Prices of Treasury coupon securities tumbled in response to the US government bailout of Bank of America (BAC). The United States Government will inject $ 20 billion into the company and will provide various guarantees for $118 billion of assets which BOA acquired in the deal with Merrill Lynch (MER).When I write this morning's piece I generally peruse Bloomberg news stories on the global economy and relate the salient facts in my posting. Reading through the overnight reports this morning is a surreal exercise. There is an Alice i Wonderland quality to the endeavor.
Here is a slice of the news. Citibank (C) lost $ 8.29 billion in Q4 and as previously reported will carve itself up into digestible morsels. Bank of America posted a $1.9 billion loss in Q4 and will require a government manufactured crutch to fund its takeover of Merrill Lynch. The $20 billion US government investment in Citibank is provided via the TARP program.
Bloomberg reports that Chrysler will seek slightly more than $ 1 billion to fund loans to consumers.
Ireland has nationalized the Anglo Irish Bank.
Bloomberg reports that spreads on bonds of Spain, Portugal Greece and Italy have widened versus German bonds and that widening calls into question some of the bedrock assumptions which underpin the European financial system as presently constituted.
And I failed to mention that the incoming Administration and its Congressional acolytes are closer to agreement on a plan which would provide the economy with a package of $825 billion of new spending and new tax cuts. One Democratic apparatchik suggested that tiny sum might prove to be inadequate and that a second round might be necessary.
From the outset, I have always been a supporter of government intervention as a means to prevent this unique crisis from taking the system down. I have always believed that the consequences of inaction were greater than the cost of government involvement. I question that assumption now.
The bailouts began with the deal in which JPMorgan took control of Bear Stearns with government assistance and continues to this day with the government intervention in the Bank of America union with Merrill Lynch.
The Federal government will now be an integral part of the financial system for a very long time and will influence decision making and risk taking in that sector during the time in which taxpayers are a partner in those businesses.
I now think that we would have been better off with some truly cathartic event which would have curbed the animal spirits of traders but which would have established a basis for a market prescribed recovery. Succinctly stated, the government is not in the business of taking risk and I would argue is in the business of risk avoidance.
In retrospect, the commonweal would have been better served had nature taken its course and allowed for capitalism to travel its natural course. I fear that this new course has placed on us a path to a very slow recovery and one in which innovation and risk taking will be viewed through the narrow and ill begotten prism of some bureaucrat.
In overnight trading yields on benchmark Treasury securities have risen sharply as there has been some sudden epiphany that the US government will soon become a profligate and prodigious purveyor of not so pristine paper to fund its takeover and stimulus activities.
When I last checked the yield on the 2 year note had climbed 5 basis points to 0.76 percent. The yield on the 3 year note had jumped 7 basis points to 1.08 percent. The benchmark 5 year note took a drubbing as its yield increased 11 basis points to 1.47 percent. The yield on the 10 year note jumped 11 basis points to 2.32 percent and the yield on the Long Bond edged higher by 7 basis points to 2.94 percent.
Enough for now. More later.
