The New World Order?
Monday was a crazy day in the financial markets worldwide. Oil and gold achieved record prices, the dollar sank lower and in general, the situation got worse. And it doesn’t appear to be over. Weekend efforts by the Federal Reserve to ease investor fears, instead seem to have fueled those fears to new heights. Invoking powers they haven’t used since the Great Depression of the 20th century, the Fed has adopted a “no-holds-barred” stance to fight the current recession. The Guardian reports:
Wall Street opened almost 200 points lower this afternoon, at 11,760.67. There was a brief respite later with the Dow Jones index briefly moving into positive territory. By 5pm, however, it was back in the red with a loss of 87 points, at 11,870.
The FTSE 100 closed 217.3 points down, or 3.9%, at 5,414.4 – its lowest since November 2005. There were sharp falls throughout the rest of Europe and in Asia the Nikkei 225 ended the day down 3.7% at 11,787.51, its lowest level in two-and-a-half years.
The Bank of England moved to stabilise the markets this morning, offering £5bn of three-day funds in a move designed to bring overnight interest rates down. Banks scrambled for the cash, asking for nearly five times more than was on offer.
The US Federal Reserve took emergency action on Sunday, cutting its discount rate – the rate at which banks lend to each other – by a quarter of a point. It also said it would set up a new lending facility for investment banks – something it has not done since the Great Depression in the 1930s.
But the Fed’s actions failed to reassure the markets and traders remained in a state of near-panic, with many fearing that Bear Stearns will not be the last casualty of the credit crunch that has gripped the global financial system since last August.
All Aboard!
Asian and European markets tumbled, as investors were finally convinced that the US markets are on the verge of catastrophe. Indexes closed down across the board, posting losses from 3 and a half to more than 4 percent. Overseas investors seem worried that the economic crisis in the US is more severe than they’ve been led to believe. As Time reports
“There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted,” said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.
“Just buying an investment bank does not solve the problem,” he said. “Markets are prodding (the U.S. government) to inject public funds.”
Further slides in Asian markets are likely, said Ismael Cruz, the governor of the Philippine Association of Securities Brokers and Dealers Inc.
“The outlook is very grim,” he said.
The bane of BS was their exposure to “bad mortgages”, which they hawked like carnies to unwary consumers for the past several years. According to ADN.com, that same risk has already accounted for more than $150 billion in write-downs worldwide. They go on to say, “The head of the International Monetary Fund said Monday that the global financial crisis is more serious and more widespread than even a few weeks ago.”
No Confidence
Speculation abounds as to who will be next, and whether they will garner the kind of help that BS was able to get. Most eyes are on Lehman Brothers, another investment firm sunk heabily into the subprime mortgage mess. LEH was trading considerably lower at the close on Monday, down nearly 20% after tumbling over 45% during the day. Earlier, Lehman “repeated that it has enough cash to keep doing business”. As late as last Thursday, BS was assuring their investors the exact same thing. It’s no surprise that investors aren’t listening to management anymore. Like it says over on UrbanDigs
“…the kicker is that TWICE in the past 4 days that this rumor was floating around executives at Bear told us that rumors were FALSE, and that cash cushion was fine; THERE IS NO LIQUIDITY ISSUES AT BEAR!
What happened today proves one thing: we can’t trust anything we hear!”
When investors lose confidence in management, there are hard times ahead for the markets. And that means hard times ahead for all of us, not just here in the US, but everywhere. Terry Smith, chief executive of specialist inter-bank broker Tullett Prebon explains in an article from the Guardian:
“I don’t think anybody alive has seen events of this seriousness and magnitude affecting the financial markets.”
He doubts that lowering interest rates will have any real effect: “High interest rates didn’t cause this problem, so lowering interest rates isn’t going to solve it. It is hard to see exactly what tools the authorities do have.”
The Fed’s activities over the last fortnight imply that a number of systemic risks are crystalising – “and this in turn implies a need for an extraordinary response,” he said.
Russell Jones, head of fixed income and currencies global research at RBC Capital Markets
“If the US financial system is in as much trouble as it seems, it is a global problem and will require a global policy response.”
Bring Out The Big Guns
The men who are the Federal Reserve must agree. More than half a century has passed since the Fed has taken such drastic action to bolster the economy. With last week’s promise to inject more than $200 billion to support the failing credit markets, the weekend bailout of BS, and the opening of a new program to provide emergency loans, the Fed hopes to make investors confident in the system as a whole, even while admitting some of the system’s major components are faulty. The Telegraph puts it this way:
The Federal Reserve, the Bank of England and the other central banks today ramped up their efforts to prevent credit markets falling into a deeper freeze by announcing plans to inject more than $200bn.
The agency crisis was a Tsunami event,” said Tim Bond, global strategist at Barclays Capital.
“The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody’s attention in Washington,” he said.
It is a ground-breaking move for the Fed to accept mortgage collateral, even if the debt is theoretically ‘AAA-grade’ debt. The Fed is constrained by Article 13 of the Federal Reserve Act from buying mortgage bonds outright, but it can achieve a similar effect by letting banks roll over collateral indefinitely. The European Central Bank is already doing this, shielding Dutch, Spanish, German, and some British banks from the full impact of the credit crunch.
The Fed is to create a new facility that allows banks to swap their mortgage bonds for US Treasuries. It is a well-targeted “sterilized” move to avoid adding fuel to inflationary fire. It follows the Fed’s separate pledge last Friday to add up to $200bn in liquidity.
Bernard Connolly, global strategist at Banque AIG, said the Fed action may help calm the markets for now, but it cannot solve the root problem of eroded of bank capital.
“There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But this time at least the North American central banks are doing their best to stop it spreading to the real economy,” he said.
Mr Bond said the mortgage agencies may ultimately need to be nationalized. Fannie Mae has already seen its stock price drop 70pc since October at a cost of $50bn in market value, even though it has an implicit federal guarantee. “There is going to have to be a very big bail-out,” he said.
A very big bailout, indeed. That sentiment is echoed across the spectrum. At MSNBC we read, “You’re going to have some very weak players pushed out of business,” said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. He said JPMorgan’s buy of Bear Stearns and Bank of America Corp.’s acquisition of mortgage lender Countrywide Financial Corp. are probably not the only rescues the industry will witness during this credit crisis.”
Grief
I caught a bit of grief from a few readers over my last post here @ Wordout. It seems that I am “ignoring all the little guys” that got caught up in this greed-grab we are now calling the subprime mortgage crisis. Let me make myself clear: I do feel badly for the “little guys” who were manipulated into these horrible instruments of financial destruction by the slightly less little guys at the local bank. You were manipulated by your desires and your fears. I do feel terribly for most of you.
But that loan agent at your local bank who might lose her job? Or her boss, the manager, or the VP or the investment firm employees? You guys can live in a ditch, for all I care. All you “house flippers” and speculators who drove prices so unsustainably high, you can eat smegma and wash it down with horse urine. You deserve everything that’s happening, and is going to happen to you. And to you really big fish, you billionaires who started this whole fiasco:
The windows are open. Jump.
Oh, that’s right, you guys didn’t lose any money, did you…. I almost forgot that part.
I am Jon, and this is your world.
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See a timeline of the BS decline here.
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From the Wall Street Journal:
The Federal Reserve’s decision to invoke a Depression-era law so that it could lend to Bear Stearns shows how seriously it believes the financial system is at risk.
The Fed has two principal tools for lending money to market participants. It lends to its 20 “primary dealers,” including Bear Stearns, every day for up to 28 days in return for top-quality collateral such as Treasurys. But this doesn’t enable it to lend any single firm much money. It can lend unlimited sums through its discount window, but only to banks. It has, since 1932, had the authority to lend to nonbanks, but has been reluctant to use it. To underline the gravity of its use, at least five of the Fed’s seven governors must ordinarily vote in its favor.
It was last used to make loans during the Depression. The Fed invoked the clause in 1970 to lend to companies cut off from the commercial paper market by the failure of the Penn Central railroad, but did not end up lending any money.