Radical measures taken yesterday have yet to impact. The 90 day LIBOR rate jumped to 4.75% this am ( http://www.bloomberg.com/markets/rates/keyrates.html). Take our word for it - this means that aside from a little O/N activity, banks are not lending to each other.
Central banks continue to lower key rates. Our problem has nothing to do with rates at this juncture, but lack of trust.
The WSJ editorialized this morning that there is "Progress Amid the Ruins." Maybe so. They’re smarter than we are. We just don’t see it.
KEY - Banks are not raising enough capital to offset losses.
Certainly yesterday’s UK Treasury mandate appears to be a positive - injections in return for partial gov’t ownership. Certainly Paulson’s flirting today with a similar rescue (US taxpayers inject capital and take a position), although it would gag Hayek and please Marx, may be a positive. There are other plans afoot.
May the force be with us.
Robert Craven
Thursday, October 9, 2008
Wednesday, October 8, 2008
CONTAGION
The loss of confidence in financial institutions, as of yesterday pm, was complete. Today’s globally coordinated package aims to insert trust into a world wide financial web that has been completely without it. In addition to the Fed, the European Central Bank, the Swiss, Canada, China, Hong Kong - all cut rates drastically. The UK announced their rescue plan which among other things partially nationalizes major banks. German, Ireland and Greece pledged to guarantee savers deposits. Iceland took over two of its largest banks. Spain agreed to bail out its banks by taking on $68 Bln of their assets. My goodness.
What was at first a liquidity problem, triggered by the US mortgage mess (and key within that, the failure of Fan/Fred) has now become a world wide solvency crisis. All the world’s major banks are intertwined and in incredibly complex ways, many of these unregulated and hidden. Now funding has evaporated; no one trusts anyone else not knowing what’s on their books. Interbank lending, the life blood of the system, is unsecured. If one bank lends to another it relies (or relied) on trust that it will get it back with interest. Central banks have been flooding the markets with cash but to little avail. Banks simply hoarded anything they can get their hands on because of fear of counter party risk. Hoarding cash to rebuild one’s balance sheet quickly becomes a habit, a state of mind. This is one reason part of today’s UK package in effect guarantees banks’ debt to, hopefully, restore confidence and get banks lending to one another again.
Contagion has moved quickly in the US from the financial to the non-financial sector. The so-called commercial paper market provides corporations with short term funds - anywhere from a few days to a few months. This is how they fund their day-to-day operations (not capital operations). This was a well established (over 90 years), deep and liquid market. Last week this market became frozen. Nobody wanted to take any risk at all, not even to GE. So with the recent announcement the Fed is now backing that market too, meaning the Fed is in the direct business of making loans to the private sector. This is a stunning development.
Look at this as a very large wicked loop. Weakness spreads from the financial arena quickly to consumer and capital spending, from a global slowdown to US exports (until recently a real strength), promoting further and more intense declines in employment, then pressuring income, consumers and lenders, on and on.
Robert Craven
What was at first a liquidity problem, triggered by the US mortgage mess (and key within that, the failure of Fan/Fred) has now become a world wide solvency crisis. All the world’s major banks are intertwined and in incredibly complex ways, many of these unregulated and hidden. Now funding has evaporated; no one trusts anyone else not knowing what’s on their books. Interbank lending, the life blood of the system, is unsecured. If one bank lends to another it relies (or relied) on trust that it will get it back with interest. Central banks have been flooding the markets with cash but to little avail. Banks simply hoarded anything they can get their hands on because of fear of counter party risk. Hoarding cash to rebuild one’s balance sheet quickly becomes a habit, a state of mind. This is one reason part of today’s UK package in effect guarantees banks’ debt to, hopefully, restore confidence and get banks lending to one another again.
Contagion has moved quickly in the US from the financial to the non-financial sector. The so-called commercial paper market provides corporations with short term funds - anywhere from a few days to a few months. This is how they fund their day-to-day operations (not capital operations). This was a well established (over 90 years), deep and liquid market. Last week this market became frozen. Nobody wanted to take any risk at all, not even to GE. So with the recent announcement the Fed is now backing that market too, meaning the Fed is in the direct business of making loans to the private sector. This is a stunning development.
Look at this as a very large wicked loop. Weakness spreads from the financial arena quickly to consumer and capital spending, from a global slowdown to US exports (until recently a real strength), promoting further and more intense declines in employment, then pressuring income, consumers and lenders, on and on.
Robert Craven
Saturday, October 4, 2008
This Time - It Is That Simple
A frustrated Thomas Sowell inquired this morning, "Do facts matter any more?". Indeed they do, yet they require explanation, to be made simple, in little bites so the masses may digest leisurely and at their own pace. Surely the McCain campaign understands that facts matter yet it is about to squander that very key fact, one which is undeniable, not in shades, but black from white and upon which the fate of the election rests - the role of liberal Democrats as the agent of the current crisis. This is not judgement; it is a fact. For those liberal friends of ours who nonstop whine about their 401K, their house price and are in search of the villain - they need only look to their own party. This time - it is that simple.
From early Sep we have highlighted the complicity of Fannie/Freddie and the Democrats, how those agencies became a cash cow for Barney Frank, Dodd, Clinton, Obama and others. It was liberal Democrats led by Dodd and Frank who for years, even this year, denied that the twins were taking outsized risks. It was liberal Democrats who for years push the twins for go further and further into sub-primes, into poorer and poorer neighborhoods. It was the same bunch who for years refused requests from the Bush adm to set up an agency to regulate Fan/Fre, the same bunch who defeated S-190, the bill co-authored by McCain which carried major reform and would have prevented this very crisis. If that bill would have become law, today’s world would be different. That such a reckless stand could have been taken by one party is obscene, unforgivable. The Democrats who opposed portfolio limitations could not possibly have gotten away with it if their constituents understood what they were doing. But then Obama, Clinton, Dodd and others of the left received mind-boggling amounts of $ support from the twins, the twins’ private profit finding its way back to the left, who then killed the fix.
We have already demonstrated that it was the gov’t that pressured banks and others to lend to poor credits through the CRA, coupled with threats of legal action from Janet Reno if they did not. And it was the gov’t, not free enterprise, that encouraged the twins to go along. It was Fan/Fre which played THE key role in the creation of sub-primes AND, through their incestuous relationship with wall st, the sub-prime mortgage-backed securities themselves. For the left, this was win / win: by pressuring banks to serve poor borrowers in poor regions Frank and Dodd and others could go on record pushing for an increase in home ownership and urban development, and by working with the twins, encouraging them to take more risk, they effectively could subsidize low income housing off budget. Off budget that is, until just a few days ago.
Robert Craven
From early Sep we have highlighted the complicity of Fannie/Freddie and the Democrats, how those agencies became a cash cow for Barney Frank, Dodd, Clinton, Obama and others. It was liberal Democrats led by Dodd and Frank who for years, even this year, denied that the twins were taking outsized risks. It was liberal Democrats who for years push the twins for go further and further into sub-primes, into poorer and poorer neighborhoods. It was the same bunch who for years refused requests from the Bush adm to set up an agency to regulate Fan/Fre, the same bunch who defeated S-190, the bill co-authored by McCain which carried major reform and would have prevented this very crisis. If that bill would have become law, today’s world would be different. That such a reckless stand could have been taken by one party is obscene, unforgivable. The Democrats who opposed portfolio limitations could not possibly have gotten away with it if their constituents understood what they were doing. But then Obama, Clinton, Dodd and others of the left received mind-boggling amounts of $ support from the twins, the twins’ private profit finding its way back to the left, who then killed the fix.
We have already demonstrated that it was the gov’t that pressured banks and others to lend to poor credits through the CRA, coupled with threats of legal action from Janet Reno if they did not. And it was the gov’t, not free enterprise, that encouraged the twins to go along. It was Fan/Fre which played THE key role in the creation of sub-primes AND, through their incestuous relationship with wall st, the sub-prime mortgage-backed securities themselves. For the left, this was win / win: by pressuring banks to serve poor borrowers in poor regions Frank and Dodd and others could go on record pushing for an increase in home ownership and urban development, and by working with the twins, encouraging them to take more risk, they effectively could subsidize low income housing off budget. Off budget that is, until just a few days ago.
Robert Craven
Tuesday, September 30, 2008
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
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
Sunday, September 28, 2008
We're All Hedge Fund Managers Now
Aside from the far left, most of us understand the words of Hayek as highlighted in our Sep/19 sketch, that government intervention of any sort is suspect, that the foundation to government planning means a limited group of individuals deciding the relative importance of different ends for the rest of us. Unfortunately we have arrived at a point in time when we must ignore that warning, confronted with events of such gravity that to ignore them would mean a near-immediate decline in the personal net worth of every one of us. Really.
We all now run a hedge fund, the largest in the world. Pauslon is president of that endeavor. Maybe we’ll do alright.
Taxpayers have rescued the twins and taken a near 80% stake in the business. That means at least $25bln down the drain, already allocated to fiscal ‘09 and ‘10. We may never recover a cent, who knows. Taxpayers "rescued" Bear and through the Fed took on the risk that $29Bln in sub-par assets, which may eventually regain some value (unlike most hedge funds, we don’t have a problem with just sitting on stuff; we can weather it). As taxpayers we tossed Lehman to the hyenas. And now as taxpayers we orchestrated the largest bail out ever of some of the most miserable dogs on wall st, the kind that wouldn’t bother to pxxs on you if you were on fire. We are about to begin buying their so-called toxic assets to deliver relief. But is this necessarily a bad deal for us. Are we out $700bln? I mean, never more, a loss, history?
The answer is no. First, our fund may be able to eventually sell this stuff at a profit. Maybe. But in the meantime we will do just fine on the "carry," that is, the difference between what we will pay to borrow to get the $ with which to buy these assets, and their yield. Where do we get the $700bln? We borrow it, through a range of Treasury securities that practically every large international investor wants to own right now - still the securest investment in the world, all the more attractive in times of trouble. So we may have to pay 3 or 4%. But the paper we will own yields anywhere from 7% to 10% or higher (no one knows yet because it depends on the price we pay). We can hold it to maturity if we have to, or, until the housing market recovers. As Bloomberg illustrated, if we borrow at 3 or 4% and buy assets at 10 or 12% on an investment of $700 bln this will generate some $40 to $60 bln annually.
Peter Orszag, the director of the CBO told the House on Sep/24 that the budget would not reflect the $700 bln "bailout". Instead, there would be an estimate of the net cost to the government equal to the purchase price minus the expected value of future earnings from holding these assets, and minus the proceeds from eventual sale. So that is good for our books, reported results.
I think we’ll do alright.
Robert Craven
We all now run a hedge fund, the largest in the world. Pauslon is president of that endeavor. Maybe we’ll do alright.
Taxpayers have rescued the twins and taken a near 80% stake in the business. That means at least $25bln down the drain, already allocated to fiscal ‘09 and ‘10. We may never recover a cent, who knows. Taxpayers "rescued" Bear and through the Fed took on the risk that $29Bln in sub-par assets, which may eventually regain some value (unlike most hedge funds, we don’t have a problem with just sitting on stuff; we can weather it). As taxpayers we tossed Lehman to the hyenas. And now as taxpayers we orchestrated the largest bail out ever of some of the most miserable dogs on wall st, the kind that wouldn’t bother to pxxs on you if you were on fire. We are about to begin buying their so-called toxic assets to deliver relief. But is this necessarily a bad deal for us. Are we out $700bln? I mean, never more, a loss, history?
The answer is no. First, our fund may be able to eventually sell this stuff at a profit. Maybe. But in the meantime we will do just fine on the "carry," that is, the difference between what we will pay to borrow to get the $ with which to buy these assets, and their yield. Where do we get the $700bln? We borrow it, through a range of Treasury securities that practically every large international investor wants to own right now - still the securest investment in the world, all the more attractive in times of trouble. So we may have to pay 3 or 4%. But the paper we will own yields anywhere from 7% to 10% or higher (no one knows yet because it depends on the price we pay). We can hold it to maturity if we have to, or, until the housing market recovers. As Bloomberg illustrated, if we borrow at 3 or 4% and buy assets at 10 or 12% on an investment of $700 bln this will generate some $40 to $60 bln annually.
Peter Orszag, the director of the CBO told the House on Sep/24 that the budget would not reflect the $700 bln "bailout". Instead, there would be an estimate of the net cost to the government equal to the purchase price minus the expected value of future earnings from holding these assets, and minus the proceeds from eventual sale. So that is good for our books, reported results.
I think we’ll do alright.
Robert Craven
That Was Close
We have a package, the heart of which remains Bush’s original idea. In the absence of an agreement, tomorrow’s equity markets would have melted, Tbill rates hitting 0.0%. That’s for starters. Next would have been the beginning of a bank run (we’ve already seen isolated instances). Financial institutions would fail at an accelerating pace, savings would have been wiped out, jobs evaporate, the economy tank. This would cost us a hell of a lot more than $700bln.
For pure libertarian types - how long can you hold your breath? Until the market regains its sanity? What’s the sense of being right if the markets don’t agree and convert you to crow bait in the process? We can argue about "obscene pay packages," golden parachutes, the notion of socializing losses while privatizing gains, all of it. We agree but save that for later. This is not GM or Wall Mart; this is the financial web and by its very nature it is a house of cards.
Recall from Econ 1-A that roughly 80% of bank deposits are backed not by cash on hand, but faith. No bank could cover all its deposits given a panic by savers, not close. Recall that banks borrow (from us) short term and lend long term, making a profit on the spread. That’s why they can’t honor all their deposits at once - no way to quickly liquidate this stuff. But given a panic, the banks begins to sell - fire sale. Vultures sense the opportunity. Those assets, bank assets drop in value in a hurry and most banks hold the same kind of assets. The draconian accounting practice of "mark-to-market" forces all banks to mark down theirs too - right now, and take the losses.
Such a run was until this morning just around the next corner. People are darn nervous, despite the commendable handling of Wash Mutual by the FDIC. (There was only a small "run" of depositors withdrawing their money from WaMu branches earlier in the week. The FDIC moved in Thursday night, rather than waiting until Friday night as it usually does. It probably feared that the depositor run would get worse on Friday, and it didn't want images of depositor lines outside WaMu branches in newspapers, newscasts and Web sites over the weekend.)
The administration’s plan may be flawed; there are plenty of others being bandied about including going to 0 on capital gains, repeal Sarbanes-Oxley, suspend mark-to-market rules for 6 months, extend the Bush tax cuts, the compulsory conversion of some of the banks’ debt into equity and so on. Flawed or not, the present package as we understand it will be enough to stave off what otherwise would have been a catastrophe. Fine tune later. Fortunately we may not have to stomach Dodd and Frank’s proposal to put 20% of any profits from re-sale into an "affordable housing" fund for their pals, instead of retiring our, US taxpayer, debt. Apparently that has been dropped.
Finally, for those who still advise nothing, from today’s WSJ: "Anyone who thinks capitalism will fare better after a crash should recall that the 1930's didn’t end politically until 1980."
Robert Craven
For pure libertarian types - how long can you hold your breath? Until the market regains its sanity? What’s the sense of being right if the markets don’t agree and convert you to crow bait in the process? We can argue about "obscene pay packages," golden parachutes, the notion of socializing losses while privatizing gains, all of it. We agree but save that for later. This is not GM or Wall Mart; this is the financial web and by its very nature it is a house of cards.
Recall from Econ 1-A that roughly 80% of bank deposits are backed not by cash on hand, but faith. No bank could cover all its deposits given a panic by savers, not close. Recall that banks borrow (from us) short term and lend long term, making a profit on the spread. That’s why they can’t honor all their deposits at once - no way to quickly liquidate this stuff. But given a panic, the banks begins to sell - fire sale. Vultures sense the opportunity. Those assets, bank assets drop in value in a hurry and most banks hold the same kind of assets. The draconian accounting practice of "mark-to-market" forces all banks to mark down theirs too - right now, and take the losses.
Such a run was until this morning just around the next corner. People are darn nervous, despite the commendable handling of Wash Mutual by the FDIC. (There was only a small "run" of depositors withdrawing their money from WaMu branches earlier in the week. The FDIC moved in Thursday night, rather than waiting until Friday night as it usually does. It probably feared that the depositor run would get worse on Friday, and it didn't want images of depositor lines outside WaMu branches in newspapers, newscasts and Web sites over the weekend.)
The administration’s plan may be flawed; there are plenty of others being bandied about including going to 0 on capital gains, repeal Sarbanes-Oxley, suspend mark-to-market rules for 6 months, extend the Bush tax cuts, the compulsory conversion of some of the banks’ debt into equity and so on. Flawed or not, the present package as we understand it will be enough to stave off what otherwise would have been a catastrophe. Fine tune later. Fortunately we may not have to stomach Dodd and Frank’s proposal to put 20% of any profits from re-sale into an "affordable housing" fund for their pals, instead of retiring our, US taxpayer, debt. Apparently that has been dropped.
Finally, for those who still advise nothing, from today’s WSJ: "Anyone who thinks capitalism will fare better after a crash should recall that the 1930's didn’t end politically until 1980."
Robert Craven
Thursday, September 25, 2008
RESCUE
The Treasury’s plan is not perfect but it will work (and perhaps make the taxpayer $ over the intermediate to longer term) but it’s got to be put to press in 4 to 5 days or we are in for trouble so severe that most of us will have to learn to enjoy car camping.
Don’t understand that institutional funding has all but ceased; don’t even know what institutions are; don’t understand the overnight markets and what it means when these "freeze up"; don’t know how or why we are moving very quickly from a crisis of illiquidity to one of insolvency? Then take our word for it.
If there is delay, then the crisis we know now - that confined to the world’s financial system, will mutate to one that impacts lending by banks to households and non-financial corporations, that is, all the rest of us. If this happens our economy is toast.
Upset with the wording of this deal as some of our friends seem to be? For example, "..decisions by the Secretary ...are non-reviewable....may not be reviewed by any court..." Fine, put in a nod to accountability, make Paulson promise he won’t donate the $700bln to the Nature Conservancy for goodness sake.
Bothered by the ornaments that Congress wants to hang on this deal? Good. So are most reasonable people. But there is nothing on the books prohibiting greed; the trade off between keeping a few of the Street types on salary, or at the very least a severe recession, is not a trade off at all. Our guess is that Congress will finally come to understand the scale and gravity of this situation and retreat.
Every one of us better hope so.
Robert Craven
Don’t understand that institutional funding has all but ceased; don’t even know what institutions are; don’t understand the overnight markets and what it means when these "freeze up"; don’t know how or why we are moving very quickly from a crisis of illiquidity to one of insolvency? Then take our word for it.
If there is delay, then the crisis we know now - that confined to the world’s financial system, will mutate to one that impacts lending by banks to households and non-financial corporations, that is, all the rest of us. If this happens our economy is toast.
Upset with the wording of this deal as some of our friends seem to be? For example, "..decisions by the Secretary ...are non-reviewable....may not be reviewed by any court..." Fine, put in a nod to accountability, make Paulson promise he won’t donate the $700bln to the Nature Conservancy for goodness sake.
Bothered by the ornaments that Congress wants to hang on this deal? Good. So are most reasonable people. But there is nothing on the books prohibiting greed; the trade off between keeping a few of the Street types on salary, or at the very least a severe recession, is not a trade off at all. Our guess is that Congress will finally come to understand the scale and gravity of this situation and retreat.
Every one of us better hope so.
Robert Craven
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