Fed fix working — for now
posted at 8:33 am on March 20, 2008 by Ed Morrissey
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Just a few days after the markets seemed primed for a crash, the quick action of the Federal Reserve to salvage the mortgage market appears to have stabilized the system. It took a $200 billion lending pool and a fire sale at Bear Stearns, but investors have climbed back into the mortgage bond market. Analysts have begun breathing again, but warn that the crisis has not yet passed:
The Federal Reserve’s latest dose of medicine to calm the credit crunch appears to be working in at least the all-important mortgage-bond market where yields have dropped in recent days.
“Every little bit of support in the mortgage market helps every other single market out there,” said Jim Vogel, head of agency debt research at securities firm FTN Financial. “The Fed, by a combination of actions, is giving people more assurance that things are better for now.”
The sigh of relief in the $4.1 trillion market for bonds guaranteed by Fannie Mae and Freddie Mac came even as investors in other fixed-income markets, stocks and commodities grew negative yesterday following the euphoria over Tuesday’s 0.75 percentage point cut in short-term interest rates by the Fed. Ultimately, though, the mortgage market has broad impact on the economy and other markets, so any improvement there could bring relief to other markets as well. Of course, the good news doesn’t mean the financial crisis is over. The mortgage-market calm is fragile and could easily be undone if, say, default rates again lurch higher, another high-profile financial firm fails or more multibillion-dollar write-downs force banks to curtail lending further and seek emergency capital. “There is no such thing as an all-clear siren at the moment,” Mr. Vogel said. “It’s too soon to say, ‘Dismantle your bomb shelter.’”
The markets have kept their heads around the world. On Monday, they took hits in most global markets, but by yesterday most of the losses had been absorbed. At least one major fund manager, Bill Gross, announced that he had resumed buying mortgage bonds with the guarantees from the Fed and Treasury now in place.
However, the crisis remains as the root cause has not yet been resolved. Lenders wrote a lot of bad paper and the lack of equity still exists on those loans. Until housing prices rise again, borrowers who took out unrealistic ARMs will find making the new rates workable or refinancing possible without a large infusion of cash to make up the loss in equity. There will be less pressure on lenders to foreclose, but defaults will continue.
How will the Fed and the Treasury deal with this structural problem in the mortgage markets? Congress and the White House will probably determine a system to identify actual homeowners from speculators and devise some sort of relief package. Politically, it makes more sense, and in a way it addresses the core problem more than simply providing guarantees for the lenders who created the problem by overselling credit. Speculators and flippers heightened the risk and gambled knowing the consequences of failure.
Is that the right thing to do? As William Polley told us on Monday on our podcast, extreme crises sometimes require intervention. However, it does make it more difficult for free-market advocates to argue against statism in economics. In an election year, however, people win re-election by taking action, not by standing around watching events unfold. Expect more intervention throughout the year.
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One thing to note is that the Fed’s slash-and-burn approach to the Fed Funds discount rate means that many ARMS may reset at equivalent or even lower rates than homeowners are paying.
furytrader on March 20, 2008 at 8:37 AM
… sorry, I meant to end that last sentence by saying “… than homeowners are paying now.”
furytrader on March 20, 2008 at 8:38 AM
Would be nice if Congress had intervened to stop all the lending abuses in the years they were going on, rather than waiting until we reached the crisis point. Instead, they did nothing, and now we will all have to pay for the greed and irresponsibility of a relative few.
AZCoyote on March 20, 2008 at 8:42 AM
Ed,
The new fed window for investment banks (wtf?), the Primary Dealer Credit Facility, is problematic.
One para. from today’s WSJ(Fed Attracts First Takers):
JiangxiDad on March 20, 2008 at 8:46 AM
Many in Congress actually encouraged some of these ridiculous lending practices to make mortgages available to those who had no business having mortgages. What are they saying now?
bopbottle on March 20, 2008 at 8:47 AM
Sorry, the last sentence was not part of the WSJ quote.
JiangxiDad on March 20, 2008 at 8:47 AM
Make that the last two sentences. Those are mine. Sorry
JiangxiDad on March 20, 2008 at 8:48 AM
“Just wait til we pass HUD’s new encyclopedia of regulations. We’ll send you into the rice fields yet!”
RushBaby on March 20, 2008 at 8:51 AM
Um, the Federal government created the problem with the Community Reinvestment Act and “pressure” to stop the “racist” practice of redlining. They are partly responsible for forcing banks to make loans they never would make otherwise.
TheBigOldDog on March 20, 2008 at 8:53 AM
“What are they saying now?” They are saying that Bush admin isn’t doing anything or enough to fix the problem they created.
Neo on March 20, 2008 at 8:56 AM
Now that they have access to the discount window they are going to have to come under the same oversight as depository bank. However, in the mean time, the way to prevent a meltdown of the entire financial system (and hence the economy) is to make the credit markets liquid again and that’s exactly what they Fed is doing. Even is they take a hit on some bad collateral, it will be cheaper in the end than repairing the damage of a true meltdown…
TheBigOldDog on March 20, 2008 at 8:58 AM
“Blame Bush”
amerpundit on March 20, 2008 at 8:58 AM
Makes it more difficult? How exactly? What aspect of state intervention artificially shielding idiots from the consequences of their actions is anything other than political? Anything other than socialism?
The state took my money to bail out fools. Why do these fools not have to stand or fall by their decisions, like the rest of us? Where is the government authorised to act in such a way?
There is no free lunch. This short-sighted relief will have repercussions. The weak should have been left to wither on the vine.
LimeyGeek on March 20, 2008 at 9:05 AM
Yes, I do agree with you. What other choice did they have? But to have gotten to this situation where there is no choice but to turn on the presses and lend/give taxpayer money to private firms pisses me off to no end somehow.
Also, why not have just done the same thing for Bear? Lehman shareholders survive but Bear not? Where’s the logic in that?
JiangxiDad on March 20, 2008 at 9:15 AM
It is only prolonging the inevitable.
Not only that, the stimulus to the M1 money supply WILL lead to VERY HIGH inflation. We are beginning to see that effect already.
Gas = $5 per gallon
Milk = $6 per gallon
Break = $5 per loaf.
Beer = still cheap enough to forget about all the rest.
.
.
sbf
subbottomfeeder on March 20, 2008 at 9:17 AM
The economy will be the story of the year. It will be bigger than the election itself.
Grab a good seat and watch history unfold before your very eyes.
voiceofreason on March 20, 2008 at 9:22 AM
Seems to me the way to prevent this from happening again is to prevent third parties from buying up mortgages and selling them as securities. This will keep the important lendor-lendee relationship intact, and then self-interest will prevent lenders from writing bad loans.
MrLynn on March 20, 2008 at 9:23 AM
The plummeting discount rate doesn’t fix anything for the Senior Baby Boomers entering retirement. For those who showed financial discipline over the years by socking away savings in retirement accounts, the coming 2% discount rate will be a blow to their anticipated income.
The diligent savers lose, the credit card spenders win. The planners lose, the bad lenders and stupid buyers win. The conservative long term, low-risk, fixed rate investors lose, the stock market crap-playing speculators win.
Some fix.
The ant loses, the grasshopper wins.
fogw on March 20, 2008 at 9:23 AM
We need to stop relying solely on the Fed to fix this problem. It is only one instrument in fixing this. The Treasury needs to come up with some better solutions and the Congress needs to get a budget that cuts out a bunch of superfluous spending (which is most of it) or sharply raise taxes (I prefer the spending cuts)
The Fed can’t and shouldn’t, do it alone.
MannyT-vA on March 20, 2008 at 9:34 AM
posted at 8:33 am on March 20, 2008 by Ed Morrissey
This might be construed as a criminal bailout of “Bush Bear Stearns”. What the “Fed” should have done is guarantee Fannie and Freddie’s paper directly. This action would have supported the middleclass mortgagee’s directly.
“Bush-BS” should have been allowed to tank, they were the knowledgeable, culpable facilitator’s. Instead just before their precipitous plunge there was a “spike” in buying and then; Katie bar the door!
Looks darn suspicious to this pilgrim!
This fiasco of manipulation and greed isn’t anywhere near over. Unless and until we let this market find its’ own bottom the Bush Administration is just “whistling into the wind”, or worse?
J_Gocht on March 20, 2008 at 9:39 AM
When I saw the news about this bailout I had to wonder where the money came from. My copy of the constitution says that congress should be involved. Or did they give Bush hundreds of billions in discretionary funds that I didn’t hear about?
snaggletoothie on March 20, 2008 at 9:50 AM
foqw, I can’t believe I’m agreeing with you?
J_Gocht on March 20, 2008 at 9:55 AM
snaggletoothie; that money came right out of your and my 401K and IRA’s. By printing ‘greenbacks” as if it were toilet paper the Administration is on a daily basis decimating the value of all our savings.
Even worse they are perpetrating a continuing ugly burden of apparently limitless debt upon our children and grand children.
Shame on you Messrs Bush and Paulson!
J_Gocht on March 20, 2008 at 10:12 AM
Take both parties’ encouragement of home ownership and combine it with the Fed creating too much money and that explains much of the housing bubble. Greenspan isn’t getting the criticism he deserves.
seanhackbarth on March 20, 2008 at 10:15 AM
J_Gocht, the Federal Reserve manages the money supply. Put the blame on them for creating too much money.
seanhackbarth on March 20, 2008 at 10:16 AM
Never forget that government regulators are the “good guy posse” who turns up late to a massacre and end up shooting the survivors.
Sugar Land on March 20, 2008 at 10:20 AM
We had people standing in driveways bidding against each other for homes in Phoenix. Our housing was the most affordable in the US. It went up 55% during the feeding frenzy. And they say this is a SURPRISE? All we are doing is slowing the course of events. We need higher interest rates, not lower. We need to stabilize the dollar. Get the price of gold and oil under control. Stop bailing out mistakes by individuals and business. Let the market correct itself now, or this will last longer and be more painful. In Detroit we used to say of recession, it was a time for thinning out. Survival of the fittest, the weak fall by the wayside. LET IT HAPPEN!!!
pueblo1032 on March 20, 2008 at 10:28 AM
seanhackbarth; Your telling me Paulson and Bernanke don’t “lunch”? Who selected the chairman?
Mr. Paulson is right out of Lehmann Bros. President Bush doesn’t palaver? Mr. Bernanke’s phones aren’t working over at the “Fed”?
Gosh, I’m aware my olde bod is a bit creaky…perhaps the noodle is turning to mush too?
J_Gocht on March 20, 2008 at 10:35 AM
Thank God! The adults came to play this weekend. The actions of the FED and the federal government this weekend saved this country from a major depression caused by a stock/bond crash aka 1929. As Ed says we are still not out of the woods yet but we are closer to the end than the beginning. If the FED and Bush would have listened to the let them eat cake crowd then Bush’s name would have gone down in history with the name Hoover. Hoover did what all those saying “suck it up” did. He sat on his hands did not intervene in the “free market” and enabled the socialist takeoff of the country by FDR for the next 60 years. If we have another depression in this country because of a credit crunch the idea that capitalism could survive the impacts of that in this day and age is insane. Seeing bread lines and soup kitchens around the corners in the USA would push this country into the arms of socialism in a heartbeat as our great “leaders” rush to show the Americian people that they care.
unseen on March 20, 2008 at 10:40 AM
The whole concept of a “fix” rather fallaciously presumes that there is a “correct” state that we have deviated from, and that only the fed can return us to.
Isn’t it “correct” that stupidity fails? Are we really “fixing” things, or pissing away money for cynically political ends?
LimeyGeek on March 20, 2008 at 10:40 AM
J_Gocht, stop while you’re behind. Paulson is from Goldman Sachs, not Lehmann Brothers.
seanhackbarth on March 20, 2008 at 10:43 AM
There’s hope for you :)
fogw on March 20, 2008 at 10:44 AM
But they have been doing that for decades.
One side of this issue I haven’t seen talked about much is how over the past decade the lenders turned to new methods to determine the value of what they were investing in. In many cases they eliminated the traditional real estate appraiser and instead used computers and “automated valuation models” to decide whether a property was worth lending on or not. Of course, these methods have plenty of flaws, but they used them anyway.
Del Dolemonte on March 20, 2008 at 10:45 AM
I think it’s making the best of a bad situation. The Fed and Treasury weren’t willing to risk a bad market reaction to the slow death of Bear Stearns. They moved in to keep the markets liquid.
I’m concerned about the precedent and potential moral hazard. But to be honest I don’t know if I would have done anything differently. Last week was a wild few days where anything (or nothing) could have happened.
seanhackbarth on March 20, 2008 at 10:46 AM
Congress authorised the power for the Fed to print money. None of these actions are taken lightly. I believe the powers that be truley believe they are charting the right course, regardless of whether that is so. So many of them are set to topple should the wheels come off that believe they are actually trying to do the least harm.
When ordinary folks bought unaffordable digs that required endless refinancing to pull money out of their house to buy life’s necessities, that money was coming out of our IRAs. Eventually. We just didn’t know it. As long as prices seemed to go up, and crooked appraisers added just a bit more “appreciation,” refinancing worked.
shuzilla on March 20, 2008 at 10:47 AM
LimeyGeek on March 20, 2008 at 10:40 AM
If you would rather see all you have worked for your entire life go down the drain in a massive deflationary cycle than no there is no correct state. I tend to NOT want my entire life savings to be wiped out because of the actions of a few knuckleheads that got greedy. Why should the entire country pay in lost jobs, lost homes and lost wealth because of a few. Is it not the job of our goverbnment to protect us from enemies both forgein and domestic? Does not the definition of an enemy define those greedy enough to let the entire country fail to further their own wealth? we spend 400billion a year on our military to protect us from physical harm, yet you seem to say that we should spend zero to protect us from financal harm.
unseen on March 20, 2008 at 10:48 AM
Thanks, seanhackbarth.
A different post infiltrated my mushy noodle. If you allow me the same latitude given Senator McCain in equating Iranian training of al-Qaeda; I have two strikes left?
J_Gocht on March 20, 2008 at 10:56 AM
J_Gocht, I’ll treat you like a cat. Eight lives to go. :-)
That way you might give me some slack when I mess up.
seanhackbarth on March 20, 2008 at 11:02 AM
Thanks for the explanation Shuzila. I am among the economic illeterate. I’ve long had a vague sense that this whole fed thing is an extraconstitutional sham that is run by bankers. More evidence seems to be emerging.
snaggletoothie on March 20, 2008 at 11:08 AM
Ed, thanks for the Douglas Adams allusion. May he rest in peace.
mikeyboss on March 20, 2008 at 11:24 AM
seanhackbarth on March 20, 2008 at 11:02 AM
Your comity is only exceeded by your intellect.
Did I actually write that?
J_Gocht on March 20, 2008 at 11:25 AM
Sure. Neither do I. Such an apocalyptic scenario is absurd, however.
I am bloody well saying no such thing! I am saying that the government should not be taking my money to prop up private-sector fools.
What happens if we just let Bear Stearns slide? Those same “greedy” people you deride will snap up the company in a firesale and augment their own business. All within the private sector. Over time, investments in that one specific miniscule sector will recover.
Panic, and clamouring for “solutions” from pappy gubmint, are a far greater cause of pain long-term, but certain people do get to feel a short-term glow of satisfaction about having “done something” to “fix” the “crisis”.
LimeyGeek on March 20, 2008 at 11:33 AM
History will be both your judge and jury. Your thought is valid.
J_Gocht on March 20, 2008 at 11:33 AM
I agree had Bear Stearns been allowed to collapse all by itself other firms would have bought the assets. But that takes time. Bankruptcy court isn’t a speedy process. The Fed and Treasury made the judgment that something fast needed to be done. I’m amazed they got JP Morgan to do all their due diligence in a weekend.
So far the government’s bet is playing out. That could change.
seanhackbarth on March 20, 2008 at 11:37 AM
Agreed. I actually do appreciate the contrasting view to my own – the desire to forestall greater damage.
The government has a phenomenal pile of money it can throw at problems, and it is easy to be supportive of their decision to do so, but at the same time we are supporting decisions that damage a far broader and deeper economic landscape. Our futures.
This, together with my dispute over the constitutionality of the action, form the basis of my objection.
I think the “bet” is going to come around and bite a chunk out of our arse. As Sowell might say – it’ll take longer than most political time-horizons, however.
LimeyGeek on March 20, 2008 at 11:42 AM
I agree with your observations about the Fed needing to step in but also avoid moral hazard. I think they got it about right by making sure that the counter-party obligations of Bear were not jeapordized and ensuring that Bear shareholders were not benefited–and they certainly weren’t.
dedalus on March 20, 2008 at 11:46 AM
You can bet that didn’t happen. That is where the Fed stepped in by providing some $30B in guarantees to Jamie Dimon and JPM if they had the deal done in time for Monday’s opening bell.
dedalus on March 20, 2008 at 11:50 AM
Exactly
LimeyGeek on March 20, 2008 at 11:53 AM
I don’t see how socialism for rich people should be considered any more acceptable than socialism for poor people.
libertytexan on March 20, 2008 at 11:55 AM
Sure. Neither do I. Such an apocalyptic scenario is absurd, however.
Absurd? You must not being paying attention to the markets.
What happens if we just let Bear Stearns slide?
Just from this statement you are missing the big picture. think of our financial markets as a row of dominios. When the first falls the rest follows. If Bear streans would have failed without government intervention we could have expected a run on all investment banks, goldman saks, Merille Lynch, Lehman brothers. the panic would have spread across the pond and the UK and EU banking systems would have similar runs like Nothern Rock. Asian and china’s banks would have failed also. with each failure the amount of capital to fund day to day operations of companies would dry up. companies would no longer be able to pay thier accounts payable with short term borrowing at the same time that their long term investments would have lost millions, that means payrolls would not have been met, those americans and companies living pay check to pay check would have missed payments on their overleveraged lifestyles. Another wave of credit defaults would cause more runs on the banks, more bank failures and more job losses. All the banks are FDIC insured so the federal government would be on the hook for all losses. Yet the speed of the federal government’s response would make Katrina look like a well run operation. It would be months before the gov was able to make up thoses losses, and where would they get the money to make up thoses loses, the rest of the world would be having their own problems so we could not borrow our way out of the problem. The government would start seizing assets like gold from individuals like FDR did in the 1930’s. All hard assets would be seized including oil. Credit cards would be worhtless and no longer accepted by merchants. All because the first domino was allowed to fall. You think this is sci-fi. this happened in 1929. If it happened once it can and will happen again. the difference between 1929 and 2008is that in 1929 the taxpayers where not on the hook for the depsoits. the government was not in debt 9 TRILLION, we did not have social security, welfare, unemployment insurance, medicare and all the other government programs that limits the governments ability to act in a deflationary cycle.
Add into this mix the fact that Bear streans was a market maker for a large % of the US and world stocks and you have not only a run on the banks but a run on the markets.
Maybe if people understood all this stuff we would have less people shouting “let them cake” So a few individuals get “saved” they can be prosecuted later after the crisis.
You still don’t think this could happen? Ask yourself this. Why did obsama attack the world trade center? It was this reason this negative feedback loop that Bin Laden wanted to set in motion. He almost succeed if not for the quick actions of the FED dropping the FEd rates to 1% the federal government pumping billions into the markets. I didn’t hear any complaints on 9/12 when the fed gov did the same thing because of an external threat. why is an internal threat treated different. Quit listening to the class warfare rethoric of the MSM. We are in a crapload of trouble and things can get alot worse. It took 14 years and a world war to get us out of the last deflationay cycle. I would rather live those 14 years in the land of plenty instead of in the land of sorrow. If it takes a couple hundred billion to save us from that possibility I say do it. we spend more on the interest for debt than that.
unseen on March 20, 2008 at 11:59 AM
Your view of economics tends to the dramatic. Makes for good conversation though :)
LimeyGeek on March 20, 2008 at 12:05 PM
LimeyGeek on March 20, 2008 at 12:05 PM
the Fed chairman was a student of the depression its causes, its effect. He sees the same scenrio unfolding. If he didn’t he would not have done what he did. the federal gov can not agree on anything yet they passed a 150billion rebate package in record time. Dems and REps came together to do this. the same people that fight over everything. They came together in record time to pass a bill that the majority of american think is stupid. Ask yourself why they did this. They see the same thing as the Fed chairman. the Tresury sec and the fed chairman seized Bear streans assets. Again an 85 year old company with billions of assets was seized in 2 days and sold off for 250million. Ask yourself why. this is not dramtic. the world markets have sold off for the last six months over this fear. trillions in wealth have evaporated as those that understand the ramifications flee the risk of total collapse. Again ask yourself why the smart money is dumping stocks,fleeing to treasury bills with very low rates of return during times of record profits in the underlying companies. Ask why gold and oil were surging before Bear streans buy out and now are selling off because the crisis has been avoided. Why the world was fleeing the dollar? Why the oil shieks were pumping billions of their money into our economy to prop up the banking system and losing money in the deal. The answers to these questions give a very clear big picture of the problems.
unseen on March 20, 2008 at 12:15 PM
You can bet that didn’t happen. That is where the Fed stepped in by providing some $30B in guarantees to Jamie Dimon and JPM if they had the deal done in time for Monday’s opening bell.
dedalus on March 20, 2008 at 11:50 AM
but the deal was done before the opening ASIAN bell. why did the Fed want to get the deal done before the Asian stock markets opened? Because a Bear Streans failure would have had worldwide ramifications and sparked a massive stock market crash.
unseen on March 20, 2008 at 12:18 PM
Good point. Lucky BSC’s problems started on a Friday. It is interesting to watch the stock be bid up now as bond holders and equity holders get ready to fight it out over the deal. Either way JPM gets the Madison Avenue building which is worth about $1 billion.
dedalus on March 20, 2008 at 12:34 PM
unseen is dramatic. Certainly a story like that could happen. Let me try tell a story based on the Fed acting.
The Bear Stearns buyout tells other banks if the Fed isn’t willing to let Bear go under then they should expect their operations to get help if needed. They continue on their merry way waiting for housing prices to stabilize. When they do they go right back to their free lending ways encouraged by the Fed’s continued low interest rates.
More loans are made, this time with slightly more scrutiny of borrowers. Eventually people’s skepticism about these markets pass and lenders get foolish again. Another housing bubble takes place. Defaults rise again and lenders are back into the same situation they were in 2007-08 only this time there’s even more bad debt.
The lenders and financiers assume the Fed will save them. Only the Fed doesn’t have enough cash to do it. It tries to bailout one, but others pop up. The Fed runs out of money and it’s interest rate tools are shot. It’s only resort is to run the printing presses night and day to inflate the currency for needed cash. The dollar really tanks. Countries stop pegging their currency to the dollar, and the Middle East stops selling oil in dollars.
That scenario is grim, dramatic, and plausible. Ultimately taking action is about best guesses within a short amount of time. I hope things work out.
seanhackbarth on March 20, 2008 at 12:40 PM
dedalus on March 20, 2008 at 12:34 PM
Once the crisis is passed i would not be surprised to see JPM increase their offer to maybe .25 shares instead of the .05 shares it is now offering. It will still be an all share deal IMO. So that would put the bid to around $10.00/share. this way the big shareholders can buy the shares at the $5 level see a double on their invesment and get out of the shares without a major loss. the Fed wins, the country wins and of course the shareholders win. JPM is a great buy right now as long as the markets stay solvent.
unseen on March 20, 2008 at 12:42 PM
seanhackbarth on March 20, 2008 at 12:40 PM
yes that could happen also. however the actions of the FED to regulate the industry would tend to make that possiblity less. this could also happen. the Fed and the federal gov by way of freddie/fannie take all these loans onto their books. the crisis adverts. Home prices go up and the federal gov (the taxpayers) makes a killing in the real estate business.
you can not outlaw fear and greed. Bubbles will happen as well as crashes. This was true before the FED also. It is not the printing of money or low rates that cause bubbles it is the human emotion of greed. the trick of a good government is to dampen both emotions so the bubbles and crashes are small, orderly and manageable and do not spill over into other faucets of the economy. It was not the low inerest rates or the printing of money that is causing the bubble to form in gold and oil it is the human emotion of fear. Once the emotion is gone oil and gold will crash (it may already be crashing) These crashes will cause a large destruction of wealth should the fed gov bail out those investors? No because one there is little chance of the crash spilling over to the broder economy and two cheaper commodites will help not hurt the economy. All crahses and all bubbles are not the same and should not be treated the same.
unseen on March 20, 2008 at 12:53 PM
Interesting. I hope the deal gets done. A sweetener for equity holders might help some, though not for the employees who are losing their jobs and retirement nest egg. I feel bad for them and know of a few, but the Fed can point to them as evidence that they aren’t creating a moral hazard.
I agree that JPM is a well run company. I remember when Sandy Weil fired Jamie Dimon thinking that it was a really bad move for Citi. No doubt Citi shareholders wish Jamie had taken over the company rather than Chuck Prince.
GS is probably still a good buy at these prices and maybe USB, but I’m staying away from all the financials for now.
dedalus on March 20, 2008 at 1:15 PM
dedalus on March 20, 2008 at 1:15 PM
citibank will be the next test of the FED. It is too big to fail and also too big to bailout a.ka. JPM/Stearns deal. It will need massive infusions of capital possibly by SWFunds. Wells fargo looks like a good buy also at these levels. There will be another test soon. Mer traded 72,000 puts yesterday of way out of the money options. Someone does not place that large of bet on a whim. that is 7.2 million shares with a strike price about $20.00 below the present price. So basically someone is betting that MER will be cut in half within the next month. GS,LEH both came out smelling like roses from last qrt. We are in the bottom of the seventh. If we can hold out a little longer we should be ok with only a recession to show for it. That would be the best outcome.
unseen on March 20, 2008 at 3:18 PM
This is the real story. The Fed – owned and controlled by retail banks that share in its fortunes and misfortunes – has opened a new lending window to INVESTMENT BANKS that do not own or control shares in the Federal Reserve System and therefore have almost no exposure to its risk.
This is a big problem. The Fed isn’t stupid. They’re really not going to risk everything to bail out some investment banks, but they are doing it because their projections of investment bank failures are a threat to Fed member retail banks.
gabriel sutherland on March 20, 2008 at 4:29 PM
I had seen this as a rather plausible option also…?
unseen, given the “Fed” is the arbiter of last resort in any case. Why isn’t this sort of direct intervention a completely plausible scenario?
My best thought would be…this sort of direct action would be a wholesale departure from the status quo and the presently accepted way of doing business in our “supposedly orderly” capitalistic business, financial and third party markets?
But; what do I know…?
I can certainly visualize the calamity you define.
J_Gocht on March 20, 2008 at 4:56 PM
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