America's Reign of Terror 16 comments
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My money market source is still as distressed as he has been the last several times we have chatted. He said that the recent quarter end has not brought relief and the market has much bigger preoccupations than that. He notes the 8 percent decline in financial company commercial paper in the most recent Federal Reserve data as an indications of the strains present in the system. I hate to be redundant, but each time I speak to the fellow he notes that the dislocations are as severe as any ever faced by a critical financial market.
He offers an example and I cannot use the names. This morning, a AAA British bank borrowed overnight at 75 basis points. I think overnight Libor was 2.68 percent, so approximately 200 basis points through Libor.
Separately, another British bank, not so favorably viewed by the investing public, with a AA1/AA rating, was forced to borrow overnight at 3.25 percent. There is a slight difference in the ratings, but the spread between those borrowers indicates the extent of the credit crunch and the loss of confidence in the system
In a previous post, I mentioned the T+650 basis point pricing of 5 year American Express credit. That would generally be considered a solid, stable American company with a deep and lasting franchise.
Markets get overdone and revolutions end in excess. In my opinion, the fact that American Express can trade that wide is the financial equivalent of the Reign of Terror during the French Revolution. Trust has been destroyed and devalued and it will take a very long time for it to revive itself.
I worry about our political class. This morning, I cast aspersions on the market savvy of Harry Reid who spoke cavalierly about a nearly bankrupt insurance company. That displays a real lack of understanding of the consequences of loose lipped statements.
I would also note that John McCain demonstrated a similar lack of understanding of the situation during the debate last Friday. Twice during that debate he referred to the “fiscal crisis”. I gave him a pass the first time thinking that he misspoke. When he used the same phrasing the second time I was forced to conclude that he lacks an understanding of the complexity and nuances of the problem.
In the next debate, I would request that each candidate offer three names whom they consider potential candidates for Secretary of the Treasury in their new administration. That will be a crucial post in January and the person in that seat must understand the nuances of the markets.
I apologize for rambling.
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This article has 16 comments:
In contrast, Reid's comment was a maliciois attempt to CREATE more financial chaos, knowing that it helps the Obama campaign. This is not the first time the democrats have cheered this crisis, and it won't be the last. Until Nov 4th, that is.
cyclingscholar
When the new financial environment has changes to "the rules" such that the whims of unaccountable bureaucrats:
1) 'sell' Bear Stearns to JPM for pennies on the dollar with gov't guarantees as backup to the purchase
2) wipe out preferred shareholders of FNM & FRE
3) save bondholders of FNM & FRE
4) wipe out both shareholders and bondholders of WaMu
5) 'donates' billions of $ in WaMu assets to JPM for a $1.9 Billion "fee"
6) etc.
How is ANY sort of trust going to survive. Putting your money in the market anywhere exposes it to the risk of the government seizure du jour in the name of propping up the rotting system.
bobbarr2008.com/pr.../
Press Releases › BARR: No more government guarantees
October 2, 2008 10:39 am EST
Originially published at the Washington Times ...
Just one week ago, Treasury Secretary Henry Paulson was demanding that Congress grant him unprecedented, unreviewable authority to spend $700 billion or more to bail-out Wall Street. But in a major rebuke to the administration and to both the Republican and Democratic congressional leadership, the House voted down the 110-page plan that emerged from last weekend´s frenzied — if not unseemly — effort by Mr. Paulson to salvage a bailout deal.
The Dow dropped some 10 percentage points in reaction to the House vote and, while that was less than a third of the massive percentage drop it suffered in 1987, it shouldn´t surprise anyone that Wall Street was upset at being denied at least $700 billion of taxpayer´ s money to practice more of what got it into trouble in the first place — buying up over-valued mortgage-based securities. A majority of members of Congress correctly concluded that the leadership-backed bailout bill was, to put it mildly, bad and that the closed-door sessions that spawned it were deeply flawed as well.
Perhaps at long last, some basic understanding of economics is seeping into the Capitol. Dare we hope that some members now understand the fact that Congress can only redistribute, not eliminate, the pain of an economic downturn? At a minimum now, as a result of the House “no” vote, Congress has time to seriously consider alternative strategies and it needs to press its advantage.
The starting point should be private market adjustment. With the knowledge that an easy government bailout is no longer around the corner, the markets can get serious about working through the mountain of bad debt that imperils homeowners, banks and companies alike.
Unfortunately, artificial booms inev itably lead to painful busts, but these can be productively addressed. Today, this means a mix of bankruptcies, company workouts, and takeovers as we are seeing in the banking sector and outside investors buying large pieces of companies, such as Warren Buffett´s $5 billion investment in Goldman Sachs. This process will reward more responsible firms and encourage them to move early to correct past mistakes.
Many companies also will have to sell mortgage-backed securities. Obviously, companies holding over-valued mortgage-based securities (MBS) prefer to dump bad securities on the government than sell them in a down market. But there is a market even though asset values are uncertain. Merrill Lynch liquidated its MBSs in July.
Bailout advocates simultaneously tell us that these assets are “toxic” and are destroying firms, but which magically at the same time are possessed of value that will ultimately make money for the governmen t if it is allowed to buy them with ta xpayer funds. However, good business leaders know that private investors are better able than government officials to dig out that hidden value. Private buyers, too, could participate in reverse auctions and hire asset managers on their dime, not the taxpayer´s. This adjustment process should be carried out in the marketplace — not behind closed doors in Washington.
Both Congress and the administration should focus on cleaning up the mess, not making it potentially far worse. Federal and state authorities need to begin to aggressively prosecute fraud in private markets; fraud that has resulted in trillions of dollars of grossly and deliberately, if not criminally negligently, overvalued mortgage paper. The goal is not to create scapegoats, but to keep markets clean. At the same time, we need a thorough investigation of the misbehavior of public officials in spurring Fannie Mae and Freddie Mac, for instance, to engage in reckless lendin g. Many of the politicians leading the attack on Wall Street for its failures worked overtime to create the subprime lending debacle.
Congress should rein in the Federal Reserve System. Over the last decade the Fed has followed an easy money policy designed to spur economic growth. But this encouraged irresponsible lending and inflated property values. Increasing the money supply is a bit like mainlining heroin — it´s pleasant while you´re doing it, but it´s extremely painful when you finally stop. Yet as currently configured, the Fed is neither transparent nor accountable.
Congress must say never again with Fannie Mae and Freddie Mac, which lowered mortgage standards and pushed people into new or larger homes than they could afford. These government-sponsored enterprises must be privatized; there must be no more implicit or explicit public guarantees for mortgage lending.
Congress needs to repeal the Community Reinvestment Act. The CRA effectively forces ba nks to lend to poorer communities irres pective of the creditworthiness of borrowers. Many of the same legislators who demanded increased bank lending in the inner-city now criticize banks for making “predatory loans.” Agencies such as the Securities and Exchange Commission need to suspend the mark-to-market accounting standard and reconsider its application. The rule makes sense for trading assets, especially where values are well established; however, the standard has a perverse impact when applied to long-term income-producing assets in a volatile market. A single major, bad sale can force a major corporate write-down, artificially crippling an otherwise creditworthy firm.
We need better, more streamlined regulation, not more regulation. There are a multitude of government financial regulators, leaving us with expensive controls, but without the transparency most needed by customers and investors.
Finally, we must control federal spending. Where is the $700 billi on or more for a bailout supposed to com e from, in a government already drowning in deficit spending and a spiraling national debt? Who will bail-out the federal government when investors at home and abroad refuse to buy its paper Instead of attempting to ram through a new version of this bad bill, the president and congressional leaders should announce that a government bailout is off the table. Companies and institutions must focus on systematically working through their problems, in a transparent, focused effort, utilizing the tools in the government´s already-massive quiver of tools.
We must learn from today´s economic disaster lest, to paraphrase George Santayana, we repeat this painful experience in the years ahead.
Bob Barr, a former Republican congressman from Georgia, is the official candidate for president of the Libertarian Party.
That is exactly opposite of what has to, and what will, happen! We are all overleveraged...not just the banks. Even if banks were handed clean balance sheets, consumers are over their heads in debt and increasingly out of jobs -- we won't take on more debt. And we are 2/3 of the GDP.
The real answer is not "let's get credit-based business going again", but rather...let's get people and businesses back to a point where they have cash on hand to spend that is not borrowed. That will only happen with massive tax cuts...which means massive government spending cuts, not increases ala the pork-laden bailout bill.
I further question the competence of Paulson, the White House, Congress, and Wall Street when noone seems to be able to see that if businesses need credit to fund day-to-day operations, they are not businesses that are solvent to begin with! We need to let failure happen and do a real reset for the taxpayers with *much* lower taxes; following that, let foreclosures happen to those who made bad decisions and overborrowed; and let businesses that are awash in debt fail.
More government spending is only throwing gasoline on the fire.
This country needs to let insolvent businesses fail and insolvent homeowners foreclose. We need to raise, not lower, interest rates that people will actually save and potentially earn a real return on their savings. This will enable banks to recapitalize under a save-and-produce model instead of borrow-and-spend.
We're going to have asset deflation, that's for sure. The feds can't stop it.....decades of deficit spending and trade deficits let that genie out of the bottle long ago.
The best we can hope for is that we don't have inflation simultaneously.
We need MASSIVE reductions in government and in government spending. McCain MIGHT cut spending. Obama/Biden won't. The sheeple are afraid and want a safety net, not spending cuts, so I'm assuming we'll get Obama/Biden.
Have you actually LOOKED at the Federal budget? A large fraction of it is NON-discretionary-- stuff like Social Security and Defense. The biggest source of waste is the 10-12 billion we blow in Iraq per month which the Iraqis themselves could be paying for, instead of US tax payers.
Getting us out of the Bush recession will not be easy, but it demands better solutions than "cut Government spending". In fact, it seems some kind of "rescue package" is needed-- perhaps not the exact one we're getting.
Barack Obama taught Constitutional law for ten years at the University of Chicago.
I don't know about you but I thought I heard McCain say America's financial problems are caused a bad physical policy, not bad fiscal policy.
Both McCain and Palin also think the Nucular Power is a good thing and that "I" ran and "I" raq are countries in the Middle East.
Hup two, three, four, ....
www.youtube.com/watch?...
Cafferty was too polite to that nitwit... she's a clueless menace