$700B Bailout Plan Discussions...

Among all this yelling about the US crisis, it is still the silence from Greenspan that bothers me.

A follow-up to points raised by Suntrader's post related to the FED being insolvent;

On The Level Of Care And Thought That Went Into The Paulson Plan;

"In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

The Real Reason for the Rush?

One of the questions that has come up in connection with this week's scramble to pass a $700 billion bailout package for the beleaguered financial sector is: Why the rush? Why not take some time to fully explore the risks, discuss the financial, economic and political ramifications, and figure out ways to minimize the cost to taxpayers?
Although those in charge have attributed their sense of urgency to fears of an imminent seize-up in financial markets, it is conceivable that policymakers could have applied a few more of the band-aids they have been using prior to now so that the issues and prospective outcomes could be examined more fully in the harsh light of day.
Unless, of course, there is more to it than what our leaders are admitting to. In "Brad Setser: Extraordinary Times," the London Banker blog suggests the pressure for a rapid-fire solution stems from the precarious financial position of the rescuer-in-chief: the Federal Reserve.

Brad Setser has a fascinating insight to offer in his newest post, Extraordinary Times:

In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:
Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);
Increased its “other assets” by about $80b (from $98.67b to $183.89b);
Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);
That works out to the provision of something like $370b of credit to the financial system in a two week period. And that is just what I saw on a cursory glance.
The most that the IMF ever lent out to cash strapped emerging economies in a year?
$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).
The most the IMF ever lend out over two years?
$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)
This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lent out these kinds of sums over such a short-period.

My response:
Excellent and timely, Brad. I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral.
The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.
The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.- Michael Panzner, Sept 26/08.



A story about the costs of the $700B can be found at the link below for anyone interested, but to quickly summarize the argument being made is that the recent IMF Study contradicts the Paulson bailout bill and premise.



http://www.nakedcapitalism.com/



Also the The New York Times' Dealbook discusses a Merrill Lynch write-up of the IMF report:

A look at Japan’s financial crisis in the 1990s is instructive, the Merrill report said. Like the current American crisis, Japan’s banking turmoil included the rescue and disposal of home-loan companies and the bankruptcy of a big securities firm — although the crisis in the United States seems to be unfolding much faster than Japan’s, possibly accelerated by the magic of securitization.

Judging from previous crises, Merrill’s economists suggest that the United States should move quickly to declare certain banks “survivors” and put the others out of their misery.

Doing so, they said, would end the “who’s next?” game that has gummed up the credit markets:

The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.

More on the subject of why the rush?...........http://www.nakedcapitalism.com/2008/...pens-ugly.html


Friday, September 26, 2008

I have to turn in, but the early morning sightings, as expected, are not at all pretty. What is particularly troubling is that central bank interventions may have become unproductive. Banks have quit lending to each other because they know they can go to their friendly monetary authority instead.

We had warned of the difficult of weaning financial firms off of facilities like the Term Auction Facility, but we never envisaged a problem of this scale. This is troublingly like 1930, when money supply in the US fell, turning a recession into a depression. Conventional wisdom has it that the Fed goofed, but in fact, it did what it could.

The central bank increased the monetary base, which was what it controlled, but with banks failing and funds being withdrawn by worried depositors, money supply nevertheless contracted. The fact set is different now, but we may be getting a similar outcome. The open question is whether this hoarding will be reversed to some degree once a bailout or some other form of assistance calms frazzled nerves.

From Sam Jones at FT Alphaville:

US 3-DOLLAR INTERBANK RATES INDICATED AT UPPER END OF 3.7-4.8 PCT RANGE IN EARLY LONDON TRADE.

Despite a $30bn repo auction to be held by the BoE today.

If dollar Libor spreads blow out to that level, it will be a truly incredible move. We’re on the point of running out of adjectives - yesterday’s move in the Libor OIS spread was incredible too.

It looks like central banks are worried that the only thing keeping banks up now is the fragile commercial paper market, which banks have been desperately tapping in the past few days as a source of overnight funding.

Liquidity is being thrown at the system, but it’s just making things worse.

By pumping in more money central banks aren’t addressing the fundamental concerns of the banks at all. Going cold turkey is a very unpleasant thing, but the solution isn’t more drugs, even if they alleviate short term pain.

In assuming they can rely on central bank money market operations - which will be expanded (as is the case) when the going gets tough - banks are naturally avoiding lending to each other.

Despite the signs that their efforts are becoming counterproductive, central banks continue to throw money at the problem. From Bloomberg:

With the cost of borrowing dollars over three months yesterday jumping by the most since 1999, the European Central Bank, Bank of England and Swiss National Bank said today they will auction a total of $74 billion in one-week funding. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion.

Hoisted from comments (forgive me if you saw this already), reader Dan points out that financial players have plenty good reason to be spooked. And his reasoning suggests that liquidity measures and rescue packages will have little to no impact:

I understand that the explosion in the OIS spread is a reflection of the fear banks have for each others solvency. And it makes sense that it exploded right after the bankruptcy of LEH--it was not the bankruptcy per se, IMO, but the that $110b of senior LEH debt went from trading .95 to .12 in a matter of days that concentrated the market's attention. If you include the less senior debt that is trading at essentially zero, LEH had $110b hole in its balance sheet. And just days before this, the market was being told and was believing that the $10b disposition of Neuberger was going to solve their funding problems.

Now is there a precedent in this history of bankruptcy--excluding cases of accounting fraud--where bonds collapsed like this once a bankruptcy court opened up the books? I'm thinking the answer is 'no.' Which then makes you re-evaluate the premise that there wasn't fraud at LEH in marking the value of their assets.

Now extrapolate this reasoning across the entire banking system and, voila, you have the seizure of the interbank lending market.

Now this leads me to the question: if the OIS spread represents eminently legitimate fears of inaccurate marks on banks books, how is a commitment from the treasury to buy hundreds of billions of distressed assets from the banks any assurance to a counterparty that that bank will not still become insolvent. Obviously it helps on the margin, but the staggering hole in LEH's balance sheet that was revealed after bankruptcy creates profound fears about the true solvency of C or UBS. Until the market is convinced they are solvent--and TARP does not do this--the OIS spread will remain elevated and lending will remain frozen.

Good article, makes you wonder???

Now I also heard that if this bill is pass.....the UK will get some of that money for their bank problems also.

Can anyone confirm that????

HOLLA

$340 billion under "other stuff", in a Central Bank?

They should rush to include in the balance sheet: "provision for the two guys that will bring the Fed's sign off the wall: $100"

a question:

are all you here thinking about change your account form a $ to one based in GBP, Yen, etc? And what about the bank account?

when the crisis started i remember Joe Ross suggesting this.

and more: if the government detect this fear, is t possible to occur what happened here in Brazil and freeze accounts?

I saw an interview recently with Ron Paul and Ralph Nader. Both are apparently working together for the upcoming election and making 4 primary proposals to the American people;

- eliminate the budget deficits

- repeal the Patriot Act

- end the Iraq war and withdraw US forces

- Paul and Nader contend that the FEDERAL Reserve has become a government inside a government.

To the 4th point that the FED has become a government within a government;

The is not something I had thought about before hearing it from Nader and Paul, but soon after read an excerpt from Army Times which has reported effective October 1, in anticipation of social unrest in the US a military army brigade is to be placed on-call for natural or man-made emergencies and disasters. This is the first time an active unit has been given a dedicated assignment of this kind.

A run on banks is certainly a candidate for another more incisive form of government intervention into the civil society, ie., imposition of martial law in order to control a panic.

PIMCO's Bill Gross has advocated for some time that Paulson's primary tasks were in effect to;

1. - prevent a run on banks' and investment banks' stocks and,

2. - to allow enough time for the real estate markets to reflate and FNM/FRE to re-capitalize.

That effort looks to be running into some very stiff headwinds and the likelihood of the real estate markets making a bottom seem in doubt even if a bottom has been found, and a turn up in prices seems even more remote a possibility given the difficult credit issues and weak economic prints coming out of the US.

Cesarnc suggested that Greenspan seems strangely quiet on this bailout issue, so who knows.

Another point realted to the role of real estate prices and the value of mortgages is made by Daniel Gros and an excerpt is copied below from an article Gros printed at the RGE Monitor.

A de facto put for US households holding residential real estate mortgages is worth noting as a risk to the banks.

Daniel Gros | Sep 25, 2008
A key issue for the $700 billion bail out plan now being finalized is the pricing of the ‘toxic assets’ the US Treasury should buy. The main target of the Paulson plan is the market for securities based on low quality mortgages (sub prime and ‘Alt A’ mortgages). This subclass of the general universe of RMBS or residential mortgage based securities has become illiquid. How should these securities be priced? In the few market transactions still taking place their value has often been less than 50 cents to the dollar of face value. But it is difficult to establish a reliable market price. Are there any other ways to assess their value?
This note shows that there is a simple way to look at the value of mortgages in the US, which might greatly help in establishing a fair price for these securities. Preliminary calculations suggest that the value of securities based on lower quality mortgages might indeed be very low.
The starting point is a key feature of the US mortgage market, namely that most loans are de facto or de jure ‘no recourse’. This means that the debtor cannot be held personally liable for the mortgage even if, after a foreclosure, the bank receives only a fraction of the total mortgage outstanding from the sale of the house.
With a ‘no recourse’ mortgage (or any other such loan, e.g. the latest MMMF facility of the Fed) the debtor effectively receives a ‘put option’ to sell the asset that serves as a security to the creditor at par (or rather for the amount of the loan still outstanding). This implies that US households with a mortgage debt hold at the same time a put option to sell their house to the bank for the amount of the remaining mortgage balance. Banks (or other mortgage lenders) are ‘short’ this option, but this is not recognized in the balance sheets of banks, which in most cases report mortgages at face value – at least for all those mortgages on which payments are still ongoing.

This post is not meant to be pro republican or anything related to politics.

Burning Down The House: What Caused Our Economic Crisis?



Knowing this can really delay and complicate things now and in the future.
There will probably be alot more squabling and make markets more volatile.

Interesting YouTube and a very slick smear.........

Read the following link, no pun intended, but the slick professionalism of the YouTube piece suggests it may have something in common with Dangerous Obsession.

http://www.atimes.com/atimes/Middle_East/JI26Ak03.html

At the risk of stating the obvious it seems too convenient to heap all of the blame on Democrats given that the Republicans have been running the majorities in Congress and the Senate for the better part of the past 10 years, more or less........not to forget the Executive and a Republican president for 8.........lots of opportunity to set things right and re-establish proper checks and balances along the way with majorities like the Republicans held.

I prefer to blame both parties.

Germany has a Green party. We have two of them here.

Forget balances, man. It's all about check these days. A $700 billion one

Congress was under intense pressure to reach a deal this weekend on a Wall Street bailout. Top Senate Republicans said they hoped for an agreement Sunday and a vote on Monday. "Pressure is coming from everywhere", completed the senator, "even this guy cesarnc from forex factory started hie 'sign the freaking check' campaing".
-CNBC...

The second part was my add actually

im not sure what the comotion is on this whole thing. ....I mean,
they just passed a budget of 600 billion ...what's another 600 billion?
heck, spend another 10 trillion or so. that ought to drive the dollar down.
Theres no shame in printing money!. Heck, I can go buy a copy machine before inflation takes off and we can just lop off a couple of zero's every few months. That ought to take care of this bailout issue. I would not mind to see this country go bankrupt and start all the currency over. That seems like a fair trade to the boomers who have been milking every dime out of this system over the last 20 years.

Hear Peter Boockvar's interview where he states that : ... top banks would have $400B of lending capacity with no taxpayer funds (more than half the federal bailout) if they would simply stop paying dividends to shareholders.

http://blog.mises.org/archives/008629.asp

Greed is still persistent on Wall Street.

And then, we get down to the final irony...

Mr. Bush spent the last 7 years (until his last appearance at UN) calling for the rising threat of terrosism. Spent several billion dollars a month smoking out the Taliban, Al Qaeda, Tora-bora. Called Bin Laden #1 enemy, smoked out more talibans, al qaedas to the point of even forgetting about Bin Laden.

Forged an iminent danger of Saddam Husseis having weapons of mass destruction, smoke the living hell out of Iraq, extracted Saddam, got him dead by hanging.

Oil surged to $140 from $35, more smokeouts everywhere - BANG, BANG, BOOM!!!!, bodycount exceeded the one of 9/11.

Turns out, the real threat to the USA, the real weapon of mass destruction, was being developed exactly where the whole mess began: New York City and the nuclear mortgage backed securities which clock ticking nobody heard.

Can anyone offer several headline points over the consequences of a potential outcome one way or the other?

There is a Greenspan plea in Friday's WST, but that was fairly vague and held no detail other than support for some bill/any bill necessary to save the world as we know it.

Along with all of the other experts' opinions there seems to be an incredible lack of any kind of detail.

Let's try for the simplest common denominator and where the pain will be felt most accutely and most quickly; is it a possibility to expect US firms to have difficulty to meet September 30 payrolls if this deal does not pass Sunday or Monday?

Trickle up theory. Simple.... Take that fricking 770,000,000,000 and give every family $100,000.00 and we will spend our way out of this mess. Our economy will be up and running in a heartbeat. Screw Wall Street

http://www.rgemonitor.com/financemarkets-monitor/253781/new_imf_study_of_banking_crises_contradicts_bailout_bill_premise_and_details

A look at Japan’s financial crisis in the 1990s is instructive, the Merrill report said. Like the current American crisis, Japan’s banking turmoil included the rescue and disposal of home-loan companies and the bankruptcy of a big securities firm — although the crisis in the United States seems to be unfolding much faster than Japan’s, possibly accelerated by the magic of securitization.
Judging from previous crises, Merrill’s economists suggest that the United States should move quickly to declare certain banks “survivors” and put the others out of their misery.
Doing so, they said, would end the “who’s next?” game that has gummed up the credit markets:

The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.

Ditto...all lead by that "W" guy!!

HOLLA