Market Falters: RTC 2.0 Not Working

Well, now we know the market's reaction to The Plan to Save the World, aka RTC II. 

Consider the following:

When I last checked late Monday, the TED spread - the difference between three month LIBOR and the three month T-bill - was 2.38%, up from Friday's close of 2.31%.  That is lower than the 3.00% registered on Wednesday and 3.18% on Thursday, but only those two days saw higher rates than Monday.  The TED spread was a more normal 0.45% three months ago.  One would think that if the inter-bank market was confident that RTC II would solve the enormous problems we face, the TED spread would have plummeted today.  It did not.  Instead, it rose.  Maybe the TED spread will fall tomorrow or next week, but so far, it is demonstrating a discernible lack of confidence in RTC II.

The Fed funds rate was 0.125% last I checked Monday afternoon.  Frankly, I do not know why.  However, given the Fed is targeting 2%, I cannot in any way interpret this as a normal market.

W&T Offshore, Inc. (WTI) was up an astonishing $25 at one point Monday to $130 per barrel, before settling at $120 last I checked.  Yes, some of that was a technical squeeze given that we were rolling over contracts, but such action is unprecedented and also not evidence of a normal market.

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The dollar, as represented by the dollar index, fell the most it has fallen since May 1995.

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Gold traded above $900 after trading as low as $825 on Friday.

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Stocks wiped out all of Friday's gains and more.  This is similar to the action after the GSEs were nationalized.  About the only positive thing that can be said about stocks Monday was that volume on the NYSE composite was a "mere" 5.1 billion shares, roughly half the volume on Thursday and Friday.

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The bank index, the BKX, fell 10.3%.  Since this plan is supposed to bail out the banks, one might think the response would not have been a violent sell-off.

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Perhaps Monday was a knee-jerk sell-the-news reaction and the market will move higher in the not too distant future.  However, for today, the reaction was unreservedly bad.

Comments

[axelrod608:]

r

2008 Sep 23 08:12 AM

[dassaultdriver:]

need to fire your proofreader. Article included comment that:
"W&T Offshore, Inc. (WTI) was up an astonishing $25 at one point Monday to $130 per barrel, before settling at $120 last I checked."
Crude was up $25 at one point, not WTI.
DD

2008 Sep 23 08:33 AM

[axelrod608:]

My suspicion is that this tells us more bout these institutions' balance sheets than they want us to know. Based on the amount of derivatives in world markets - 1,000 trillion dollars - and the likihood they are concentrated in the American market, the probable reason for banks to still be reluctant to grant loans to others is that they either know or suspect the others have far more bad paper under their kimonos than they care to admit or want others to know. .

What Paulson is proposing is a blind bailout - first we shovel a ton of money into these institutions, then they show us what they're hiding in their level 3 portfolio. If Paulson were still running Sachs and another bank came to Sachs wanting to be bailed out, would he agree to give the other bank a ton of money on these terms ? No way.

Granted, the Federal government hasn't made a single decision based on sound business principles in a very long time, but isn't it about time to start ?

As for Paulson's "for my eyes only" pitch, if my government wants to dump a few trillion dollars into some poorly run, failing businesses, I want to know who's getting how much and what they are doing with it. 700B is just the beginning. They created this mess with a lack of transparency. Public policy should demand a thorough examination of all assets and liabilities, not just the ones they are willing to show us.

The more reluctant they are, the more it makes one wonder if these firms have really flat out illegal transactions buried in their unreported assets. Who says they have no "Enron" accounts ?

Finally, good public policy would also require different management. It makes no sense whatsoever to pour the greatest amount of public money in history into failing businesses and leave the management in place that created the situation. Let them flip burgers, not CDO's


l

2008 Sep 23 08:45 AM

[anarchist:]

axelrod608, an insightful post

2008 Sep 26 12:07 AM