paying big dividends (i.e. desperate attempt to keep themselves in the dividend indices) and are paying big management bonuses…
…cuz they so afraid to lose all this financial “talent” to other firms? Which other firms? The other firms that are also so afraid to lose their under-performing talent? Those “smart-money” SWF’s that bought Citi at 30? To the “Fed?”
Four things to do: 1) stop letting these corporate managements prevent investor agitation 2) Pay bankers future bonuses in the financial product they create 3) Shut of the TAF, TSLF et al. money spigot(s) to these dividend paying banks and 4) raise Fed funds rates.
A band-aid.
The beginning of the downturn.
Here is a waaaay cool infoporn chart of AAA bonds in the ABX issue:
http://www.bloomberg.com/apps/data?pid=avimage&iid=iQUy2GaasArs
Of course, the Bloomberg article on the Fed move didn’t even make note of their own article on ratings. Duh. Bob in Mass.
—
Funny. Rule 1 for weathermen (courtesy of Don Kent of WBZ, Boston): look out the window before you give your forecast. Rule 1 for reporters: read your own @#$%^ publication before you start typing.
How does the Fed “write off” the bad paper? Somewhere we write off the bad paper and will pay for it via increased comodity prices and higher taxes. I do not think this works at all since much of this toxic paper is held by hedge funds, towns in Norway, etc. The Fed cannot backstop all of it and as a result the unwind will continue sans some banks that the fed has backstopped. The recession/depression (depends on your job situation and neighborhood) will continue as well except that the Fed is 200 billion poorer and with fewer options. Way to go Ben!
Why is it that bullets bounce off Superman’s chest but when you throw the empty gun at him, he ducks?
Barley’s “I am curious. If pledged collateral declines in value, who recognizes the loss?”
The Fed. Thanks for asking.
—
If there is an end of day fade I think it will be countered by a new rumor… Gotta end the week flat, at minimum.
Why did they do this?
Raw display of power to show ‘free market’ traders who runs things.
I told you they’d be buying everything soon. I wonder how long it will be before they start buying shares straight off the market instead of just through liquidity proxies
This won’t end until people stop accepting US dollars and most people still have no clue the true value of their paper dollars
Our credit markets are finally a complete and accurate variation of a good ole fashion ponzi scheme built on fraudulent misrepresentation of debt. We all know it.
“No recession at any cost seems to be the Feds’ philosophy in light of the latest massive cash infusion to Banks”
Man is this going to end in tears.
I think it should be clarified, the Fed isn’t assuming the losses on this paper. They are just providing a way for dealers to make it liquid so the financial system doesn’t get stuck in a margin call spiral. These dealers can’t just give the paper to the fed if it defaults, they are still responsible for the debt. Also, the fed has been sterilizing these injections, which means when they lend out new money, they withdraw it from somewhere else. So this shouldn’t affect inflation at all, except in the knee-jerk reaction by commodity specs.
“the bad news is it will do nothing to help the Housing market, or stop the decline in House prices.”
Barry – Why is it bad news that the Fed isn’t propping up house prices? Deflating the housing bubble is a good and necessary thing, n’est-ce pas?
I guess they did this because Goldman barked yesterday and if you don’t jump when Goldman barks you could wind up with prostitutes in your bed on the front page of the NYT
And we’re descending back to base camp…nice, with all the oxygen.
Roo is absolutely right. The Euro gave back a week’s worth of gains on the announcement digestion, and commodities look flat overall — I think this is a clear sign that the FED is not going to cut as much as anticipated and the currency and commodity markets have figured out as much.
The real panic will come when people realize that this is not a liquidity issue but a solvency issue, and I think we are very close to that point.
Something must really be wrong with BSC. It’s down 8% today. It has fallen quickly the last 15 minutes or so…
Let’s clarify a few things about what this is, and what it isn’t.
It isn’t new. The fed has lent securities to primary dealers in the past. This extends the time from overnight to 28days and the range of securities accepted as collateral.
The timeframe and collateral are new with respect to primary dealers, but are not new with respect to banks (which the TAF increases have addressed).
The fed isn’t taking junk as collateral. It’s taking AAA RMBS, for example, which is the best of the (admittedly unhealthy) lot, and will require overcollateralization in the 10% range. The odds of the fed realizing a loss on that in the short term (<28days) is vanishingly small.
Roo’s “I think it should be clarified, the Fed isn’t assuming the losses on this paper.”
That is correct if the collateral is marked to market. Is it?
The Fed _is_ assuming the potential loss/gain(ha!) of the collateral during the Term.
Form the wagons in a circle and cover them with bad paper?
Mikkel,
Quite so. If the okay stuff starts trading, maybe we’ll be able to get a handle on who really does have problems versus those who are just caught in the credit constipation.
I suspect some are pleading liquidity issues to buy time (and double down).
mhm,
I think the fed is, for all intents and purposes, effectively making the market in AAA RMBS to which prices can be marked.
mappo:
It’s bad news because they’re propping up junk paper, instead.
Estragon:
Isn’t the “AAA” rating part of the issue?
Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor’s and Moody’s Investors Service haven’t cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.
None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.
Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that’s triggered $188 billion in writedowns for the world’s largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.
“The fact that they’ve kept those ratings where they are is laughable,” said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. ‘Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.'”
http://www.nakedcapitalism.com/2008/03/moodys-and-s-avoid-cutting-ratings-on.html
Off topic, but what is the better play to ride the oil / commodities wave?
USO
or
XLE?
Would love to hear eveyrone’s thoughts.
Don’t fight the Fed!
spencerh,
Yes, the AAA ratings are certainly part of the issue. That said, it’s going to take time to sort it out, and in the meantime you’ve got a lot of babies being thrown out with the bathwater.
The fed simply won’t allow meaningful losses on the best 80% of the mortgage market. They’ll inflate out of it if they have to, but they’re trying this sort of thing first.
If there comes one good thing out of this it will satisfy academics to a degree. I think when everything is said and done in about 2yrs or 2 wks (who knows) we will get a definite answer to the question that challenges monetarists since the dawn of capital markets:
Who is right about the cause for the Great Depression? The Austrian School identifying the ease monetary policy of the twenties or the Keynesian’s (Keynes, Friedman, Greenspan and Bernanke, what a mighty assembly!) blaming the tight monetary policy of the thirties. This will not be of much needed help for us mortals though, but as I said it will satisfy the academics. Oh, and along the way it might even open the eyes of the public towards the misguided conceptions of Buckley’s/Reagan’s neo-conservatism. That would be definitely a good thing.
Jdamon: I personally think USO as it’s a pure oil play. XLE is oil companies, and I think that there is going to be a big crunch in demand. In fact, I got puts on OIH because the way I figure it, they’ll be the first to be affected by decreased demand.
Since I’ve bought the puts, oil has gone up 12% while OIH is down a few percent (it’s had a big rally today, I’m curious to see if it’ll stick). If there is a geopolitical crisis or somesuch, I’m sure it’ll affect barrels of oil more than revenues of the companies.
meanwhile back in the real estate market, home values will continue to fall….so much more inventory about to hit the market come spring. The fed is attempting to inject a bid into a market where no bid exists (hmmmm sounds alot like the M-LEC super SIV plan) by accepting highly questionable collateral. Supposedly for only 28 days to boot. What happens when they extend indefinitely, becoming the buyer of last resort. How do you spell covert bailout. Willful naivity and blind ignorance is astonishing in this market of late.
Markets welcome socialist money laundry. Make your money shining clean. Special offer by the FED for 28 days only, maybe forever!
Everybody who doesn’t believe in state capitalism is a liar and hypocrite.
AAA is not junk. the structures in which they sit is. what the fed did is to effectively strip out the AAA tranches. naysayers aside, the default rates on the AA and AAA is well within acceptable. it’s the CDOs that mired the overall quality of the indiviudal tranches. the smart money is buying the A and above when they can becuase just like the RTC days, it’s overly discounted.
You know, reading all the comments here gives me hope that there are people in this country intelligent enough to see reality and deal with it responsibly. We might come out of this better than I originally thought.
Mikkel has the right point: “I think this is a clear sign that the FED is not going to cut as much as anticipated and the currency and commodity markets have figured out as much.”
As far as the move, the bigger picture now is they will likely do similar moves as time goes on and NOT be as aggressive with FFR cuts. A target shot without the residual damage of further weakening dollar & a rise in commodities priced in dollars.
First you fix liquidity, then you let insolvency bring the dead fish to the surface! This may help quicken the correction process for credit bubble, and has less of an effect or an indirect effect on housing market. Once credit markets normalize and the hurt companies die off, lending may normalize a bit and that could help form a bottom for housing that is still clearly very weak
Alfred wrote on Mar 11, 2008 12:24:50 PM
“Who is right about the cause for the Great Depression? The Austrian School identifying the ease monetary policy of the twenties or the Keynesian’s (Keynes, Friedman, Greenspan and Bernanke, what a mighty assembly!) blaming the tight monetary policy of the thirties.”
The easy monetary policy of the ’20s did cause the Depression. And the tight monetary policy of the ’30s made it Great. I.e., it’s both.
“Oh, and along the way it might even open the eyes of the public towards the misguided conceptions of Buckley’s/Reagan’s neo-conservatism. That would be definitely a good thing.”
Yes, thankfully, their eyes are open now thanks to Iraq and this recession.
The age of “government is the problem” and “free-market” capitalism is over.
Welcome the new social market economy, it will be with us for many years..
BSC now down over 10%. I think it must be in big trouble. And, if so, it will kill this rally.
UrbanDigs you touched on my 2 year plan. Based on my understanding of history and how things should play out:
Lots of parties while there is extreme liquidity X
Something starts to go sour and there is short term panic X
Panic goes away as people insist the fundamentals are OK X (repeat previous steps as needed)
It becomes obvious that fundamentals are awful and there is panic again X
Everyone that is leveraged gets killed even if they shouldn’t X
Extreme steps provide liquidity and markets start functioning (we’re arguably at this phase)
Things correct and go to step 1 OR
The fundamentals of even the “good” stuff are so bad that a six months to a year after the last step there is a second wave of flush outs. This is the phase that sees the sharpest losses (or at least is the longest sustained downturn) and is eventually a flush out bottom.
Look at the DJIA from late ’29-’30 when it rallied 50% after the initial players got taken out but before the Depression started. Or 40% rally in Nasdaq in late ’02. I personally think we’re in for the reassessment of all the “good” stuff at some point in the “far” future, but once the obvious garbage gets taken out we’re in for a heck of a rally.
Just to be clear, I expect a huge drop coming soon as a panic low. I’m not cinefoz. Especially because markets “functioning” at this point means that people actually take their hits so they don’t have to rely on margin calls to do it for them in a few months.
KJ
I appreciate your response to my tiny little post but I caution you to misinterpret. I still believe in free market capitalism because that is the only form that will survive. The emphasis is on free though. I am an advocate for a free Federal Reserve with one mandate only and not two (look east no further than the EZB). The Greenspan fueled bull market of the last twenty years stuffed liquidity into the hands of very few and left the rest in the cold.
If Greenspan was an architect the house he build was a ‘house of cards’ and that is about to break down now.
“Watch this rally towards the end of the day. If it fades, it will be time to get crazy short . . .”
And if it does not, to cover or go long crazy?
Be careful, you have been excessively overconfident and shorting too much lately Barry.
Does anyone understand whether there is some chance that the Fed gets stuck with crap paper?
As in, is this going to end up being some form of bailout? Backstop some losses with public funds?
Great stuff Barry,
See, people are under the mis-guided notion that the Fed follows its mandate of:
1. stable prices. Do we have stable prices?
2. full employment. Do we have full employment?
I think your many excellent posts print the lie to both of these.
It seems this recession we’re in is showing the Fed’s true colors – that their real mandate is to back-stop the banks and financial institutions who got us into this mess in the first place.
“CLEAR!”
“We’ve got a pulse!”
The Fed has agreed to make a market in faux “AAA” paper until the “market comes back” someday.
Why is the Fed making a market? Simply because no one likes the prices they can get in the free market. Why is the market value low – because everyone KNOWS these aren’t AAA.
Maybe they should open a window to allow shareholders to exchange BSC at its 52 week high for treasuries. The shareholders can just keep rolling it over to avoid margin calls until Bear comes back someday.
There is a picture of Greenspan lying on the floor of the oval Office in the White house., stretching his hurting back. He looks like a poodle who wants to be scratched on his belly. Greenspan sold out his soul and the wealth of a nation to please the powerful and mighty in Washington.
28 Days Later
When the TAF program was first announced, it was billed as a temporary facility. The announcement was in December, and some suggested it was intended to help banks m…
“The good news is this will help brokers and banks; the bad news is it will do nothing to help the Housing market, or stop the decline in House prices”.
I don’t think that this is entirely true. The fed action should mitigate the decline in housing prices (more or less, depending on how much of the junk paper they buy). But it’s the taxpayers that are ultimately going to be forced to pay for the giant put option under housing.
don’t think that this is entirely true. The fed action should mitigate the decline in housing prices (more or less, depending on how much of the junk paper they buy)
Wrong. It isn’t how much they buy, crap is crap.
Prices are dead.
mikkel – yea me too! Shorts covered in past 2-4 trading days, except for EEV that I only lightened up on.
We prob have a rate cut coming in a week too. So, rallies are for shorting again!! But when to start opening new positions?
“Watch this rally towards the end of the day. If it fades, it will be time to get crazy short . . .”
Gotta agree with Lauren above….markets been a easy laydown short for 4 weeks (SRS..SKF etc.) now would be the time to get crazy short on a fade? Way to easy…careful Big B.
I LIKE THE FEDS MOVE.
MAJOR FED PLAY
The FED move to take agency paper or other sundry goods from primary dealers in exchange for a 28-day treasury loan is closing on the bailout or “domestic sovereign wealth infusion” I have talked about before.
This is an important and aggressive step in admitting that just lowering interest rates could solve the financial crisis. No doubt there are still problems, and serious ones, that will impede economic growth and consumer spending (ENERGY AND FOOD INFLATION).
My takeaway is this — The FED is saying “give me your paper that is trading below par, and we will lend you par”. Now go out and lend!!!. Get the financial flows moving!!! The 28-day loan gives dealers some breathing room. I believe that in the light of calling this a bailout, the FED will more likely than not, roll over this loan for X period and keep on rolling over the loan until bids are stable or improving. At that point, one could infer that the financial system is functionally working again, and the economy has a better chance of recovery.
If you believe this scenario, and I have and do, the good fixed income news will eventually spill over into equities. Day to day, who news. We were oversold, as stated yesterday, and this news helps in the short-term to effect a rally. This FED move is a potentially game-changing event. If the FED follows this move by lowering interest rates by less than the .75 bps expected or hints that they are close to or nearly done, the $ should rally and the market will follow. This will be an interesting next week or two.
We are 1-year into the sub-prime contagion and the FED finally gets it. THIS IS LONG TERM BULLISH EVENT.
IBH, it’s the consumer. A stronger dollar is not going to do anything to help the consumer, buy a house, or car. It might bring oil down to $90, but that will be too little too late. We need to wash-out the system, and then start creating real sustainable jobs. This move by the FED today is just a delaying tactic, like all the others. There is so much bad paper out there that this will take some time – two, to three years to work its way through the system. jmho
Barry,
I like this move by the Fed. It shows imagination and a willingness to innovate. Will it work? Not clear yet, but this is the Fed taking the markets seriously.
what fade? shorts are covering. doesnt necessarily mean a proverbial corner is turned, BUT if smart money is covering, doesn’t that mean something???? BSC is up over 1%. wouldnt be a buyer but a lot of fools bought puts thinking it was going under. going too far either way is dangerous.
Let’s wait for the 400 point drop on Friday, where everyone on the news goes, “uhhhrrrr what’s going on?@!??”
BR, the market accelerated towards the close, rather than fade. Does this imply you are going “crazy” long?
Where’s the beef? Oh! the market was terribly oversold…hmmmm? Gee, we have such a strong economy to rally around! lol
Ever feel like a small boat inside a snow globe being shaken by the fed?
“No recession at any cost before January 20th, 2009 seems to be the Feds’ philosophy”
Fixed.
>>>Of course, the Bloomberg article on the Fed move didn’t even make note of their own article on ratings. Duh<<< Bloomberg is not CNN. The real "box" doesn't work like a news wheel. Differing opinions and information are constantly fed into the system. What you see on their website is the tip of the iceberg. It is only the most popular stories. Take a look at Bloomberg's videos and you will get a flavor of the diverse opinions.
1) Kudos to ‘joe’ for, like myself, reminding folks on this blog what the Fed’s dual purpose is (Hint: it’s not the stock market).
2) What matters more: what paper the Fed is/isn’t taking or the ultimate fate of the macro paper market?
3) Today’s price action implies that day-to-day volatility is back. Long term plays are subject to relatively unsustainable short term moves, up, down or both. Short term plays are more likely, IMHO, to follow tried and true technical patterns with likelihood enhanced by volume increase/decrease confirmations.
4) Con cuidado, mis amigo(a)s.
Bove: Fed Rescue for Bear Stearns
The Federal Reserve’s actions today may have been strongly influenced by Bear Stearns’ problem.-Dick Bove, Punk Ziegel Co. Go figure: This morning’s announcement by the Fed seemed to be designed to help the brokers and their fixed-income hedge fund cli…
If you know that one day you have to repay or bring back your continuously growing debt (as a result of overspending for many years in a row), you fear the day that your bank will force you to make substantial down payments. This is logical, as this will affect your consumption pattern in a negative way, so you rather not think about it. But fortunately you receive a letter from your bank, that your credit line will be extended for the next three months. For the time being you feel great relief, but deep down you know that the fundamental problem hasn’t changed. So you can temporarily ease the pain, but you still have to cure the patient
Bob Brinker, the author of the Market Timer Newsletter and host of the radio show Money Talk, once commented that the Federal Reserve Chairman (Greenspan at the time) was the most powerful man in the world. Surely, I thought, that can’t be true; the president of the USA is the most powerful man.
But I think I have changed my mind. It took an Act of both houses of Congress and the President’s signature to approve $160 in fiscal stimulus for people. But Ben can arbitrarily decide to loan $200 billion in treasury securities to banks in exchange for toxic ABSs, and to offer to provide more billions, if needed, and to hold the toxic securities as long as needed until the market for those securities stabilizes. And this is on top of untold 10s of billions of dollars in TAF loans already provided. And he does all this without the approval of Congress or anyone else in government!
Ben Bernanke is indeed the most powerful man in the world. And he has “saved” us once again from financial meltdown.
But whose money is it anyway? Don’t we or the government have any say over what he does?
And if it is so easy to save the credit markets and support the stock market, then why did he wait till now to do it? Why didn’t he just take all the bad paper months ago, and save us all the time and trouble and the trillions of dollars in asset value that have been lost?
Yesterday I was king of the world! Sitting on a mother lode of paper profits!
Today I am just a defeated short, crying in pain as I lay dying beneath the rubble from another Fed blitzkrieg.
Unlike the TAF, this new TSLF will go to the primary dealers, which can then pump the new money directly into the markets.
So now even the Fed is in on the game of pretending AAA MBS will hold its value.
This day will become known as “The Bernanke Gambit”, as Ben has sacrificed all Fed pretenses of impartiality in order to salvage the markets.
“No recession at any cost seems to be the Feds’ philosophy in light of the latest massive cash infusion to Banks”
Might make sense if central banks and govts controlled the business cycle rather than reacting to it, might make sense if all that was ever required was ‘mo credit, mo money, mo fiscal loosening’, might make sense if we were not already in a recession. Well, yeah, the NBER hasn’t said so but 17 consecutive negative months of the Chicago Fed’s National Activity Index (CFNAI) 3-mos moving avg. says something other than ‘happy days..’.
Alfred,
Have you considered the possibility that none of the neoclassical schools (which includes the Austrian) may be correct?
Gérard Duménil and Dominique Lévy have a good paper ( “The Great Depression: A Paradoxical Event?”) available which places causality on the supply side as a large portion of total capital stock had become prematurely obsolescent through qualitative technological change prior to recession-become-depression. Additionally then, the weakness of institutional structures and a credit-supply crisis but certainly not so monocausal and/or one-sided as most neoclassicals like to argue.
Seems like TAF (Term Auction Facility) and TSLF (Term Securities Lending Facility) acronyms should really stand for something else.
I am not the most creative person, but TSLF should stand for “Total Subprime Loan Finagling” (or some other “F” word).
The Federal Reserve is a fraud.
Juan
Your point is well taken. A mono causal view is probably too simple to explain such a drastic event like the Great Depression. I would argue though that it is more important to approve or disapprove that Central Bank intervention could have helped to avoid it. I think that is what academics will write about and hopefully produce a conclusive answer.
Juan
Your point is well taken. A mono causal view is probably too simple to explain such a drastic event like the Great Depression. I would argue though that it is more important to approve or disapprove that Central Bank intervention could have helped to avoid it. I think that is what academics will write about and hopefully produce a conclusive answer.
The market is reacting to concerted central bank action taken during European hours
yesterday. In overnight trading Fed Bernanke and the ECB announced a joint new
auction facility of over $215 billion that would allow member banks to exchange AAA
mortgage debt for Treasuries for a 28 day period in a newly named Term Securities
Lending Facility (TSLF). This is a step toward a mortgage bailout but appears to only
apply to banks and only to AAA paper. Markets rallied with incredible sharpness in
response to the announcement with a 90% up-day in terms of breadth and volume today.
We suspect this therefore marks an intermediate-term low at least and will watch volume
and breadth action as the rally continues ahead to measure whether a bottom for this
recession has been made though our initial suspicion is that it hasn’t. 11 global markets
had made new lows yesterday, Asia was lower, and the Yen was starting to attack the 100
level, so the bailout announcement was very timely in preventing a crash for now in US
and global equity markets.
Stocks around the world have reacted quite positively to the action. If it is the tip of an
iceberg that includes the Fed ultimately acting as lender of last resort for mortgage paper
and sub-prime debt, then this could be the beginning of a more positive market
environment. However our suspicion is that the Fed is once again giving the market
enough to stop it from declining for a spell, but not enough to actually end the credit
crisis. Global bond markets in Asian trading are re-thinking the likelihood of ultimate
success as well already it appears too. The Fed is still expected to cut rates by 50 bp’s or
more at the FOMC meeting on the 18th. The combination of this TSLF move and the cuts
next week may allow markets to rally more sharply than they have since November.
However unless the bailout expands, it will do little to stop further write-downs and the
credit contraction. Sub-prime debts are not included in the Fed’s buying plans, and this is
where the real problems lie. Moreover in today’s world banks are hardly the only lenders
in the mortgage arena. Except for the 20 or so premium banks that deal directly with the
Fed, this TSLF does little to help other lenders. Ultimately we suspect an RTC type
bailout will have to be devised whereby some entity buys sub-prime paper and restores
liquidity to this sector of the market. So far the credit crunch has expanded as hedge
fund leverage is being sharply reduced, leveraged loan entities (like closed end funds and
virtual banks) are being deleveraged no matter how strong their loan portfolios, and even
Agencies are not able to auction upcoming debts. These problems and others are not
addressed, and this leads us to suspect that this plan will only provide a temporary boost
to markets.
We’re witnessing one of the reasons bear markets can be so treacherous.
MIDASRESORVE GROUP
MIDAS RESOURCE GROUP
Why the Fed Bailed Out the iBanks
This is the best explanation I have seen as to why the Fed set up the TSLF, and allowed it to accept less than stellar paper:The real problem began in late February, as several of Wall Street’s biggest investment banks prepared to close their books for…