What Happened to the Fed's $1.816 Trillion Lifeline?

The figure in the title of this piece is the amount of money committed by the Federal Reserve Bank since December 17, 2007 until September 23, 2008 in an effort to boost confidence in the financial system. Since December 17, 2007, we've had the failure of Bear Stearns (BSC), Fannie Mae (FNM), Freddie Mac (FRE), IndyMac Bank (IMB), WaMu (WM), Wachovia (WB), Merrill Lynch (MER), and various other financial institutions, which would have failed, but were sheltered in some way or another.

The above figure of $1.816 trillion is the amount that the Federal Reserve has committed to no avail. This does not include the many decreases in the discount rate and Fed Funds rates. These rates have fallen as dramatically as the Fed's tab has increased. Sure, not all of the money went out at the same time and not all of it was evaporated into nothingness. However, $1.816 trillion is the amount that has been holding the hands of weak or hobbling financial companies. Did it stop the bleeding? Of course not. Which is the reason why the Treasury felt the need to step in, bail out AIG (AIG), and ask for $700 billion as the first of many more requests for funds to “save” the financial markets?

As a market historian and participant, I know that no amount of action like restrictions on short selling or throwing money at the problem will solve anything. Notice that the ban on short selling didn't stop WaMu and Wachovia from falling 95% after the ban was put in place. We cannot seek solace in the fact that our Congress feels compelled to commit an additional amount of $700 billion to the problem. Not only that, giving the Treasury Secretary immunity from criminal charges while handling the nation's purse strings seems troubling, to say the least.

The markets cannot correct themselves until the bailout efforts stop and the market resolves the problems that we're experiencing. We as investors can only hope that we're better than Japan in resolving the exact same problem that they experienced over the last two decades. If we're not equal to the task at hand then we might be fated to experience a similar 18 year recession (depression) which included Japan's stock market falling from the 38,000 level in 1989 to the current level of 11,000.

Disclosure: None

Comments

[American]

"...Notice that the ban on short selling didn't stop WaMu and Wachovia from falling 95% after the ban was put in place...."

Is this right..naked Short sell example..

My brother has a share of abc

I ask him if I can sell it short and I'll get it off him when I have to deliver..

My other ten brothers ask him if they can also short sell the share..

Now we're eleven naked shorts selling ten shares that do not exist..

When the share drops, we purchase (real shares) and we deliver the ten share that did not exist..

And as long as we stay short with the share and we do not deliver, there are all these invisible non existent short shares (phantom shares) out there keeping the price down..

for no apparent reason but to bring prices down with no relation what so ever to the fundamentals of the company...

Close?

2008 Oct 02 09:08 AM

[turkeyeyes]

Who do you think you're fooling?

This is totally disingenuous:

"...Notice that the ban on short selling didn't stop WaMu and Wachovia from falling 95% after the ban was put in place...."

Don't insult our intelligence. It's obvious the shorts destroyed, perhaps irreparably, confidence in the market.

By the time the ban went in effect, the blood had been drained from these entities.

The SEC needs a robust uptick rule that can't be thwarted by computer trading, and it needs to banish shorts, or at least curtail them severely.

2008 Oct 02 09:23 AM

[turkeyeyes]

Notice how the short-sympathizers always call everyone ELSE criminals?

2008 Oct 02 09:26 AM

[Ishortyou]

Wachovia got rid off the prior toxic risky wasted bank subsidiaries and kept the good ones. Now it can start from scratch to build a new banking subsidiary with safe practice together with its remaining good outstanding subsidiaries. The current subsidiaries of Wachovia make it look like “Merrill Lynch without the toxic risky waste”, good job from management it separated the good bank from the bad bank overnight, plus its CEO Bob Steel is one of the top rated mutual fund managers. Wachovia will keep the valuable human resources and the talent that have expirience in the banking business saving them for the new banking subsidiary. Buying the municipal bonds or the auction rate securities will give the inflow of cash as long as its hold even to maturity. Some investors are taking money away from Hedge Funds going wild and putting that money into accounts manage by people that know what they are doing, Bob Steel is one of those people that know what they are doing, dont be surprise some of this money will go to Wachovia subsidiaries. Earnings will be adjusted accordingly, like simple arithmetics they will manage its expenses vs its earnings to come ahead in capital and start piling up cash (saving cash a hard job for most of us that live on debt), this new cash will give them the jump start of a new banking subsidiary without even thinking about to sell its remaining subsidiaries.Forgot to mention that Wachovia owns a hudge Insurance subsidiary which is making money and has sound book of business. Lehman debt is bonds most of them senior, as bankrupt as Lehman is those bonds get paid. ARS are Municipal Bonds as bonds they get paid, hold into maturity they get paid in principal, those ARS are cash flow. Preferred dividends will get paid accordingly because the holding company does not own the banking subsidiaries anymore so modification are going to be made. Getting rid off the toxic waste risky bank related subsidiaries is a good strategy and converting the remaining broker one to a new bank subsidiary with clean sheets is a good one too.

2008 Oct 02 09:45 AM

[zorkfin]

The strident comments of novices like turkey reduce the value of this site.

2008 Oct 02 12:04 PM

[jasonciment]

it's more about regulatory rape than anything else. Sure the companies were greedy but the government created the carrot which was dangled before them. the mark to market rules should be modified. For credit purposes the assets should be marked down to market but not for GAAP purposes. this way, net income reflects a more accurate reality and in terms of borrowing money, the lenders would get an accurate read on a company's "net worth" at the time the loan is being made. Companies like AIG would not have gone under if they were able to just hold their assets. But now bec of mark to market RESERVE requirements, the government took them over. And now we'll see the mark to market rules relaxed just weeks after wiping out 80% of shareholder stakes. How fair is that. naked short selling comes in a close 3rd to killing market value. i love our government but sometimes a few individuals can steer it in a direction the populace never intended.

2008 Oct 02 12:07 PM

[ILongyou]

This IShortyou 'investor' seems to be hurting much from the Wachovia stock collapse.... I have seen this exact same post cut-pasted on dozens of websites, forums and discussion boards. Its almost like he trying to spam his way back to profitability :) Its really funny... the desperation and denial that the game is almost over... and its not him that won. Pseudo-psychoanalysis: He probably also finds it VERY difficult to deal with losing in real life... and probably looks for everyone else to blame for his own failure.. hehehe

2008 Oct 02 03:36 PM

[madasiwannabe]

The damage was already done to both of these guys months ago. The shorts were already bought into both WB and WM long before the ban. What finally brought them down was long selling due to lack of confidence and fear.

It wasn't a secret that both of these guys were bloated with loan portfolio's in the two hardest hit areas, Florida and California. Once WM fell, it was only a matter of time before WB followed.

2008 Oct 02 05:18 PM