Archive for the 'Federal Reserve' Category

Capitalists Turn to Intervention and Socialists to Laissez Faire

Published
by
Doug
on March 31, 2008
in Banks, Credit, Economy, Federal Reserve, Government and Money
. 0 Comments

Ben Bittrolff of The Financial Ninja provides more excellent analysis and commentary on the current crises in the financial sectors.

First, Bittrolff argues that the Fed has done nearly all that it can do to prevent a total collapse of confidence in the financial systems and markets when he writes, “The Fed has almost run out of ammo. Much like George Soros on Black Wednesday, when he ‘broke the Bank of England,’ global capitalists are damn near close to breaking the Fed. 60% [of the $700 billion in Treasury securities on his balance sheet] has been committed and it doesn’t seem to be working. Another push and things could unravel quickly…”

Second, it seems inevitable that Citigroup will be breaking itself up over the coming years. Bittrolf sees Citirgoup’s separation of its credit card business from its banking business is the first step of the pending dismantling of Citigroup.

But, what struck me the most is this simple statement: “It is truly humorous that the Socialists across the pond are the one’s considering taking the ‘laissez faire’ approach while the CHAMPIONS of Capitalism over here are pounding the table for mass intervention.” I don’t think there could be a more telling signal of the immense troubles of the financial sector.

Grading the Fed and Downgrading the Financial Sector

Published
by
Doug
on March 27, 2008
in Banks, Business, Federal Reserve, Markets and News
. 0 Comments

Five experts from the American Enterprise Institute (a former employer of mine) have graded and assessed the Federal Reserve’s recent policy decisions. Each expert gives good analysis, but the feeling I get is that the majority of would give Fed should get an “A” for effort and good intentions but a “C” for delivery.

Next, the Resourceful Bear Blog says Lehman Brothers is likely another Bear Stearns. The fact that Golman Sachs and Lehman Brothers debt was downgraded on Good Friday by S&P is cited as an indicator of this possibility.

Finally, according to Oppenheimer analyst Meredith Whitney, Merrill Lynch and and UBS may suffer respective first-quarter write-downs of $6.03bn and $11.06bn.

J.P. Morgan and Bear Stearns Craziness Continues

Published
by
Doug
on March 25, 2008
in Banks, Charts, Federal Reserve, Money, Short Ideas and Trades
. 0 Comments

When I read the news that J.P. Morgan had upped its bid for Bear Stearns from $2 a share to $10 a share I felt like I would be one of the few who would consider such news BAD, as opposed to GOOD. If JPM had to be bribed to take on Bear Stearns assets, why would paying more be a good thing? And by the way, JPM is now on the hook for just the first billion in losses that might occur from Bear Stearns assets. Formerly, I think JPM was on the hook for zero losses.

Anyways, I just want to show you this chart of JPM with its insane megaphone. I was short JPM as of yesterday.

 Chart of JPM as of 032508

JPM Buys Bear Stearns for $2/Share

Published
by
Doug
on March 16, 2008
in Banks, Credit, Economy, Federal Reserve and Money
. 0 Comments

JPMorgan Chase Buys Bear Stearns for $240 Million:

March 16 (Bloomberg) — JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street’s fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”

I’m not really sure whether this is a good or bad thing. Bear Stearns stock was trading in the low 30s last Friday. Does this severe depreciation of value mean than things are worse than we could have even imagined? Well, judging by the index futures as of this posting, things are looking bad, but who knows what things will be like next by the end of next week.

Here’s a list of some other recent articles on this mess I’ve been reading.

The Bear Stearns FAQ

Published
by
Doug
on March 14, 2008
in Banks, Federal Reserve and Money
. 0 Comments

Bears

The Bear Facts - Portfolio.com

What happened to Bear Stearns?

It ran out of money.

That can’t be good if you’re a bank.

No. The stock is down over 40 percent today, and off more than 50 percent this week.

But surely the last thing this market needs right now is a bank failure?

Right. So the Fed is riding to the rescue, “allowing Bear Stearns to access liquidity as needed”.

Didn’t the Fed already do that, on Tuesday, when it announced a new “Term Securities Lending Facility” available to investment banks?

Yes, but the TSLF won’t go live until March 27. Bear Stearns couldn’t wait that long.

So was the TSLF announcement a failure?

It does look a bit like that. The TSLF was meant to boost confidence in the investment banks: when the markets have confidence in a bank, there are never any liquidity problems. The Fed might well have been hoping that the TSLF would provide enough of a generalized confidence boost that Bear Stearns in particular would be able to continue normal operations, at least until its money became available on March 27. But Bear didn’t participate in the big stock-market rally on Tuesday, and has been plagued by rumors of illiquidity and insolvency all week. Finally, today, it came clean and admitted it needed an emergency loan from the Fed. Oh, and that 400-point uptick in the Dow we saw on Tuesday as a result of the Fed announcement? We’ve already erased half those gains.

How about today’s announcement? Is the Fed’s money helping Bear at all?

It’s not helping the stock price, clearly. But it did helping the price of Bear’s credit default swaps, at least initially; they’re are a measure of how likely the market thinks Bear is to default. If you own Bear Stearns, you’re in a world of pain right now. But if you’re owed money by Bear Stearns, you do have some faith that the Fed will ensure you get it back in full - although obviously the market in Bear Stearns credit is extremely volatile right now.

Sounds like a bailout to me.

If it is a bailout, it’s a bailout of Bear’s creditors, not of its shareholders.

Why would the Fed do that?

Simple: Counterparty risk. Bear Stearns is a major broker-dealer; billions of dollars of obligations flow through it every day. If suddenly that flow was halted, and Bear defaulted on its obligations, there would be a huge risk to the entire financial system. As Herb Greenberg puts it, “if the hedge funds and rich folk get caught here, without a net, you imagine possible domino effect throughout the brokerage and banking industries as people start pulling out cash and heading for safer pastures, such as trust companies.” And the Fed simply can’t risk the entire banking industry imploding like that.

The FAQ goes on. Read it all.

CPI Cools, J.P. Morgan and Fed Provide Financing to Bear Stearns

Published
by
Doug
on March 14, 2008
in Banks, Economy, Federal Reserve and Markets
. 0 Comments

Apparently the CPI has cooled down a little, remaining unchanged in February.

A second bit of news is that J.P. Morgan, in combination with the Federal Reserve Bank of New York, has agreed to provide secured financing to Bear Stearns. There’s more to this than meets the eye. Despite all the “positive” news, seemingly designed to combat further market slides, I feel that the downtrend will resume soon.

UPDATE

The headline of the day at Marketwatch is “Bear Stearns Bailout.” Bear Stearns screwed up royally. Their stock was over $170 over a year ago. Now its in the low 30s. This is all attributable to arrogance and an over-abundance of greed (don’t get me wrong, greed is good, but too much of anything is bad for you).

“Our liquidity position in the last 24 hours had significantly deteriorated,” Alan Schwartz, chief executive at Bear, said in a statement. “We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.

“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” he added. “We have tried to confront and dispel these rumors and parse fact from fiction.”

Despite those efforts, Schwartz said “market chatter” had undermined Bear’s liquidity.

So blame it on those awful market rumors. What an silly and stupid a-hole!

Fed’s “Junk for Treasuries” Lending Program May Have Unintended Consequences

Published
by
Doug
on March 13, 2008
in Banks, Federal Reserve, Hedge Funds and Money
. 0 Comments

After the announcement late last night that Carlyle Capital could not come to an agreement with its creditors and that its assets would be seized as soon as possible, futures were down sharply as a result. Since March 12, the company has defaulted on approximately $16.6 billion of its indebtedness, with the remaining indebtedness is expected soon to go into default.

But interestingly enough, this instance of banks seizing assets of a hedge fund unable to meet margin calls might be the unintended consequence of the Fed’s recent announcement a couple of days ago to allow banks to swap mortgage-backed (most of which is essentially worthless) debt for Treasuries. Via Robert Peston of the BBC:

In fact, it’s arguable that the banks’ seizure of Carlyle’s $20bn-odd in assets has actually been encouraged by the Fed’s mortgages-for-Treasuries offer. Because the Fed’s new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.

So it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid.

If that’s the case, there will be some very scared people in hedge-fund land today. Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish.

It’s not unusual for policy-makers to come up with a seemingly rational and well-considered plans, plans that in the end actually hurt more than they help. I wonder if the Fed foresaw this possibility? For some reason, I highly doubt it.

Secret Fed Memo Uncovered

Published
by
Doug
on March 12, 2008
in Federal Reserve and Humour
. 0 Comments

This is just too funny. But then you might feel a little sad and depressed at the current state of affairs. Great thanks to Macro Man for sharing this memo with us.

To: Chairman Bernanke

From: NY Fed Governor Geithner

Re: Alternative collateral

Date: March 11, 2008
—————————————————————————————————

Mr. Chairman,

We made the announcement today regarding the additonal measures we are taking, including the TSLF. Initial market reaction to the expansion of our lending program has been positive; stocks have done pretty well- hell, even Bear Stearns rallied today!

However, I believe that it would be prudent for us to make contingency plans in the event that the TSLF fails to relieve market stress. After all, initial reactions to the discount rate cut in August, the 2.25% of Fed cuts that we have put through since September, and the TAF were all positive…..and yet we are deeper in the mire than ever before.

I have consulted at length with staff here at the New York Fed, who in turn have spoken with their network of Wall Street contacts. We have reached the conclusion that the next step in our campaign to re-liquefy the system should be to accept a broader range of collateral for those seeking to borrow at either the TAF or TSLF auctions.

The staff has drawn up a list of recommended items that we should be prepared to accept as collateral in the event that the TSLF does not solve the problems that we are facing. I intend to submit this list for discussion at our next fortnightly meeting, but per our standing arrangment I am notifying you of its contents in this memo.

The staff recommends that the following be accepted as collateral:

1) The borrower’s first-born child. The use of hostages to ensure compliance with a contract or treaty has been fairly common throughout human history, but has sadly fallen by the wayside in recent decades. The staff suggests that it could be effective in the current environment, however.

2) A T206 Honus Wagner card. These are among the scarcest securities in America, and should provide ample security for the borrowing of funds.

3) Gold Jewelry. It is the staff’s understanding that pawn shops occasionally accept gold jewelry as collateral for funds. Given that the Federal Reserve’s TAF and TSLF programs are beginning to resemble a financial pawn shop, it makes sense to start taking our cues from the original.

4) A copy of Shakespeare’s First Folio. It’s not as rare as the Honus Wagner card, but some might argue that it has slightly more cultural/historical significance.

5) A car. Staff report that the supply of autos on Bloomberg’s CARS function is flourishing (see below.) Staff recommends that the Federal Reserve accept the Kelley Blue Book valuation for autos used in the US, and the What Car? valuations for foreign-used autos in determining the amount of funding to be granted.
6) A note from the borrower’s mother. This tried-and-tested method works well in academia, and staff research suggests that it could easily be transferred to the Fed’s auction prgrams. Staff findings suggest that a similar methodology underpinned certain segments of the housing market in the current decade.

7) A Barry Bonds home run ball. Given that the Federal Reserve is attempting to “juice up” the financial system, what collateral could possibly be more appropriate?

8) The Tales of Beedle the Bard. This is one of the rarest and most sought-after works in the world. Our international contacts suggest that the People’s Bank of China would be particularly eager to accept it as collateral as part of a cross currency swap agreement.

9) Manure. While this is a bit unusual, staff feel that the bull market in soft commodities suggests that the value of fertilizing products is set to soar. Should manure prove unavailable, the Federal Reserve could consider accepting structured credit products, which share certain important characteristics with manure, instead.

10) Anything demoninated in euros. Man, have you seen EUR/USD?

Market Bounce is Another Opportunity for Bears

Published
by
Doug
on March 11, 2008
in Economics, Federal Reserve, Markets and Money
. 0 Comments

Today, the U.S. Federal Reserve and four other central banks teamed up to get hundreds of billions of dollars in fresh funds to the credit markets. The Fed allowed financial firms to use securities backed by home mortgages as collateral for these central bank loans. The markets were up sharply as a result: e.g., the Dow climbed 416.66 for its biggest gain in over 5 years.

A Bounce or a Rally?

So, will this bounce turn into a meaningful rally? I seriously doubt it. There is a still a lot of bad news out there; some of it lurking out in the open, temporarily forgotten, and I bet there is still a lot more bad news people are keeping to themselves, hoping they won’t have to make any announcements, betting they can ride this storm out, but this storm has yet to shake out all the bad apples from the tree. The arrogant and unprincipled will fall while the modest and prudent will rise to take their place in the end.

Bad News is Still Out There

Let me give you a sample of some of the bad news still out there. For starters, Standard & Poor’s and Moody’s Investors Service have not cut ratings on any of the AAA securities that track subprime bonds; this despite downgrading over 10,000 of the lesser-rated subprime-mortgage bonds. When one of these ratings agencies decides it has to cut a rating on of their AAAs, I think the market will react adversely, and I don’t think it will be much longer before this happens. The Fed is running out of ammunition to correct the markets and I don’t think it can keep dropping the money bombs ad infinitum.

Also, all the highly-leveraged hedge funds are reeling from this credit crunch, some unable to meet margin calls, as lenders are asking for more collateral and Bloomberg is reporting that the Fed has lost control of inflation when you look at the negative yields for the TIPS. I could probably go on, but I just don’t have the time.

With all this in mind, I think the traders and financial institutions were very grateful for this slight reprieve from all their troubles, but I feel that this will be a small bounce, leading to yet another great opportunity for going short.

An Interesting Theory

One last thing I want to mention is Market Ticker’s analysis of what he thinks really happened today. Here is a large excerpt from his post:

We were almost certainly on the verge of the collapse of one or more of the primary dealers AND international banks FOR THE SECOND TIME IN JUST A FEW DAYS!

Remember, The Fed just took an “extraordinary” action in expanding the TAF!

Their only defense the primary dealers had to being forced to buy back those treasuries at a huge loss is to borrow even more of them from The Fed.

BUT THEY WERE OUT OF COLLATERAL TO POST OTHER THAN THESE MORTGAGE AND OTHER “AAA” BONDS!

What’s worse, this short squeeze was being fed by people who did NOT want agency paper at any price; they were generating it by dumping the agencies and buying Ts. They have figured out that its contaminated (see below) and are freaking out about the potential for serious shortfalls or outright defaults.

Remember - “AAA” means “as safe as the US Government.”

Except that lately, we’ve learned that its not - that the claim is a lie.

So The Fed decides that they’re going to put in place a “swap” and let the primaries exchange Treasuries (of which they have several hundred billion) for “Agency and other AAA” paper - mortgages. The intent is to “pair” the two, thereby halting the spread widening and thus stopping the short squeeze.

The action today was nothing more or less than an attempt to stabilize Agency spreads which were blowing wide in a historic short squeeze that was threatening to collapse major financial institutions!

Yet if you listen to CNBS, including Fast Money, you hear these guys saying that “The Fed Injected 200 billion in money.”

NO THEY DID NOT! IN FACT, THEY EXPLICITLY INJECTED EXACTLY ZERO DOLLARS INTO THE SYSTEM; A SWAP OF ONE SECURITY FOR ANOTHER OF IDENTICAL SIZE AND FACE IS A BIG FAT NET ZERO IN TERMS OF BALANCE SHEET AND MONEY SUPPLY IMPACT.

I find this analysis simply amazing. It is something you would never see reported by the mainstream media. This to me seems like an extremely plausible explanation for today’s events. And even if this analysis is wrong, I still just wanted to highlight it as a shining example of the great thinking powers some people possess.

A Letter Regarding the Current Financial Crisis

Published
by
Doug
on March 8, 2008
in Banks, Economy, Federal Reserve, Government, Markets and Recession
. 1 Comment

Karl Denninger of Market Ticker has written an extremely cogent letter that describes the financial crisis facing this nation. He describes how we got to where we are, the immediate problems this nation faces, and the steps the government should take to correct or ameliorate the situation. Here are just a couple changes that Karl says the government must implement:

  • All securities and instruments traded and held for investment by regulated financial entities must have a CUSIP assigned and be traded on a public exchange or their value must be established by independent appraisal (in the case of a house or other real property.)
  • Margin requirements must be enforced against all market participants.
  • All off-balance sheet vehicles must be banned and existing ones immediately brought back onto the balance sheet of the firm involved and disclosed in full
  • We must either get rid of the NRSRO label for ratings agencies, allowing free and open competition, or we must hold those certified agencies to their ratings.

(There is more to this list than these four items; plus, Karl goes into much more detail, so please read the letter in full.)

This might be hard medicine to swallow, but I fear that Karl may be correct when he says that the consequences of not taking his outlined steps will be much worse than causing some institutions to fail immediately.