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Fed Sets Floor Below Rate Target, Engineering 'Stealth' Cut
By Scott Lanman
Bloomberg News
Monday, October 6, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aSiAeDH_QZtk&refer=h...
NEW YORK -- The Federal Reserve may have cut borrowing costs today without actually saying so.
The central bank used authority granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.
"Absolutely, it's a stealth easing," said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.
The announcement, and a Fed decision to double the auction of cash to banks to as much as $900 billion, failed to avert a 3.9 percent decline today in the Standard & Poor's 500 Index. The index has tumbled 28 percent this year even as the central bank has expanded credit more than at any time in seven decades, including a 3.25 percentage-point cut in the main rate during the past 13 months.
"The problem is it's an easing that's trying to offset a massive tightening in the market. Net-net, are we easier in policy? In some sense the answer is no," Ryding said.
By paying interest on reserves, the Fed can pump more cash into the financial system without worrying that the overnight lending rate will drop to zero at the end of each day as banks withdraw excess reserves. The move doesn't preclude a further reduction in the target rate by the Federal Open Market Committee (FOMC).
... Biggest Surprise
The 0.75-point spread, announced today, was the biggest surprise in the Fed's moves to implement its authority under the financial-rescue legislation, economists said. The Fed set the new rate Oct. 3, the same day the House approved the bill and President George W. Bush signed it into law.
The FOMC, composed of the Washington-based governors and 12 Fed regional-bank presidents, meets about every six weeks to set a target for the overnight lending rate, which the New York Fed tries to achieve by buying and selling Treasury securities from bond dealers.
The Fed requires banks to keep a level of reserves at the central bank. On those funds, the Fed will pay a higher rate equal to the average target rate over a one- or two-week period less 0.10 percentage point. For excess reserves, the rate is the lowest FOMC target over a period less 0.75 percentage point.
The Fed said it would raise or lower the spread so the New York Fed trading desk can keep the federal funds rate near policy makers' target "based on experience and in response to evolving market conditions."
The central bank didn't set a meeting schedule for discussing the reserve-interest rate.
... Channeling Cash
The federal funds rate will probably trade below the FOMC's target as long as the Fed is channeling cash into the banking system, thereby prompting financial institutions to park their funds with the central bank each day. The rate may trade closer to the policy target when the credit crisis eases and the Fed begins to withdraw its emergency lending.
Still, a "soft federal funds rate does not provide a perfect substitute for a cut in the target," former Fed Governor Laurence Meyer and former Fed researcher Brian Sack, now with Macroeconomic Advisers LLC in Washington, said in a research note to clients.
The Fed said today "the rate on excess balances should be set sufficiently low to provide an incentive for eligible institutions to trade funds in excess of required reserve balances and clearing balances in the federal funds market." The rate should also discourage banks from trading funds "far below" the federal funds rate.
The interest payments begin Oct. 9.
... Start Lending
A higher rate on payments may give banks too much of an incentive to keep funds at the central bank, said Peter Hooper, chief U.S. economist at Deutsche Bank Securities Inc. in New York and a former Fed official. "The whole objective here is to get banks to start lending again, and the more you pay them to hold on to their reserves, the less likely they'll be willing to lend."
Even if the funds rate trades below the 2 percent target, it doesn't mean the FOMC is deploying a new policy tool by paying interest on reserves, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "I doubt the FOMC will want to give up their Fed funds rate target as the key indicator of monetary policy."
More and more pros and cons about the possible confiscation of gold by central governments are being bandied about. Whether or not you believe it may happen, the possibility is something you should always keep close in mind. Holding physical is safe from confiscation. Paper gold would be the first to go. Just FYI and FWIW.
...........al
Financial Crisis: Rush for gold as savers queue for bullion
Savers have been queuing in the street to buy gold bars and coins, as they search for a safe place to invest their money.
By Harry Wallop, Consumer Affairs Editor
Last Updated: 6:26PM BST 02 Oct 2008
Gold nuggets and bars
Traditionally, gold has been one of the safest investments during times of financial turmoil Photo: AP
London's two leading bullion dealers, ATS Bullion and Baird & Co, have reported a rush of interest from savers, many of whom have hundreds of thousands of pounds worth of savings they want to convert into the precious metal.
At least two customers have invested the entire proceeds from selling their houses into gold, each buying up more than £500,000-worth of gold bars, according to one dealer.
Savers have been queuing in the street at ATS Bullion, whose offices are just off the Strand in London's west end.
Sandra Conway, the company's managing director, said: "We've had to turn people away. The queues have been right out of the door and it's been really hectic at times.
"Ever since Lehman Brothers went bankrupt, the phones have been going off the hook."
Traditionally, gold has been one of the safest investments during times of financial turmoil. In 1973 gold cost just $60 an ounce and hit $650 in 1981.
However, since the summer the price of gold has fallen as the dollar has strengthened – the two are linked quite closely.
But the fact that gold has not performed well in recent months has not deterred thousands of investors.
"They don't think of gold as a way of making money. They think of it as a safeguard in these turbulent times. You can move gold quickly, in a way that you can not with shares or cash in a bank account," Ms Conway said.
The average investor is buying up between £10,000 and £50,000 in bars on each visit, but it is possible to buy as little as a half sovereign coin, which costs about £70.
Some analysts say that while it may be romantic to buy bars of gold, there is a far more practical way to investing in gold. Investors can buy Exchange Traded Funds, which are like shares – they trade on the stock market – and they are directly linked to the price of gold.
Mick Gilligan, at stockbrokers Killik & Co, said that his clients had been asking about investing in gold in far greater numbers in recent weeks.
"It's lot easier to sell than the gold you keep in your sock drawe
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3123775/Financial-Crisis-Rush-for-gold-as-savers-queue-for-bullion.html
superbee- I know why you took the time to research and post all that. But really, anyone with just half a brain would know that already. If not they should not only stay away from ETNL and all other stocks no matter what the exchange, they shouldn't be investing in anything but mutuals and bonds. If this stock is so bad, why is it holding it's own thru one of the county's worst financial crisis in history? I'll bet all those trillions in non regulated derivatives didn't come with full disclosure of risks involved. Yet financial "experts" a lot smarter that me were gobbling them up. I think I'll stick with my little funeral company here. It seems to be a lot safer than what wall street is peddling.
.........al
Who owns the federal reserve bank?-
http://www.save-a-patriot.org/files/view/whofed.html
........al
Just some thoughts and I wish I knew the conclusion. I have been watching the trading pattern here for several weeks now. There is definately accumulation going on, by whom is a mystery. It's not steady but is done in spurts at various times during trading hours. Yet the volume involved adds up to quite a few million shares and a lot of $$$. I don't know the why or the who but it definately got my attention. I've watched the same thing happen before on other issues and it almost always prefaced a big run. I know this stirs up a lot more questions than answers. Time will tell.
........al
TA- Stalt, 1 650 321 7111 eom
Jim- the derivatives market is over 500 trillion and counting. As Washington tries to fix the mess caused by wall street, the banks are still bundling and packaging and selling more derivatives.
......al
I don't know how many here follow level 2 and trades, but over the past week I have seen many large blocs going at the ask at various times during the day. Someone(s) accumulating on a fairly large scale. JMHO, but this could easily run like TSHL has done the past 2 days. Someone just may know of a pending PR that will really cause this to run. Again, JMHO
............al
The 60's were turbulant times. Returning from my first tour in RVN I ended up in VA (1968). We all had to take riot control training. Never used it but it was mandatory for all non trainees. But no combat brigade was ever trained to function as a combat brigade in riot control. I know it may not seem like apples and oranges, but believe me it is. Extreme civil unrest will start in the inner cities(I always predict it will start in Detroit first) and spread from there. 45 years ago we had to deal with rioters that threw rocks and bottles, a few gasoline bombs, a few handguns and rifles or shotguns. Today they'll be facing well armed and organized gangs with automatic weapons. It took police departments years of complaining to get better weapons as they were being outgunned in confrontations. I also think the aftermath from Katrina was a lesson learned in societal breakdown and was the basis for this planning. JMHO
.......al
MH- welcome to Ihub and the board. I don't think you will find a stock board anywhere where there is any positive posting about this company. I'm sure a few more answers to your post will be forthcoming so I'll just say this. A very smart trader can make $$ trading this stock. Some have made a lot in the past and some will make more in the future. I'm not that good so I don't touch it. I will give you just two facts. Since Alex started this company in 1995 he has sold billions and billions of shares. Not one long term investor has ever made any money in this company's stock. They have all been reversed out of their positions. If some answers to your query seem a little strong, don't be offended as they mean you no harm. They are just trying to warn you and save you from losing your hard earned money investing in this company. I keep the OS counts updated in the iBox about every 2 weeks. You can see the constant dilution for yourself and make your own decisions. GL2U
..........al
Don't think the planners haven't thought about possible unrest:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32491574
......al
TAKI- check out the last 5 -10 minutes trading on CJGH today.
........al
The bailout has not failed IMHO. It has had a setback, but will continue forward. It will be tinkered with again and again to satisfy members that voted no but are not hardcore in their belief. A tweek here and there is all it may take. I believe something like allowing bankruptcy judges to change mortgage terms, or increased intervention in forclosure proceedings could be what tips the scales. The main objections, other than ideology, seems to be not enough protections for the average homebuyer about to lose his home. So action in that area could sway enough votes to pass it. This bailout will eventually pass. Too much political capital has been expended for it to fail altogether. I believe the biggest fear of the GOP is that they have been in charge for over a decade and have pushed for free unregulated markets and it has now come home to bite them in the rear. That is a common voter perception and we are VERY close to that time. I think Obama is now a shoe in and the republicans will take more hits in Congress over all this. But again, a bailout will occur eventually. IMHO
..........al
not necessarily after hours-
'T' If reporting a single protected transaction. A protected transaction occurs when a large order is going through the market. The buyer (or seller) may wish to keep the order anonymous from the rest of the market as the size of the order could greatly alter the price of the stock. With a protected transaction, the dealer will put the trade through in small quantities rather than knock the whole order out in one hit. The entire transaction is reported once the deal is completed. The LSE is notified at the start and at the end of the transaction. However, the market as a whole isn't told until the end, thus the order is protected.
huge buying last 5 minutes eom.
According to what I've been reading 90+% of voters writing in to their representatives are against the bailout. It's a tough decision to vote for it and go back and try and get re elected in Nov. It's too close for people to forget.
........al
PPT out in full force. eom
The TA doesn't have the new numbers as of yet. IMHO the sell off is coming because most traders that have been involved with penny stocks for any decent length of time know that when a pinkie raises the A/S, that usually means there will be additions to the O/S in a short time. I got in last week and am now out again at .002. That filing just killed the momemtum. Best of luck to all here.
.........al
Just confirmed with TA, A/S and O/S shares counts are accurate in iBox as of last Friday COB. FWIW
.......al
With all this squabbling going on over 700 billion, has anyone realized the FED has already doled out over 1 trillion since this mess first started a few months ago? I think the FED window did almost that much this past week in loans. Just FYI and FWIW
.........al
US steps up Pakistan raids to thwart al-Qaeda 'October surprise' plot
US secret forces are intensifying their cross-border raids into Pakistani tribal areas because of fears of a high-profile al-Qaeda attack during the American election campaign, The Sunday Telegraph has learned.
By Philip Sherwell in New York and Massoud Ansari in Islamabad
Last Updated: 12:20AM BST 28 Sep 2008
The Pentagon has ordered that raids on suspected terrorist targets within Pakistan be stepped up to pressurise al-Qaeda leaders and distract them from preparing attacks on American targets elsewhere.
"The aim is to disrupt their scope for planning and keep their leaders on the move so that it is more difficult for them to co-ordinate complicated plots," a senior US intelligence official told The Sunday Telegraph.
The operations launched from neighbouring Afghanistan have led to sharply increased tensions with Pakistan's armed forces since President George W.Bush recently authorised assaults involving "boots on the ground" without prior approval by Pakistan's government, a supposed US ally.
Those hostilities almost turned lethal last week when Pakistani troops shot at two clearly marked US helicopters, and the two sides then traded fire. The Pentagon said the aircraft were just inside Afghan air space but Pakistani officials insisted they had crossed the volatile border.
There were no injuries in the clash but US and Pakistani officers have arranged meetings this week to discuss the tensions. While new Pakistani president Asif Zardari praised US support for his country as a "blessing" on Friday in New York, senior officials in Islamabad angrily warned US troops not to intrude on its territory.
The US has been increasingly alarmed about the growth of attacks on Nato forces in Afghanistan launched from safe havens established by Islamic terror groups in the lawless mountainous tribal districts just inside Afghanistan.
Robert Gates, the defence secretary, told lawmakers last week that an estimated 30 to 40 per cent of attacks in Afghanistan were staged by fighters based in, or commanded from, Pakistan - a significant rise on previous years.
The approach of the US election has fuelled fears that al Qaeda or its allies, including the increasingly active Haqqani network, will seek a headline-grabbing strike against a symbolic American target such as an overseas embassy.
Last week's devastating truck bomb attack on Islamabad's Marriott Hotel further highlighted security concerns in Pakistan. The blast claimed the lives of 53 people, including two US military personnel, the Czech ambassador and a Danish intelligence officer.
"The level of sophistication and destruction was a message to the international community and the Pakistanis that we can pretty much hit you any place, any time," said Seth Jones, a senior regional analyst with the Rand Corporation, a leading security think-tank.
Kamran Bokhari, Middle East director at Stratfor, an intelligence analysis company, said that the scale of the attack - involving up to 1,000 kilogrammes of explosives - was a clear indication that al Qaeda or its allies were involved.
"The target and modus operandi have the signature of a sophisticated jihadi operation," he said. "The hotel is in a very sensitive area. If they can hit the Marriott, why can't they hit courts or ministries or the prime minister's house?"
Against this backdrop, a senior US intelligence official said that al Qaeda was seeking to stafe a major attack on an American target close to the election, to test the new president-elect.
"Their goal would not be to influence the election but merely to send a message that they are still a force to be reckoned with," the official said. "They know that a successful attack in the election season will have maximum impact, and they want to give the new president the jitters."
Any attack in the weeks before the Nov 4 election - what is known in American political circles as an "October surprise" - would almost certainly give a decisive boost to John McCain, the Republican candidate who already holds a commanding lead on questions of national security.
The US has for several years attacked suspected militant bases inside Pakistan with missiles fired from Predator drones. Tribesmen regularly shoot at the unmanned aircraft, although both the US and Pakistan rejected claims that a drone that crashed near the border last week was broight down by gunfire.
But in July, Mr Bush approved classified orders authorising special operations forces to conduct ground assaults inside Pakistan without seeking Islamabad's approval after his commanders presented him with evidence about the militants' increasingly secure bases in the tribal areas. Small commando units are flown in and out by helicopter for precisions raids.
"To tackle the insurgency in Afghanistan, you have to deal with what's happening in Pakistan," said Mr Bokhari. "It's not just the border now.
Pakistan increasingly feels like a state under siege."
Mr Jones said: "The US has been increasingly aware that the command and control networks for groups such as Al Qaeda and its allies in the Haqqani network conducting attacks in Afghanistan are based in Pakistan."
The new US approach has infuriated senior Pakistani commanders who feel freer to express their anger since President Pervez Musharraf was forced from office. New army chief General Ashfaq Pervez Kiyani has told his US counterparts that US incursions without prior approval are "unacceptable".
Pakistan is also mounting a major ground offensive against militants in the Bagaur region and claims to have killed 1,000 fighters in an operation that may have prompted the Marriott attack in retaliation.
But Gen Kiyani's combative approach has taken the US aback. "He is trying to assert himself more than they (US) expected and sooner than they expected," a Western diplomat said.
Relations plummeted after US commandos landed by helicopter on a raid in early September in Pakistan and killed seven innocent civilians, according to the Pakistanis. The mood was already raw after a US missile fired from Afghanistan killed several Pakistani soldiers at a border post in June.
Pakistani army officials said that the Americans do not understand that Gen Kiyani is already facing major obstacles in deploying his soldiers against the militants.
"It is just adding to the problem for him to engage these soldiers against the militants when they are being taunted by their fellow Muslims that they are working for the US against the Muslims," said a senior army official.
Scores of soldiers have deserted in the past few years especially when they were stationed in the tribal areas after refusing to fight. Nearly 1200 Pakistani soldiers have died since in the tribal region since 2001.
"There is a limit to what one could cooperate and army chief alone knows how difficult it is for his to keep the morale of his soldiers," the same official said.
Additonal reporting: William Lowther, Washingto
http://www.telegraph.co.uk/news/worldnews/asia/pakistan/3092548/US-steps-up-Pakistan-raids-to-thwart-al-Qaeda-October-surprise-plot.html
This is John Mauldin's letter to his congressman. Very good read.
Use this link to see the graphs.
http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2008/09/27/who-s-afraid-of-a-big-bad-bailout.aspx
......al
Posted Sep 27 2008, 12:52 AM
by John Mauldin
"A tournament, a tournament, a tournament of lies.
Offer me solutions, offer me alternatives and I decline.
It's the end of the world as we know it and I feel fine.
(It's time I had some time alone.)"
- Lyrics from R.E.M., 1987
Flying last Tuesday, overnight from Cape Town in South Africa to London, I read in the Financial Times that Republican Congressman Joe Barton of Texas was quoted as saying (this is from memory, so it is not exact) that he had difficulty voting for a bailout plan when none of his constituents could understand the need to bail out Wall Street, didn't understand the problem, and were against spending $700 billion of taxpayer money to solve a crisis for a bunch of (rich) people who took a lot of risk and created the crisis. That is a sentiment that many of the Republican members of the House share.
As it happens, I know Joe. My office is in his congressional district. I sat on the Executive Committee for the Texas Republican Party representing much of the same district for eight years. This week, Thoughts from the Frontline will be an open letter to Joe, and through him to Congress, telling him what the real financial problem is and how it affects his district, helping explain the problem to his constituents , and explaining why he has to hold his nose with one hand and vote for a bailout with the other.
Just for the record, Joe has been in Congress for 24 years. He is the ranking Republican on the Energy and Commerce Committee, which is one of the three most important committees and is usually considered in the top five of Republican House leadership. He is quite conservative and has been a very good and effective congressman. I have known Joe for a long time and consider him a friend. He has been my Congressman at times, depending on where they draw the line. I called his senior aide and asked him how the phone calls were going. It is at least ten to one against supporting this bill, and that is probably typical of the phones all across this country. People are angry, and with real justification. And watching the debates, it reminds us that one should never look at how sausages and laws are made. It is a very messy process.
I think what follows is as good a way as any to explain the crisis we are facing this weekend. This letter will print out a little longer, because there are a lot of charts, but the word length is about the same. Let's jump right in.
It's the End of the World As We Know It
Dear Joe,
I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don't understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.
First, let's stop calling this a bailout plan. It is not. It is an economic stabilization plan. Run properly, it might even make the taxpayers some money. If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous. Unemployment will jump to rates approaching 10%, at a minimum. How did all this come to pass? Why is it so dire? Let's rewind the tape a bit.
We all know about the subprime crisis. That's part of the problem, as banks and institutions are now having to write off a lot of bad loans. The second part of the problem is a little more complex. Because we were running a huge trade deficit, countries all over the world were selling us goods and taking our dollars. They in turn invested those excess dollars in US bonds, helping to drive down interest rates. It became easy to borrow money at low rates. Banks, and what Paul McCulley properly called the Shadow Banking System, used that ability to borrow and dramatically leverage up those bad loans (when everyone thought they were good), as it seemed like easy money. They created off-balance-sheet vehicles called Structured Investment Vehicles (SIVs) and put loans and other debt into them. They then borrowed money on the short-term commercial paper market to fund the SIVs and made as profit the difference between the low short-term rates of commercial paper and the higher long-term rates on the loans in the SIV. And if a little leverage was good, why not use a lot of leverage and make even more money? Everyone knew these were AAA-rated securities.
And then the music stopped. It became evident that some of these SIVs contained subprime debt and other risky loans. Investors stopped buying the commercial paper of these SIVs. Large banks were basically forced to take the loans and other debt in the SIVs back onto their balance sheets last summer as the credit crisis started. Because of a new accounting rule (called FASB 157), banks had to mark their illiquid investments to the most recent market price of a similar security that actually had a trade. Over $500 billion has been written off so far, with credible estimates that there might be another $500 billion to go. That means these large banks have to get more capital, and it also means they have less to lend. (More on the nature of these investments in a few paragraphs.)
Banks can lend to consumers and investors about 12 times their capital base. If they have to write off 20% of their capital because of losses, that means they either have to sell more equity or reduce their loan portfolios. As an example, for every $1,000 of capital, a bank can loan $12,000 (more or less). If they have to write off 20% ($200), they either have to sell stock to raise their capital back to $1,000 or reduce their loan portfolio by $2,400. Add some zeroes to that number and it gets to be huge.
And that is what is happening. At first, banks were able to raise new capital. But now, many banks are finding it very difficult to raise money, and that means they have to reduce their loan portfolios. We'll come back to this later. But now, let's look at what is happening today. Basically, the credit markets have stopped functioning. Because banks and investors and institutions are having to deleverage, that means they need to sell assets at whatever prices they can get in order to create capital to keep their loan-to-capital ratios within the regulatory limits.
Remember, part of this started when banks and investors and funds used leverage (borrowed money) to buy more assets. Now, the opposite is happening. They are having to sell assets into a market that does not have the ability to borrow money to buy them. And because the regulators require them to sell whatever they can, the prices for some of these assets are ridiculously low. Let me offer a few examples.
Today, there are many municipal bonds that were originally sold to expire 10-15 years from now. But projects finished early and the issuers wanted to pay them off. However, the bonds often have a minimum time before they can be called. So, issuers simply buy US Treasuries and put them into the bond, to be used when the bond can be called. Now, for all intents and purposes this is a US government bond which has the added value of being tax-free. I had a friend, John Woolway, send me some of the bid and ask prices for these type of bonds. One is paying two times what a normal US Treasury would pay. Another is paying 291% of a normal US Treasury. And it is tax-free! Why would anyone sell what is essentially a US treasury bond for a discount? Because they are being forced to sell, and no one is buying! The credit markets are frozen.
Last week, I wrote about a formerly AAA-rated residential mortgage-backed security (RMBS) composed of Alt-A loans, better than subprime but less than prime. About 5% of the loans were delinquent, and there are no high-risk option ARMs in the security. It is offered at 70 cents on the dollar. If you bought that security, you would be making well over 12% on your money, and 76% of the loans in the portfolio of that security would have to default and lose over 50% of their value before you would risk even one penny. Yet the bank which is being forced to sell that loan has had to write down its value. As I wrote then, that is pricing in financial Armageddon. (You can read the full details here.)
Let's look at the following graph. It is an index of AAA-rated mortgage bonds, created by www.markit.com. It is composed of RMBSs similar to the one I described above. Institutions buy and sell this index as a way to hedge their portfolios. It is also a convenient way for an accounting firm to get a price for a mortgage-backed security in a client bank's portfolio. With the introduction of the new FASB 157 accounting rule, accountants are very aggressive about making banks mark their debt down, as they do not want to be sued if there is a problem. Notice this index shows that bonds that were initially AAA are now trading at 53 cents on the dollar, which is up from 42.5 cents two months ago.
Accountants might look at the bond I described above, look at this index, and decide to tell their clients to mark the bonds down to $.53 on the dollar. The bank is offering the bond at $.70 because it knows there is quality in the security. They are being forced to sell. And guess what? There are no buyers. An almost slam-dunk 12% total-return security with loss-coverage provisions that suggest 40% of the loans could default and lose 50% before your interest rate yields even suffered, let alone risk to your principal – and it can't find a buyer.
One of the real reasons these and thousands of other good bonds are not selling now is that there is real panic in the markets. The oldest money market fund "broke the buck" last week, because they had exposure to Lehman Brothers bonds. We are seeing massive flights of capital from money market funds, including by large institutions concerned about their capital. What are they buying? Short-term Treasury bills. Three-month Treasury bills are down to 0.84%.
It gets worse. Last week one-month Treasury bills were paying a negative 1%!!! That means some buyers were so panicked that they were willing to buy a bond for $1 that promised to pay them back only $.99 in just one month. The rate is at 0.16% today. If something is not done this weekend, it could go a lot lower over the next few days. That is panic, Joe.
I don't want to name names, as this letter goes to about 1.5 million people and I don't want to make problems for some fine banking names; but there is a silent bank run going on. There are no lines in the street, but it is a run nevertheless. It is large investment funds and corporations quietly pulling their money from some of the best banks in the country. They can do this simply by pushing a button. We are watching deposit bases fall. It does not take long. Lehman saw $400 billion go in just a few months this summer. Think about that number. Any whiff of a problem and an institution that is otherwise sound could be brought low in a matter of weeks. And the FDIC could end up with a large loss that seemed to have come from out of nowhere.
The TED Spread Flashes Trouble
There is something called the TED spread, which is the difference between three-month LIBOR (the London Inter Bank Offered Rate which is in euro dollars, also called The Euro Dollar Spread, thus TED) and three-month US Treasury bills. Three-month LIBOR is basically what banks charge each other to borrow money. Many mortgages and investments are based on various periods of LIBOR. Look at the chart below. Typically the TED spread is 50 basis points (0.50%) or less. When it spikes up, it is evidence of distress in the financial markets. The last time the TED spread was as high as it is now was right before the market crash of 1987. This is a weekly chart, which does not capture tonight's (Friday) change, which would make it look even worse. Quite literally, the TED spread is screaming panic.
The Fed has lowered rates to 2%. Typically, three-month LIBOR tracks pretty close to whatever the Fed funds rate is. Starting with the credit crisis last year, that began to change. Look at the chart below.
Remember, LIBOR is what banks charge to each other to make loans. Lower rates are supposed to help banks improve their capital and their ability to make loans at lower interest rates to businesses and consumers. Look at what has happened in the past few weeks, in the chart above. The spread between three-month LIBOR and the Fed funds rate is almost 200 basis points, or 2%! That is something that defies imagination to market observers. On the chart above, it looks like it has not moved that much, but in the trading desks of banks all over the world it is a heart-pounding, scare-you-to-death move. The chart below reflects what traders have seen in the past two weeks, and it moved up more today.
Now let's look at the next chart. This is the amount of Tier 1 commercial paper issued. This is the life blood of the business world. This is how many large and medium-sized businesses finance their day-to-day operations. The total amount of commercial paper issued is down about 15% from a year ago, with half of that drop coming in the last few weeks. Quite literally, the economic body is hemorrhaging. Unless something is done, businesses all over the US are going to wake up in a few weeks and find they simply cannot transact business as usual. This is going to put a real crimp in all sorts of business we think of as being very far from Wall Street.
I could go on. Credit spreads on high-yield bonds that many of our best high-growth businesses use to finance their growth are blowing out to levels which make it impossible for the companies to come to the market for new funds. And that is even if they could find investors in this market! There are lots of other examples (solid corporate loans selling at big discounts, asset-backed securities at discounts, etc.), but you get the idea. Suffice it to say that the current climate in the financial market is the worst since the 1930s. But how does a crisis in the financial markets affect businesses and families in Arlington, Texas, where my office and half of your district is?
The Transmission Mechanism
The transmission in a car takes energy from the engine and transfers it to the wheels. Let's talk about how the transmission mechanism of the economy works.
Let's start with our friend Dave Moritz down the street. He needs financing to be able to sell an automobile. To get those loans at good prices, an auto maker has to be able to borrow money and make the loans to Dave's customers. But if something does not stop the bleeding, it is going to get very expensive for GM to get money to make loans. That will make his cars more expensive to consumers. Cheap loans with small down payments are the life blood of the auto selling business. That is going to change dramatically unless something is done to stabilize the markets.
Credit card debt is typically packaged and sold to investors like pension funds and insurance companies. But in today's environment, that credit card debt is going to have to pay a much higher price in order to find a buyer. That means higher interest rates. Further, because most of the large issuers of credit cards are struggling with their leverage, they are reducing the amount of credit card debt they will give their card holders. If they continue to have to write down mortgages on their books because of mark-to-market rules which price assets at the last fire-sale price, it will mean even more shrinkage in available credit.
Try and sell a home above the loan limits of Fannie and Freddie today with a nonconforming jumbo loan. Try and find one that does not have very high rates, because many lenders who normally do them simply cannot afford to keep them on their balance sheets. And a subprime mortgage? Forget about it. This is going to get even worse if the financial markets melt down.
We are in a recession. Unemployment is going to rise to well over 6%. Consumer spending is going to slow. This is an environment which normally means it is tougher for small businesses and consumers to get financing in any event. Congress or the Fed cannot repeal the business cycle. There are always going to be recessions. And we always get through them, because we have a dynamic economy that figures out how to get things moving again.
Recessions are part of the normal business cycle. But it takes a major policy mistake by Congress or the Fed to create a depression. Allowing the credit markets to freeze would count as a major policy mistake.
I have been on record for some time that the economy will go through a normal recession and a slow recovery, what I call a Muddle Through Economy. This week I met with executives of one of the larger hedge funds in the world. They challenged me on my Muddle Through stance. And I had to admit that my Muddle Through scenario is at risk if Congress does not act to stabilize the credit markets.
Let's Make a Deal
Why do we need this Stabilization Plan? Why can't the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.
There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.
Why are banks not lending to each other? Because they don't know what kind of assets are on each other's books. There is simply no trust. The Fed has had to step in and loan out hundreds of billions of dollars in order to keep the financial markets from collapsing. If you allow the banks to sell their impaired assets at a market-clearing fair price (not at the original price), then once the landscape is cleared, banks will decide they can start trusting each other. The commercial paper market will come back. Credit spreads will come down. Banks will be able to stabilize their loan portfolios and start lending again.
Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.
If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.
What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain. Jim Cramer estimated today that without a plan of some type, we could see the Dow drop to 8300. That is as good a guess as any. It could be worse. Home valuations and sales will drop even further.
The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more. Consumer spending will drop. What should be a run-of-the-mill recession becomes a deep recession or soft depression. Yes, that may be worst-case scenario. But that is the risk I think we take with inaction.
A properly constructed Stabilization Plan hopefully avoids the worst-case scenario. It should ultimately not cost the taxpayer much, and maybe even return a profit. The AIG rescue that Paulson arranged is an example of how to do it right. My bet is that the taxpayer is going to make a real profit on this deal. We got 80% of AIG, with what is now a loan paying the taxpayer over 12%, plus almost $2 billion in upfront fees for doing the loan. That is not a bailout. That is a business deal that sounds like it was done by Mack the Knife.
This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.
I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.
Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby's economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines.
Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can't help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.
With your help, we will get through this. In a few years, things will be back to normal and we can all have stories to tell to our grandkids about how we lived through interesting times. But right now we have to act.
My big question is where is the accountability for all this mess we're in? Where is my pound of flesh? Closure for the taxpayer is necessary and I fear we will never see it. Wall street is too intwined with both major political parties. There may be some sacrificial lambs but the real culprits are already long gone, with millions to boot. I keep thinking back to Jefferson - about every 50 years clean out the whole system and start from scratch otherwise the corruption will overcome what started with the best of intentions. The future looks bleak and even the government knows it. Why else would a combat brigade be trained in civil disobedience and stationed stateside for use in an emergency. The first time in our history.
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Bailout- Brits want their share-
Bush appeals for quick approval of $700bn bailout plan. UK demands share
September 26, 2008, 6:28 PM (GMT+02:00)
Economists warned Friday afternoon, Sept. 26, that if Congress fails to act in time, there will be “bloodbath” on world markets. The warning followed a rebellion in President George W. Bush’s own Republican party which disrupted negotiations on the verge of approving the $700 billion package approved by the White House to save foundering financial institutions by buying bad debts.
It was led by presidential candidate John McCain, who said the plan “will not protect the taxpayers and will sacrifice Main Street in favor of Wall Street.”
On Wall Street, nerves were stretched tighter after Washington Mutual Inc. became the largest U.S. bank to fail. British prime minister Gordon Brown arrived in Washington to hand in a bill of up to $95 bn for to rescue faltering British banks to be included in the American bail-out plan.
After McCain and his Democratic rival Barack Obama interrupted their campaigns to be in Washington for the financial crisis, Democratic leaders said the insertion of presidential politics had torpedoed seven days of negotiations. Majority leader Harold Reid pledged work would go forward without pause until the bail-out bill is adjusted so that the American taxpayer benefits - not just the banks, full oversight over its implementation is assured and failing executives are not rewarded with bonuses.
The Democrats appealed to the Republicans to “put their house in order” and work together to rescue the rescue plan without delay.
John McCain has announced the resumption of his presidential campaign and his decision to will face Barack Obama in their scheduled debate at Mississippi University.
speaking of Mr Brown- nothing like wanting 1/7 of the bailout bill for the Brits.
Bush appeals for quick approval of $700bn bailout plan. UK demands share
September 26, 2008, 6:28 PM (GMT+02:00)
Economists warned Friday afternoon, Sept. 26, that if Congress fails to act in time, there will be “bloodbath” on world markets. The warning followed a rebellion in President George W. Bush’s own Republican party which disrupted negotiations on the verge of approving the $700 billion package approved by the White House to save foundering financial institutions by buying bad debts.
It was led by presidential candidate John McCain, who said the plan “will not protect the taxpayers and will sacrifice Main Street in favor of Wall Street.”
On Wall Street, nerves were stretched tighter after Washington Mutual Inc. became the largest U.S. bank to fail. British prime minister Gordon Brown arrived in Washington to hand in a bill of up to $95 bn for to rescue faltering British banks to be included in the American bail-out plan.
After McCain and his Democratic rival Barack Obama interrupted their campaigns to be in Washington for the financial crisis, Democratic leaders said the insertion of presidential politics had torpedoed seven days of negotiations. Majority leader Harold Reid pledged work would go forward without pause until the bail-out bill is adjusted so that the American taxpayer benefits - not just the banks, full oversight over its implementation is assured and failing executives are not rewarded with bonuses.
The Democrats appealed to the Republicans to “put their house in order” and work together to rescue the rescue plan without delay.
John McCain has announced the resumption of his presidential campaign and his decision to will face Barack Obama in their scheduled debate at Mississippi University.
GM all- the SEC may be tied up right now with the bailouts going on. Congress will be demanding answers as to why all this was allowed to happen. The SEC will be a prime target for inquiries. They will be spending a lot of time and effort on CYA. It could further delay any actions like ETNL's uplisting as personnel will be tied up elsewhere. JMHO
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WAMU taken over by FDIC and handed to Chase.eom
WAMU has been seized eom
I read that earlier today. Europe is not the real problem as their central banks will support a stronger dollar or else imports from the US will rise thereby hurting European business. The far east is the sticking point. When not if they start really dumping dollar denominated assets the US dollar will become toast on the international markets.
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mmayr- I don't know if you are aware of this, but our federal reserve bank is a privately owned corporation. And I don't have the exact percentage but 60-70% ownership is foreign nationals- British, Dutch, Belguim, France
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Thank you for that video. I just finished watching it. While I understand the principles of banking, the depth of my knowledge is not near as limited as it was before. One president he missed was Kennedy. Amid all the conspiracy theories no one seems to mention that what he was working on at the time of his assasination was the creation of a US currency to replace the federal reserve note as legal tender. I have always said the elected leaders of our country are only mouthpieces for the real people running the show. Thank you again
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another half million at the ask. eom
Hi extra and welcome to the board. It's good to see at least someone is making money on this stock. I've always maintained it was possible. I tried years ago to investigate offshore naked shorting but was undercapitalized. That is definately the way to go not just on this stock but hundreds of others in pinkyworld. Best of luck to you.
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I never had any respect for Greenspan. It was his loose money policies that caused this mess in the first place. Have a problem? We'll just throw more cheap money at it. The piper has played and now wants his due. It not only delayed the inevitable, it magnified the consequence many fold. Bailout or not, this is not going to be pretty. And forget the price tag on the bailout. It will cost way more. Congress is facing an election in November also. It would be political suicide to go back to the voters and say I voted to bail out Wall street but nothing for Main street. Look for quite a few hundred billion to be added to this before it's over. It would also be hari kari to ask the voters to pay more taxes to help fund this bailout. So the printing presses will be working full time for years. Great for gold and silver. Hold the physical if you can as confiscation is becoming a possibility IMHO.
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some of these big buys at the ask are not chump change.
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EOD dow crashing hard, Congress must be balking at bailout.
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OS count updated in iBox.eom
calling the company and talking to the CEO or the IR person is fine. You can get decent info using that avenue. Real DD is disinterested 3rd party verifications of what the company says and does. Just FYI
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half million at the ask .022 eom