It appears that the Federal Reserve’s entry into the commercial market is not encouraging private actors to reenter the market.
When no one wants to lend commercial paper, and the US government steps in and lends at below market rates, it tends to drives the private players out.
*Who Could A Knowed
Because he takes some complex issues and makes them eqasily understood.
Case in point, credit default swaps, which he likens to highly profitable unregulated flood insurance companies during a decade of drought.
Go read.
Because the report that, “Customers pull their money out of ailing UBS,” from Swissinfo sounds like this might be going on.
Calculated Risk: Fannie Mortgage Bond Spreads Decline
Well, we have payroll services firm ADP saying that job cuts in October totaled 157,000, above the 100,000 predicted, with September numbers up too, and Challenger, Gray & Christmas, the grim reapers of the corporate world reporting that more firms are planning to cut jobs.
Meanwhile the ISM’s non-manufacturing index, an index of the service economy, fell to 44.4 the worst number recorded since the index was created in 1997.
It’s not just the US either. U.K. factory output is dropping like a stone.
In the credit crunch, while gross interest are improving, the spreads between these interest rates and treasury notes remain high.
For example, the LIBOR rate has fallen to 2.51% from 4.82% on 10/10, but the spread remains 151 basis points (1.51%) over the Fed’s target rate
Prior to the credit crunch it averaged 22 basis points.
This may be mortgage applications are down, banks are still skittish, and costs are higher.
This is a normal response by banks when you consider that you have things like the bath that Glitnir swap sellers took. They look to being left with 3¢ on the dollar.
The swaps in question are a sort of bond insurance, so it’s no surprise that the two largest, monoliners Ambac and MBIA just posted big losses.
It appears that there are expectations of more rate cuts, as the dollar is down, though paradoxically, so is crude oil….Normally, they tend to move in opposite directions.
Whiskey Tango Foxtrot????
In any case, this is what an an acquantance of Mr. Mortgage related to him that he, “Bought 27 second mortgages with a face value of $2,153,400 for $2400.”
It’s part of a whole package, but this is remarkably grim, though the friend in question notes that it was a, “very small pool and not typical,” (scroll down in the comments) but still…..
Because as opposed to simply pleading with banks to take bailout money and eventually lend to real people, Sarkosy ally, and French Prime Minister Francois Fillon has said that they will seize the banks and fire their management if they don’t stop hoarding cash.
I’m not sure if seizing the banks is the right course, but threatening, as opposed to cajoling, the banks is.
Well, it looks like the credit crunch is thawing a bit, as the dollar LIBOR and the TED Spread have both dropped over the past few days.
Of course, banks are still not lending to anyone other than each other, though.
Yesterday, I mentioned the ISM’s manufacturing index falling. Well today, it’s the full report from the Commerce Department, with factory orders falling 2.5%, seasonally adjusted, which was more than 3 times the predicted number.
In the mean time, the dollar fell the most against the euro since 1999, 2.7%, which is kind of odd, since the stock market was up strongly, in what I call the “No More Bush Rally”.
I think that this is all election arbitrage, kind of a financial rain dance, as is today’s bump in oil prices.
In any case, I would expect that the ECB will be cutting rates soon, which should further buttress the dollar, as their producer price inflation numbers came in below expectations.
Still, we are not out of the woods, as evidenced by soaring bankruptcies in October.
The Federal Reserve has hired Michael Alix with the responsibility of assessing the risk and soundness of institutions.
He was, “The chief risk officer of Bear Stearns from 2006 until 2008.”
I have made comments now and again….OK, nearly continuously….That one of the problems with Wall Street is that there is no accountability for the big players.
This like making Typhoid Mary chief cook on the Titanic.
There is an entire generation of mostly Ivy League trained investment banking types who should be banned from the securities business for life plus 800 years.
Well, the idea the economies have decoupled is once more giving the lie by the India central bank cutting its interest rate by 50 basis points, the Australia central bank cut its benchmark interest rate by 75 basis points, and South Korea announcing an $11 billion stimulus package.
Of course, those are just the official actions, on the level of the financial markets, we have a number of German property funds freezing redemptions, and because they are heavily into UK real estate, “German funds have been among the most active in snapping up City of London and West End properties this year,” this does not bode well for either the UK or German financial systems.
When we finally get to the United states, we have Institute for Supply Management’s its manufacturing index falling to 38.9 in from 43.5 last month, the lowest reading since . It was the lowest reading since September 1982.
Additionally, construction spending in September fell 0.3%, which is better than the 0.8% expected, but Lehman’s collapse probably came late enough not to move that number much.
The October construction number will be positively grim, because it runs on credit, which is still nearly non-existent.
Speaking of credit, it appears that the LIBOR and other interest rates are down, indicating some loosening of credit. (see also here)
On the other hand it appears that while banks are slightly less reticent to lend to each other, they are still tightening lending to everyone else, according to a Fed survey of lending practices.
I don’t blame them, after all Iceland Bank Swaps are losing 97¢ on the dollar.
All this news has pushed oil prices lower, which is no surprise.
First, Hank Paulson pays twice market value for bank shares in the bailout package, and now we find out that the recipients of the Tresury dole will be spending lavishly on dividends
The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury’s investment over the initial three-year term.
Paulson knows this, and he has the power to stop this, and he is not.
I we can’t find a law he broke explicitly, declare him an enemy combatant, and send him to Gitmo, because he’s done more damage to the US in the past 8 weeks than Osama bin Laden has done in his entire life.
Specifically, the Royal Bank of Scotland, which just received a £20 billion bailout from the British government, but still intends to pay bonuses to the people who screwed up the bank in the first place:
The bank has set aside £1.79bn to cover “staff costs” – including discretionary bonuses – at its investment banking division for the first six months of the year alone. The same division caused a £5.9bn writedown that wiped out the bank’s profits for the same period.
The last ‘graph in the article says it all:
Banking sources privately acknowledge that the sight of these bonus accruals may provoke anger. They concede the industry’s pay and bonus regime is under unprecedented strain as it fails to reflect profitability, asset writedowns or share price declines.
The idea that you give people bonuses who lose you money is not, “Unprecedented Strain”, it is insanity.
Well, The Daily Telegraph tells a little tale, titled, “Porsche and VW share row: how Germany got revenge on the hedge fund locusts,” and it is a happy, happy story.
You see the evil trolls, believing that the general downturn in the world economy would adversely impact profit numbers at Volkswagen, had shorted the stock heavily, to the tune of 12% of all shares in the company, but the princess, Porsche had quietly arranged to increase its equity stake in VW from 42.6% to 74.1%.
The German state of Lower Saxony owned 20.1% of the outstanding shares.
Well, 74.1%+20.1% gives you 94.2% of all shares outstanding, and so the short selling trolls had to fill their 12% from the remaining 5.8%, and fell upon each other, bidding VW shares up to unforeseen heights, from €210 to well over €1000, causing billions of dollars in losses for the trolls, and Porsche made a paper profit (they will never realize this money, because they aren’t selling) of £100 billion.
The trolls rent their garments and cried to the king (Bafin, Germany’s financial regulator), but the king would have none of it:
So should we lose any sleep over the fact that hedge funds have lost their shirts, or should we all indulge in a spot of schadenfreude? The answer, as we should know after months of financial turmoil, is that we are all, ultimately, likely to be losers.
The princess, Porsche, manages to trick the trolls, hedge funds, and lives happily ever after.
Joe Nocera of the New York Times had a source get him access to a a JPMorgan Chase conference call, and what he heard was disappointing, though not surprising.
It appears that the bank has absolutely no intention to expand lending, even after receiving $25 billion from the Treasury.
Instead, they see their path forward as being more merger and acquisition action:
In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.
(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)
“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”
Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.
It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.
(emphasis mine)
So Paulson lied to Congress, and he’s not leaning on banks to make loans again.
When Mr. Nocera says, “I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods,” doesn’t know the half of it.
Freedom Bank of Bradenton, FL. Fifth Third has taken over their customers.
So now, we find that Wall Street has lines it won’t cross, specifically, they consider obscene bonuses to be a matter of principle:
Oct. 30 (Bloomberg) — Wall Street’s chief executives will hunker down and pay bonuses this year in the face of the worst financial crisis since the Great Depression, a taxpayer bailout and mounting political outcry, industry veterans say.
…
How many yachts to you need to water ski behind?
Seriously these folks are well on their way to killing more Americans and harming the country in to a degree that Osama bin Laden could only dream of.
Let’s just declare them economic terrorists, and freeze their assets.
I guess the news from the central banks is as good a place to start as any.
It looks like the the Federal Reserve’s initiative to buy commercial paper is bearing fruit, to the tune of $145.7 billion between October 27 and October 31….Annualize it out, it’s about 7.6 trillion a year.
I also must note that the Bank of Japan cut rates for the first time in 7 years.
It also looks like the ECB will be cutting rates at their next meeting, because Euro Zone inflation numbers were low.
I’m not sure that it’s going to help when consumer spending is falling, by 0.3% in September.
Remember, even though it seems a very long time ago, the Lehman collapse was on September 15, halfway through the month, so the October will likely be worse.
In real estate, one of the leading indicators, the Architecture Billings Index, which presages construction by 9-12 months just dropped off a cliff.
This ain’t no ‘V’ shaped recession.
In any case, the oncoming recession has significantly lowered commodities prices in October, even oil, which posted a record drop, though it was up yesterday to $67.81/bbl.
GMAC is looking at becoming a bank and restructuring extensively.
Finally some historical chart pr0n, graphs or recent market crashes:
VERY scary image courtesy of Calculated Risk.
Click image for full size graphic.
More on Hank Paulson’s bailing out my peeps program:
The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson’s transaction, the taxpayers were taken for a ride–a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public’s money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.
Just lovely.
Can we throw him in jail, hopefully sooner rather than later.
Independent analysts are smelling something fishy:
American International Group is rapidly running through $123 billion in emergency lending provided by the U.S. Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.
Do I have to quote Inspector Renault from Casablanca?
They’ve already blown through $90 billion of their $123 billion loan, and there simply are not enough posh retreats in the world to generate a burn rate that fast.
It’s less than reassuring that they still haven’t said where that money has gone.
There are stories of conflicts within the insurance giant, and people who gave warnings being shunted to the side.
Expect more of this from the Hank Paulson, “Bail out my Buddies” plan.
First news is a question, can we please admit that we are in a recession? Please?
The economy contracted at an 0.3% annual rate last quarter, with a a 6.4% rate decline on purchases of non-durable goods, and a 3.1% rate decline on consumer spending.
This is not just a “recession”. This is a big MoFo.
There are predictions of a rate approaching 5% in the 4th quarter.
In any case, credit remains tight, though there appears to be some loosening, see here and here.
We are also seeing the first growth in commercial paper since the collapse of Lehman.
However, we also just saw 30 year mortgage rates spiked by 40 basis points, even though the Fed cut rates.
This ain’t over, and the Japanese have released details on a ¥ 5 trillion stimulus package, and the Germans have done so with a €30 billion stimulus package.
Still, the sounds of an oncoming train continue to drive oil prices down.