Ex15:26

Did the Fed's Move Prevent a Stock Market Panic?

Russ, - here's the problem... you mentioned that "Occasional market intervention is far better than the panic"...
Here's an update - The Fed has intervened at least one time a month creating new facilities to provide liquidity and clean up rotten balance sheets. As we all know, it has been way more than once a month, which hardly indicates occasional interference.
While my posts sound like I want the world to melt down and punish all that is far from the truth. My point here is simply that yes, the Fed potentially avoided an all out slaughter Friday, but the reality is that it set us up for a slow blood-letting for what I think will be the next several months.
The Fed's action did this by prolonging the big wash out we need.

The Fed’s action does nothing about the real cause of the hedge funds and Bear’s blow up. The continued acceleration of late mortgage payments and foreclosures will be the fuel for much more of the collateral devaluation of the “structured weapons of mass destruction”. As I see it, the move by the Fed simply moves the obligations of BS to JPM and you and me. What part of the Fed’s move today did anything to stop the melt down in these deals? More foreclosures will simply cause further write downs on these and other banks will slip down the same slope as Bear. I’m sure we’ll bail them out too.

Just look at the Canadian ABCP program. Government stepped in and now it looks like a complete disaster rather than freezing it and selling it off at a much higher recovery rate. Now I suspect that investors will receive 10 or 15 cents on the dollar (Canadian dollar that is). Government action while well meaning is distorting what an efficient market will do ---- reward the winners and take the losers out to the woodshed and beat them up.

This is not over and when the Fed continues to put its head in the sand and assume that printing money and providing liquidity will solve all the problems in our world, we continue down an inflationary slippery slope that will punish us all. Watch out for higher oil, food, and metals costs.

What's interesting to me is that C has been very quiet and they were the one that I've been watching most.

Did the Fed's Move Prevent a Stock Market Panic?

I guess I really like the number 5.

Did the Fed's Move Prevent a Stock Market Panic?

Felix,

I have to disagree with your assessment. While I appreciate the sentiment regarding shareholders of Bear, nice employees that I have known, and your belief that market participants (the average retail investor) are taking i.b risk by being in the game, I firmly believe that the Fed's move will have the following results;

1) The Fed's move gave the US taxpayer more exposure to the i.b community than we already had. As you infer, we had exposure by being in the market, now we're the recourse backer of JPM's benevolent move to buttress BSC.

2) The Fed's move simply put us on the hook for BSC's part - (in a sense nationalized them) and then put the rest of the market on watch signaling that things must really be bad. Now we have a weekend to have investors freak out more and watch the blood bath on Monday.

3) I believe the move gave shorts more of an opportunity to get shorter and set up when the markets took off early.

4) The Fed sets up a terrible precedent that any bank that gets in trouble will be worthy of saving. (large bank, not community bank)

5) Each move the Fed has made will and has made things worse later. Each move to pump liquidity in the system drives the dollar lower, oil higher and commodities higher, will make inflation that much nastier. More rate cuts won't make banks lend when Bear's example shows us that they will only enhance their balance sheet. Tuesday's rate cut will only continue this troubling trend.

5) 10x, 20x, or 30x leverage sounds neat, but as we've seen will get you into trouble when things don't go perfectly. About the only thing the Fed can and should do is reign in margin requirements. The bottom line is that the Bear is now the US Taxpayers mess and we'll still have to endure the market meltdown as we test lows. Unfortunately, the Fed is good intentioned (like we all are), but the Fed essentially added to our market exposure by giving me 1:150,000,000 of their bailout. (assuming their are 150 million taxpayers).