Lights Out, or Darn Close

Warren Buffet and I have something in common after all - we both figured this deal would pass yesterday, both it seems demonstrating the need for a lesson in politics.

It was a given that libertarian types would resist on principle. But as the AP noted this am, 2/3's of Congress’ most vulnerable members decided to protect their seats, notwithstanding what most of them knew would be the implications of a "No" vote. One Rep Congressman noted that, "Most of us say, ‘I want this thing to pass, but I want you to vote for it, not me.’" Their calculation - the date of their election will be before the full impact of the financial collapse made likely by their vote, that is, before this events wallops their constituents’ jobs and businesses. These folk yesterday put re-election before the health of the nation and the intermediate to long-term interests of their constituents. Since the masses see this as a bail out of wall st types, not as a means to an end, this was a pretty risk-free approach (given emails and phone calls at nearly 200:1 against). They don’t understand that if in the next day or two (Sen - Wed, Hse - Thur) zero is accomplished, we will experience nothing less than a financial melt down, impacting each and every one of us.

We highlighted in the Sep/19 sketch the interconnection of the world’s financial institutions. Just one step away from these institutions are major businesses. Most do not realize how critically these guys rely on short-term loans for routine operations like payroll for example, and there is a very well established market (commercial paper) for that purpose. But credit is nearly frozen, between financial institutions first, and between financial institutions and the rest of the world’s borrowers secondly.

What happened to these credit markets yesterday converts an equity mkt 700 pt loss into a side show. We predicted earlier that Tbill rates would drop to 0.0% on a fail to pass. Pretty close! The 90 day Tbill rate went to 0.132%. What’s that mean? It means an immense rush to safety on the part of major world pools of $, that the Saudis, and GE, and Boeing, all of them accepted essentially no return on their funds in exchange for protection.

For a litmus test, a gauge or measure of the all encompassing nature of this emergency, ignore the equity market and look instead at the London Interbank Offered Rate, or LIBOR. This a the rate set by the British Bankers Assoc after a daily survey of 16 world banks, and it is a long-time benchmark, the benchmark that reflects banks’ short term borrowing costs. On hearing the news, the O/N rate more than doubled to 6.88%. This may seem a "So what?" to those of us not involved in these markets. (The one, and two months rates also set records.) Instead, this spike reflects catastrophic conditions, a near complete freeze. The O/N LIBOR rate exploding in such a fashion is the equivalent of news that unless repairs are made now, the entire US naval fleet will sink in perhaps two weeks. And the world’s financial system can take perhaps two weeks more of this, and that’s it.

Robert Craven